UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-KSB A/3
x
ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
Fiscal Year Ended December 31, 2007
o
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
transition period from _______________ to _____________________
Commission
file number: 333-139910
China
Shoe Holdings, Inc.
(Exact
name of registrant as specified in its charter)
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NEVADA
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20-2234410
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State
or other jurisdiction of
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(I.R.S.
Employer
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|
incorporation
or organization
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Identification
No.)
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488
Wai
Qingsong Road,
Waigang,
Jiading District, Shanghai, PR of China 201800
(Address
of principal executive
offices)
(Zip code)
Registrant’s
Telephone Number, including area code: 011-86-21-59587756
Securities
Registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange where registered
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|
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None
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Not
applicable
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Securities
Registered pursuant to Section 12(g) of the Act:
Common
Stock, par value $0.001 per share
(Title
of
class)
Indicate
by check mark if the registrant is a well-known seasoned issuer as defined
in
Rule 405 of the Securities Act
o
Yes
o
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.
o
Yes
o
No
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes
o
No
x
The
aggregate market value of voting and non-voting stock held by non-affiliates
of
the registrant as of April 11, 2008 was $5,870,976.
There
were 104,902,198 shares of common stock outstanding as of April 14, 2008.
DOCUMENTS
INCORPORATED BY REFERENCE
None
CHINA
SHOE HOLDINGS, INC.
TABLE
OF CONTENTS TO ANNUAL REPORT ON FORM 10-KSB
For
the Fiscal Year Ended December 31, 2007
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ITEM
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Page
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PART
I
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Item
1.
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Business
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5
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Item
1A.
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Risk
Factors
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8
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Item
2.
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Properties
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13
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Item
3.
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Legal
Proceedings
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13
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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13
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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13
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Item
6.
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Selected
Financial Data
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14
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Item
7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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14
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Item
8.
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Financial
Statements and Supplementary Data
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25
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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25
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Item
9A.
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Controls
and Procedures
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25
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Item
9B.
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Other
Information
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26
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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26
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Item
11.
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Executive
Compensation
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27
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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28
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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29
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Item
14.
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Principal
Accounting Fees and Services
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29
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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29
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Signatures
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30
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-I-
SPECIAL
NOTE REGARDING FORWARD-L
OOKING
STATEMENTS
This
Annual Report on Form 10-KSB contains forward-looking statements that are based
on management's beliefs, assumptions, current expectations, estimates and
projections about the footwear business, worldwide economics and the Company
itself. Statements, including without limitation, those related to: future
revenue, earnings, margins, growth, cash flows, operating measurements, tax
rates and tax benefits; expected economic returns; projected 2008 operating
results and dividend rates; future share repurchase activity; future strength
of
the Company; future brand positioning; achievement of the Company vision; future
pension costs; future marketing investments; the introduction of new lines
or
categories of products; future growth or success in specific countries,
categories or market sectors; liquidity; capital resources and market risk
are
forward-looking statements. In addition, words such as "anticipates,"
"believes," "estimates," "expects," "forecasts," "intends," "is likely,"
"plans," "predicts," "projects," "should," "will," variations of such words
and
similar expressions are intended to identify forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions ("Risk Factors") that are difficult to predict
with regard to timing, extent, likelihood and degree of occurrence. Therefore,
actual results and outcomes may materially differ from what may be expressed
or
forecasted in such forward-looking statements.
Risk
Factors include, but are not limited to, uncertainties relating to changes
in
demand for the Company's products; changes in consumer preferences or spending
patterns; the cost and availability of inventories, services, labor and
equipment furnished to the Company; the cost and availability of contract
manufacturers; the cost and availability of raw materials, including leather
and
petroleum based materials; changes in planned consumer demand or at-once orders;
customer order cancellations; the impact of competition and pricing by the
Company's competitors; changes in government and regulatory policies; foreign
currency fluctuation in valuations compared to the Chinese yuan renminbi and
the
relative value to the Japanese Yen or the currencies of other countries where
we
buy or sell inventory or finished products; changes in duty structures in
countries of import and export; changes in interest rates, tax laws, duties,
tariffs, quotas or applicable assessments; technological developments; changes
in local, domestic or international economic and market conditions; the size
and
growth of footwear markets; service interruptions at shipping and receiving
ports; changes in the amount or severity of inclement weather; changes due
to
the growth of Internet commerce; popularity of particular designs and categories
of footwear; the ability of the Company to manage and forecast its growth and
inventories; the ability to secure and protect trademarks, patents and other
intellectual property; integration of operations of newly acquired businesses;
changes in business strategy or development plans; the ability to attract and
retain qualified personnel; loss of significant customers; relationships with
international distributors. These matters are representative of the Risk Factors
that could cause a difference between an ultimate actual outcome and a
forward-looking statement. Historical operating results are not necessarily
indicative of the results that may be expected in the future. The Risk Factors
included here are not exhaustive. Other Risk Factors exist, and new Risk Factors
emerge from time-to-time, that may cause actual results to differ materially
from those contained in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking
statements as a prediction of actual results. Furthermore, the Company
undertakes no obligation to update, amend or clarify forward-looking statements,
whether as a result of new information, future events or otherwise.
Part
I
GENERAL
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
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, Wholly
Success Technology Group Limited, a British Virgin Islands Corporation, (WSTG)
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 of the outstanding shares of Shanghai Kanghong Yunheng
Enterprise Development Company Ltd.(“SKYEDC”), a corporation organized under the
laws of the People’s Republic of China (“PRC”) and a manufacturer of women’s
shoes, casual shoes and shoe components, principally for the export market,
particularly Japan.
As
a
result of the closing under the Agreement, our business became the business
of
SKYEDC and we are now in the business of manufacturing shoes and shoe
components.
Business
General
Our
subsidiary WSTG was founded in the British Virgin Islands in 2004 and in 2006
WSTG acquired all of the shares of SKYEDC for $1,921,328. SKYEDC is an
independent, single facility-based, private label designer, manufacturer and
marketer of a broad line of women’s shoes. SKYEDC also manufactures shoe
components such as soles, for other shoe manufacturers. SKYEDC also sells shoes
under its own brands in China, including the brand “Kanggies”, and is planning
to open retail stores, both company owned and franchised in the 2008 calendar
year. SKYEDC began operations in 1997. Since the business of SKYEDC is the
sole
business of the Company, we will refer to SKYEDC as “we” “us” or “the Company”.
In 2007 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.
The
Company believes that its primary competitive strengths are its exceptional
quality control and low costs of operation and distribution, which enable it
to
offer favorable prices on defect free shoes to its customers. The Company uses
industry based web marketing such as the web site
www.shoeses.net
to
reduce costs as opposed to using sales representatives. We believe that we
improve our quality control and efficiency by being vertically integrated and
producing shoes principally from raw materials that we make into the various
components rather than producing shoes from components purchased from other
manufacturers.
The
Company's footwear is generally sold under its customers’ brand names. The
Company recently began developing its own brands for retail sale in China and
intends to enter into the retail shoe business in China during 2008.
The
Company operates two shoe assembly lines and five sole production lines at
its
factory. Management believes that the Company must expand its operations to
be
able to accept large orders it is now receiving that have resulted from its
reputation for quality. Part of management’s strategy in becoming a publicly
held company in the United States is to enhance the Company’s capital raising
abilities to fund expansion.
Our
address is 488 Wai Qingsong Road, Waigang, Jiading District, Shanghai,
China 201800 and our telephone number is 011-86-21-59936678.
Marketing
The
Company's overall marketing strategy is to develop its reputation as a quality
manufacturer and to utilize Chinese government sponsored marketing assistance,
especially the
www.shoeses.net
web
site. This strategy has served the Company’s needs to date as it has enabled us
to obtain orders and operate profitably while avoiding the costs associated
with
marketing employees and sales representatives. However, we may determine that
future growth will require us to increase our marketing efforts. The Company
is
seeking to expand its operations so that it can service larger, more profitable,
orders.
International
Operations and Payment Terms
The
Company records revenue from foreign sources through sales to wholesale
customers in Japan. Japanese customers generally pay the Company within 30
days
of product delivery. Terms on products sold into Japan are generally more
favorable to the Company than those available within the PRC and the Company
has
to date experienced extremely few collection problems on its international
sales. Sales within the PRC tend to be on somewhat longer terms.
Manufacturing
The
Company manufactures all of the footwear it sells and does not outsource its
orders. The Company starts with tanned leather, plastic, rubber, thread and
other basic components and performs the entire manufacturing process in house.
Shoe manufacture is a labor-intensive industry requiring skilled craftsmen
for
cutting and fitting of the upper portion of shoes and more technology intensive
construction for shoe bottoms.
The
Company's factory has the flexibility to produce a variety of footwear, which
departs from the industry's historical practice of dedicating a given facility
to production of specific footwear products. This flexibility allows the Company
to quickly respond to changes in its order mix. The Company currently produces
casual and dress footwear for women, men and children at its factory. Management
believes that the skill level and experience of the Company’s work force as well
as the Company’s integrated operations allow it to limit the lead-time for new
style production as compared to many other manufacturers.
The
Company's principal required raw material is quality leather, which it purchases
from a selected group of Chinese suppliers. The global availability of common
upper materials and specialty leathers eliminates any reliance by the Company
upon a sole supplier. The Company purchases all of its other raw materials
and
component parts from a variety of sources, none of which is believed by the
Company to be a dominant supplier. Alternative sources of supply are believed
to
be available to the Company.
The
Company is subject to the normal risks of doing a multi-national business
including the risk of political disturbances and similar events, the imposition
of trade barriers, quotas, tariffs and duties, and currency and exchange rate
fluctuations. To date the Company has not engaged in currency hedging with
respect to these risks, but may do so in the future. A sustained disruption
of
such sources of supply could have an adverse impact on the Company's operations
and financial condition.
Trademarks,
Licenses and Patents
The
Company does not rely on any licenses. The Company owns several Chinese
trademarks, but since it is predominately a wholesale manufacturer of private
label goods, these trademarks have not been material to its business.
The
Company owns three Chinese patents, two utility patents and one invention
patent, related to shoe making. It has not filed for the more respected
international patents because it lacked available capital resources. It may
make
such filings in the future. In the event the Company applies for international
patents, no assurance is given that such patents will be granted. Such patents,
if granted, will afford the Company meaningful protection against infringement
or that such patents will not be held by a court to infringe upon patents held
by others.
Order
Backlog
At
December 31, 2007, the Company had an order backlog of approximately $3 million.
