UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1 to Form 10-K
[X] Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended: December 31, 2010
[ ]Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______to_______
Commission file number:
CHINA SHESAYS MEDICAL COSMETOLOGY INC.
(Exact name of small business issuer as specified in its charter)
| NEVADA | 01-0660195 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
Sichuan SHESAYS Cosmetology Hospital Co., Ltd.
New No. 83, Xinnan Road, Wuhou District
Chengdu City, Sichuan Province, P.R. China 610041
(Address of Principal Executive Offices)
(86)-028-8548-2277
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [x]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [ ]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
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 [ ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition for “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large Accelerated Filer [ ] | Non-Accelerated Filer [ ] | Accelerated Filer [ ] | Smaller Reporting Company [x] |
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [ ] No [x]
The number of shares outstanding of our common stock as of June 30, 2010, was 18,000,012 shares. The aggregate market value of the common stock held by non-affiliates (930,000 shares), based on the closing market price ($0.2 per share) of the common stock as of July 7, 2010 was $186,000. As there was no trading activity of our common stock quoted on the OTC Bulletin Board as of June 30, 2010, and the first available market price of the common stock was $0.2 per share as of July 7, 2010, we base the calculation of the aggregate market value of the common stock on the closing market price as of July 7, 2010.
There were a total of 18,600,012 shares of the registrant’s common stock outstanding as of March 28, 2011.
Documents Incorporated by Reference:None
Explanatory Note
This Amendment No. 1 on Form 10-K/A (this “Amended 10-K”) to the Annual Report on Form 10-K for the year ended December 31, 2010 (the “Original 10-K”) of China Shesays Medical Cosmetology Inc. (the “Company”, “China Shesays” or “SHESAYS”) is being filed to amend and restate our consolidated financial statements and related disclosures for the year ended December 31, 2010 as discussed in Note 3 to the accompanying restated financial statements.
Background of the Restatement
On July 15, 2011, as a result of the preparation of the responses to comments the Company received from the Securities and Exchange Commission (the “SEC”) in connection with the SEC’s review of the Company’s Amendment No. 2 to the Registration Statement on Form S-1 filed on May 13, 2011, after its communications with the Company’s auditors, the Company determined that the Company’s financial statements for the year ended December 31, 2010, and the three months period ended March 31, 2011 should no longer be relied upon as a result of certain errors regarding: (i) pre-operating expenses wrongly recorded as other current assets; (ii) under-provisions of rental expenses for clinics that had not yet commenced business; (iii) income tax expense for the above items; (iv) foreign currency translation gain or loss for the above items; and (v) an over statement of payments to acquire property and equipment in cash flows from investing activities and increases in other payables and accrued liabilities included in cash flows from operating activities in the statement of cash flows for the year ended December 31, 2010. An explanation of the error and its impact on the Company's financial statements is contained in Note 3 to the financial statements contained in Part II of this report.
Restatement of Other Financial Statements
Along with the filing of this Amended 10-K, we are concurrently filing an amendment to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011. The amendment to our Quarterly Report on Form 10-Q is being filed to restate our unaudited financial statements and related financial information for the period contained in the report to correct the errors as set forth above.
Amendments to the Original 10-K
For the convenience of the reader, this Amended 10-K sets forth the Original 10-K, as modified and superseded where necessary to reflect the restatement. The following items have been amended principally as a result of, and to reflect, the restatement:
Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations; and
Part IV - Item 15. Exhibits, Financial Statement Schedules.
In accordance with applicable SEC rules, this Amended 10-K includes certifications from our Chief Executive Officer and Chief Financial Officer dated as of the date of this filing. Except for the items noted above, no other information included in the Original 10-K is being amended by this Amended 10-K. The Amended 10-K continues to speak as of the date of the Original 10-K, and we have not updated the filing to reflect events occurring subsequently to the Original 10-K date, other than those associated with the restatement of the Company's financial statements. Accordingly, this Amended 10-K should be read in conjunction with our filings made with the SEC subsequent to the filing of the Original 10-K.
PART II
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations, which we refer to as the MD&A, is intended to help the reader understand our Company, our operations and our present business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this annual report on Form 10-K. Some of the information contained in this discussion and analysis constitutes forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this annual report on Form 10-K particularly under “Special Note Regarding Forward-Looking Statements” and “Risk Factors.”
Unless otherwise specified, references to Notes to our consolidated financial statements are to the Notes to our audited consolidated financial statements as of December 31, 2010 and 2009 and for the two-year period ended December 31, 2010.
This discussion should be read in conjunction with the other sections of this report, including the related exhibits. The various sections of this discussion contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this prospectus. See “Risk Factors.” Our actual results may differ materially.
Overview
We are a Nevada holding company operating in the cosmetology industry. Substantially all of our operations are conducted in China through BOAN, our wholly-owned subsidiary in China, and through our contractual arrangements with several of our consolidated affiliated entities in China, including SHESAYS and its subsidiaries.
