UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
SCHEDULE
14C
INFORMATION
STATEMENT PURSUANT TO SECTION 14(c)
OF
THE SECURITIES EXCHANGE ACT OF 1934
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Preliminary Information
Statement
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Confidential, for Use of the
Commission Only (as permitted by Rule
14(c)-5(d)(2))
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Definitive Information
Statement
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Datone,
Inc.
(Name of
the Registrant as Specified in its Charter)
Payment
of Filing Fee (Check the appropriate box):
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x
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No
Fee Required
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Fee
Computed on table below per Exchange Act Rules 14c-5(g) and
0-11.
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1.
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Title
of each class of securities to which transaction
applies:
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2.
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Aggregate
number of securities to which transaction
applies:
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3.
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Per
unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was
determined):
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4.
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Proposed
aggregate value of transaction:
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5.
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Total
fee paid:
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Fee
paid previously with preliminary
materials.
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Check
box is any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its
filing.
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1.
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Amount
previously paid:
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2.
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Form,
schedule, or registration statement
number:
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3.
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Filing
party:
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4.
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Date
filed:
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INFORMATION
STATEMENT
May 6,
2010
DATONE,
INC.
GENERAL
This
Information Statement is first being mailed on or about May 10, to the holders of
record of the outstanding common stock, $0.0001 par value per share (the “Common
Stock”) and Series A Convertible Preferred Stock, par value $0.0001 per share
(“Series A Preferred Stock”) of Datone, Inc., a Delaware corporation (the
“Company”), as of the close of business on May 6, 2010 (the “Record Date”),
pursuant to Rule 14c-2 promulgated under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”).
This
Information Statement relates to a written consent in lieu of a meeting, dated
March 1, 2010, (the “Written Consent”) of stockholders of the Company owning at
least a majority of the outstanding shares of Common Stock and Series A
Preferred Stock of the Company, voting together as a single class on an
as-converted to Common Stock basis, as of the Record Date (the “Majority
Stockholders”). Except as otherwise indicated by the context, references in this
Information Statement to “Company,” “we,” “us,” or “our” are references to
Datone, Inc.
The
Written Consent authorized an amendment to our Certificate of Incorporation (the
“Amendment”), which amends our current Certificate of Incorporation
to:
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to change our name to Qingdao
Footwear, Inc.; and
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to authorize the board of
directors to effect a one for twenty-seven (1:27) reverse stock split of
the outstanding shares of common
stock.
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A copy of
the Amendment is attached to this Information Statement as Appendix
A.
These
corporate actions will become effective on the filing of a certificate of
amendment to our certificate of incorporation with the Secretary of State of
Delaware which filing will occur at least 20 days after the date of the mailing
of this Information Statement to our stockholders.
PLEASE
NOTE THAT THIS IS NOT A NOTICE OF A MEETING OF STOCKHOLDERS AND NO STOCKHOLDERS
MEETING WILL BE HELD TO CONSIDER THE MATTERS DESCRIBED HEREIN. THIS INFORMATION
STATEMENT IS BEING FURNISHED TO YOU SOLELY FOR THE PURPOSE OF INFORMING
STOCKHOLDERS OF THE MATTERS DESCRIBED HEREIN PURSUANT TO SECTION 14(C) OF THE
EXCHANGE ACT AND THE REGULATIONS PROMULGATED THEREUNDER, INCLUDING REGULATION
14C.
WE
ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
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By
Order of the Board of Directors,
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/s/ Tao Wang
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Tao
Wang
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Chief
Executive Officer
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Date: May
6, 2010
Introduction
On
February 12, 2010, the Company entered into a Share Purchase and Exchange
Agreement with Glory Reach International Limited, a Hong Kong limited company,
its shareholders, Greenwich Holdings LLC, and Glory Reach’s wholly owned
subsidiary Hongguan Shoes Co., Ltd., a People’s Republic of China limited
company.
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Pursuant
to the Exchange Agreement, the Company acquired all of the outstanding
shares of Glory Reach from its
shareholders.
