UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
_______________
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______to______.
| CHINA SPORTS HOLDING COMPANY LIMITED | ||||
| (Exact name of registrant as specified in its charter) | ||||
| Delaware | 000-52623 | 37-1532843 | ||
| (State or other jurisdiction of incorporation) | (Commission File Number) | (I.R.S. Employer Identification No.) |
Yangdai Village, Chendai County
Jinjiang City, Fujian Province
People’s Republic of China
(Address of principal executive offices) (Zip Code)
+86 (151) 1249-4568
(Registrant’s telephone number, including area code)
(Former Name or Former Address if Changed Since Last Report)
Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer o Smaller Reporting Company x
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes o No x
State the number of shares outstanding of each of the issuer’s classes of common equity, as of August 13, 2010: 10,000,000 shares of common stock.
1
CHINA SPORTS HOLDING COMPANY LIMITED
FORM 10-Q
June 30, 2010
INDEX
PART I-- FINANCIAL INFORMATION
| Item 1. | Financial Statements. |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
| Item 4T. | Controls and Procedures. |
PART II-- OTHER INFORMATION
| Item 1. | Legal Proceedings. |
| Item 1A. | Risk Factors. |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
| Item 3. | Defaults Upon Senior Securities. |
| Item 4. | (Removed and Reserved) |
| Item 5. | Other Information. |
| Item 6. | Exhibits. |
SIGNATURE
2
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
(FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS EXPRESSED IN US DOLLARS)
| June 30, | December 31, | |||||||
| 2010 | 2009 | |||||||
| ASSETS | (Unaudited) | |||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 20,829,938 | $ | 17,387,929 | ||||
| Accounts receivable, net of $nil allowance | 23,247,091 | 22,125,979 | ||||||
| Prepaid land use rights – current portion | 17,569 | 17,473 | ||||||
| Inventories | 2,327,682 | 1,687,090 | ||||||
| Loan due from a related party | - | 3,148,707 | ||||||
| Total current assets | 46,422,280 | 44,367,178 | ||||||
| OTHER ASSETS | ||||||||
| Property, plant and equipment, net | 9,448,505 | 9,837,833 | ||||||
| Deposit for land use right | 7,362,794 | − | ||||||
| Prepaid land use rights – long-term portion | 788,331 | 792,761 | ||||||
| Total non-current assets | 17,599,630 | 10,630,594 | ||||||
| Total assets | $ | 64,021,910 | $ | 54,997,772 | ||||
| LIABILITIES AND EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Short-term bank loans | $ | 1,236,949 | $ | 1,354,676 | ||||
| Accounts and notes payable | 14,295,066 | 14,329,705 | ||||||
| Other payables and accruals | 2,527,377 | 1,243,656 | ||||||
| Income taxes payable | 1,806,105 | 1,360,954 | ||||||
| Total current liabilities | 19,865,497 | 18,288,991 | ||||||
| Total liabilities | 19,865,497 | 18,288,991 | ||||||
SHAREHOLDERS' EQUITY Preferred stock, $0.001 par: 10,000,000 shares authorized, none shares issued and outstanding | - | - | ||||||
| Common stock, $0.001 par: 40,000,000 shares authorized, 10,000,000 and 9,000,000 shares issued and outstanding as of June 30, 2010 and December 31, 2009, respectively | 10,000 | 9,000 | ||||||
| Additional paid-in capital | 2,402,198 | 2,399,003 | ||||||
| Statutory reserves | 2,009,528 | 2,009,528 | ||||||
| Retained earnings | 35,182,592 | 28,409,504 | ||||||
| Accumulated other comprehensive income | 1,902,962 | 1,679,219 | ||||||
| Total China Sports shareholders' equity | 41,507,280 | 34,506,254 | ||||||
| Noncontrolling interests | 2,649,133 | 2,202,527 | ||||||
| Total equity | 44,156,413 | 36,708,781 | ||||||
| Total liabilities and shareholders' equity | $ | 64,021,910 | $ | 54,997,772 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements
3
CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
(FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(AMOUNTS EXPRESSED IN US DOLLARS)
| For the Three Months | For the Six Months | |||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Revenue | $ | 27,568,749 | $ | 19,931,420 | $ | 42,367,797 | $ | 37,622,831 | ||||||||
| Cost of goods sold | (19,391,793 | ) | (14,242,612 | ) | (29,974,106 | ) | (27,107,193 | ) | ||||||||
| Gross profit | 8,176,956 | 5,688,808 | 12,393,691 | 10,515,638 | ||||||||||||
| Selling expenses | (747,617 | ) | (578,934 | ) | (1,479,744 | ) | (1,148,523 | ) | ||||||||
| General and administrative expenses | (760,147 | ) | (478,587 | ) | (1,302,683 | ) | (977,400 | ) | ||||||||
| Income from operations | 6,669,192 | 4,631,287 | 9,611,264 | 8,389,715 | ||||||||||||
| Other income (expenses): | ||||||||||||||||
| Interest income | 16,272 | 81,790 | 101,050 | 89,874 | ||||||||||||
| Interest expenses | (16,730 | ) | (39,519 | ) | (34,717 | ) | (39,530 | ) | ||||||||
| Total other income (expenses) | (458 | ) | 42,271 | 66,333 | 50,344 | |||||||||||
| Income before income tax | 6,668,734 | 4,673,558 | 9,677,597 | 8,440,059 | ||||||||||||
| Provision for income tax | (1,719,968 | ) | (1,168,391 | ) | (2,472,184 | ) | (2,113,923 | ) | ||||||||
| Net income | 4,948,766 | 3,505,167 | 7,205,413 | 6,326,136 | ||||||||||||
| Income attributable to noncontrolling interests | (296,926 | ) | (210,310 | ) | (432,325 | ) | (379,568 | ) | ||||||||
| Net income attributable to China Sports shareholders | $ | 4,651,840 | $ | 3,294,857 | $ | 6,773,088 | $ | 5,946,568 | ||||||||
| Other comprehensive income attributable to China Sports shareholders: | ||||||||||||||||
| Foreign currency translation adjustment | 213,951 | 13,220 | 223,743 | 9,128 | ||||||||||||
| Comprehensive income attributable to China Sports Shareholders | $ | 4,865,791 | $ | 3,308,077 | $ | 6,996,831 | $ | 5,955,696 | ||||||||
| Comprehensive income attributable to noncontrolling interests | 310,582 | 211,154 | 446,606 | 380,150 | ||||||||||||
| Total comprehensive income | $ | 5,176,373 | $ | 3,519,231 | $ | 7,443,437 | $ | 6,335,846 | ||||||||
| Earnings per share attributable to China Sports shareholders | ||||||||||||||||
| Basic | $ | 0.47 | $ | 0.37 | $ | 0.69 | $ | 0.66 | ||||||||
| Diluted | $ | 0.47 | $ | 0.37 | $ | 0.69 | $ | 0.66 | ||||||||