Our entire backlog related to products expected to be shipped prior to December
31, 2008. Orders in backlog are subject to cancellation by customers. The
backlog at a particular time is affected by a number of factors, including
seasonality, retail conditions, expected customer demand, product availability
and the schedule for the manufacture and shipment of products. Accordingly,
a
comparison of backlog from period to period is not necessarily meaningful and
may not be indicative of eventual actual revenues.
Competition
The
Company's operates in a highly competitive environment. The Company competes
with numerous domestic and foreign marketers, manufacturers and importers of
footwear, many of which are larger and have greater resources than the Company.
The Company's major competitors are located in China and other East Asian
countries. The Company competes on quality, reliability in order fulfillment
and
price as well as its ability to adapt to style changes for its customers. The
footwear industry in general is subject to changes in consumer preferences.
Because
of the lack of reliable published statistics, the Company is unable to state
with certainty its position in the footwear industry or the number of its
competitors. Market shares in the non-athletic footwear industry are highly
fragmented and no one company has a dominant market position.
Research
and Development
The
Company employs about ten technicians/craftsmen in its design department. In
2007, no expense was incurred on Research and Development. While the Company’s
research and development efforts will continue, it anticipates that such
expenditures will represent a smaller percentage of revenues as the Company
launches its retail effort in 2008 and 2009.
Environmental
Matters
Compliance
with national, provincial or local provisions which have been enacted or adopted
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment have not had, nor are they
expected to have, any material effect on the capital expenditures, earnings
or
competitive position of the Company. The Company uses and generates certain
substances and wastes that are or can be regulated or may be deemed hazardous
under certain national, provincial or local regulations with respect to the
environment. The Company from time to time works with government agencies to
resolve cleanup issues at waste sites and other regulatory issues.
Employees
As
of
December 31, 2007, the Company had approximately four hundred production and
office workers. None of these employees are covered by any collective bargaining
agreement. The Company presently considers its employee relations to be
satisfactory. As of December 31, 2007, there are 373 workers in our production
plant and 48 administrative staff.
Item
1A Risk Factors.
In
addition to other information in this current report, the following risk factors
should be carefully considered in evaluating our business because such factors
may have a significant impact on our business, operating results, liquidity
and
financial condition. As a result of the risk factors set forth below, actual
results could differ materially from those projected in any forward-looking
statements. Additional risks and uncertainties not presently known to us, or
that we currently consider to be immaterial, may also impact our business,
operating results, liquidity and financial condition. If any such risks occur,
our business, operating results, liquidity and financial condition could be
materially affected in an adverse manner. Under such circumstances, the trading
price of our securities could decline, and you may lose all or part of your
investment.
Risks
Relating to Our Business
Negative
News From China
There
have been several news events in recent months relating to the safety of pet
food, toothpaste and food items manufactured in the PRC that may result in
consumers developing negative attitudes towards Chinese products and these
attitudes could negatively impact our results of operations.
I
mpact
of Consumer Spending Patterns
The
success of the Company's operations within the women’s footwear industry depends
to a significant extent upon a number of factors affecting disposable consumer
income, both domestic and foreign, including economic conditions and factors
such as employment, business conditions, interest rates and taxation. In
addition, consumer spending patterns may be affected by changes in the amount
or
severity of inclement weather and the growth or decline of global footwear
markets. The Company's business, results of operations and financial condition
may be adversely affected by changes in consumer spending or economic
conditions.
Competition
and Changes in Consumer Preferences in the Women’s Footwear
Industry
The
Company competes with numerous other manufacturers and marketers of women’s
footwear, many of which are larger, have greater resources than the Company
or
own valuable trademarks that are accepted internationally. Product performance
and quality, competitive pricing and the ability to adapt to style changes
are
all important elements of competition in the footwear industry. The footwear
industry in general is subject to changes in consumer preferences with respect
to the popularity of particular designs and categories of footwear. Future
sales
by the Company will be affected by its continued maintaining its reputation
among wholesale customers and to meet their needs. If the Company is unable
to
respond effectively to competitive pressures and changes in consumer spending,
the Company's business, results of operations and financial condition will
be
adversely affected.
Currency
Valuation and Foreign Regulations
As
a
company based in China that makes the majority of its sales overseas, changes
in
monetary controls and valuations of the Chinese Renminbi and the Japanese Yen
could have an adverse effect on the Company's business, results of operations
and financial condition.
The
Company cannot predict whether Japanese customs quotas, duties, taxes or other
changes or restrictions will be imposed or increased on the importation of
non-domestically produced products in the future or what effect such actions
could have on the Company's business, financial condition or results of
operations.
Government
Regulation May Impact Our Results
As
a
Chinese manufacturing company, we may be affected by changes in government
and
regulatory policies in China as well as changes to such policies on a global
basis. Changes in interest rates, tax laws, duties, tariffs and quotas could
have a negative impact on the Company's ability to produce and market footwear
at competitive prices.
Cyclical
trends in footwear retailing could have a material adverse effect on our results
of operations.
As
we
commence retail operations we are entering an industry that has been subject
to
substantial cyclical variations. As economic conditions in China change, trends
in discretionary consumer spending become unpredictable and could be subject
to
reductions due to uncertainties about the future. When consumers reduce
discretionary spending, purchases of footwear may decline. In addition, a
general reduction in consumer discretionary spending due to a recession in
the
Chinese domestic economy or uncertainties regarding future economic prospects
could have a material adverse effect on our results of operations.
RISKS
RELATING TO OUR COMPANY
Suppliers
and Service Providers
The
Company's ability to competitively price its products depends on the cost of
footwear components, including leather and materials used in the production
of
outsoles. The cost of materials is subject to change based on the availability
and market conditions that are difficult to predict. Conditions such as diseases
affecting the availability of leather can affect the cost of the footwear
marketed by the Company. In addition, the Company's shipping costs are affected
by fuel prices and numerous other factors such as the possibility of service
interruptions at shipping and receiving ports.
The
Success of our Retail Operations is Dependant on our Locating and Leasing Prime
Retail Space and Generating a high Volume of Sales from those
Operations
As
we
commence retail operations we will be seeing space in high profile commercial
districts in major Chinese markets. As in most developed and rapidly developing
economies, prime space is scarce and rents at high prices. Not only do we have
to locate desirable retail space, we must rent the same on acceptable terms
and
then efficiently mange our retail operations to ensure that our stores have
adequate inventories of readily salable merchandise. Our ability to successfully
accomplish these tasks is can not be predicted and our failures in these areas
will negatively impact our results.
Customers
The
Company's financial success is directly related to the willingness of its
customers to continue to purchase its products. The Company does not typically
have long-term contracts with its customers. Sales to the Company's customers
are generally on an order-by-order basis and are subject to rights of
cancellation and rescheduling by the customers. Failure to fill customers'
orders in a timely manner could harm the Company's relationships with its
customers. Furthermore, if any of the Company's major customers experiences
a
significant downturn in its business, then these customers may reduce or
discontinue purchases from the Company, which could have an adverse effect
on
the Company's business, results of operations and financial
condition.
The
Company sells its products to wholesale customers and extends credit based
on an
evaluation of each customer's financial condition, usually without requiring
collateral. The financial difficulties of a customer could cause the Company
to
stop doing business with that customer or reduce its business with that
customer. The Company's inability to collect from its customers or a cessation
or reduction of sales to certain customers because of credit concerns could
have
an adverse effect on the Company's business, results of operations and financial
condition.
We
are in
large part dependant upon the continued growth of Internet commerce and the
trend toward the sale of private label products by major retailers. A reversal
of this trend in the Japanese market could have an adverse effect on the
Company's business, results of operations and financial condition.
Implementation
of Growth Strategy
As
part
of its growth strategy, the Company seeks to expand its factory operations
to be
able to accept larger orders that will involve larger production runs and that,
management believes, will be more profitable. In addition, the Company
contemplates operating retail stores within China during 2008. These initiatives
are largely conditioned upon the Company obtaining additional capital, of which
there can be no assurance. Furthermore, there can be no assurance that we will
be able to successfully implement any or all of these growth strategies, or
that
it will be able to maintain its high level of quality in a larger operation.
Any
such failures could have an adverse effect on the Company's business, results
of
operations and financial condition.
Inventory
Management
The
Company's ability to manage its inventories properly is an important factor
in
its operations. Inventory shortages can impede the Company's ability to meet
orders on a timely basis. Conversely, excess inventories can result in increased
interest costs as well as lower gross margins due to the necessity of lowering
prices in order to liquidate excess inventories. If the Company is unable to
effectively manage its inventory, its business, results of operations and
financial condition will be adversely affected.
Integration
of Newly Acquired Businesses
The
Company may make strategic acquisitions in the future and cannot assure that
it
will be able to successfully integrate the operations of newly acquired
businesses into the Company's current operations. The failure to integrate
newly
acquired businesses or the inability to make suitable strategic acquisitions
in
the future could have an adverse effect on the Company's business, results
of
operations and financial condition.
Attraction
and Retention of Qualified Personnel
The
Company is dependent on the efforts and abilities of its senior executive
officers. While the Company believes that its senior management team has
significant depth and that appropriate senior management succession plans are
in
place; the loss of one or more members of senior executive management or the
failure to successfully implement succession planning could have an adverse
effect on the Company, its results of operations and financial condition. The
Company's future success also depends on its ability to identify, attract and
retain additional qualified personnel. While the Company has historically been
successful in attracting and retaining key employees, competition for such
employees in the footwear industry is intense and failure to retain or attract
key employees could adversely impact the Company.
The
Company may not be entitled to certain benefits that it receives from the
Chinese Government
We
take
advantage of favorable tax rates and other beneficial governmental policies
afforded to us as a result of the nature of our business. In the event that
the
programs offered to us is amended or rescinded or we no longer meets the
eligibility requirements of the program, we may not be able to enjoy the
benefits of these programs and as a result may have to pay higher income taxes,
which may have a material adverse affect on our economic results.
There
are
also risks that the Chinese government might adjust the current industrial
policies and tax rates with the growth of political and economic environment
in
China, which may negatively impact our business.
RISKS
RELATING TO OUR SECURITIES
We
do not
intend to pay dividends and there will be less ways in which you can make a
gain
on any investment in our company.
We
have
never paid any cash dividends and currently do not intend to pay any dividends
for the foreseeable future. To the extent that we require additional funding
currently not provided for in our financing plan, our funding sources may likely
prohibit the payment of a dividend.
We
May Never Have an Active Trading Market
Although
our stock is listed on the Over the Counter Bulletin Board established by NASDAQ
(the “OTCBB”) under the symbol CHSH, it has not consistently traded at volume
levels that would allow investors to liquidate their holdings. Accordingly,
there can be no assurances that a reliable and consistent market for the
Registrant's common stock will be established. The Registrant's common stock
will be influenced by a number of factors relating to our operations.