SHESAYS was established in May 2005 and specializes in cosmetology treatments, integrating medical treatment and education. At present, we have such core clinical departments as cosmetic surgery, cosmetic dermatology, cosmetic dentistry, cosmetic Traditional Chinese Medicine (“TCM”). Services provided in cosmetic surgery include eye shaping, facial contour, rhinoplasty, face shaping, wrinkles elimination, breast surgery,chiloplasty, liposuction slimming, ear reshaping, gynecology / male plastic surgery. Cosmetic dermatology department provides services of laser depilation, acne/pock removal, facelift and wrinkle decrease of Cutera Titan, laser whitening, pore minimizing, skin rejuvenation etc. Cosmetic dentistry includes the services of optical fluoride whitening, repair of uneven denture, porcelain teeth / cercon, orthodontic treatment, comfortable painless teeth cleaning, complex tooth extraction face-lift surgery, orthodontic caries-prevention and correction for children, adult orthodontics invisible. Traditional Chinese Medicine, also known as TCM, is the medical theory and practices of Chinese culture, especially herbal medicine, acupuncture and osteopathy, for preventing or treating illness, or promoting health and well-being. Cosmetic TCM is to use traditional Chinese Medicine, such as acupuncture and moxibustion, to provide cosmetic services, such as to dispel freckle, lose weight, as well as to enhance the endocrine system. The major difference of Chinese medicine from Western medicine is that it focuses on "health" rather than on "healing" because Chinese medicine promotes overall wellness of an individual, as opposed to the approach of Western medicine in treating the symptoms of an illness.
Headquartered in Chengdu, Sichuan province, P.R. China, SHESAYS aims to expand its business outside of Chengdu. In 2010, SHESAYS established three new outpatient clinics in the cities of Yibin, Leshan and Zigong, Sichuan province, and is constructing a new flagship store, a comprehensive cosmetology hospital in Chengdu.
For the fiscal year ended December 31, 2010, we generated revenue of $12,173,231 which represents a growth of 37.8% compared to $8,834,673 in the previous fiscal year. This increase in revenue is attributed to our increased sale to the existing and new customers in 2010. We serviced 25,682 customers in 2010 compared to 20,514 in 2009.
However, our net income decreased from $1,766,442 for 2009 to $524,960 for 2010, a 70.3% decline. The decrease in net income was mainly due to our increased expense related to listing on OTCBB and effect of pre-operating expenses for new clinics and our flagship hospital.
Our business operates in China and financial statements are denominated in Chinese Renminbi (RMB), but we report our financial results in our SEC filings in U.S. dollars. The conversion of our financial statements from RMB to U.S. dollars results in translation adjustments, which are reported as a line item after net income and before comprehensive income. The net income is added to the retained earnings on our balance sheet; while the translation adjustment is added to a line item on our balance sheet labeled “accumulated other comprehensive income,” because it is more reflective of changes in the relative values of U.S. and Chinese currencies than of the success of our business. For the years ended December 31, 2010 and 2009, we recorded foreign currency translation gains attributable to SHESAYS common stockholders of $109,474 and $1,073 respectively.
Major factors that affect our Financial Conditions in 2010
The increase in our operating results in the last two years is attributable to a number of factors, including the substantial increase of domestic cosmetology demand and successful brand promotion. We expect our business to continue to be driven by the following factors:
Increasing domestic spending in Cosmetology
The demand for our cosmetology services is directly related to consumer’s cosmetology spending, which is largely determined by the economic conditions and disposable income of consumers. According to the statistics released by National Bureau of Statistics of China, China’s economy has experienced a rapid growth in the last thirty years. The annual growth rate has been in the range of 9% to 13% in the last five years. China’s GDP per capita has been over $3,000 since 2007, which marks a new starting point in terms of consumption. With economic growth of a country with 1.3 billion people, China’s increased consumption has upgraded many traditional consumption industries and accelerated development of many new industries, such as medical cosmetic industry. The national medical cosmetic market reached approximately $439 million last year but compared with $60 billion in the United States, there is still a huge gap. We believe that the domestic spending in cosmetology will continue to increase at a fast rate within the next five years as consumer’s disposable income continues to grow.
Successful Promotion of Our Brand Name
Mr. Yixiang Zhang, our CEO, owns a trademark registered at the State Administration for Industry and Commerce of China, namely,“西婵” (translated as “SHESAYS” in English). Mr. Zhang has entered into an agreement with SHESAYS to allow SHESAYS to use the trademark without charge. “SHESAYS” will appear as our core brand. In addition, SHESAYS registered a trademark at the State Administration for Industry and Commerce of China, namely, “钧阁” (translated as “Junge” in English). Junge will appear in our clinics and skincare centers.
The logo “SHESAYS” combines the names of two of the four great beauties in ancient China, Xi Shi and Diao Chan, and embodies grace and joy, stimulating people to pursue beauty. The logo conceives rich visual impact and imagination, which contains profound cultural connotations and is easy to promote.
Also, in the year of 2010, there are another two factors affecting our financial conditions. Firstly, we established three clinics and achieved a steady growth of our revenue of 37.8% with the growth of the number of our customers. Secondly, we became a public company in US by reverse-merger with an OTCBB shell company. Therefore, we have incurred expenses related to this reverse merger and maintaining the status as a public company, this will negatively affect our bottom line result.
Results of Operations
The following table summarizes the results of our operations in dollar amounts and percentage of increase (decrease) over previous year during the fiscal years ended on December 31, 2010 and 2009.