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In
exchange, we issued to the former Glory Reach shareholders 10,000 shares
of our Series A Preferred Stock, which constituted 97% of our issued and
outstanding capital stock on an as-converted to common stock
basis.
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Therefore,
Glory Reach became a wholly-owned subsidiary of the Company. The share exchange
resulted in a change in control of the Company.
Additional
information concerning the transactions relating to the reverse merger, the
related transactions and the current operating business of the Company is set
forth under the heading of "Share Exchange Transaction and Acquisition of
Qingdao Shoes" in this Information Statement. We urge you to read this
Information Statement in its entirety.
Change
in Control
On
February 12, 2010, Craig H. Burton, our former President and current Director,
Joseph J. Passalaqua, our former Secretary and current Director, and Joseph
Meuse, our Director, submitted a resignation letter pursuant to which they
resigned from all offices that they held effective immediately and from their
position as our directors effective on March 18, 2010. In addition,
our board of directors on February 12 appointed Tao Wang (Chairman), Renwei Ma
and Lanhai Sun to fill the vacancies created by these resignations, which
appointments became on March 18, 2010.
On March
5, 2010, we filed an Information Statement on Schedule 14F with the SEC relating
to a potential change in control of our board of directors containing the
information required under Rule 14f-1 of the Exchange Act.
Approval
of Amendment of Certificate of Incorporation
On
March 1, 2010, Swift Dynamic Limited (“Swift Dynamic”), being the record holder
of 6,495 shares of our Series A Preferred Stock, constituting 63.0% of the
voting power of our issued and outstanding shares of our Common Stock and Series
A Preferred Stock, voting together as a single class, consented in writing to
the Amendment. The Written Consent authorized an amendment to our
Certificate of Incorporation to:
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to change our name to Qingdao
Footwear, Inc.; and
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to authorize the board of
directors to effect a one for twenty-seven (1:27) reverse stock split of
the outstanding shares of common
stock.
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A copy
of the Amendment is attached to this Information Statement as Appendix
A. These corporate actions will become effective on the filing of a
certificate of amendment to our certificate of incorporation with the Secretary
of State of Delaware, which filing will occur at least 20 days after the date of
the mailing of this Information Statement to our
stockholders.
AUTHORIZATION
BY THE BOARD OF DIRECTORS AND THE MAJORITY STOCKHOLDERS
Under the
Delaware General Corporation Law and the Company’s Bylaws, any action that can
be taken at an annual or special meeting of stockholders may be taken without a
meeting, without prior notice and without a vote, if the holders of outstanding
stock having not less than the minimum number of votes that will be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted consent to such action in writing. The approval
of the Amendment requires the affirmative vote or written consent of a majority
of the voting power of the issued and outstanding shares of Common Stock and
Series A Preferred Stock, voting together as a single class. Each Stockholder is
entitled to one vote per share of Common Stock and 26,190 votes per share of
Series A Preferred Stock held of record on any matter which may properly come
before the stockholders.
On the
Record Date, the Company had 8,100,000 shares of Common Stock issued and
outstanding with the holders thereof being entitled to cast one vote per share
and 10,000 shares of Series A Preferred Stock with the holders thereof being
entitled to cast 26,190 votes per share.
On March
1, 2010, our Board of Directors unanimously adopted resolutions approving the
Amendment and recommended that our stockholders approve the Amendment as set
forth in Appendix
A. In connection with the adoption of these resolutions, our Board of
Directors elected to seek the written consent of the holders of a majority of
our outstanding shares in order to reduce associated costs and implement the
proposals in a timely manner.
Our
Board of Directors has determined that the change of our name to “Qingdao
Footwear, Inc.” is in the best interest of our stockholders and will more
accurately reflect, and allow us to engage in, our business operations as
described under the heading of "Share Exchange Transaction and Acquisition of
Qingdao Shoes" in this Information Statement.
The
Reverse Split will reduce the number of issued and outstanding shares of our
Common Stock outstanding prior to the split and increase the total number of
issued and outstanding shares of our Common Stock subsequent to the split by
triggering the automatic conversion of our Series A Preferred Stock into
9,700,000 shares of Common Stock. The Reverse Split has been implemented to
facilitate the automatic conversion of our Series A Preferred Stock and provide
us with greater flexibility with respect to our capital structure for such
purposes as additional equity financings and future stock based
acquisitions.