Accordingly, even if a trading market does develop, it may not be maintained
or
trading may not be at sufficient levels to provide liquidity.
Our
Common Stock is Likely to continue to be a “Penny Stock”
The
Registrant's common stock will be considered to be a "penny stock" if it meets
one or more of the definitions in Rules 15g-2 through 15g-6 promulgated under
Section 15(g) of the Securities Exchange Act of 1934, as amended. These include
but are not limited to the following: (i) the stock trades at a price less
than
$5.00 per share; (ii) it is not traded on a "recognized" national exchange;
(iii) it is not quoted on the NASDAQ Stock Market, or even if so, has a price
less than $5.00 per share; or (iv) is issued by a company with net tangible
assets less than $2.0 million, if in business more than a continuous three
years, or with average revenues of less than $6.0 million for the past three
years. The principal result or effect of being designated a "penny stock" is
that securities broker-dealers cannot recommend the stock but must trade in
it
on an unsolicited basis. Our common stock has been a “penny stock” at all times
since it started trading.
Broker-Dealer
Requirements May Affect Trading and Liquidity of Our Common
Stock
Section
15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2
promulgated there under by the SEC require broker-dealers dealing in penny
stocks to provide potential investors with a document disclosing the risks
of
penny stocks and to obtain a manually signed and dated written receipt of the
document before effecting any transaction in a penny stock for the investor's
account.
Potential
investors in the Registrant's common stock are urged to obtain and read such
disclosure carefully before purchasing any shares that are deemed to be "penny
stock." Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve
the account of any investor for transactions in such stocks before selling
any
penny stock to that investor. This procedure requires the broker-dealer to
(i)
obtain from the investor information concerning his or her financial situation,
investment experience and investment objectives; (ii) reasonably determine,
based on that information, that transactions in penny stocks are suitable for
the investor and that the investor has sufficient knowledge and experience
as to
be reasonably capable of evaluating the risks of penny stock transactions;
(iii)
provide the investor with a written statement setting forth the basis on which
the broker-dealer made the determination in (ii) above; and (iv) receive a
signed and dated copy of such statement from the investor, confirming that
it
accurately reflects the investor's financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult for holders of our common stock to resell their shares to third
parties or to otherwise dispose of them in the market or otherwise.
Need
for Additional Financing - Possible Dilution
In
order
to expand our business, we will require additional financing. We recently
entered into an Equity Line Agreement with a funding source that requires us
to
register shares of common stock for sale. While management believes that the
terms of the Equity Line Agreement are in the best interests of the Company
and
it shareholders, sales of common stock pursuant to the equity line agreement
are
likely to depress the market for our common stock.
Our
articles of incorporation provide for indemnification of officers and directors
at our expense and limit their liability which may result in a major cost to
us
and hurt the interests of our shareholders because corporate resources may
be
expended for the benefit of officers and/or directors.
Our
articles of incorporation and applicable Nevada law provide for the
indemnification of our directors, officers, employees, and agents, under certain
circumstances, against attorney's fees and other expenses incurred by them
in
any litigation to which they become a party arising from their association
with
or activities on our behalf. We will also bear the expenses of such litigation
or any of our directors, officers, employees, or agents, upon such person's
promise to repay us, therefore, if it is ultimately determined that any such
person should not have been entitled to indemnification this indemnification
policy could result in substantial expenditures by us, which we will be unable
to recoup.
We
have
been advised that, in the opinion of the SEC, indemnification for liabilities
arising under federal securities laws is against public policy as expressed
in
the Securities Act of 1933 and is, therefore, unenforceable. In the event that
a
claim for indemnification against these types of liabilities, other than the
payment by us of expenses incurred or paid by a director, officer or controlling
person in the successful defense of any action, suit or proceeding, is asserted
by a director, officer or controlling person in connection with the securities
being registered, we will (unless in the opinion of our counsel, the matter
has
been settled by controlling precedent) submit to a court of appropriate
jurisdiction, the question whether indemnification by us is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue. The legal process relating to this matter if it
were
to occur is likely to be very costly and may result in us receiving negative
publicity, either of which factors is are likely to materially reduce the market
and price for our shares, if such a market ever develops.
Item
1B. Unresolved Staff Comments
None
Item
2.
Properties
The
Company operates from an 80,000 square foot industrial building containing
approximately 76,500 square feet of factory space and 3,500 square feet of
office and design space located on approximately 2.5 acres. The Company’s
facilities are adequate for its present operations. The Company rent offices
and
factories under non-cancelable operating lease commitment.
Item
3.
Legal
Proceedings
We
are
not currently party to any legal proceedings and are not aware of any threatened
legal proceedings against us.
Item
4.
Submission
of Matters to a Vote of Security Holders
We
did
not submit any matters to the vote of security holders of the period covered
by
this report.
Part
II.
Item
5.
Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Our
common stock trades on the Over the Counter Bulletin Board under the symbol
“CHSH”. We initially traded under the symbol “INGY” commencing on April 13, 2007
and our symbol was changed to “CHSH” on June 21, 2007 in connection with the
change of our name from Indigo Technologies, Inc. to China Shoe Holdings, Inc.
and our seven and six tenths for one stock split. As of April 2, 2008, there
were 576 holders of record of our common stock. The number of holders does
not
include the shareholders for whom shares are held in a "nominee" or "street"
name. We have not paid any cash dividends and do not anticipate doing so in
the
foreseeable future. Future dividends, if any, will depend upon our results
of
operations, financial condition, capital needs and such other factors as the
Board of Directors deems relevant.
The
following table sets forth the high and low closing prices for our common stock
for the quarters ending on the dates indicated since we were first granted
a
symbol as indicated below:
|
|
|
MARKET
PRICE $
|
|
|
|
|
HIGH
|
|
LOW
|
|
|
FISCAL
YEAR ENDED DECEMBER 31, 2007:
|
|
|
|
|
|
|
|
|
December
31
|
|
$
|
0.25
|
|
$
|
0.09
|
|
|
September
30
|
|
$
|
0.87
|
|
$
|
0.25
|
|
|
June
30 (commencing on July 13)
|
|
|
-
|
|
|
-
|
|
Item
6.
Selected
Financial Data
.
The
following information is derived from our financial statements contained
elsewhere herein and should be reviewed in conjunction with those financial
statements, the notes thereto and “Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations” included in this annual
report.
All
amounts, except for share and per share amounts, in millions of U.S.
dollars.
|
|
|
|
2007
|
|
|
2006
|
|
|
Revenues
|
|
$
|
7.26
|
|
$
|
4.47
|
|
|
|
|
|
|
|
|
|
|
|
Income
From Operations
|
|
$
|
0.71
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
0.65
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
Income
From Operations Per Share Basic & Diluted
|
|
$
|
0.008
|
|
$
|
0.002
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
4.59
|
|
$
|
3.18
|
|
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
$
|
1.13
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
Net
Assets
|
|
$
|
3.45
|
|
$
|
2.48
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
Basic
& Diluted
|
|
|
85,098,864
|
|
|
69,615,000
|
|
|
|
|
|
|
|
|
|
|
|
Total
Shareholders' Equity
|
|
$
|
3.45
|
|
$
|
2.48
|
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
.
Special
Note Regarding Forward Looking Statements
This
Annual Report on Form 10-KSB, 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 this report on
Form 10-KSB. 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) “BVI” are to British Virgin Islands; (vi)
“PRC” and “China” are to the People's Republic of China; (v) “U.S. dollar,” “$”
and “US$” are to United States dollars; (vi) “RMB” are to Yuan of China; (vii)
“Securities Act” are to the Securities Act of 1933, as amended; and (viii)
“Exchange Act” are to the Securities Exchange Act of 1934, as
amended.
Overview
The
Company continued to implement its growth strategy for the twelve months ended
December 31, 2007 through slightly higher marketing efforts placed on ladies
footwear for the Japanese market.
The
Company continued to strengthen its balance sheet in 2007 and for the year
ended
December 31, 2007. 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.
In
2007,
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.
Results
of Operations
The
following table summarizes the results of our operations during the years ended
December 31, 2007 and 2006, and provides information regarding the dollar and
percentage increase or (decrease) from the year ended December 31, 2006 to
the
year ended December 31, 2007.
All
amounts, other than percentages, are in millions of U.S dollars
|
|
|
Years
Ended December 31,
|
|
Increase
|
|
%
Increase
|
|
|
Item
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
(% Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
|
|
$
|
7.26
|
|
$
|
4.47
|
|
$
|
2.79
|
|
$
|
62.4
|
%
|
|
Cost
of Revenues
|
|
|
5.36
|
|
|
3.33
|
|
|
2.03
|
|
|
60.9
|
%
|
|
Gross
Profit
|
|
|
1.90
|
|
|
1.14
|
|
|
0.76
|
|
|
66.7
|
%
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Depreciation
|
|
|
0.22
|
|
|
0.15
|
|
|
0.07
|
|
|
46.7
|
%
|
|
-
General & administrative
|
|
|
0.91
|
|
|
0.71
|
|
|
0.20
|
|
|
28.2
|
%
|
|
-
Stock-based compensation
|
|
|
0.06
|
|
|
-
|
|
|
0.06
|
|
|
100.0
|
%
|
|
Other
Income (Expenses)
|
|
|
-0.05
|
|
|
-0.02
|
|
|
0.03
|
|
|
150.0
|
%
|
|
Income
Tax Expenses
|
|
|
-
|
|
|
0.08
|
|
|
-0.08
|
|
|
-100.0
|
%
|
|
Net
Income
|
|
|
0.66
|
|
|
0.18
|
|
|
0.48
|
|
|
266.7
|
%
|
Year
Ended December 31, 2007 Compared to Year Ended December 31,
2006
Revenue:
Revenue
was $7.26 million for the year ended December 31, 2007 as compared to $4.47
million for the year ended December 31, 2006, which comprised of $6.2 million
representing an increase by 62.4%. Revenue from Japan segment increased $2.42
million or 39.1% from December 31, 2006 to $6.20 million for the year ended
December 31, 2007, revenue from China segment increased $0.37 million or
34.6%
from December 31, 2006 to $1.06 million for the year ended December 31, 2007.
The increase in revenue was mainly attributed 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 $5.36 million and $1.90 million
for
the year ended December 31, 2007 as compared to $3.33 million and $1.14 million
for the year ended December 31, 2006, representing an increase by 60.9% and
66.7% respectively. The growth in cost of revenue and 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 $1.19 million for the year ended December 31, 2007 as compared
to
$0.86 million for the year ended December 31, 2006, representing an increase
by
38.4%. 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.