All amounts, other than percentages, in U.S. dollars
| Year ended December 31, | ||||||||||||
| 2010 | 2009 | |||||||||||
| As a | As | |||||||||||
| percentage | percentage | |||||||||||
| of net | of net | |||||||||||
| All Amounts | revenue | All Amounts | revenue | ||||||||
REVENUE | ||||||||||||
Customer service revenue | ||||||||||||
Cosmetic surgery services | $ | 6,195,516 | 50.9% | $ | 4,835,389 | 54.7% | ||||||
Professional medical beauty services | 4,940,433 | 40.6% | 2,998,806 | 33.9% | ||||||||
Cosmetic dentistry services | 427,427 | 3.5% | 579,822 | 6.6% | ||||||||
Sales of goods | 609,855 | 5.0% | 420,656 | 4.8% | ||||||||
Total Revenue | 12,173,231 | 100.0% | 8,834,673 | 100.0% | ||||||||
| ||||||||||||
COST OF REVENUE | ||||||||||||
Cost of service revenue | ||||||||||||
Cosmetic surgery services | (1,762,733 | ) | -14.5% | (1,536,779 | ) | -17.4% | ||||||
Professional medical beauty services | (847,827 | ) | -7.0% | (517,428 | ) | -5.9% | ||||||
Cosmetic dentistry services | (164,928 | ) | -1.4% | (168,547 | ) | -1.9% | ||||||
Cost of goods sold | (228,078 | ) | -1.9% | (162,705 | ) | -1.8% | ||||||
Depreciation | (349,328 | ) | -2.9% | (206,831 | ) | -2.3% | ||||||
Total Cost of Revenue | (3,352,894 | ) | -27.5% | (2,592,290 | ) | -29.3% | ||||||
| ||||||||||||
GROSS PROFIT | 8,820,337 | 72.5% | 6,242,383 | 70.7% | ||||||||
OPERATING EXPENSES | ||||||||||||
Selling, general and administrative expenses | 3,860,858 | 31.7% | 2,680,577 | 30.3% | ||||||||
Advertising costs | 3,014,871 | 24.8% | 1,290,545 | 14.6% | ||||||||
Professional and consultant fees | 716,910 | 5.9% | 138,292 | 1.6% | ||||||||
Depreciation | 197,071 | 1.6% | 125,768 | 1.4% | ||||||||
Total Operating Expenses | 7,789,710 | 64.0% | 4,235,182 | 47.9% | ||||||||
| ||||||||||||
INCOME FROMOPERATIONS | 1,030,627 | 8.5% | 2,007,201 | 22.7% | ||||||||
| ||||||||||||
OTHER INCOME (EXPENSES) | ||||||||||||
Other income | 4,574 | 0.0% | 52,714 | 0.6% | ||||||||
Interest income | 5,128 | 0.0% | 3,383 | 0.0% | ||||||||
Interest expenses | (48,852 | ) | -0.4% | (3,224 | ) | -0.0% | ||||||
Imputed interest | (250 | ) | 0.0% | (1,027 | ) | -0.0% | ||||||
Other expenses | (41,530 | ) | -0.3% | (66,489 | ) | -0.8% | ||||||
Total Other Expenses, net | (80,930 | ) | -0.7% | (14,643 | ) | -0.2% | ||||||
| ||||||||||||
INCOME BEFORETAXES | 949,697 | 7.8% | 1,992,558 | 22.6% | ||||||||
Add (less): | ||||||||||||
Income tax expenses | (424,737 | ) | -3.5% | (226,116 | ) | -2.6% | ||||||
NET INCOME | 524,960 | 4.3% | 1,766,442 | 20.0% | ||||||||
Net loss attributable to noncontrolling interest | 19,607 | 0.2% | - | 0.0% | ||||||||
NET INCOMEATTRIBUTABLE TO CHINASHESAYS COMMONSTOCKHOLDERS | 544,567 | 4.5% | 1,766,442 | 20.0% | ||||||||
| ||||||||||||
OTHER COMPREHENSIVEINCOME (LOSS) | ||||||||||||
Total foreign currency translation gain | 108,972 | 0.9% | 1,073 | 0.0% | ||||||||
Add: foreign currency translation loss attributable to noncontrolling interest | 502 | 0.0% | - | 0.0% | ||||||||
Foreign currency translation gains attributable to China Shesays common stockholders | 109,474 | 0.9% | 1,073 | 0.0% | ||||||||
COMPREHENSIVE INCOMEATTRIBUTABLE TO CHINASHESAYS COMMONSTOCKHOLDERS | $ | 654,041 | 5.4% | $ | 1,767,515 | 20.0% | ||||||
Year Ended December 31, 2010 Compared with Year Ended December 31, 2009
Total revenue.Total revenue increased by approximately $3.3 million or 37.8% to approximately $12.2 million in 2010 from approximately $8.8 million in 2009. Our sales growth was driven by sales from our new outpatient clinics in Leshan, Yibin and Zigong, and our continued efforts to attract new customers in the headquarter hospital. We serviced approximately 25,682 customers in the headquarter hospital and three clinics in 2010 compared to approximately 20,514 customers in 2009.