CONSENTING
STOCKHOLDERS
On March
1, 2010, Swift Dynamic, being the record holder of 6,495 shares of our Series A
Preferred Stock, constituting 63.0% of the voting power of the issued and
outstanding shares of our Common Stock and Series A Preferred Stock, voting
together as a single class consented in writing to the Amendment.
Accordingly,
we have obtained all necessary corporate approvals in connection with the
Amendment. We are not seeking written consent from any other stockholder, and
the other stockholders will not be given an opportunity to vote with respect to
the actions described in this Information Statement. All necessary corporate
approvals have been obtained. This Information Statement is furnished solely for
the purposes of advising stockholders of the action taken by written consent and
giving stockholders notice of such actions taken as required by the Exchange
Act.
As the
actions taken by the majority stockholder were by written consent, there will be
no security holders’ meeting and representatives of the principal accountants
for the current year and for the most recently completed fiscal year will not
have the opportunity to make a statement if they desire to do so and will not be
available to respond to appropriate questions from our
stockholders.
We
will, when permissible following the expiration of the 20 day period mandated by
Rule 14c of the Exchange Act and the provisions of the Delaware General
Corporation Law, file the Amendment with the Delaware Secretary of State’s
Office. The Amendment will become effective upon such filing (the “Effective
Date”) and we anticipate that such filing will occur approximately 20 days after
this Information Statement is first mailed to our stockholders.
DESCRIPTION OF THE COMPANY’S CAPITAL
STOCK
Common
Stock
We are
authorized to issue up to 100,000,000 shares of common stock, par value $0.0001
per share. Each outstanding share of common stock entitles the holder
thereof to one vote per share on all matters. Our bylaws provide that any
vacancy occurring in the board of directors may be filled by the affirmative
vote of a majority of the remaining directors though less than a quorum of the
board of directors. Shareholders do not have preemptive rights to purchase
shares in any future issuance of our common stock.
The
holders of shares of our common stock are entitled to dividends out of funds
legally available when and as declared by our board of directors. Our board of
directors does not anticipate declaring a dividend in the foreseeable future.
Should we decide in the future to pay dividends, as a holding company, our
ability to do so and meet other obligations depends upon the receipt of
dividends or other payments from our operating subsidiary and other holdings and
investments. In addition, our operating subsidiary in the PRC, from time to
time, may be subject to restrictions on their ability to make distributions to
us, including as a result of restrictive covenants in loan agreements,
restrictions on the conversion of local currency into U.S. dollars or other hard
currency and other regulatory restrictions. In the event of our liquidation,
dissolution or winding up, holders of our common stock are entitled to receive,
ratably, the net assets available to shareholders after payment of all
creditors.
All of
the issued and outstanding shares of our common stock are duly authorized,
validly issued, fully paid and non-assessable. To the extent that additional
shares of our common stock are issued, the relative interests of existing
shareholders will be diluted.
As
February 12, 2010, we had a total of 8,100,000 shares of common stock
outstanding.
Preferred
Stock
We are
authorized to issue up to 10,000,000 shares of preferred stock, par value
$0.0001 per share, in one or more classes or series within a class as may be
determined by our board of directors, who may establish, from time to time, the
number of shares to be included in each class or series, may fix the
designation, powers, preferences and rights of the shares of each such class or
series and any qualifications, limitations or restrictions thereof. Any
preferred stock so issued by the board of directors may rank senior to the
common stock with respect to the payment of dividends or amounts upon
liquidation, dissolution or winding up of us, or both. Moreover, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, under certain circumstances, the issuance of preferred stock
or the existence of the unissued preferred stock might tend to discourage or
render more difficult a merger or other change of control.
Series A Convertible
Preferred Stock
In
accordance with our Certificate of Incorporation, our Board of Directors
unanimously approved the filing of a Certificate of Designation designating and
authorizing the issuance of up to 10,000 shares of our Series A Preferred
Stock. The Certificate of Designation was filed on February 11,
2010.