Stock-based
compensation:
On June
27, 2007, the Company granted 15,185,000 shares of restricted common stock
for
business advisory services to China Venture Partners (the “Consultant”) in lieu
of a total cash fee payable to the Consultant at $0.06 million. The service
period was from June1 2007 to December1
ô
2007.
There is no active market for any class of the Company’s common stock as of the
contract date and the Company recognized the stock-based compensation at
a fair
value of $0.06 million, which was equal to the cash payments as stipulated
in
the original contract.
Income
Tax Expenses:
No
income
tax was incurred during the year ended December 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 $0.66 million for the year ended December 31, 2007 as compared
to net
income of $0.18 million for the year ended December 31, 2006, the increased
in
net income was mainly attributable to the increased in the proportion of
sales
into the Japanese market.
Liquidity
and Capital Resources
Cash
Flows
All
amounts in millions of U.S. dollars
|
|
|
Year
Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
Net
cash provided by operating activities
|
|
$
|
0.84
|
|
$
|
0.45
|
|
|
Net
cash (used in) investing activities
|
|
|
(0.39
|
)
|
|
(0.42
|
)
|
|
Net
cash (used in) provided by financing activities
|
|
|
(0.11
|
)
|
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
$
|
0.34
|
|
$
|
0.12
|
|
Operating
Activities:
Net
cash
provided by operating activities was $0.84 million for the year ended December
31, 2007, which is an increase of $0.39 million from $0.45 million as compared
with the corresponding year in 2006. The increase was mainly due to the increase
in net income, decrease in value-added tax receivable, and increases in accounts
payable, amount due to directors and other payables and accrued
liabilities.
Investing
Activities:
Net
cash
used in investing activities was $0.39 million for the year ended December
31,
2007, which is a decrease of $0.03 million from $0.42 million as compared
with
the corresponding year in 2006. The decrease was mainly due to the decrease
in
the amount of acquisition of property, plant & equipment as compared with
the corresponding year of 2006.
Financing
Activities:
Net
cash
used in financing activities was $0.11 million for the year ended December
31,
2007, which is an increase of $0.20 million from $0.09 million net cash provided
by financing activities during the year ended December 31, 2006. The increase
of
the cash used in financing activities was mainly attributable to the repayment
of short-term borrowings for the year ended December 31, 2007.
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.
All
amounts in millions of U.S. dollars
Short-term
bank borrowings were as follows:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Short-term
bank loans
|
|
$
|
0.17
|
|
$
|
0.19
|
|
|
T
rust receipt loans
|
|
|
-
|
|
|
0.1
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.17
|
|
$
|
0.33
|
|
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.
Operating
Lease Commitment:
The
Company rented offices and factories under non-cancelable operating lease
agreements. As of December 31, 2007, the future minimum rental payments required
for the coming years are as follows:
All
amounts in millions of U.S. dollars
|
Years
ending December 31,:
|
|
|
|
|
|
2008
|
|
$
|
0.04
|
|
|
2009
|
|
|
0.04
|
|
|
2010
|
|
|
0.04
|
|
|
2011
|
|
|
0.04
|
|
|
Thereafter
|
|
|
0.08
|
|
|
|
|
$
|
0.24
|
|
Off-Balance
Sheet Arrangements
We
have
no significant off-balance sheet arrangements that have or are reasonably
likely
to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to
stockholders.
Seasonality
and Inflation
We
do not
believe our business will be seasonal to any material extent except that
certain
styles of shoes sell better at various times of year. We do not believe that
our
results will be materially impacted by inflation in the current fiscal
year.
Critical
Accounting Policies and Estimates
The
preparation of financial statements, in conformity with accounting principles
generally accepted in the United States, requires our management to make
assumptions, estimates and judgments that affect the amounts reported in
the
financial statements, including the notes thereto, and related disclosures
of
commitments and contingencies, if any. We consider our critical accounting
policies to be those that require the more significant judgments and estimates
in the preparation of financial statements, including the
following:
l
Basis
of
presentation
These
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of
America.
l
Use
of
estimates
In
preparing these 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.
l
Basis
of
consolidation
The
consolidated financial statements include the financial statements of CHSH
and
its subsidiaries, WSTG and SKYEDC.
All
significant inter-company balances and transactions within the Company have
been
eliminated upon consolidation.
l
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.
l
Restricted
cash
Restricted
cash consists of cash pledged with a bank as collateral for all letters of
credit. As of December 31, 2007, the Company fully repaid all letters of
credit
and as a result the restricted cash had been withdrawn.
l
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 December 31, 2007 and
2006, the Company recorded no allowance for doubtful accounts.
Inventories
include direct materials, labor and factory overhead and are stated at lower
of
cost or market value, cost being determined on a FIFO basis. 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 December 31, 2007 and 2006, the Company did not record an
allowance for obsolete inventories, nor have there been any
write-offs.
l
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
equipment
|
|
10
years
|
|
|
5
|
%
|
|
Motor
vehicles
|
|
5
years
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
Expenditure
for repairs and maintenance is expensed as incurred. When assets are 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.
l
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 December 31, 2007 and 2006.
l
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
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 years
ended December 31, 2007 and 2006.
(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 and manufacturing
overheads, which are directly attributable to the manufacture of
products.
l
Advertising
costs
The
Company expenses advertising costs are accounted for in accordance with SOP
93-7,
“Reporting
for Advertising Costs”
.
No
advertising expense was incurred for the years ended December 31, 2007 and
2006.
l
Research
and development
Research
and development costs are expensed when incurred in the development of new
products or processes including significant improvements and refinements
of
existing products. Such costs mainly relate to labor and material cost. No
such
cost was incurred by the company for the years ended December 31, 2007 and
2006.
l
Income
taxes
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
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.
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. The adoption of FIN 48 did not have a significant impact on
the
Company’s consolidated financial statements.
The
Company conducts 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.
l
Stock-based
compensation
Stock
based grants issued to non-employees are measured at estimated fair
value.
l
Retirement
plan costs
Contributions
to retirement schemes (which are defined contribution plans) are charged
to
general and administrative expenses in the consolidated statements of operations
and comprehensive income as and when the related employee service is
provided.
l
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.
l
Comprehensive
(loss) 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.
l
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 statement of operations.
The
reporting currency of the Company is the United States dollar (“US dollars”).
The Company’s subsidiaries operating in the PRC maintained their books and
records in its local currency, Renminbi Yuan (“RMB”), which is functional
currency as being the primary currency of the economic environment in which
these entities operate.
In
general, assets and liabilities 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 year. 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 changes in stockholders’ equity.
Translation
of amounts from RMB into United States dollars (“US$”) has been made at the
following exchange rates for the respective year:
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Years
end RMB:US$ exchange rate
|
|
|
7.314
|
|
|
7.813
|
|
|
Average
rates RMB:US$ exchange rate
|
|
|
7.563
|
|
|
7.945
|
|
l
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.
l
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.
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.
Recent
Accounting Pronouncements
The
Company has reviewed all recently issued, but not yet effective, accounting
pronouncements and do not believe the future adoption of any such pronouncements
may be expected to cause a material impact on its financial condition or
the
results of its operations.
In
September 2006, the FASB issued SFAS No. 157,
"Fair
Value Measurements"
("SFAS
No. 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles ("GAAP"),
and
expands disclosures about fair value measurements. This statement applies
under
other accounting pronouncements that require or permit fair value measurement
where the FASB has previously determined that under those pronouncements
fair
value is the appropriate measurement. This statement does not require any
new
fair value measurements but may require companies to change current practice.
This statement is effective for those fiscal years beginning after November
15,
2007 and to the interim periods within those fiscal years. The Company believes
that SFAS No. 157 should not have a material impact on the consolidated
financial position or results of operations
In
September 2006, the FASB issued SFAS No. 158, ‘‘
Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans – an
amendment of FASB Statements No. 87, 88, 106, and 132(R
)’’
(‘‘SFAS No. 158’’). This statement improves financial reporting by requiring an
employer to recognize the over funded or under funded status of a defined
benefit postretirement plan (other than a multi-employer plan) as an asset
or
liability in its statement of financial position and to recognize changes
in
that funded status in the year in which the changes occur through comprehensive
income of a business entity or changes in unrestricted net assets for a
not-for-profit organization. This statement also improves financial reporting
by
requiring an employer to measure the funded status of a plan as of the date
of
its year-end statement of financial position, with limited exceptions. The
Company does not believe that this new pronouncement will have a material
impact
on its consolidated financial statements.
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",
or
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.
In
December 2007, the FASB issued SFAS No. 160,
"Non
controlling Interests in Consolidated Financial Statements—An Amendment of ARB
No. 51, or SFAS No. 160"
.
SFAS
No. 160 establishes new accounting and reporting standards for the non
controlling 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.
Item
8 Financial Statements and Supplementary Data
.
See
Financial Statements beginning on Page F-1.
Item
9
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
No
events
have occurred which would require disclosure under this item.
Item
9A Controls and Procedures
Conclusions
Regarding the Effectiveness of Disclosure Controls and
Procedures
We
maintain disclosure controls and procedures, as defined in Exchange Act Rule
13a-15(e), that are designed to ensure that information required to be disclosed
by the company in the reports that it files or submits under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized, and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and that such information is accumulated and
communicated to the company’s management, including its chief executive officer
and chief financial officer, as appropriate to allow timely decisions regarding
required disclosure. Our management evaluated, with the participation of
the
Chief Executive Officer and Chief Financial Officer, the effectiveness of
the
design and operation of our disclosure controls and procedures as of December
31, 2007. Based on this evaluation, our principal executive and principal
financial officers concluded that our disclosure controls and procedures
were
not effective as of December 31, 2007, the end of the period covered by this
annual report.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining effective internal
control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f)
promulgated under the Exchange Act). Even an effective system of internal
control over financial reporting, no matter how well designed, has inherent
limitations, including the possibility of human error, circumvention or
overriding of controls and, therefore, can provide only reasonable assurance
with respect to reliable financial reporting. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that
the
degree of compliance with internal control policies or procedures may
deteriorate.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2007. The assessment conducted by Management
based on the criteria described in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Management’s assessment included evaluating the design of the
Company’s internal control over financial reporting and testing of the
operational effectiveness of the Company’s internal control over financial
reporting. Based on our assessment, we concluded that, as of December 31,
2007, the Company’s internal control over financial reporting was
effective.
This
report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this annual
report.