The following table sets the revenue generated from each of our cosmetology categories for the periods indicated.
| REVENUE | For the year ended December 31, | |||||||||||
| Increase/ | % | |||||||||||
| 2010 | 2009 | (Decrease) | Change | ||||||||
Cosmetic surgery services | $ | 6,195,516 | $ | 4,835,389 | $ | 1,360,127 | 28.1% | |||||
Professional medical beauty services | 4,940,433 | 2,998,806 | 1,941,627 | 64.7% | ||||||||
Cosmetic dentistry services | 427,427 | 579,822 | (152,395 | ) | -26.3% | |||||||
Sales of goods | 609,855 | 420,656 | 189,199 | 45.0% | ||||||||
Total revenue | $ | 12,173,231 | $ | 8,834,673 | $ | 3,338,558 | 37.8% | |||||
Revenue generated from Cosmetic Surgery Services increased 28.1% to $6.2 million in 2010, mainly due to enhanced marketing activities and increase in number of cosmetic surgery customers. Revenue generated from Professional Medical Beauty Services increased 64.7% to $4.9 million in 2010 as we increased investment in advertising for these services during 2010. Revenue generated from Cosmetic Dentistry Services decreased 26.3% to $0.4 million in 2010. The decrease was primarily due to our strategy in 2010 focusing on cosmetic surgery services and professional medical beauty services. Revenue generated from Sales of Goods increased 45.0% to $0.6 million due to increased efforts of our staff to sell cosmetic products when servicing customers.
For 2010, revenue of our current headquarter hospital increased by 32.2% to $11.7 million, from $8.8 million in 2009. Three new clinics launched in 2010 contributed approximately $0.5 million to revenue.
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | |||||||||||
| Location | ||||||||||||
| Sichuan Shesays | $ | 11,676,294 | 96.0% | $ | 8,834,673 | 100.0% | ||||||
| Leshan Jiazhou Shesays | 272,412 | 2.2% | - | |||||||||
| Yibin Shesays | 158,336 | 1.3% | - | |||||||||
| Zigong Shesays | 66,189 | 0.5% | - | |||||||||
| Total sales | $ | 12,173,231 | 100.0% | $ | 8,834,673 | 100.0% | ||||||
Cost of revenue.Our cost of revenue, which includes cost of service revenue, cost of goods sold and depreciation, increased by approximately $0.8 million, or 29.3% to approximately $3.4 million in 2010 from approximately $2.6 million in 2009. As a percentage of net revenue, the cost of goods sold decreased approximately by 1.8% to 27.5% in 2010, from 29.3% in 2009. The increase in cost of sales was mainly due to the increase in revenue during the year.
| COST OF REVENUE | For the year ended December 31, | |||||||||||
| 2010 | 2009 | Decrease/(Increase) | % Change | |||||||||
| Cosmetic surgery services | $ | (1,762,733 | ) | $ | (1,536,779 | ) | $ | (225,954 | ) | 14.7% | ||
| Professional medical beauty services | (847,827 | ) | (517,428 | ) | (330,399 | ) | 63.9% | |||||
| Cosmetic dentistry services | (164,928 | ) | (168,547 | ) | 3,619 | -2.1% | ||||||
| Sales of goods | (228,078 | ) | (162,705 | ) | (65,373 | ) | 40.2% | |||||
| (3,003,566 | ) | (2,385,459 | ) | (618,107 | ) | 25.9% | ||||||
| Depreciation | (349,328 | ) | (206,831 | ) | (142,497 | ) | 68.9% | |||||
| Total cost of revenue | $ | (3,352,894 | ) | $ | (2,592,290 | ) | $ | (760,604 | ) | 29.3% | ||
Gross profit.Our gross profit increased by approximately $2.6 million, or 41.3% to approximately $8.8 million in 2010 from approximately $6.2 million in 2009. Gross profit as a percentage of net revenue increased by 1.8% to 72.5% in 2010 as compared to 70.7% in 2009, mainly due to the increased revenue during the period. Our higher gross margin was primarily due to economies of scale obtained from business expansion.
Total Operating Expenses.Our total operating expenses increased by approximately $3.6 million or 83.9% to approximately $7.8 million in 2010 from approximately $4.2 million in 2009. As a percentage of net revenue, total operating expenses increased from 47.9% in 2009 to 64.0% in 2010. The increase in our total operating expenses was mainly attributed to the increase of $1.2 million in selling, general and administrative expenses, the increase of $1.7 million of advertising costs, as well as the increase of $0.6 million in professional and consultant fees.
Selling, general and administrative expenses.Our selling, general and administrative expenses increased by approximately $1.2 million, or 44.0% to approximately $3.9 million in 2010 from approximately $2.7 million in 2009. As a percentage of net revenue, selling, general and administrative expenses increased by 1.4% to 31.7% in 2010, as compared to 30.3% in 2009. The increase in expenses was mainly due to the increase in salary cost, leasing expenses of three new clinics and current headquarter hospital and pre-operating expenses related to the planned opening of our new flagship hospital.
Advertising costs.Our advertising costs increased by approximately $1.7 million or 133.6% to approximately $3.0 million in 2010 from approximately $1.3 million in 2009. Advertising costs as a percentage of net revenue increased by 10.2% to 24.8% in 2010 as compared to 14.6% in 2009. The increase in our advertising expenses was mainly contributable to the increase in marketing expenses and promotion of the brand name of “SHESAYS” in Sichuan’s cosmetology market.
Professional and consultant fees.Our professional and consultant fees increased by approximately $0.6 million or 418.4% to approximately $0.7 million in 2010 from approximately $0.1 million in 2009. As a percentage of net revenue, professional and consultant fees were increased from 1.6% in 2009 to 5.9% in 2010. The significant increase in our professional and consultant fees was mainly attributed to expenses incurred related to being a public company.