| Weighted average number of shares outstanding | ||||||||||||||||
| Basic | 10,000,000 | 9,000,000 | 9,767,956 | 9,000,000 | ||||||||||||
| Diluted | 10,000,000 | 9,000,000 | 9,767,956 | 9,000,000 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
4
CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
(FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(AMOUNTS EXPRESSED IN US DOLLARS)
| Attributable to China Sports shareholders | ||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||
| Common Stock | Additional | Other | Non- | |||||||||||||||||||||||||||||
| Number of shares | Amount | Paid-in Capital | Statutory Reserves | Retained Earnings | Comprehensive Income | controlling interests | Total | |||||||||||||||||||||||||
| At January 1, 2010 | 9,000,000 | $ | 9,000 | $ | 2,399,003 | $ | 2,009,528 | $ | 28,409,504 | $ | 1,679,219 | $ | 2,202,527 | $ | 36,708,781 | |||||||||||||||||
| Effect of reverse acquisition (Note 1) | 1,000,000 | 1,000 | 3,195 | - | - | - | - | 4,195 | ||||||||||||||||||||||||
| Net income | - | - | - | - | 6,773,088 | - | 432,325 | 7,205,413 | ||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | 223,743 | 14,281 | 238,024 | ||||||||||||||||||||||||
| At June 30, 2010 (Unaudited) | 10,000,000 | $ | 10,000 | $ | 2,402,198 | $ | 2,009,528 | $ | 35,182,592 | $ | 1,902,962 | $ | 2,649,133 | $ | 44,156,413 | |||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
(FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS EXPRESSED IN US DOLLARS)
For the Six Months Ended June 30, | ||||||||
| 2010 | 2009 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income | $ | 7,205,413 | $ | 6,326,136 | ||||
| Adjustments for: | ||||||||
| Interest income receivable on loan due from a related party | (73,276 | ) | (73,176 | ) | ||||
| Depreciation and amortization | 449,986 | 451,393 | ||||||
| (Increase) decrease in assets: | ||||||||
| Accounts receivable | (994,806 | ) | (2,473,283 | ) | ||||
| Other receivables | - | 83,421 | ||||||
| Inventories | (628,309 | ) | 1,771,142 | |||||
| Increase (decrease) in liabilities: | ||||||||
| Accounts and notes payable | (112,805 | ) | (1,088,408 | ) | ||||
| Other payables and accruals | 1,270,791 | 1,355,232 | ||||||
| Income taxes payable | 435,585 | 247,390 | ||||||
| Net cash provided by operating activities | 7,552,579 | 6,599,847 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Repayment by (loan to) a related party | 3,224,152 | (2,927,058 | ) | |||||
| Purchase of property, plant and equipment | - | (203,240 | ) | |||||
| Payment of deposit for land use right | (7,362,794 | ) | - | |||||
| Net cash used in investing activities | (4,138,642 | ) | (3,130,298 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Repayments of short-term bank loans | (124,570 | ) | - | |||||
| Net cash used in financing activities | (124,570 | ) | - | |||||
| Foreign currency translation adjustment | 152,642 | 3,383 | ||||||
| Net increase in cash and cash equivalents | 3,442,009 | 3,472,932 | ||||||
| Cash and cash equivalents, beginning of period | 17,387,929 | 7,400,057 | ||||||
| Cash and cash equivalents, end of period | $ | 20,829,938 | $ | 10,872,989 | ||||
| SUPPLEMENTAL DISCLOSURE INFORMATION | ||||||||
| Cash paid for interest | $ | 34,717 | $ | 39,530 | ||||
| Cash paid for income taxes | $ | 2,037,215 | $ | 1,866,533 | ||||
| NONCASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Interest receivable on loan due from a related party | $ | - | 73,176 | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
(FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 DESCRIPTION OF BUSINESS AND ORGANIZATION
Nature of operations
China Sports Holding Company Limited (formerly known as Mondo Acquisition III, Inc., the “Company” or “China Sports”) was incorporated in the State of Delaware on October 30, 2006. On February 12, 2010, the Company completed a share exchange with Kobe Sport (International) Company Limited (“Kobe Sport”). As a result of the share exchange, the Company is no longer a shell company and, through its subsidiaries, primarily engages in design, manufacturing and sales of sports shoes, sportswear and related accessories.
On March 12, 2010, the Company received written consents in lieu of a meeting of stockholders from a shareholder holding 6,300,000 voting shares representing approximately 63% of the total voting stock of the Company to amend its Articles of Incorporation to change its name from “Mondo Acquisition III, Inc.” to “China Sports Holding Company Limited”. The change in name became effective on April 20, 2010.
Corporate organization
Subsidiaries’ names | Domicile and date of incorporation | Ownership by the Company | Principal activities | |||
| Kobe Sport (International) Company Limited (“Kobe Sport”) | British Virgin Islands September 25, 2009 | 100% | Intermediate holding company | |||
| Nam Kwong Trading Company Limited (“Nam Kwong”) | Hong Kong October 8, 2009 | 100% (through Kobe Sport) | Intermediate holding company | |||
Kobe Brand and Properties Management Company Limited (“Kobe Brand”) | Hong Kong April 26, 2010 | 100% (through Kobe Sport) | Intermediate holding company | |||
| Fujian Jinjiang Hengfeng Shoes & Garments Co., Ltd. (“Hengfeng”) | People’s Republic of China (“PRC”) March 2, 1992 | 94% (through Nam Kwong) | Design, manufacturing and sales of sports shoes, sportswear and related accessories |
Share Exchange
On February 12, 2010, the Company entered into a share exchange agreement ("Share Exchange Agreement”) under which the Company issued 9,000,000 shares of its common stock, par value $0.001, to the shareholders of Kobe Sport (the “Kobe Sport Shareholders”) in exchange for all the issued and outstanding shares of Kobe Sport (the “Share Exchange”). As a result of the Share Exchange, Kobe Sport has become the Company’s wholly-owned subsidiary and Kobe Sport Shareholders acquired 90% of the Company’s issued and outstanding stock. Concurrent with the Share Exchange, Mr. Anding Lin (the managing director of Kobe Sport and all of its operating subsidiaries, “Mr. Lin”) has been appointed the Chief Executive Officer of the Company.