Changes
in Internal Control over Financial Reporting
There
has
been no change in our internal control over financial reporting that occurred
during our fiscal quarter ended December 31, 2007, that has materially affected,
or is reasonably likely to materially affect, our internal controlover financial
reporting.
Item
9B—Other Information
We
do not
have any information that was required to be reported on Form 8-K during
the
fourth quarter that was not reported.
Part
III
Item
10 Executive Officers and Corporate Governance
Directors
and Executive Officers
Our
current directors and executive officers are as follows
:
|
Name
|
|
Age
|
|
Position(s)
|
|
|
|
|
|
|
|
Gu
Xianzhong
|
|
52
|
|
President,
CEO and a Director
|
|
|
|
|
|
|
|
Kon
Ki Lo
|
|
33
|
|
Director
|
|
|
|
|
|
|
|
Gu
Changhong
|
|
57
|
|
COO
and VP Manufacturing
|
|
|
|
|
|
|
|
Angus
Cheung Ming
|
|
38
|
|
CFO
|
|
|
|
|
|
|
|
Chaojun
Huang
|
|
33
|
|
Secretary
|
Gu
Xianzhong
was a
founder of SKYEDC in where he has worked since 1997 and has over 20 years
of
experience in managing shoe operations in the PRC. Gu Xianzhong has been
a
director and our CEO since June 2007.
Kon
Ki Lo
was
appointed director in July 2007. He has been a practicing attorney in the
Hong
Kong Special Administrative Region since 1999 and is presently the General
Counsel of a NYSE company. He has also been counsel to three Chinese companies
that are publicly traded in the United States. Mr. Lo holds a Bachelor of
Laws
Degree and a P.C.LL from the University of Hong Kong.
Gu
Changhong
was
appointed COO and VP Manufacturing and Production in July 2007. Gu Changhong
is
a co-founder if SKYEDC where he has worked since 1997. He has over 20 years
of
managerial experience in the wholesale footwear industry including experience
in
shoe design and export.
Angus,
Cheung
Ming
was
appointed CFO in July 2007. Mr. Cheung is a certified public accountant both
in
the Hong Kong Special Administrative Region and the United Kingdom. Before
joining the Company, he was the Chief Financial Officer of a Hong Kong based
PRC
IT Company at OTCBB, Prior to the aforesaid, Mr. Cheung worked as an auditor
in
Deloitte Touche & Tohmatsu and RSM Nelson Wheeler. Mr. Cheung holds two
Master Degrees from the City University of Hong Kong (International Accounting
and Information Systems). He was also an ordinary member of Hong Kong Securities
Institute and an associate member of the Taxation Institute of Hong
Kong.
Chaojun
Huang
has been
was appointed Secretary in July 2007. He has been CFO of SKYEDC since 2005.
Prior thereto, from 1999 to 2005, he was the financial director of Shanghai
Taihe Metallic Material Co., Ltd. He is a 1998 graduate of Hunan Financial
and
Economical College and a registered accountant.
There
are
no family relationships among members of management except that
Gu
Xianzhong and Gu Changhong are brothers
.
Directors serve for one year terms or until their successors shall have been
elected and shall qualify. Officers serve at the pleasure of the board. Due
to
its small size, the Company has not adopted a code of ethics. The Board of
Directors does not have any committees.
Item
11. Executive Compensation
SUMMARY
COMPENSATION TABLE
The
following table sets forth the cash and non-cash annual remuneration of each
of
the three highest paid persons who are officers and directors as a group
during
our last fiscal year:
|
Name of
Individual or
Identity of
Group
|
|
Capacilities in
which
Remuneration
was
Received
|
|
Salary
|
|
Bonus
|
|
Stock Awards
|
|
All Other
Compensation
|
|
Remuneration
|
|
|
|
|
|
|
$
|
|
$
|
|
|
|
$
|
|
$
|
|
|
Gu
Xian Zhong
|
|
CEO
|
|
7,933
|
|
Nil
|
|
Nil
|
|
Nil
|
|
Nil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gu
Chang Hong
|
|
COO
|
|
7,140
|
|
Nil
|
|
Nil
|
|
Nil
|
|
Nil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chao
Jun Huang
|
|
Secretary
|
|
6,347
|
|
Nil
|
|
Nil
|
|
Nil
|
|
Nil
|
|
The
Company has not paid any compensation other than cash. The Company does not
have
any Stock Option Plan or other equity compensation plans, but is considering
adopting an employee stock incentive plan for its management and key employees
consultants and directors in the future.
No
compensation to Directors
No
director has received any cash or other compensation for serving as a director
and we do not plan to pay any cash or other compensation to any person for
serving as a director.
Item
12 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The
information in the following table sets forth the beneficial ownership of
our
shares of common stock as of March 25, 2008, by: (i) each of the three highest
paid persons who are our officers and directors (or in the alternative, each
officer and director); (ii) all officers and directors as a group; (iii)
each
shareholder who beneficially owns more than 5% of any class of our securities,
including those shares subject to outstanding options. A person deemed to
be a
beneficial owner of any securities that such a person has a right to acquire
within 60 days.
|
Name
and Address
|
|
Number of
Shares
|
|
Percentage of
Class
|
|
|
|
|
|
|
|
|
|
Cranberry
Heights Group Limited
(1)
|
|
|
14,616,000
|
|
|
13.9
|
%
|
|
|
|
|
|
|
|
|
|
|
Gu
Xianzhong
(1)
|
|
|
10,500,000
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Shen
Lei
(1)
|
|
|
3,672,612
|
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
|
|
Angus
Cheung Ming
(1)
|
|
|
1,001,000
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
Gu
Changhong
(1)
|
|
|
3,395,000
|
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
|
|
Lo
Kon Ki
(1)
|
|
|
2,002,000
|
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
All
officers and
|
|
|
|
|
|
|
|
|
directors
as a group (5) persons
(2)
|
|
|
16,899,000
|
|
|
16.1
|
%
|
(1)
The
address of all of these persons is 488 Wai Qingsong Road, Waigang Town, Jiading
District, Shanghai, PRC. Cranberry Heights Group Limited is controlled by
Xun
Shi, a consultant to the Company.
(2)
The
individual holdings of each officer and director owning less than 5% of the
issued and outstanding shares of common stock, appears elsewhere herein under
the list of shares issued in connection with the Agreement.
Item
13. Certain Relationships and Related Transaction, and Director
Independence
Pursuant
to an assets transfer agreement, dated as of December 31, 2006, Gu Xianzhong
and
Gu Changhong transferred ownership of Kanghong’s plant to Kanghong as a
contribution to capital. The transfer remains subject to official recording
in
the Real Property Registry of Jia Ding District, Shanghai, PRC.
Item
14. Principal Accounting Fees and Services
To
Be
Provided BY ACCOUNTANT
Part
IV
Item
15. Exhibits, Financial Statement Schedules
(A)
Financial Statements
See
index
to Financial Statements on Page F-1
(B)
Exhibits.
|
Exhibit Number
|
|
Exhibit
Description
|
|
3.1.1
|
|
Certificate
of Incorporation - Incorporated by reference to like numbered exhibit
to
the Company’s Registration Statement on Form SB-2 File Number
333-133910
|
|
3.2
|
|
Bylaws
- Incorporated by reference to like numbered exhibit to the Company’s
Registration Statement on Form SB-2 File Number
333-133910
|
|
3.3
|
|
Certificate
of Amendment to Certificate of Incorporation - Incorporated by
reference
to Exhibit 3.1 to Current Report on Form 8-K filed June 8,
2007.
|
|
4.1
|
|
Specimen
Stock Certificate - Filed Herewith
|
|
10.1
|
|
Regulation
S Subscription Agreement - Incorporated by Reference to Exhibit
10.1 to
Current Report on Form 8-K filed January 30, 2008
|
|
10.2
|
|
Equity
Line of Credit Agreement - Incorporated by Reference to Exhibit
10.1
Current Report on Form 8-K filed March ___ 2008
|
|
10.3
|
|
Registration
Rights Agreement - Incorporated by Reference to Exhibit 10.2 Current
Report on Form 8-K filed March ___ 2008
|
|
10.4
|
|
Placement
Agency Agreement -Incorporated by Reference to Exhibit 10.3 Current
Report
on Form 8-K filed March ___ 2008
|
|
23.1
|
|
Consent
of Zhong Yi (Hong Kong) C.P.A. Company Limited
|
|
31.1
|
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act *
|
|
31.2
|
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act*
|
|
32
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002*
|
(
C)
Financial Statement Schedules - None
*Filed
herewith
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned thereunto duly authorized.
China
Shoe Holdings, Inc.
|
By:
|
/s/
Gu Xianzhong, President and CEO
|
November
5, 2008
Pursuant
to the requirements of the Securities Exchange Act of 1934, 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
|
|
Signature
|
|
Date
|
|
Capacities
|
|
|
|
|
|
|
|
|
|
Gu
Xianzhong
|
|
/s/
Gu Xianzhong
|
|
November
5, 2008
|
|
President
and CEO
|
|
|
|
|
|
|
|
|
|
Angus
Cheung Ming
|
|
/s/
Cheung Ming
|
|
November
5, 2008
|
|
CFO
|
|
|
|
|
|
|
|
|
|
Kon
Ki Lo
|
|
|
|
|
|
|
CHINA
SHOE HOLDINGS, INC
(Formerly
Indigo Technologies, Inc.)
Consolidated
Financial Statements
For
The Years Ended December 31, 2007 And 2006
(With
Report of Independent Registered Public Accounting Firm
Thereon)
ZHONG
YI (HONG KONG) C.P.A. COMPANY LIMITED
Certified
Public Accountants
CHINA
SHOE HOLDINGS, INC.
(Formerly
Indigo Technologies, Inc.)
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Page
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
|
|
Consolidated
Balance Sheets
|
F-3
|
|
|
|
|
Consolidated
Statements of Income And Comprehensive Income
|
F-4
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
F-5
|
|
|
|
|
Consolidated
Statements of Stockholders’ Equity
|
F-6
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
F-7 –
F-22
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Stockholders of
CHINA
SHOE HOLDINGS, INC
(Formerly
Indigo Technologies, Inc.)