Shares of
Series A Preferred Stock will automatically convert into shares of common stock
on the basis of one share of Series A Preferred Stock for 970 shares of common
stock immediately subsequent to the effectiveness of a planned 1-for-27 reverse
split of our outstanding common stock, which will become effective on the
Effective Date (the “Reverse Stock Split”). Upon the reverse split
the 10,000 outstanding shares of Series A Preferred Stock will automatically
convert into 9,700,000 shares of common stock, which will constitute 97% of the
outstanding common stock of Datone subsequent to the Reverse Stock
Split.
Holders
of Series A Preferred Stock vote with the holders of common stock on all matters
on an as-converted to common stock basis, based on an assumed post 1-for-27
reverse split (to retroactively take into account the Reverse Stock
Split).
The
holders of our Series A Preferred Stock are entitled to vote on all matters
together with all other classes of stock. Holders of Series A
Preferred Stock have protective class voting veto rights on certain matters,
such as increasing the authorized shares of Series A Preferred Stock and
modifying the rights of Series A Preferred Stock.
Following
the effectiveness of the Reverse Stock Split and conversion of Series A
Preferred Stock into common stock, there will be approximately 10,000,000 shares
of our common stock issued and outstanding and no
shares of preferred stock issued and outstanding.
At the
close of business on the Record Date, we had 8,100,000 shares of Common Stock
and 10,000 shares of Series A Preferred Stock issued and
outstanding.
AMENDMENT
TO OUR CERTIFICATE OF INCORPORATION
On
March 1, 2010, our Board of Directors approved, subject to receiving the
approval of the holders of a majority of our outstanding capital stock, an
amendment to our Certificate of Incorporation, which amends our current
Certificate of Incorporation to (i) change our name to “Qingdao Footwear, Inc.”
to more accurately reflect our business operations, and (ii) effect a 1-for-27
reverse stock split of our issued and outstanding Common Stock. The
majority shareholder Swift Dynamic approved the Amendment pursuant to a Written
Consent dated as of March 1, 2010. The proposed Amendment is attached hereto as
Appendix A.
The
Reverse
Stock Split provision in the Amendment has been adopted to provide us
with greater flexibility with respect to our capital structure for such purposes
as additional equity financings and future stock based acquisitions, and to
facilitate the conversion of our Series A Preferred Stock previously
issued in the Share Exchange Transaction, which is generally described in
the following paragraphs.
On
February 12, we completed a reverse acquisition transaction through a share
exchange with Glory Reach and its shareholders, whereby we acquired 100% of the
issued and outstanding capital stock of Glory Reach in exchange for 10,000
shares of our Series A Preferred Stock, which constituted 97% of our issued and
outstanding capital stock on an as-converted to common stock basis as of and
immediately after the consummation of the reverse acquisition. As a result of
the reverse acquisition, Glory Reach became our wholly-owned subsidiary and the
former shareholders of Glory Reach became our controlling
stockholders. The share exchange transaction with Glory Reach’s
shareholders was treated as a reverse acquisition, with Glory Reach as the
acquirer and Datone, Inc. as the acquired party.
Immediately
following closing of the reverse acquisition of Glory Reach, one shareholder
transferred 337 of the 874 shares of Series A Convertible Preferred
Stock issued to him under the share exchange to certain persons who
provided services to Glory Reach’s subsidiaries, pursuant to share
allocation agreements that the shareholder entered into with such service
providers.
Immediately
following the acquisition of Glory Reach, under an Agreement of Conveyance,
Transfer and Assignment of Assets and Assumption of Obligations (the “Conveyance
Agreement”), we transferred all of our pre-acquisition assets and liabilities to
our wholly-owned subsidiary, DT Communications, Inc.
Additional
information regarding the Share Exchange Transaction is contained under the
heading of "Share Exchange Transaction and Acquisition of Qingdao Shoes" in this
Information Statement.
1.
Name
Change
Our
current Certificate of Incorporation states that the name of the Company is
“Datone, Inc.”