As a result, the Share Exchange has been accounted for as a reverse acquisition using the purchase method of accounting, whereby Kobe Sport is deemed to be the accounting acquirer (legal acquiree) and the Company to be the accounting acquiree (legal acquirer). The financial statements before the date of Share Exchange are those of Kobe Sport with the results of the Company being consolidated from the date of Share Exchange. The equity section and earnings per share have been retroactively restated to reflect the reverse acquisition and no goodwill has been recorded.
Kobe Sport was incorporated in the British Virgin Islands on September 25, 2009. On December 4, 2009, pursuant to a restructuring plan set out below, Kobe Sport has become the holding company of a group of companies comprising Nam Kwong, a company incorporated in Hong Kong, which holds 100% equity interests in Hengfeng, a limited liability company organized under the existing laws of PRC.
Kobe Brand was incorporated in Hong Kong by Kobe Sport on April 26, 2010.
7
CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
(FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 DESCRIPTION OF BUSINESS AND ORGANIZATION (CONTINUED)
Reorganization of Hengfeng
Hengfeng is a sino-foreign joint stock limited liability company established in the PRC. On December 4, 2009, Hengfeng underwent a reorganization (“Reorganization”). Before the Reorganization, Hengfeng had been owned as to 94% by Nam Kwong Trading Co. (“Nam Kwong Unincorporated”, an unincorporated company registered in Hong Kong) and 6% by another unrelated minority shareholder, which is a company registered in the PRC, according to their respective capital contribution. Pursuant to the Reorganization, Nam Kwong Unincorporated transferred the 94% interest in Hengfeng held by it to Nam Kwong. As a result, through Nam Kwong, Kobe Sport owns a 94% interest in Hengfeng.
Both before and after the Reorganization, Nam Kwong Unincorporated, Nam Kwong and Kobe Sport have all been beneficially owned and controlled by Mr. Anding Lin, who is also the managing director of Hengfeng.
The Reorganization has been accounted for as a common control transaction and a recapitalization of Hengfeng with retroactive effect in the accompanying financial statements. The financial statements have been prepared as if the existing corporate structure had been in existence throughout all periods and the Reorganization had occurred as of the beginning of the earliest period presented in the accompanying financial statements.
NOTE 2 SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES
Basis of preparation
These interim condensed consolidated financial statements are unaudited. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these interim condensed consolidated financial statements have been included. The results reported in the condensed consolidated financial statements for any interim periods are not necessarily indicative of the results that may be reported for the entire year. The following (a) condensed consolidated balance sheet as of December 31, 2009, which was derived from audited financial statements, and (b) the unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial stat ements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes of the Company for the year ended December 31, 2009.
These condensed consolidated financial statements include the financial statements of China Sports and its subsidiaries. All significant inter-company balances or transactions have been eliminated on consolidation.
As a result of Share Exchange, which has been accounted for as a reverse acquisition using the purchase method of accounting, Kobe Sport (International) Company Limited is deemed to be the accounting acquirer (legal acquiree) and the Company to be the accounting acquire (legal acquirer). The audited condensed consolidated balance sheet of Kobe Sport (International) Company Limited as of December 31, 2009 has been adopted as comparative figures in these financial statements.
Research and development costs
Research and development costs are expensed as incurred. During the six months ended June 30, 2010 and 2009, research and development costs were $96,733 and $79,088 respectively.
Advertising costs
The Company expenses all advertising costs as incurred. The total amount of advertising costs charged to selling, general and administrative expense were $1,355,944 and $1,053,741 for the six months ended June 30, 2010 and 2009, respectively.
Shipping and handling costs
Substantially all costs of shipping and handling of products to customers are included in selling, general and administrative expense. Shipping and handling costs for the six months ended June 30, 2010 and 2009 were $17,590 and $5,380, respectively.
8
CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
(FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign currency
The Company uses the United States dollars (“U.S. Dollar” or “US$” or “$”) for financial reporting purposes. The PRC subsidiaries within the Company maintain their books and records in their functional currency, Chinese Renminbi (“RMB”), being the lawful currency in the PRC. Assets and liabilities of the PRC subsidiaries are translated from RMB into US Dollars using the applicable exchange rates prevailing at the balance sheet date. Items on the statement of operations are translated at average exchange rates during the reporting period. Equity accounts are translated at historical rates. Adjustments resulting from the translation of the Company’s financial statements are recorded as accumulated other comprehensive income.
The exchange rates used to translate amounts in RMB into U.S. Dollars for the purposes of preparing the consolidated financial statements are based on the rates as published on the website of People’s Bank of China and are as follows:-
| June 30, 2010 | December 31, 2009 | |||
| Balance sheet items, except for equity accounts | US$1=RMB 6.7909 | US$1=RMB6.8282 | ||
| Three months ended June 30, | ||||
| 2010 | 2009 | |||
| Items in the statements of income and cash flows | US$1=RMB 6.8235 | US$1=RMB 6.8299 | ||
| Six months ended June 30, | ||||
| 2010 | 2009 | |||
| Items in the statements of income and cash flows | US$1=RMB 6.8252 | US$1=RMB6.8328 | ||
No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at the above rates.
The value of RMB against U.S. dollars and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. Any significant revaluation of RMB may materially affect the Company’s financial condition in terms of U.S. dollar reporting.
9
CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
(FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently issued accounting standards
Effective January 1, 2010, the Company adopted the provisions in ASU 2010-06, “Fair Value Measurements and Disclosures (ASC Topic 820): Improving Disclosures about Fair Value Measurements, which requires new disclosures related to transfers in and out of levels 1 and 2 and activity in level 3 fair value measurements, as well as amends existing disclosure requirements on level of disaggregation and inputs and valuation techniques. The adoption of the provisions in ASU 2010-06 did not have an impact on the Company’s consolidated financial statements.
In February 2010, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that amends the disclosure requirements related to subsequent events. This guidance includes the definition of a Securities and Exchange Commission filer, removes the definition of a public entity, redefines the reissuance disclosure requirements and allows public companies to omit the disclosure of the date through which subsequent events have been evaluated. This guidance is effective for financial statements issued for interim and annual periods ending after February 2010. This guidance did not materially impact the Company’s results of operations or financial position, but did require changes to the Company’s disclosures in its financial statements.
In April 2010, the FASB issued ASU No. 2010-13—Compensation—Stock Compensation (Topic 718), which addresses the classification of an employee share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. This update provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this update are effective for fiscal years, and interim periods within those fisc al years, beginning on or after December 15, 2010. The Company expects that the adoption of the amendments in this update will not have any significant impact on its financial position and results of operations.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s Consolidated Financial Statements upon adoption.
NOTE 3 FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS
ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1 - | Quoted prices in active markets for identical assets or liabilities. |
Level 2 - | Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
Level 3 - | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter.