Income from operations.Our income from operating decreased by approximately $1.0 million or 48.7% to approximately $1.0 million in 2010 from approximately $2.0 million in 2009. As a percentage of net revenue, our income from operations was 8.5% in 2010 and 22.7% in 2009. This decrease in income from operations was primarily due to the increase in operating expenses offset by the increase in revenue.
Other Income (Expenses).Other income (expenses), consisting primarily of interest income, interest expenses, imputed interest, and other miscellaneous expenses, increased by $66,287 to $80,930 expenses in 2010 from $14,643 expenses in 2009. The increase was primarily due to the increase in interest expenses as a result of the short term loan of $0.9 million obtained from Bank of Chengdu in 2010.
Income before taxes. Our income before income taxes decreased by approximately $1.0 million or 52.3% to approximately $0.9 million in 2010 from approximately $2.0 million in 2009. As a percentage of net revenue, our income before income taxes decreased by 14.8% to 7.8% in 2010, as compared to 22.6% in 2009. This decrease of income before income taxes was primarily attributable to the increase in operating expenses in 2010.
Income taxes.We incurred income taxes of approximately $0.4 million in 2010, with an increase of approximately $0.2 million or 87.8% over approximately $0.2 million in 2009. The increase was mainly due to the expiration of the special income tax assessment basis which was calculated based on the net income for income tax purpose assessed at 10% of services revenue with the applicable tax rate of 25% in 2009. From 2010 onwards, China SHESAYS has an income tax rate of 25%.
Net income.Net income decreased by approximately $1.2 million or 70.3% to approximately $0.5 million in 2010 from approximately $1.8 million in 2009, due to our 83.9% increase in operating expenses, coupled with our 87.8% increase in income tax expenses.
Liquidity and Capital Resources
As of December 31, 2010, we had cash and cash equivalents of $1.0 million. We had a working capital deficit of $1.9 million, that is, our current assets were $2.2 million and our current liabilities were $4.1 million as of December 31, 2010. Our net working capital deficit may initially raise substantial doubt as to our ability to continue as a going concern. However, we believe that our strong net cash flow from operating activities, cost reduction and delay on capital expenditure will provide sufficient liquidity to finance our anticipated working capital and capital expenditure requirements for the next 12 months. Total equity as of December 31, 2010, was $4.5 million.
Pursuant to our BOAN’s contractual arrangements with SHESAYS, BOAN provides management and consulting services to SHESAYS and its subsidiaries in exchange for service fees, which shall be equal to 100% of the residual return of SHESAYS and its subsidiaries and can be waived by BOAN from time to time at its sole discretion.
BOAN and SHESAYS reached an agreement that, in order to support the strategic expansion plan of SHESAYS in China, BOAN waived the service fees to be paid by SHESAYS for three years commencing from April 27, 2010 so that SHESAYS can execute its business expansion plan, launch the flagship hospital in Chengdu and establish the cosmetology hospitals in various locations in China. Therefore, no service fees have been paid to BOAN by SHESAYS up to date. Based on our expansion plan and past experience with respect to the new clinics launched in 2010, we believe that we need to retain our existing cash reserves and cash flow from operations in SHESAYS to support annual growth in the number of customers and number of new outpatient clinics and our planed new flagship hospital openings in fiscal 2011. BOAN and our company have never received any service fee from SHESAYS, the operating company and we expect to receive service fees commencing on April 28, 2013. Boan and we don’t expect to declare any dividend before the April 27, 2013, nor does any other amount expected to due prior to April 27, 2013. However, if there is extra expense occurred and need to be paid during the period, we can borrow from SHESAYS to settle such amount.
The following table provides detailed information regarding our net cash flow for all financial statement periods presented in this report.
| December 31, | ||||||
| (in US dollars) | 2010 | 2009 | ||||
Net cash provided by operating activities | 1,983,221 | 2,116,493 | ||||
Net cash used in investing activities | (4,469,361 | ) | (747,484 | ) | ||
Net cash provided by (used in) financing activities | 2,129,555 | (38,107 | ) | |||
Effect of foreign currency translation on cash and cash equivalents | 14,133 | 419 | ||||
Net (decrease) increase in cash and cash equivalents | (342,452 | ) | 1,331,321 | |||
Cash and cash equivalents – beginning of year | 1,371,732 | 40,411 | ||||
Cash and cash equivalents – end of year | 1,029,280 | 1,371,732 | ||||
Pursuant to our BOAN’s contractual arrangements with SHESAYS, BOAN provides management and consulting services to SHESAYS and its subsidiaries in exchange for service fees, which shall be equal to 100% of the residual return of SHESAYS and its subsidiaries and can be waived by BOAN from time to time at its sole discretion. BOAN and SHESAYS reached an agreement that, in order to support the strategic expansion plan of SHESAYS in China, BOAN waived the service fees to be paid by SHESAYS for three years commencing from April 27, 2010 so that SHESAYS can execute its business expansion plan, launch the flagship hospital in Chengdu and establish the cosmetology hospitals in various locations in China. Therefore, no service fees have been paid to BOAN by SHESAYS up to date. Based on our expansion plan and past experience with respect to the new clinics launched in 2010, we believe that we need to retain our existing cash reserves and cash flow from operations in SHESAYS to support annual growth in the number of customers and number of new outpatient clinics and our planed new flagship hospital openings in fiscal 2011.