We
have
audited the accompanying consolidated balance sheets of China Shoe Holdings,
Inc. (Formerly Indigo Technologies, Inc.) (“the Company”) as of December 31,
2007 and 2006 and the related consolidated statements of income and
comprehensive income, cash flows and stockholders’ equity for the years ended
December 31, 2007 and 2006. The financial statements are the responsibility
of
the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required
to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits include consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of China Shoe Holdings,
Inc. as
of December 31, 2007 and 2006, and the results of operations and cash flows
for
the years ended December 31, 2007 and 2006, in conformity with accounting
principles generally accepted in the United States of America.
|
/s/
Zhong Yi (Hong Kong) C.P.A. Company Limited
|
|
|
Zhong
Yi (Hong Kong) C.P.A. Company Limited
|
|
Certified
Public Accountants
|
Hong
Kong, China
April
11,
2008
CHINA
SHOE HOLDINGS, INC
(Formerly
Indigo Technologies, Inc.)
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (‘US$”), except for number of
shares)
|
|
|
As of December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
(restated)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
706,823
|
|
$
|
333,508
|
|
|
Restricted
cash
|
|
|
-
|
|
|
60,160
|
|
|
Accounts
receivable, trade
|
|
|
1,071,037
|
|
|
582,372
|
|
|
Advances
to employees
|
|
|
41,017
|
|
|
145,040
|
|
|
Inventories
|
|
|
529,574
|
|
|
384,394
|
|
|
Value
added tax receivable
|
|
|
-
|
|
|
66,948
|
|
|
Other
receivables and prepayments
|
|
|
519,210
|
|
|
227,769
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
2,867,661
|
|
|
1,800,191
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
assets:
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
1,717,719
|
|
|
1,382,851
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
4,585,380
|
|
$
|
3,183,042
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Short-term
bank borrowings
|
|
$
|
170,903
|
|
$
|
333,249
|
|
|
Accounts
payable, trade
|
|
|
500,491
|
|
|
253,201
|
|
|
Income
tax payable
|
|
|
-
|
|
|
20,119
|
|
|
Amount
due to directors
|
|
|
76,049
|
|
|
-
|
|
|
Other
payables and accrued liabilities
|
|
|
386,208
|
|
|
99,293
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
1,133,651
|
|
|
705,862
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value; 10,000,000 shares authorized; no shares
issued
and outstanding as of December 31, 2007 and 2006
|
|
|
-
|
|
|
-
|
|
|
Common
stock, $0.001 par value; 300,000,000 shares authorized; 100,000,001
shares
and 69,615,000 shares issued and outstanding as of December 31,
2007 and
2006
|
|
|
100,000
|
|
|
69,615
|
|
|
Additional
paid-in capital
|
|
|
1,883,364
|
|
|
1,851,783
|
|
|
Accumulated
other comprehensive income (loss)
|
|
|
225,226
|
|
|
(33,829
|
)
|
|
Retained
earnings
|
|
|
1,243,139
|
|
|
589,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,451,729
|
|
|
2,477,180
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
4,585,380
|
|
$
|
3,183,042
|
|
See
accompanying notes to consolidated financial statements.
CHINA
SHOE HOLDINGS, INC
(Formerly
Indigo Technologies, Inc.)
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENISVE INCOME
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed United States Dollars (‘US$”), except for number of
shares)
|
|
|
For the years ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
(restated)
|
|
|
|
|
|
|
|
|
|
OPERATING
REVENUES
|
|
$
|
7,256,568
|
|
$
|
4,465,755
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF REVENUES
(exclusive of depreciation)
|
|
|
5,362,306
|
|
|
3,333,402
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
1,894,262
|
|
|
1,132,353
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
218,735
|
|
|
152,932
|
|
|
General
and administrative
|
|
|
969,697
|
|
|
709,103
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
1,188,432
|
|
|
862,035
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
705,830
|
|
|
270,318
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,614
|
|
|
268
|
|
|
Interest
expense
|
|
|
(53,916
|
)
|
|
(20,201
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
other expense
|
|
|
(52,302
|
)
|
|
(19,933
|
)
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
653,528
|
|
|
250,385
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expenses
|
|
|
-
|
|
|
(76,767
|
)
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
653,528
|
|
$
|
173,618
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
-
Foreign currency translation gain
|
|
|
259,055
|
|
|
44,375
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
912,583
|
|
$
|
217,993
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share- Basic and diluted
|
|
$
|
0.008
|
|
$
|
0.002
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding during the year - Basic and
diluted
|
|
|
85,098,864
|
|
|
69,615,000
|
|
See
accompanying notes to consolidated financial statements.
CHINA
SHOE HOLDINGS, INC
(Formerly
Indigo Technologies, Inc.)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed United States Dollars (‘US$”))
|
|
|
For
the years ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
(restated)
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
653,528
|
|
|
173,618
|
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
218,735
|
|
|
152,932
|
|
|
Shares
issued for service rendered, non-cash
|
|
|
60,000
|
|
|
-
|
|
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable, trade
|
|
|
(434,188
|
)
|
|
(169,495
|
)
|
|
Advances
to employees
|
|
|
110,742
|
|
|
437,566
|
|
|
Inventories
|
|
|
(115,066
|
)
|
|
183,606
|
|
|
Other
receivables and prepayments
|
|
|
(266,829
|
)
|
|
(123,234
|
)
|
|
Value-added
tax receivable
|
|
|
69,154
|
|
|
(29,441
|
)
|
|
Accounts
payable, trade
|
|
|
222,457
|
|
|
3,401
|
|
|
Income
tax payable
|
|
|
(20,782
|
)
|
|
11,698
|
|
|
Amount
due to directors
|
|
|
72,992
|
|
|
-
|
|
|
Other
payables and accrued liabilities
|
|
|
273,472
|
|
|
(190,479
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
844,215
|
|
|
450,172
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(390,245
|
)
|
|
(419,461
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(390,245
|
)
|
|
(419,461
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Cash
received from reverse acquisition
|
|
|
1,966
|
|
|
-
|
|
|
Repayment
of short-term bank borrowings
|
|
|
(1,510,985
|
)
|
|
(179,510
|
)
|
|
Proceeds
from short-term bank borrowings
|
|
|
1,332,028
|
|
|
333,249
|
|
|
Proceeds
from (payment to) restricted cash
|
|
|
62,142
|
|
|
(60,160
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
|
(114,849
|
)
|
|
93,579
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
34,194
|
|
|
44,375
|
|
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
373,315
|
|
|
168,665
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
333,508
|
|
|
164,843
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
706,823
|
|
|
333,508
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
20,782
|
|
$
|
65,069
|
|
|
Cash
paid for interest expenses
|
|
$
|
53,916
|
|
$
|
20,201
|
|
See
accompanying notes to consolidated financial statements
CHINA
SHOE HOLDINGS, INC
(Formerly
Indigo Technologies, Inc.)
CONSOLDIATED
STATEMENTS OF STOCKHOLDERS’EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
|
|
Common Stock
|
|
Additional
|
|
Accumulated
other
comprehensive
|
|
Retained
|
|
Total
stockholders’
|
|
|
|
|
No. of shares
|
|
Amount
|
|
paid-in capital
|
|
(loss) income
|
|
earnings
|
|
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2006 (restated)
|
|
|
69,615,000
|
|
$
|
69,615
|
|
$
|
1,851,783
|
|
$
|
(78,204
|
)
|
$
|
415,993
|
|
$
|
2,259,187
|
|
|
Net
income for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
173,618
|
|
|
173,618
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
44,375
|
|
|
-
|
|
|
44,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2006
|
|
|
69,615,000
|
|
$
|
69,615
|
|
$
|
1,851,783
|
|
$
|
(33,829
|
)
|
$
|
589,611
|
|
$
|
2,477,180
|
|
|
Shares
issued to complete reverse acquisition
|
|
|
15,200,001
|
|
|
15,200
|
|
|
(13,234
|
)
|
|
-
|
|
|
-
|
|
|
1,966
|
|
|
Shares
issued for service rendered, non-cash
|
|
|
15,185,000
|
|
|
15,185
|
|
|
44,815
|
|
|
-
|
|
|
-
|
|
|
60,000
|
|
|
Net
income for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
653,528
|
|
|
653,528
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
259,055
|
|
|
-
|
|
|
259,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2007
|
|
|
100,000,001
|
|
$
|
100,000
|
|
$
|
1,883,364
|
|
$
|
225,226
|
|
$
|
1,243,139
|
|
$
|
3,451,729
|
|
See
accompanying notes to consolidated financial statements
CHINA
SHOE HOLDINGS, INC
(Formerly
Indigo Technologies, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
|
1.
|
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.
On
June
6, 2007, CHSH completed a 7.6 for 1 forward stock split on the common stock
in
the form of a dividend and the par value remains at $0.001 per share. In
addition, Amended and Restated Articles of Incorporation was filed to the
Secretary of State of the State of Nevada in connection with the increase
in
authorized capital stock from 75,000,000 shares of common stock at par value
of
$0.001 per share to 300,000,000 shares of common stock at par value $0.001
per
share and 10,000,000 shares of preferred stock at par value $0.001 per
share.
On
June
29, 2007, CHSH completed a 1 for 3.0625 reverse stock split on the Company’s
common stock. As a result, the total number of issued and outstanding shares
of
the Company before the stock exchange transaction was increased from 6,125,000
to 15,200,001 shares and par value of its common stock was unchanged at $0.001.
This is inclusive of issuance of 1 share of common stock as fractional share.
All common stock and per share data for all periods presented in these
consolidated financial statements have been restated to give effect to the
forward stock split and stock cancellation.
On
June
29, 2007, CHSH completed a stock exchange transaction with Wholly Success
Technology Group Limited (“WSTG”). WSTG was incorporated as a limited liability
company in the British Virgin Islands (“BVI”) on December 16, 2004 with the
authorized, issued and outstanding shares of 994,500 common stock at par
value
of $1 per share. Its principal activity is investment holding in Shanghai
Kanghong Yunheng Enterprise Development Company Limited (“Shanghai Kanghong”).
Shanghai Kanghong was organized as a limited liability company and located
in
Shanghai city, the People’s Republic of China (“PRC”) with a registered capital
of $1,921,398 (equivalent to Renminbi (“RMB”) 15,000,000).
The
stock
exchange transaction involved an issuance by CHSH of 70 shares of the Company’s
common stock to each WSTG’s shareholder for each share of WSTG common stock
owned. As a result, the total number of issued and outstanding shares of
common
stock held by WSTG’s shareholders was 69,615,000 shares. In accordance with
reverse merger accounting practice, these shares are assumed to be outstanding
as of the beginning of the periods presented in the accompanying financial
statements.
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 $60,000 pursuant to a contract
for
consulting services dated June 1, 2007.
The
stock
exchange transaction has been accounted for as a reverse acquisition and
recapitalization of the CHSH whereby WSTG is deemed to be the accounting
acquirer (legal acquiree) and CHSH to be the accounting acquiree (legal
acquirer). The accompanying consolidated financial statements are in substance
those of WSTG, with the assets and liabilities, and revenues and expenses,
of
CHSH being included effective from the date of stock exchange transaction.