There were no assets or liabilities measured at fair value on a recurring basis as of June 30, 2010 or December 31, 2009.
The carrying values of cash and cash equivalents, accounts receivables, accounts and notes payables, other payables and accruals and due from related parties approximate their fair values due to their short maturities.
10
CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
(FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 ACCOUNTS RECEIVABLE, NET
Accounts receivable consisted of the following:
| June 30, | December 31, | |||||||
| 2010 | 2009 | |||||||
| (Unaudited) | ||||||||
| Accounts receivable | $ | 23,247,091 | $ | 22,125,979 | ||||
| Less: Allowance for doubtful accounts | - | - | ||||||
| Accounts receivable, net | $ | 23,247,091 | $ | 22,125,979 | ||||
Based on the Company’s assessment of collectibility, there has been no allowance for doubtful accounts recognized for the six months ended June 30, 2010.
NOTE 5 INVENTORIES
Inventories by major categories are summarized as follows:
| June 30, | December 31, | |||||||
| 2010 | 2009 | |||||||
| (Unaudited) | ||||||||
| Raw materials | $ | 665,255 | $ | 558,990 | ||||
| Work in progress | 848,990 | 317,072 | ||||||
| Finished goods | 813,437 | 811,028 | ||||||
| $ | 2,327,682 | $ | 1,687,090 | |||||
Included in work in progress were inventories of $366,938 and $126,649 as of June 30, 2010 and December 31, 2009, respectively, which were at subcontractors’ locations.
NOTE 6 LAND USE RIGHTS
The Company has recorded as prepaid land use rights the lump sum payments paid to acquire long-term interest to utilize the land underlying the Company’s buildings and production facility. This type of arrangement is common for the use of land in the PRC. The prepaid land use rights are expensed on the straight-line basis over the term of the land use rights of 50 years.
The amount expensed on prepaid land use rights for the six months ended June 30, 2010 and 2009 were $8,740 and $10,003, respectively. As of June 30, 2010, the estimated expense of the prepaid land use rights over each of the next five years will be $17,569 per annum.
As of June 30, 2010, the deposit for land use rights represented the payment made by Hengfeng to acquire a 50-year right to use a parcel of land pursuant to the land use rights transfer agreement between Hengfeng and the PRC local land authority dated January 16, 2010, for a price of $7,324,612. The land will be used for the extension of Hengfeng’s existing factory buildings. As of June 30, 2010, the relevant formalities were not completed, hence Hengfeng has not yet obtained the legal title to the land use rights.
Land use rights with net carrying value of $176,597 and $175,632 as of June 30, 2010 and December 31, 2009, respectively, have been pledged as collateral against the short-term bank loans (see Note 9).
11
CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
(FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 PROPERTY, PLANT AND EQUIPMENT, NET
| June 30, | December 31, | |||||||
| 2010 | 2009 | |||||||
| (Unaudited) | ||||||||
| Cost: | ||||||||
| Buildings | $ | 3,009,763 | $ | 2,993,322 | ||||
| Machinery | 8,874,298 | 8,825,821 | ||||||
| Office equipment | 370,749 | 368,724 | ||||||
| Total cost | 12,254,810 | 12,187,867 | ||||||
| Less: Accumulated depreciation | (2,806,305 | ) | (2,350,034 | ) | ||||
| Net book value | $ | 9,448,505 | $ | 9,837,833 | ||||
Depreciation expense for the six months ended June 30, 2010 and 2009 was $441,246 and $441,390, respectively.
Buildings with net book value of $992,934 and $998,675 as of June 30, 2010 and December 31, 2009, respectively, have been pledged as collateral against the short-term bank loans (see Note 9).
| NOTE 8 | OTHER PAYABLES AND ACCRUALS |
| June 30, | December 31, | |||||||
| 2010 | 2009 | |||||||
| (Unaudited) | ||||||||
| Accrued staff costs and other operating expenses | $ | 474,428 | $ | 280,126 | ||||
| Value added tax and other taxes payable | 1,404,495 | 963,530 | ||||||
| Accrued expenses | 648,454 | - | ||||||
| $ | 2,527,377 | $ | 1,243,656 | |||||
12
CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
(FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 SHORT-TERM BANK LOANS
Short-term bank loans consisted of the following loans granted by Industrial Bank Co., Ltd.:
| Annualized interest rate | |||||||||||||||||
| June 30, 2010 | December 31, 2009 | June 30, 2010 | December 31, 2009 | ||||||||||||||
| Maturity date | Collateral | ||||||||||||||||
| (Unaudited) | (Unaudited) | ||||||||||||||||
| February 23, 2011 | 5.31 | % | 5.31 | % | The Company’s land use right and buildings and guaranteed by a minority shareholder of Hengfeng and the general manager of Hengfeng | $ | 176,706 | $ | - | ||||||||
| March 4, 2011 | 5.31 | % | 5.31 | % | Guaranteed by a third party entity, the general manager of Hengfeng and a third party individual | 176,707 | - | ||||||||||
| February 25, 2010 | 5.31 | % | 5.31 | % | Guaranteed by a minority shareholder of Hengfeng and the general manager of Hengfeng | - | 109,838 | ||||||||||
| March 5, 2010 | 5.31 | % | 5.31 | % | Guaranteed by a third party entity, the general manager of Hengfeng and a third party individual | - | 366,129 | ||||||||||
| April 2, 2010, extended to March 31, 2011 | 5.31 | % | 5.31 | % | The Company’s land use right and buildings and guaranteed by the general manager of Hengfeng | 184,070 | 183,064 | ||||||||||
| April 10, 2010, extended to March 31, 2011 | 5.31 | % | 5.31 | % | The Company’s land use right and buildings and guaranteed by the general manager of Hengfeng | 184,070 | 183,064 | ||||||||||
| April 22, 2010, extended to April 19, 2011 | 5.31 | % | 5.31 | % | The Company’s land use right and buildings and guaranteed by the general manager of Hengfeng | 191,433 | 190,387 | ||||||||||
| August 30, 2009 extended to August 26, 2010 | 5.31 | % | 5.31 | % | The Company’s land use right and buildings and guaranteed by the general manager of Hengfeng | 103,079 | 102,516 | ||||||||||
| September 26, 2009, extended to September 25, 2010 | 5.31 | % | 5.31 | % | Guaranteed by a third party entity, the general manager of Hengfeng and a third party individual | 110,442 | 109,839 | ||||||||||
| September 26, 2009, extended to September 25, 2010 | 5.31 | % | 5.31 | % | Guaranteed by a third party entity, the general manager of Hengfeng and a third party individual | 110,442 | 109,839 | ||||||||||
| $ | 1,236,949 | $ | 1,354,676 | ||||||||||||||
13
CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
(FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 STATUTORY RESERVES
In accordance with the PRC Companies Law, Hengfeng, the PRC subsidiary, is required to transfer 10% of its profits after tax, as determined in accordance with accounting standards and regulations of the PRC, to the statutory surplus reserve and had been required to transfer not less than 5%, as determined by management, of the profits after tax to the public welfare fund. However, the PRC subsidiary is not required to transfer any profit after tax to the statutory surplus reserve only after the accumulated statutory surplus reserves reached 50% of registered capital of the Company’s PRC subsidiaries. With the amendment of the PRC Companies Law which was effective from January 1, 2006, enterprises in the PRC have no longer been required to transfer any profit to the public welfare fund. Any balance of public welfare fun d brought forward from December 31, 2005 should be transferred to the statutory surplus reserve. The statutory surplus reserve is non-distributable.