Operating Activities
Net cash provided by operating activities in 2010 amounted to $2.0 million, with a decrease of $0.1 million from net cash inflows from operating activities of $2.1 million in 2009. The slight decrease in our cash provided by operations was primarily due to a decrease in net income, offsetting by an increase in our income tax payable and other payables and accrued liabilities .
Inventories. Our inventories increased by approximately $0.19 million or 55.17% to approximately $0.52 million in 2010 from approximately $0.34 million in 2009. The increase in our inventory was mainly attributed to our increase in revenue and customers.
Other current assets and prepaid expenses. Our other current assets and prepaid expense increased by 19% from $527 thousand in 2009 to $627 thousand in 2010. The increase was mainly due to the increase in rental deposits and prepayments, which we prepaid for leasing premises for our new clinics in Leshan, Yibin and Zigong.
Income tax payable: Our income tax payable increased by 1,198% from $54,428 to $706,450. The increase was mainly due to the difference in income tax assessment method. In 2009, the tax bureau approved Sichuan Shesays to assess its income tax based on the 10% of its revenue generated. In 2010, Sichuan Shesays need to assess its income tax based on 25% applicable tax rate on its assessable net income.
Other payables and accrued liabilities: Other payables and accrued liabilities increased from $0.7 million in 2009 to $1.8 million in 2010, which was 168.0% increase in percentage. The increase was mainly due to $0.5 million increase in other payables, which were the equipment and renovation costs owed to suppliers due to our opening of 3 clinics as well as the beginning of the renovation of flagship hospital, and $0.5 million increase in accrued liabilities, which consists of the accrued advertising expense and accrued rental expense of flagship hospital as well as accrued professional expense related to listing.
Other payables and accrued liabilities at December 31, 2010 and 2009 consisted of the following:
| 2010 | 2009 | |||||
| (Restated) | ||||||
| (consolidated) | (combined) | |||||
| Other payables | $ | 599,724 | $ | 62,615 | ||
| Deposits from customers | 231,390 | 215,618 | ||||
| Deposits from membership reward program | 277,010 | 221,059 | ||||
| Accrued liability for membership reward program | 18,586 | 56,497 | ||||
| Accrued liabilities | 631,265 | 100,124 | ||||
| $ | 1,757,975 | $ | 655,913 |
Investing Activities
Net cash used in investing activities in the year 2010 was $4.5 million, with a significant increase of $3.7 million from net cash used in investing activities of $0.7 million in 2009. We invested $4.4 million in purchase of property and equipment for 2010 as compared to $0.8 million in 2009. The investments were a part of our development plans, which include continuous expansion of our cosmetic services and expansion of new chain clinics. We paid $2.7 million cash for renovation and equipment for three new clinics launched in late 2010. For the year 2010, $0.9 million was paid for new equipment at existing headquarter hospital compared to $0.8 million for the year 2009. In addition, $0.9 million was paid for renovation of the new flagship hospital in Chengdu in 2010.
Financing Activities
Net cash provided by financing activities was $2.1 million in 2010, compared to net cash used in financing activities of $38,107 in 2009. On November 5, 2010, we entered into a Stock Purchase Agreement with certain institutional and accredited investors relating to a private placement of 600,000 shares of our common stock, for net proceeds of approximately $1.1 million.
Loan Facilities
As of December 31, 2010, the Company and its subsidiaries have the following credit facilities with the following terms:
| All amounts, other than percentages, are in U.S. dollars | |||||
| No | Type | Contracting Party | Valid Date | Duration | Amount |
| 1 | Loan | Bank of Chengdu | February 10, 2010 | 1 year | $0.46 million |
| 2 | Loan | Bank of Chengdu | February 23, 2010 | 1 year | $0.46 million |
We have approximately $0.9 million in total loans and $0.46 million and $0.46 million will mature on or before February 9, 2011 and February 22, 2011, On these maturity dates, we have repaid the loans with our working capital.
Interest expense paid for the above short term loans totaled $48,852 and $3,224 for 2010 and 2009, respectively. There is no default in payment in respect of all of our obligations under the terms of the outstanding loan facilities from Bank of Chengdu and we have not breached any covenant thereof.
Critical Accounting Policies
Management’s discussion and analysis of results of operations and financial condition are based upon our consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require management to make certain estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes.
The most significant estimates and assumptions include valuation of inventories, provisions for income taxes, allowance for doubtful accounts, and the recoverability of the long-lived assets. Actual results could differ from these estimates. Periodically, we review all significant estimates and assumptions affecting the financial statements and record the effect of any necessary adjustments.
The following critical accounting policies rely upon assumptions and estimates and were used in the preparation of our consolidated financial statements:
Variable Interest Entities
The Company accounts for Variable Interest Entities (“VIE”) in accordance with ASC 810. As a result of the adoption of ASU 2009-17, consolidations (Topic 810) – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, effective January 1, 2010, ASC 810 requires the consolidation of VIEs in which a company has both the power to direct the activities of the VIEs that most significantly impact the VIEs’ economic performance and the obligation to absorb losses or the right to receive the benefits from the VIEs that could potentially be significant to the VIEs. The Company has applied the requirements of ASC 810 on a prospective basis from the date of adoption.
The Company assesses all newly created entities and those with which the Company becomes involved to determine whether such entities are VIEs and, if so, whether or not the Company is their primary beneficiary.