CHSH
is deemed to be a continuation of the business of WSTG. Accordingly, the
accompanying consolidated financial statements include the
following:
CHINA
SHOE HOLDINGS, INC
(Formerly
Indigo Technologies, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
|
(1)
|
the
balance sheet consists of the net assets of the accounting acquirer
at
historical cost and the net assets of the accounting acquiree at
historical cost;
|
|
(2)
|
the
financial position, results of operations, and cash flows of the
accounting acquirer for all periods presented as if the recapitalization
had occurred at the beginning of the earliest period presented
and the
operations of the accounting acquiree from the date of stock exchange
transaction.
|
On
February 9, 2006, Shanghai Kanghong transferred it registered capital of
$1,921,398 (equivalent to RMB15,000,000) to WSTG. The transfer has been
accounted for as a reorganization of entities under common control as the
companies were beneficially owned by identical shareholders and share common
management. The financial statements have been prepared as if the reorganization
had occurred retroactively.
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.
CHSH,
WSTG and Shanghai Kanghong are collectively known as “the Company” in these
consolidated financial statements.
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
|
These
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of
America.
In
preparing these 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.
The
consolidated financial statements include the financial statements of CHSH
and
its subsidiaries, WSTG and Shanghai Kanghong.
All
significant inter-company balances and transactions within the Company have
been
eliminated upon consolidation.
CHINA
SHOE HOLDINGS, INC
(Formerly
Indigo Technologies, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
|
l
|
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.
Restricted
cash consists of cash pledged with a bank as collateral for all letters of
credit. As of December 31, 2007, the Company fully repaid all letters of
credit
and as a result the restricted cash had been withdrawn.
|
l
|
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 December 31, 2007 and
2006, the Company recorded no allowance for doubtful accounts.
Inventories
include direct materials, labor and factory overhead and are stated at lower
of
cost or market value, cost being determined on a FIFO basis. 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 December 31, 2007 and 2006, the Company did not record an
allowance for obsolete inventories, nor have there been any
write-offs.
|
l
|
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
equipment
|
|
|
10
years
|
|
|
5
|
%
|
|
Motor
vehicles
|
|
|
5
years
|
|
|
5
|
%
|
Expenditure
for repairs and maintenance is expensed as incurred. When assets are 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.
CHINA
SHOE HOLDINGS, INC
(Formerly
Indigo Technologies, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
|
l
|
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 December 31, 2007 and 2006.
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.
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 years
ended December 31, 2007 and 2006.
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 and manufacturing
overheads, which are directly attributable to the manufacture of
products.
The
Company expenses advertising costs are accounted for in accordance with SOP
93-7,
“Reporting
for Advertising Costs”
. No
advertising expense was incurred for the years ended December 31, 2007 and
2006.
|
l
|
Research
and development
|
Research
and development costs are expensed when incurred in the development of new
products or processes including significant improvements and refinements
of
existing products. Such costs mainly relate to labor and material cost. No
such
cost was incurred by the company for the years ended December 31, 2007 and
2006.
CHINA
SHOE HOLDINGS, INC
(Formerly
Indigo Technologies, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
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
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.
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. The adoption of FIN 48 did not have a significant impact on
the
Company’s consolidated financial statements.
The
Company conducts 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.
|
l
|
Stock-based
compensation
|
Stock
based grants issued to non-employees are measured at estimated fair
value.
Contributions
to retirement schemes (which are defined contribution plans) are charged
to
general and administrative expenses in the consolidated statements of operations
and comprehensive income as and when the related employee service is
provided.
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.
CHINA
SHOE HOLDINGS, INC
(Formerly
Indigo Technologies, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
SFAS
No.
130,
“Reporting
Comprehensive Income”
,
establishes standards for reporting and display of comprehensive income,
its
components and accumulated balances. Comprehensive income as defined includes
all changes in equity during a period from non-owner sources. Accumulated
comprehensive income consists of changes in unrealized gains and losses on
foreign currency translation. This comprehensive income is not included in
the
computation of income tax expense or benefit.
|
l
|
Foreign
currencies translation
|
Transactions
denominated in currencies other than the functional currency are translated
into
the functional currency at the exchange rates prevailing at the dates of
the
transaction. Monetary assets and liabilities denominated in currencies other
than the functional currency are translated into the functional currency
using
the applicable exchange rates at the balance sheet dates. The resulting exchange
differences are recorded in the statement of operations.
The
reporting currency of the Company is the United States dollar (“US dollars”).
The Company’s subsidiaries operating in the PRC maintained their books and
records in its local currency, Renminbi Yuan (“RMB”), which is functional
currency as being the primary currency of the economic environment in which
these entities operate.
In
general, assets and liabilities are translated into US dollars, in accordance
with SFAS No. 52, “
Foreign
Currency Translation”
, using
the exchange rate on the balance sheet date. Revenues and expenses are
translated at average rates prevailing during the year. The gains and losses
resulting from translation of financial statements of foreign subsidiaries
are
recorded as a separate component of accumulated other comprehensive income
within the statement of changes in stockholders’ equity.
Translation
of amounts from RMB into United States dollars (“US$”) has been made at the
following exchange rates for the respective year:
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Years
end RMB:US$ exchange rate
|
|
|
7.314
|
|
|
7.813
|
|
|
Average
rates RMB:US$ exchange rate
|
|
|
7.563
|
|
|
7.945
|
|
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.
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.
CHINA
SHOE HOLDINGS, INC
(Formerly
Indigo Technologies, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
|
l
|
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.
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.
|
l
|
Recently
issued accounting pronouncements
|
The
Company has reviewed all recently issued, but not yet effective, accounting
pronouncements and do not believe the future adoption of any such pronouncements
may be expected to cause a material impact on its financial condition or
the
results of its operations.
In
September 2006, the FASB issued SFAS No. 157,
"Fair Value Measurements"
("SFAS
No. 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles ("GAAP"),
and
expands disclosures about fair value measurements. This statement applies
under
other accounting pronouncements that require or permit fair value measurement
where the FASB has previously determined that under those pronouncements
fair
value is the appropriate measurement. This statement does not require any
new
fair value measurements but may require companies to change current practice.
This statement is effective for those fiscal years beginning after November
15,
2007 and to the interim periods within those fiscal years. The Company believes
that SFAS No. 157 should not have a material impact on the consolidated
financial position or results of operations
In
September 2006, the FASB issued SFAS No. 158, ‘‘
Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans - an
amendment of FASB Statements No. 87, 88, 106, and 132(R
)’’
(‘‘SFAS No. 158’’). This statement improves financial reporting by requiring an
employer to recognize the overfunded or underfunded status of a defined benefit
postretirement plan (other than a multi-employer plan) as an asset or liability
in its statement of financial position and to recognize changes in that funded
status in the year in which the changes occur through comprehensive income
of a
business entity or changes in unrestricted net assets for a not-for-profit
organization. This statement also improves financial reporting by requiring
an
employer to measure the funded status of a plan as of the date of its year-end
statement of financial position, with limited exceptions. The Company does
not
believe that this new pronouncement will have a material impact on its
consolidated financial statements.
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.
CHINA
SHOE HOLDINGS, INC
(Formerly
Indigo Technologies, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007),
"Business Combinations",
or 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.
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 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.
|
3.
|
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 years ended
December 31, 2007 and 2006.
Inventories
consisted of following:
|
|
|
As of December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
(restated)
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
224,795
|
|
$
|
211,682
|
|
|
Work
in process
|
|
|
124,214
|
|
|
56,948
|
|
|
Finished
goods
|
|
|
180,565
|
|
|
115,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
529,574
|
|
$
|
384,394
|
|
For
the
years ended December 31, 2007 and 2006, the Company did not record an allowance
for obsolete inventories, nor have there been any write-offs.
CHINA
SHOE HOLDINGS, INC
(Formerly
Indigo Technologies, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
|
5.
|
OTHER
RECEIVABLES AND
PREPAYMENTS
|
Other
receivables and prepayments consisted of the following:
|
|
|
As of December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
(restated)
|
|
|
|
|
|
|
|
|
|
Prepayments
|
|
$
|
457,973
|
|
$
|
218,639
|
|
|
Other
receivables
|
|
|
61,237
|
|
|
9,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
519,210
|
|
$
|
227,769
|
|
The
prepayments represented the deposits to suppliers for materials consumptions.
The balances are subsequently settled upon the delivery of
materials.
|
6.
|
PROPERTY,
PLANT AND EQUIPMENT, NET
|
Property,
plant and equipment, net, consisted of the following:
|
|
|
As of December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
(restated)
|
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
403,046
|
|
$
|
403,046
|
|
|
Plant
and machinery
|
|
|
1,822,779
|
|
|
1,419,238
|
|
|
Office
equipment
|
|
|
38,954
|
|
|
38,954
|
|
|
Motor
vehicles
|
|
|
29,452
|
|
|
29,452
|
|
|
Foreign
translation difference
|
|
|
214,299
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,508,530
|
|
|
1,890,690
|
|
|
Less:
accumulated depreciation
|
|
|
(726,573
|
)
|
|
(507,839
|
)
|
|
Less:
foreign translation difference
|
|
|
(64,238
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
$
|
1,717,719
|
|
$
|
1,382,851
|
|
Depreciation
expense for the years ended December 31, 2007 and 2006 were $218,735 and
$152,932, respectively.
CHINA
SHOE HOLDINGS, INC
(Formerly
Indigo Technologies, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
|
7.
|
SHORT-TERM
BANK BORROWINGS
|
Short-term
bank borrowings were as follows:
|
|
|
As of December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
(restated)
|
|
|
|
|
|
|
|
|
|
Short-term
bank loans
|
|
$
|
170,903
|
|
$
|
185,600
|
|
|
Trust
receipt loans
|
|
|
-
|
|
|
147,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
170,903
|
|
$
|
333,249
|
|
As
of
December 31, 2007, the short-term bank loans consist of three individual
bank
loans with aggregate amount of RMB 1,250,000 (2006: RMB 2,603,505) payable
to a
financial institution, guaranteed by an independent third party, with interest
rate ranged from 7.29% to 8.21% (2006: 7.38%) per annum payable quarterly,
with
principals due between August 20 to October 20, 2008.
|
8.
|
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.
|
9.
|
OTHER
PAYABLES AND ACCRUED
LIABILIITES
|
Other
payables and accrued liabilities consisted of the followings:
|
|
|
As of December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
(restated)
|
|
|
|
|
|
|
|
|
|
Salaries
payable
|
|
$
|
77,718
|
|
$
|
780
|
|
|
Welfare
payable
|
|
|
1,629
|
|
|
4,098
|
|
|
Advances
from customers
|
|
|
13,395
|
|
|
43,199
|
|
|
Accrued
expenses
|
|
|
146,230
|
|
|
43,115
|
|
|
Advances
from third parties
|
|
|
109,378
|
|
|
-
|
|
|
VAT
payable
|
|
|
9,355
|
|
|
-
|
|
|
Other
payables
|
|
|
28,503
|
|
|
8,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
386,208
|
|
$
|
99,293
|
|
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. The operations in the United States of America and BVI have
incurred net operating 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 has $nil and $76,767 recorded
income tax provision for the years ended December 31, 2007 and 2006,
respectively.