NOTE 11 EMPLOYEE BENEFITS
The full-time employees of the Company’s PRC subsidiary are entitled to staff welfare benefits, including medical care, welfare subsidies, unemployment insurance and pension benefits. The Company’s PRC subsidiary is required to accrue for these benefits based on certain fixed percentages of the employees’ salaries in accordance with the relevant regulations and to make contributions to the state-sponsored pension and medical plans out of the amounts accrued for medical and pension benefits. The total amounts charged to the statements of income for such employee benefits amounted to $57,783 and $96,247 for the six months ended June 30, 2010 and 2009, respectively.
NOTE 12 INCOME TAXES
The Company is subject to income tax on an entity basis on income arising from the tax jurisdiction in which they operate.
China Sports is subject to taxes in the U.S.
Kobe Sport, being incorporated in the British Virgin Islands (“BVI”), is not subject to any income tax in the BVI.
Nam Kwong and Kobe Brand are subject to Hong Kong income tax on their taxable income derived from trade or businesses carried out in Hong Kong at 16.5% for the years ended December 31, 2010 and 2009.
Hengfeng is subject to PRC income taxes. On March 16, 2007, the PRC government promulgated a new tax law, China’s Unified Enterprise Income Tax Law (“New EIT Law”), which took effect from January 1, 2008. Under the New EIT Law, foreign-owned enterprises as well as domestic companies are subject to a uniform tax rate of 25%. Therefore, Hengfeng has been subject to an EIT rate of 25% on its taxable income for the six months ended June 30, 2010 and 2009.
The Company’s provision for income taxes consisted of:
| For the three months | For the six months | |||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Current – PRC | $ | 1,719,968 | $ | 1,168,391 | $ | 2,472,184 | $ | 2,113,923 | ||||||||
| Deferred | - | - | - | - | ||||||||||||
| $ | 1,719,968 | $ | 1,168,391 | $ | 2,472,184 | $ | 2,113,923 | |||||||||
14
CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
(FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 13 EARNINGS PER SHARE
| For the three months | For the six months | |||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Income available to common shareholders – Basic and diluted | $ | 4,651,840 | $ | 3,294,857 | $ | 6,773,088 | $ | 5,946,136 | ||||||||
| Weighted average number of shares – Basic and diluted | 10,000,000 | 9,000,000 | 9,767,956 | 9,000,000 | ||||||||||||
| Earnings per share – Basic and diluted | $ | 0.47 | $ | 0.37 | $ | 0.69 | $ | 0.66 | ||||||||
All per share date including earnings per share has been retrospectively restated to reflect the reverse acquisition on February 12, 2010 whereby the 9,000,000 shares of the common stock issued by the Company (nominal acquirer) to the shareholders of Kobe Sport (nominal acquiree) are deemed to be the number of shares outstanding for the period prior to the reverse acquisition. For the period after the reverse acquisition, the number of shares considered to be outstanding is the actual number of shares outstanding during the period.
NOTE 14 RELATED PARTY TRANSACTIONS
| June 30, | December 31, | |||||||
| 2010 | 2009 | |||||||
| (Unaudited) | ||||||||
| Loan due from a related party: | ||||||||
| Mr. Qionglin Lin, the general manager of the Company | $ | - | $ | 3,148,707 | ||||
The above loan due from Mr. Qionglin Lin as of December 31, 2009 was unsecured, bearing interest at 10% per annum and was originally repayable in one lump sum on or before September 22, 2010. On April 5, 2010, the Company and Mr. Qionglin Lin entered into a revised scheme of settlement, pursuant to which $2,929,845 (i.e. RMB20,000,000) of the loan was repaid to the Company on April 30, 2010 and whereas the remaining balance of approximately $292,984 was repaid before May 31, 2010.
The Company recognized interest income of $73,276 and $73,176 on the loan due from Mr. Qionglin Lin for the six months ended June 30, 2010 and 2009, respectively.
Guarantees for the Company’s loans
Fujian Jinjiang Chenli Yangli Hengfeng Shoe-Making Factory (the 6% minority shareholder of Hengfeng) provided guarantees for the Company’s short-term bank loan of $176,706 and $109,838 as of June 30, 2010 and December 31, 2009, respectively (See Note 9).
Mr. Qionglin Lin, the general manager of the Company, provided guarantees for the Company’s short-term bank loans of $1,236,949 and $1,354,676 as of June 30, 2010 and December 31, 2009, respectively (See Note 9).
| NOTE 15 | CERTAIN RISKS AND CONCENTRATIONS |
Credit risk
As of June 30, 2010 and December 31, 2009, 100% of the Company’s cash included cash on hand and deposits in accounts maintained within the PRC where there is currently no rule or regulation in place for obligatory insurance to cover bank deposits in the event of bank failure. However, the Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.
For the six months ended June 30, 2010 and 2009, all of the Company’s revenue arose in the PRC. In addition, all accounts receivable as of June 30, 2010 and December 31, 2009, respectively, were due from customers located in the PRC.
15
CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
(FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| NOTE 15 | CERTAIN RISKS AND CONCENTRATIONS (CONTINUED) |
Credit risk (continued)
As of June 30, 2010, there was no customer who accounted for 10% or more of the accounts receivable of the Company. As of December 31, 2009, there was one customer who accounted for 11% of the accounts receivable of the Company. Except for the afore-mentioned, there was no other single customer who accounted for more than 10% of the Company’s accounts receivable as of December 31, 2009.
There were no customers who accounted for 10% or more of the Company’s revenue for the six months ended June 30, 2010. There was one customer who accounted for 12% of the Company’s revenue for the six months ended June 30, 2009. Except for the afore-mentioned, there was no other single customer who accounted for 10% or more of the Company’s revenue for the six months ended June 30, 2009.