On April 27, 2010, the Company through its PRC subsidiary, Chengdu Boan entered into a series of contractual arrangements consisting of four agreements with Sichuan Shesays and the stockholders of Sichuan Shesays. Those four agreements and their consequences are described below.
| (i) | an exclusive service agreement, pursuant to which Sichuan Shesays and its subsidiaries irrevocably entrust to Chengdu Boan the right of management and operation of Sichuan Shesays and its subsidiaries and the responsibilities and authorities of their stockholders and directors of Sichuan Shesays and its subsidiaries. In return, Sichuan Shesays and its subsidiaries agreed to pay 100% of its residual return, if any, from time to time, as management fee to Chengdu Boan. | |
| (ii) | a voting rights proxy agreement, pursuant to which the stockholders of Sichuan Shesays and its subsidiaries have granted the personnel designated by Chengdu Boan the right to appoint directors and senior management of Sichuan Shesays and its subsidiaries and to exercise all of their other voting rights as stockholders of Sichuan Shesays and its subsidiaries, as the case may be, as provided under the articles of association of each such entity; | |
| (iii) | a call option agreement, pursuant to which: | |
| (a) | neither Sichuan Shesays nor any of its subsidiaries may enter into any transaction that could materially affect its assets, liabilities, equity or operations without the prior written consent of Chengdu Boan; | |
| (b) | neither Sichuan Shesays nor any of its subsidiaries will distribute any dividends without the prior written consent of Chengdu Boan; and | |
| (c) | Chengdu Boan or its designee has an exclusive option to purchase all or part of the equity interests in Sichuan Shesays, all or part of the equity interests in subsidiaries owned by Sichuan Shesays or its nominee holders, or all or part of the assets of Sichuan Shesays, in each case when and to the extent permitted by PRC law. In case of Chengdu Boan exercising the call option in its sole discretion upon the occurrence of the situation in which such call option exercise become feasible under the relevant laws in PRC, any additional consideration paid other than $1 which may be required under the laws of PRC to effect such purchase to comply with such legal formalities shall be either cancelled or returned to Sichuan Shesays immediately with no additional compensation to the owners; and | |
| (iv) | an equity pledge agreement pursuant to which each of stockholders of Sichuan Shesays has pledged his or her equity interest in Sichuan Shesays and its subsidiaries, as the case may be, to Chengdu Boan to secure their obligations under the relevant contractual control agreements, including but not limited to, the obligations of Sichuan Shesays and its subsidiaries under the exclusive services agreement, the call option agreement, the voting rights proxy agreement described above, and each of them has agreed not to transfer, sell, pledge, dispose of or create any encumbrance on their equity interest in Sichuan Shesays or its subsidiaries without the prior written consent of Chengdu Boan. |
In the PRC restructuring transaction described above, the Company gained indirect control of Sichuan Shesays and its subsidiaries and Sichuan Shesays and its subsidiaries are considered VIEs of the Company.
As required by ASC 810-10, the Company performs a qualitative assessment to determine whether the Company is the primary beneficiary of Sichuan Shesays and its subsidiaries which are identified as VIEs of the Company. A quality assessment begins with an understanding of the nature of the risks in the entity as well as the nature of the entity’s activities including terms of the contracts entered into by the entity, ownership interests issued by the entity and the parties involved in the design of the entity. The Company’s assessment on the involvement with Sichuan Shesays and its subsidiaries reveals that the Company has the absolute power to direct the most significant activities that impact the economic performance of Sichuan Shesays and its subsidiaries. Under the accounting guidance, the Company is deemed to be the primary beneficiary of Sichuan Shesays and its subsidiaries and the results of Sichuan Shesays and its subsidiaries are consolidated in the Company’s consolidated financial statements for financial reporting purposes. As of December 31, 2010, Sichuan Shesays and its subsidiaries had total assets of $7,621,593 (restated) and total liabilities of $4,059,585 (restated). As of December 31, 2009, Sichuan Shesays had total assets of $3,863,832 and total liabilities of $1,313,712.
As of December 31, 2010, the Company agreed to waive the management fee to be payable by Sichuan Shesays and its subsidiaries for a period of 3 years from April 27, 2010 to April 26, 2013 due to lack of liquidity as Sichuan Shesays is launching a new comprehensive hospital in Chengdu City, Sichuan Province.
Revenue recognition
The Company recognizes revenue in the period in which the services are performed. The Company recognizes revenue under the provisions of ASC 605, Revenue Recognition when all of the following have occurred: persuasive evidence of arrangement with the customer, services has been performed, fees are fixed or determinable and collectability of the fees is reasonably assured. These criteria as related to the Company’s revenue are considered to have been met as follows:
Services fees
Revenue from rendering of services is recognized when the services are rendered. Fees received in advance for prepaid service packages are recorded as deferred revenue under current liabilities and are recognized on a systematic basis in accordance with service usage. As the Company is primarily engaged in providing professional medical beauty and cosmetic services, the Company is subject to claims from customers, usually in form of demand for refund of service fee paid. The Company’s policy allows for refund only upon the Company’s authorization for reasonable demand. Based on the past experience on refunds incurred, the Company considers that amount is not material to the Company’s operation. Pursuant to FASB ASC 954-605-25, the Company recognized refunds and discounts on an accrual basis and deducted from gross service revenue to determine net service revenue. During the years ended December 31, 2010 and 2009, the amount of refund of service fee was $31,393 and $24,130 respectively.