CHINA
SHOE HOLDINGS, INC
(Formerly
Indigo Technologies, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
The
components of income (loss) before income taxes separating U.S., BVI and
PRC tax
jurisdictions are as follows:
|
|
|
Years ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
(restated)
|
|
|
Tax
jurisdictions from:
|
|
|
|
|
|
|
Loss
subject to U.S.
|
|
$
|
(74,092
|
)
|
$
|
-
|
|
|
Loss
subject BVI
|
|
|
(63,528
|
)
|
|
(5,466
|
)
|
|
Income
subject to the PRC
|
|
|
791,148
|
|
|
255,851
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
653,528
|
|
$
|
250,385
|
|
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
December 31, 2007, the operation in the United States of America incurred
$74,092 of 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. The Company has provided for a full
valuation allowance against the deferred tax assets of $50,734 on the expected
future tax benefits from the net operating loss carryforwards as the management
believes it is more likely than not that these assets will not be realized
in
the future.
British
Virgin Islands
Under
the
current BVI law, the Company is not subject to tax on income.
The
PRC
The
Company's subsidiary operating in the PRC, Shanghai Kanghong is subject to
the
Corporate Income Tax governed by the Income Tax Law of the People’s Republic of
China, at a statutory rate of 33%, which is comprised of a 30% national income
tax and 3% local income tax.
In
December 2006, the Shanghai city local government tax bureau in the PRC approved
Shanghai Kanghong as a foreign investment enterprise. Hence, effective from
January 1, 2007, Shanghai Kanghong is entitled to a two-year exemption from
enterprise income tax and a reduced enterprise income tax rate of 15% for
the
following three years.
On
March
16, 2007, the National People’s Congress approved the Corporate Income Tax Law
of the People’s Republic of China (the “New CIT Law”). The new CIT Law, among
other things, imposes a unified income tax rate of 25% for both domestic
and
foreign invested enterprises with effect from January 1, 2008. Shanghai Kanghong
is considered a foreign invested enterprise and its ultimate applicable
effective tax rate in 2008 and beyond will depend on many factors, including
but
not limited to whether certain of its legal entity will be subject to a
transitional policy under the Corporate Income Tax Law, whether Shanghai
Kanghong can continue to enjoy the unexpired tax holidays.
CHINA
SHOE HOLDINGS, INC
(Formerly
Indigo Technologies, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
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
years
ended December 31, 2007 and 2006 is as follows:
|
|
|
Years ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
791,148
|
|
$
|
255,851
|
|
|
Statutory
income tax rate
|
|
|
33
|
%
|
|
33
|
%
|
|
|
|
|
261,079
|
|
|
84,430
|
|
|
Tax
effect of expenses not deductible for tax purposes:
|
|
|
|
|
|
|
|
|
-
Accrued expenses
|
|
|
24,802
|
|
|
6,618
|
|
|
-
Others
|
|
|
-
|
|
|
(14,281
|
)
|
|
Effect
from tax holiday
|
|
|
(285,881
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expenses
|
|
$
|
-
|
|
$
|
76,767
|
|
The
Company’s effective income tax rates for the years ended December 31, 2007 and
2006 were 0% and 30%, respectively.
The
following table sets forth the significant components of the aggregate deferred
tax assets of the Company as of December 31, 2007 and 2006:
|
|
|
As of December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
-
Net operating loss carried forward
|
|
$
|
25,932
|
|
$
|
-
|
|
|
-
Accrued expenses
|
|
|
24,802
|
|
|
6,618
|
|
|
Less:
valuation allowance
|
|
|
(50,734
|
)
|
|
(6,618
|
)
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets
|
|
$
|
-
|
|
$
|
-
|
|
|
11.
|
STOCK-BASED
COMPENSATION
|
The
Company granted 15,185,000 shares of restricted common stock to China Venture
Partners, Inc. in accordance with a supplementary agreement dated June 27,
2007.
The shares were issued in lieu of cash payment pursuant to a Consulting
Agreement (the “Agreement”) dated June 1, 2007. According to the Agreement,
China Venture Partners, Inc. is required to provide business advisory services
to the Company for a period of 6 months from June 1, 2007 to November 30,
2007
and the total cash fee payable to China Venture Partners, Inc. was $60,000.
There was no active market for any class of the Company’s common stock as of the
contract date and so the fair value was estimated at $60,000 to equal the
cash
payments stipulated in the original contract. The Company is consulting
with the SEC Office of the Chief Accountants on the accounting
treatment.
CHINA
SHOE HOLDINGS, INC
(Formerly
Indigo Technologies, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
Basic
net
income per share is computed using the weighted average number of the ordinary
shares outstanding during the year. Diluted net income per share is computed
using the weighted average number of ordinary shares and ordinary share
equivalents outstanding during the year. Pursuant to stock exchange transaction
on June 29, 2007, the weighted average number of common shares issued and
outstanding was adjusted to account for the effects of the stock exchange
transaction as a reverse acquisition as more fully described in Note
1.
The
following table sets forth the computation of basic and diluted net income
per
share for the years ended December 31, 2007 and 2006:
|
|
|
Years ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
Basis
and diluted net income per share calculation
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
-
Net income in computing basic net income per share
|
|
$
|
653,528
|
|
$
|
173,618
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
-
Weighted average ordinary shares outstanding
|
|
|
85,098,864
|
|
|
69,915,000
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net income per share
|
|
$
|
0.008
|
|
$
|
0.002
|
|
|
13.
|
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:
|
|
|
Years ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
-
Japan
|
|
$
|
6,197,244
|
|
$
|
3,773,314
|
|
|
-
The PRC
|
|
|
1,059,324
|
|
|
692,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,256,568
|
|
$
|
4,465,755
|
|
|
|
|
As of December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Net
assets (liabilities):
|
|
|
|
|
|
|
-
U.S.
|
|
$
|
(12,126
|
)
|
$
|
-
|
|
|
-
BVI
|
|
|
(69,352
|
)
|
|
(5,466
|
)
|
|
-
The PRC
|
|
|
3,533,207
|
|
|
2,482,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,451,729
|
|
$
|
2,477,180
|
|
CHINA
SHOE HOLDINGS, INC
(Formerly
Indigo Technologies, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
|
14.
|
CHINA
CONTRIBUTION PLAN
|
Under
the
PRC Law, full-time employees of the Company are entitled to staff welfare
benefits including medical care, welfare subsidies, unemployment insurance
and
pension benefits through a China government-mandated multi-employer defined
contribution plan. The Company is required to accrue for these benefits based
on
certain percentages of the employees’ salaries. The total contributions made for
such employee benefits were $18,201 and $31,191 for the years ended December
31,
2007 and 2006 respectively.
|
15.
|
CONCENTRATION
OF RISK
|
|
(a)
|
Major
customers and vendors
|
For
the
years ended December 31, 2007 and 2006, 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 year ended December 31, 2007.
For
the
year ended December 31, 2007, customers who account for 10% or more of revenues
are presented as follows:
|
Customers
|
|
Revenues
|
|
Percentage
of revenues
|
|
|
|
Accounts
receivable, trade
|
|
|
Customer
A
|
|
$
|
1,411,598
|
|
|
19
|
%
|
|
|
|
$
|
234,877
|
|
|
Customer
B
|
|
|
1,322,505
|
|
|
18
|
%
|
|
|
|
|
202,589
|
|
|
Customer
C
|
|
|
1,215,003
|
|
|
17
|
%
|
|
|
|
|
193,635
|
|
|
Customer
D
|
|
|
1,207,417
|
|
|
17
|
%
|
|
|
|
|
181,572
|
|
|
Customer
E
|
|
|
1,008,653
|
|
|
14
|
%
|
|
|
|
|
122,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
6,165,176
|
|
|
85
|
%
|
|
Total:
|
|
$
|
934,935
|
|
For
the
year ended December 31, 2006, customers who account for 10% or more of revenues
are presented as follows:
|
Customers
|
|
|
|
Revenues
|
|
Percentage
of revenues
|
|
|
|
Accounts
receivable, trade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
A
|
|
|
Total:
|
|
$
|
1,511,627
|
|
|
34
|
%
|
|
Total:
|
|
$
|
241,334
|
|
For
the
years ended December 31, 2007 and 2006, there are no vendors who account
for 10%
or more of purchases.
CHINA
SHOE HOLDINGS, INC
(Formerly
Indigo Technologies, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
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.
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 December 31, 2007, all of borrowings were at fixed
rates.
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.
|
16.
|
OPERATING
LEASE COMMITMENT
|
The
Company rented offices and factories under non-cancelable operating lease
agreements. As of December 31, 2007, the future minimum rental payments required
for the coming years are as follows:
Years
ending December 31,:
|
2008
|
|
$
|
37,986
|
|
|
2009
|
|
|
39,885
|
|
|
2010
|
|
|
41,879
|
|
|
2011
|
|
|
43,973
|
|
|
Thereafter
|
|
|
82,532
|
|
|
|
|
|
|
|
|
|
|
$
|
246,255
|
|
For
the
years ended December 31, 2007 and 2006, rental expenses were $ 34,985 and
$31,718 respectively.
CHINA
SHOE HOLDINGS, INC
(Formerly
Indigo Technologies, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(Currency
expressed in United States Dollars (“US$”))
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 sold 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
last month. The Company intends to utilize the funds received primarily on
expansion of its retail store operations in China.
On
February 21, 2008, the Company, through its subsidiary, Shanghai Kanghong,
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 B”)
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 B 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. In addition, upon effectiveness
of
a registration statement pursuant to the Agreement B, 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 retails strategy.
China Shoe (CE) (USOTC:CHSH)
Gráfica de Acción Histórica
De May 2024 a Jun 2024
China Shoe (CE) (USOTC:CHSH)
Gráfica de Acción Histórica
De Jun 2023 a Jun 2024