Concentration of suppliers
There was one supplier who accounted for 13.37% and 15.34% of the total value of the Company’s purchases made during the six months ended June 30, 2010 and 2009, respectively. Except for the afore-mentioned, there was no other single subcontractor or supplier who accounted for 10% or more of the Company’s purchases for the six months ended June 30, 2010 or 2009.
Risk arising from operations in China
Substantially all of the Company’s operations are conducted in China. The Company’s operations are subject to various political, economic, and other risks and uncertainties inherent in China. Among other risks, the Company’s operations are subject to the risks of restrictions on transfer of funds; export duties, quotas, and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations.
Currency convertibility risk and restriction on net assets
Substantially all of the Company’s businesses are transacted in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment application form with suppliers’ invoices, shipping documents and signed contracts. These requirements imposed by the PRC government may restrict the ability of the PRC subsidiary to transfer its net assets, representing 100% of the Company’s net assets as of June 30, 2010, to the Company through loans, advances or cash dividends.
NOTE 16 COMMITMENTS AND CONTINGENCIES
Lease commitments
The Company has entered into tenancy agreements for the lease of factory premises and warehouse with independent parties. The Company’s commitments for minimum lease payments under these operating leases for the next five years and thereafter as of June 30, 2010 are as follows:
| (Unaudited) | ||||
| Payable within: | ||||
| - remainder of fiscal year ending December 31, 2010 | $ | 31,468 | ||
| - fiscal year ending December 31, 2011 | 31,468 | |||
| - fiscal year ending December 31, 2012 and thereafter | - | |||
| Total | $ | 62,936 | ||
16
CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
(FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 17 SEGMENT DATA
The Company follows FASB ASC Topic 280, Segment Reporting, which requires that companies disclose segment data based on how management makes decision about allocating resources to segments and evaluating their performance.
The Company operates and manages its business as a single segment that includes the design, manufacturing and sales of sports shoes, sportswear and related accessories.
Throughout the six months ended June 30, 2010 and 2009, all of the Company’s revenue was derived from China and all of its long-lived assets were located in China.
The Company’s major product categories are (1) sports shoes, which include casual shoes, basketball shoes, jogging shoes, skate board and other shoes, and (2) sportswear and accessories: sports bag, wristlet, basketball, travel bag, hat, sport socks, and scarf, etc. The following table sets out the analysis of the Company’s revenue by product:
| For the Three months Ended | For the Six months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Net revenue from external customers: | ||||||||||||||||
| Sports shoes | $ | 17,112,339 | $ | 11,681,993 | $ | 24,556,544 | $ | 21,979,207 | ||||||||
| Sports accessories | 10,456,410 | 8,249,427 | 17,811,253 | 15,643,624 | ||||||||||||
| Total | $ | 27,568,749 | $ | 19,931,420 | $ | 42,367,797 | $ | 37,622,831 | ||||||||
17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of the results of operations and financial condition for the six months ended June 30, 2010 and 2009 should be read in conjunction with our financial statements, and the notes to those financial statements that are included elsewhere in this Form 10-Q. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “beli eve,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.
COMPANY OVERVIEW
China Sports Holding Co., Ltd. (“we,” “us” or the “Company”) was incorporated under the laws of the State of Delaware on October 30, 2006. On February 12, 2010, we acquired Kobe Sport (International) Company Limited (“Kobe Sport”), a British Virgin Islands company with limited liability (“Kobe Sport”), that is in the business of production and sales of sports shoes, sportswear and accessories, in accordance with a share exchange agreement by and among the Company, Kobe Sport, and the shareholders of Kobe Sport. On the closing date, pursuant to the terms of the share exchange agreement, we acquired all of the outstanding shares of Kobe Sport from the Kobe Sport shareholders; and the Kobe Sport shareholders transferred and contributed all of their interests to us. In exchange, we issued a total of 9,000,000 shares of common stock to the Kobe Sport shareholders, their designees or assigns, which totals 90% of the issued and outstanding shares of common stock of us on a fully-diluted basis as of and immediately after the closing of the transaction. Following the transaction, Kobe Sport became our wholly owned subsidiary.
Kobe Sport is a holding company and owns 100% issued and outstanding capital stock of Nam Kwong Trading Company Limited (“Nam Kwong���). Through Nam Kwong, the Company owns 94% interest in Fujian Jinjiang Hengfeng Shoes & Garments Co., Ltd., a sino-foreign joint stock limited liability company established in the PRC.
On April 20, 2010, we filed an amendment to our articles of incorporation to change our corporate name from “Mondo Acquisition III, Inc.” to “China Sport Holding Co., Ltd.”
Through our PRC subsidiary, we design, develop, and manufacture “Kobe” brand shoes, sportswear and accessories in Jinjiang city, Fujian province. Around 50% of the shoes are produced by the Company internally, while the clothes and accessories are outsourced to subcontractors. We incorporate innovated value-added technology into our products, such as perspiration absorption system, 3D ventilation system and polyurethane anti-crease system to satisfy the demands of our target consumers. In 2009, we held a valuable chain of 869 stores over the whole country. We expect to increase the number of stores by at least 20% each year within the coming five years.
Our main focus is on second and third-tier cities with trendy consumers and professional athletes. Our target customers are those within the age of 15-45 year olds. The majority of our customers are secondary school and university students who have a taste for fashion and middle-aged individuals who have a high purchase power and preference for quality.
We had 41 distributors who operated 800 retail shops as of June 30, 2009. As of June 30, 2010, our distributors operated 952 retail shops. We believe that an increase of the number of sales points within our sales network will continue to proportionally raise our turnover and net profit. Therefore, over the next few years our distributors will continue to open more retail shops.