The service usage is measured by the percentage of service rendered based on the content of package. For example, if the service package composed of 3 injections of Botox, the usage of service will be 1/3 when each injection is applied and the payment rates are determined prospectively.
Sales of goods
The Company recognizes revenue on sales of goods when the goods are delivered and title to the goods passes to the customers provided that: (i) there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; (ii) the sales price is fixed and determinable; and (iii) collectability is deemed probable. It is the Company’s policy not to allow return of goods once the goods are inspected by and delivered to the customer. Accordingly, the Company makes no allowance for potential losses arising from sales return.
Accrued liability for customer reward program
The Company establishes a membership reward program of which the membership is free of charge. Under the membership reward program, members enjoy high discounts on services and accumulate membership credit points that vary depending on the services rendered. Members are eligible to redeem credit points to reduce the fees for services rendered by the Company and these credit points do not have any expiry date. The costs associated with these incentives are included in deductions from revenue and accrued for as a current liability as members accumulate credit points. As members redeem credit points, the accrued liability is reduced correspondingly. As of December 2010 and 2009, the Company’s accrued liability for its customers reward program amounted to $18,586 and $56,497 respectively, based on the estimated liabilities under the customer reward program.
Cash Coupons
Third parties and the Company’s customers may be awarded cash coupons. The coupons are distributed on a random and discretionary basis to induce future services and treatments and are redeemable within a short time period. The cash coupons cannot be renewed or extended. No liability is recorded when the coupons are distributed, except where redemption of the coupons will result in the services being sold at a loss. The Company recognizes a reduction in revenue as a promotional allowance for these cash coupons at the later date at which the related revenue is recognized or the date at which the coupons are distributed in accordance with ASC 605-50-25-3. No cash coupons were issued during 2010.
Cash and cash equivalents
For purpose of the statements of cash flows, cash and cash equivalents include cash on hand and demand deposits with a bank with a maturity of less than three months.
Inventories
Inventories represent medical materials and finished goods – merchandise and are stated at the lower of cost or market. Cost represents invoices value on purchases and is being calculated on the weighted average basis.
The Company provided inventory allowances based on excess and obsolete inventories determined principally by demand for these products.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation. Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation is provided on a straight-line basis, less estimated residual value over the assets’ estimated useful lives. The estimated useful lives are as follows:
| Buildings | 20 Years |
| Leasehold improvements | 5 Years |
| Medical equipment | 3 to 10 Years |
| Motor vehicles | 5 Years |
| Office equipment | 3 to 10 Years |
Income taxes
The Company accounts for income taxes under the FASB Codification Topic 740-10-25 (“ASC 740-10-25”). Under ASC 740-10-25, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740-10-25, the effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period included the enactment date.
On January 1, 2007, the Company adopted the provisions of ASC 740-10-25, “Accounting for Uncertainty in Income Taxes”. ASC 740-10-25 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. This Interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. The adoption of ASC 740-10-25 has not resulted in any material impact on the Company’s financial position or results.
The Company was incorporated in the PRC and is subject to PRC income tax which is computed according to the relevant laws and regulations in the PRC. The applicable tax rates for 2010 and 2009 are 25%. Prior to 2009, income tax was calculated by net income with the applicable tax rate. In 2009, the Company elected to have its net income for income tax purpose assessed at 10% of services revenue and the election was approved by the local tax bureau, income tax was therefore calculated by 10% of services revenue with the applicable tax rate. From 2010 onwards, Sichuan Shesays’s income tax will be assessed at the applicable tax rate of 25% on its net income.
Foreign currency transactions
The functional currency of the Company is Renminbi (“RMB”). Foreign currency transactions during the year are translated to the functional currency at the approximate rates of exchange on the dates of transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the approximate rates of exchange at that date. Non-monetary assets and liabilities are translated at the rates of exchange prevailing at the time the asset or liability was acquired. Exchange gains or losses are recorded in the statement of operations.
The financial statements are translated into United States Dollars (“US$”) using the closing rate method. The balance sheet items are translated into US$ using the exchange rates at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the year. All exchange differences are recorded within equity.
No presentation is made that RMB amounts have been, or would be, converted into US$ at the above rates. Although the Chinese government regulations now allow convertibility of RMB for current account transactions, significant restrictions still remain. Hence, such translations should not be construed as representations that RMB could be converted into US$ at that rate or any other rate.
The value of RMB against US$ 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 US$ reporting.
Recent Accounting Pronouncements
In December 2010, FASB issued ASU 2010-29 Business Combinations (Topic 805)-Disclosure of Supplementary Pro Forma Information for Business Combinations. The objective of this Update is to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The amendments in this Update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this Update are effective prospectively for 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, 2010. Early adoption is permitted. Management is currently evaluating the potential impact of ASU 2010-18 on the Company’s consolidated financial statements.
In February 2010, FASB issued ASU 2010-9 Subsequent Events (Topic 855) Amendments to Certain Recognition and Disclosure Requirements ("ASU 2010-9"). ASU 2010-9 amends disclosure requirements within Subtopic 855-10. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC's requirements. ASU 2010-9 is effective for interim and annual periods ending after June 15, 2010. The Company does not expect the standard to have any impact on the Company’s consolidated financial position.
In October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue Arrangements”, now codified under FASB ASC Topic 605, “Revenue Recognition”, (“ASU 2009-13”). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-13 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company does not expect the standard to have any impact on the Company’s consolidated financial position.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.