18
RESULTS OF OPERATIONS
Results of Operations for the three months ended June 30, 2010 compared to the three months ended June 30, 2009
The following tables set forth key components of our results of operations for the periods indicated, in US dollars, and key components of our revenue for the period indicated, in US dollars. The discussion following the table is based on these results.
| For the Three Months | ||||||||
| Ended June 30, | ||||||||
| 2010 | 2009 | |||||||
| Revenue | $ | 27,568,749 | $ | 19,931,420 | ||||
| Cost of goods sold | (19,391,793 | ) | (14,242,612 | ) | ||||
| Gross profit | 8,176,956 | 5,688,808 | ||||||
| Selling expenses | (747,617 | ) | (578,934 | ) | ||||
| General and administrative expenses | (760,147 | ) | (478,587 | ) | ||||
| Income from operations | 6,669,192 | 4,631,287 | ||||||
| Other income (expenses): | ||||||||
| Interest income | 16,272 | 81,790 | ||||||
| Interest expenses | (16,730 | ) | (39,519 | ) | ||||
| Total other income (expenses) | (458 | ) | 42,271 | |||||
| Income before income tax | 6,668,734 | 4,673,558 | ||||||
| Provision for income tax | (1,719,968 | ) | (1,168,391 | ) | ||||
| Net income | 4,948,766 | 3,505,167 | ||||||
| Income attributable to noncontrolling interests | (296,926 | ) | (210,310 | ) | ||||
| Net income attributable to China Sports shareholders | $ | 4,651,840 | $ | 3,294,857 | ||||
| Other comprehensive income attributable to China Sports shareholders: | ||||||||
| Foreign currency translation adjustment | 213,951 | 13,220 | ||||||
| Comprehensive income attributable to China Sports Shareholders | $ | 4,865,791 | $ | 3,308,077 | ||||
| Comprehensive income attributable to noncontrolling interests | 310,582 | 211,154 | ||||||
| Total Comprehensive income | $ | 5,176,373 | $ | 3,519,231 | ||||
Net Revenue:
Our major product categories are (1) sports shoes, which include casual shoes, basketball shoes, jogging shoes, skate board and other shoes, and (2) sportswear and accessories: sports bag, wristlet, basketball, travel bag, hat, sport socks, and scarf, etc.
Net revenue increased by $7,637,329 or 38%, from $19,931,420 for the three months ended June 30, 2009 to $27,568,479 for the three months ended June 30, 2010. Our overall net revenue increased primarily because: 1) the number of retail shops operated by our distributors increased from 800 as of June 30, 2009 to 952 as of June 30, 2010 and 2) the sales increase of skate board shoes for the three months ended June 30, 2010. The sales quantity of skate board shoes increased from 500,636 pairs in the three months ended June 30, 2009 to 768,855 pairs in the same period of 2010. Meanwhile, the unit price of skate board rose from RMB64/pair in 2009 to RMB67/pair in 2010.
Cost of sales:
Cost of sales increased by $5,149,181, or 36%, from $14,242,612 for the three months ended June 30, 2009 to $19,391,793 for the three months ended June 30, 2010. The percentage increase in cost of sales is in line with the increase in revenue as mentioned above.
19
Gross profit:
Gross profit increased by $2,488,148, or 44%, from $5,688,808 for the three months ended June 30, 2009 to $8,176,956 for the three months ended June 30, 2010. The percentage increase in gross profit is in line with the increase in revenue as mentioned above. The gross profit margin for the three months ended June 30, 2010 was about 30%, which was slightly higher than 29% for the three months ended June 30, 2009.
Selling expenses:
Selling expenses were $578,934 for the three months ended June 30, 2009, compared to $747,617 for the three months ended June 30, 2010. The percentage increase in the selling expenses for the three months ended June 30, 2010 was 29% as compared to the three months ended June 30, 2009.
The selling expenses include salaries, shipping expenses, travelling expenses and advertising cost for products. In order to increase the market share, we carried out more advertising activities in 2010, which caused our advertisement expenditures to increase by $154,576 for the three months ended June 30, 2010.
Administrative expenses
Administrative expenses for the three months ended June 30, 2010 and 2009 were $760,147 and $478,587 respectively. The increase of administrative expenses was due to $227,156 of plant and equipment maintenance expenditures in June 2010.
Income from Operations:
Income from operations was $4,631,287 for the three months ended June 30, 2009, compared to $6,669,192 for the three months ended June 30, 2010. The increase of $2,037,905 or 44% was primarily the result of the increase in gross profit.
Provision for income tax
Income tax increased by $551,577 to $1,719,968 for the three months ended June 30, 2010 from $1,168,391 for the same period in 2009. We paid more tax in 2010 because of the increase in sales and taxable income.
Net Income
Net income increased by $1,443,599, or 41.18% to $4,948,766 for the three months ended June 30, 2010 from $3,505,167 for the same period of 2009, as a result of the factors described above.
Income attributable to noncontrolling interests
“Income attributable to noncontrolling interests” was $210,310 for the three months ended June 30, 2009, compared to $296,926 for the three months ended June 30, 2010. The increase of $86,616, or 41%, was primarily the result of the increase in income before “Income attributable to noncontrolling interests” (or, “Net income”). It is calculated as the 6% share of the income before “Income attributable to noncontrolling interests” for the current period ended June 30, 2010.
Net income attributable to China Sports shareholders
“Net income attributable to China Sports shareholders” was $3,294,857 for the three months ended June 30, 2009, compared to $4,651,840 for the three months ended June 30, 2010, an increase of $1,356,983 or 41%. Our net income increased based on the increase in our revenues.
20
Results of operations for the six months ended June 30, 2010 compared to the six months ended June 30, 2009
The following tables set forth key components of our results of operations for the periods indicated, in US dollars, and key components of our revenue for the period indicated, in US dollars. The discussion following the table is based on these results.
| For the Six Months | ||||||||
| Ended June 30, | ||||||||
| 2010 | 2009 | |||||||
| Revenue | $ | 42,367,797 | $ | 37,622,831 | ||||
| Cost of goods sold | (29,974,106 | ) | (27,107,193 | ) | ||||
| Gross profit | 12,393,691 | 10,515,638 | ||||||
| Selling expenses | (1,479,744 | ) | (1,148,523 | ) | ||||
| General and administrative expenses | (1,302,683 | ) | (977,400 | ) | ||||
| Income from operations | 9,611,264 | 8,389,715 | ||||||
| Other income (expenses): | ||||||||
| Interest income | 101,050 | 89,874 | ||||||
| Interest expenses | (34,717 | ) | (39,530 | ) | ||||
| Total other income (expenses) | 66,333 | 50,344 | ||||||
| Income before income tax | 9,677,597 | 8,440,059 | ||||||
| Provision for income tax | (2,472,184 | ) | (2,113,923 | ) | ||||
| Net income | 7,205,413 | 6,326,136 | ||||||
| Income attributable to noncontrolling interests | (432,325 | ) | (379,568 | ) | ||||
| Net income attributable to China Sports shareholders | $ | 6,773,088 | $ | 5,946,568 | ||||
| Other comprehensive income attributable to China Sports shareholders: | ||||||||
| Foreign currency translation adjustment | 223,743 | 9,128 | ||||||
| Comprehensive income attributable to China Sports Shareholders | $ | 6,996,831 | $ | 5,955,696 | ||||
| Comprehensive income attributable to noncontrolling interests | 446,606 | 380,150 | ||||||
| Total Comprehensive income | $ | 7,443,437 | $ | 6,335,846 | ||||
Net Revenue:
Net revenue increased by $4,744,966 or 13%, from $37,622,831 for the six months ended June 30, 2009 to $42,367,797 for the six months ended June 30, 2010. Our overall net revenue increased primarily because: 1) the number of retail shops operated by our distributors increased from 800 as of June 30, 2009 to 952 as of June 30, 2010 and 2) the sales increase of skate board shoes for the six months ended June 30, 2010. The sales quantity of skate board shoes increased from 949,555 pairs in the six months ended June 30, 2009 to 1,097,562 pairs in the same period of 2010. Meanwhile, the unit price of skate board shoes rose from RMB64/pair in 2009 to RMB67/pair in 2010.
Cost of sales:
Cost of sales increased by $2,866,913, or 11%, from $27,107,193 for the six months ended June 30, 2009 to $29,974,106 for the six months ended June 30, 2010. The percentage increase in cost of sales is basically in line with the increase in revenue as mentioned above.
Gross profit:
Gross profit increased by $1,878,053 or 18%, from $10,515,638 for the six months ended June 30, 2009 to $12,393,691 for the six months ended June 30, 2010. The gross profit margin for the six months ended June 30, 2010 was about 29%, which was slightly higher than 28% for the six months ended June 30, 2009.
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Selling expenses:
Selling expenses were $1,148,523 for the six months ended June 30, 2009, compared to $1,479,744 for the six months ended June 30, 2010. The percentage increase in the selling expenses for the six months ended June 30, 2010 was 29% as compared to six months ended June 30, 2009.
The selling expenses include salaries, shipping expenses, travelling expenses and advertising cost for products. In order to increase the market share, we carried out more advertising activities in 2010, which caused our advertisement expenditures to increase by $302,203 for the six months ended June 30, 2010.
Administrative expenses
Administrative expenses for the six months ended June 30, 2010 and 2009 were $1,302,683 and $977,400 respectively. The increase in administrative expenses was caused, in part, by the increase in depreciation expenses. From February to April 2010, production was temporarily stopped for maintenance, hence the related depreciation expense for plant and equipment was recorded as administrative expenses during this period instead of cost of production as in the prior year.
The increase in administrative expenses was also caused by $227,156 of plant and equipment maintenance expenditures in June 2010.
Income from operations:
Income from operations was $8,389,715 for the six months ended June 30, 2009, compared to $9,611,264 for the six months ended June 30, 2010. The increase of $1,221,549 or 15%, was primarily the result of the increase in gross profit.
Provision for income tax
Income tax increased by $358,261 to $2,472,184 for the six months ended June 30, 2010 from $2,113,923 for the same period in 2009. We paid more tax in 2010 because of the increase in sales and taxable income.
Net income
Net income increased by $879,277, or 14% to $7,205,413 for the six months ended June 30, 2010 from $6,326,136 for the same period of 2009, as a result of the factors described above.
Income attributable to noncontrolling interests
“Income attributable to noncontrolling interests” was $379,568 for the six months ended June 30, 2009, compared to $432,325 for the six months ended June 30, 2010. The increase of $52,757 or 14% was primarily the result of the increase in income before “Income attributable to noncontrolling interests” (or, “Net income”). It is calculated as the 6% share of the income before “Income attributable to noncontrolling interests” for the current period ended June 30, 2010.
Net income attributable to China Sports shareholders
“Net income attributable to China Sports shareholders” was $5,946,568 for the six months ended June 30, 2009, compared to $6,773,088 for the six months ended June 30, 2010, an increase of $826,520 or 14%. Our net income increased because our revenues increased.
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LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2010, our balance of cash and cash equivalents was $20,829,938. As of December 31, 2009, our balance of cash and cash equivalents was $17,387,929.
The following table summarizes our cash flows for each of the periods indicated:
For the six months ended June 30, | ||||||||
| 2010 | 2009 | |||||||
| (US$) | ||||||||
| Net cash provided by operating activities | $ | 7,552,579 | $ | 6,599,847 | ||||
| Net cash used in investing activities | (4,138,642 | ) | (3,130,298 | ) | ||||
| Net cash used in financing activities | (124,570 | ) | - | |||||
| Effect of exchange rate changes | 152,642 | 3,383 | ||||||
| Net increase in cash and cash equivalents | 3,442,009 | 3,472,932 | ||||||
| Cash and cash equivalents at beginning of period | 17,387,929 | 7,400,057 | ||||||
| Cash and cash equivalents at end of period | $ | 20,829,938 | $ | 10,872,989 | ||||
Operating activities
For the six months ended June 30, 2010, cash provided by operating activities totaled $7,552,579 compared to $6,599,847 in the same period of 2009. This was primarily attributable to net income of $7,205,413 for the period.
Investing activities
For the six months ended June 30, 2010, cash used by investing activities totaled $4,138,642 compared to $3,130,298 in the same period of 2009. This was attributable to a $7,362,794 deposit for land use rights offset by $3,224,152 in loan repayment by a related party.
Financing activities
For the six months ended June 30, 2010, we had net cash outflow of $124,570 from financing activities for repayments of short-term bank loans.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs).
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rates. Our exposure to market risk for changes in interest rates relates primarily to our short-term investments and short-term obligations; thus, fluctuations in interest rates would not have a material impact on the fair value of these securities. At June 30, 2010, we had $20,829,938 in cash and cash equivalents. A hypothetical 1% increase or decrease in interest rates would not have a material impact on our earnings or loss, or the fair market value or cash flows of these instruments.
Item 4. Controls and Procedures.
a) Evaluation of Disclosure Controls. Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) (the Company’s principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures are effective to ensure that info rmation required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
(b) Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item 1A. Risk Factors.
During the six months ended June 30, 2010, there were no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. (Removed and Reserved).
Item 5. Other Information.
On July 26, 2010, the “Company dismissed AGCA, Inc. (“AGCA”), the Company’s independent registered public accounting firm. On July 26, 2010, the Company engaged Crowe Horwath (HK) CPA Limited as the Company’s new independent registered public accounting firm. The decision to engage Crowe Horwath (HK) CPA Limited was approved by the Company’s Board of Directors on July 26, 2010.
Item 6. Exhibits.
Exhibit No. | Description | |
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification of Chief Executive Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification of Chief Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CHINA SPORTS HOLDING COMPANY LIMITED | ||
| Date: August 16, 2010 | By: | /s/ Mendoza Anding Lin |
| Mendoza Anding Lin | ||
| President, Chief Executive Officer and Chairman | ||
| Date: August 16, 2010 | By: | /s/ Wing Sang Tommy Lo |
| Wing Sang Tommy Lo | ||
| Chief Financial Officer and Principal Accounting Officer |
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