Our Board
of Directors unanimously approved, subject to stockholder approval, the
Amendment to change our name from “Datone, Inc.” to “Qingdao Footwear,
Inc.”
Stockholder
approval for the Amendment changing our name was obtained by Written Consent of
stockholders holding at least a majority of the voting power of our issued and
outstanding Common Stock and Series A Preferred Stock, voting together as a
single class, as of the Record Date. The Amendment effecting the name change
will become effective following filing with the Secretary of State of the State
of Delaware, which will occur promptly following the 20th day after the mailing
of this Information Statement to our stockholders as of the Record
Date.
Purposes
for Name Change
Following
the change of control of our Company and reverse acquisition of Glory Reach
effected by the Share Exchange Transaction, our Board of Directors has
determined that the change of our name to “Qingdao Footwear, Inc.” is in the
best interest of our stockholders and will more accurately reflect, and allow us
to engage in, our new business operations as described under the heading of
"Share Exchange Transaction and Acquisition of Qingdao Shoes" in this
Information Statement.
2.
Adoption of 1-for-27
Reverse Stock Split
Our Board
of Directors unanimously approved, subject to Stockholder approval, the 1-for-27
Reverse Split of our issued and outstanding Common Stock, which will be
effectuated in conjunction with the adoption of the Amendment. The majority
shareholder Swift Dynamic also approved this action in the Written
Consent.
The
Reverse Split will reduce the number of issued and outstanding shares of our
Common Stock outstanding prior to the split. The Reverse Split increases the
total number of issued and outstanding shares of our Common Stock subsequent to
the split by triggering the automatic conversion of our Series A Preferred Stock
into 9,700,000 shares of Common Stock. The Reverse Split will become effective
on the Effective Date which occurs when the Amendment is filed with the
Secretary of State of the State of Delaware following the expiration of the 20
day period mandated by Rule 14c of the Exchange Act. We currently have no plans,
agreements, proposals, arrangements, or understandings for the issuance of
additional shares of Common Stock for any purpose, including future acquisitions
or financing transactions. We may consider issuing additional shares in the
future, but at this time we have no definite plans in this
regard.
On the
Effective Date, 27 shares of Common Stock will automatically be combined and
changed into one share of Common Stock. The table below sets forth, as of the
Record Date and as of the Effective Date, the following information both before
and after the proposed Reverse Split and assumes the conversion of all shares of
Series A Preferred Stock into shares of Common Stock at the applicable
conversion ratios:
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the
number of issued and outstanding shares of Common Stock and the number of
shares of Common Stock into which the Series A Preferred Stock can be
converted;
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the
number of shares of Common Stock reserved for issuance upon conversion of
the Series A Preferred Stock, or otherwise;
and
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the
number of authorized but unissued and unreserved shares of Common
Stock.
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Capital
Structure
prior to
conversion
of issued
and
outstanding
Series A
Preferred
Stock on
Pre-Reverse
Split Basis
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Capital
Structure
after the
Reverse
Split and
automatic
conversion
of Series A
Preferred
Stock
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(As of
Record
Date)
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(On
Effective
Date)
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Issued
and outstanding Common Stock
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8,100,000 | 10,000,000 | ||||||
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Issued
and outstanding Series A Preferred Stock
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10,000 | -0- | ||||||
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Common
Stock reserved for issuance upon conversion of Series A Preferred
Stock
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9,700,000 | -0- | ||||||
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Authorized
but unissued and unreserved Common Stock
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82,200,000 | 90,000,000 | ||||||
Purposes
for Reverse Split and Effects on Common Stock
As shown
in the table above, the Reverse Split will trigger the automatic conversion of
our Series A Preferred Stock into 9,700,000 shares of the Company’s common stock
and increase the total number of issued and outstanding shares of our Common
Stock. The pre-split holders of our common stock will hold 300,000
shares of common stock subsequent to the Reverse Split. The Reverse
Split has been implemented to facilitate the automatic conversion of our Series
A Preferred Stock and provide us with greater flexibility with respect to our
capital structure for such purposes as additional equity financings and future
stock based acquisitions.
Unless
the Reverse Split is effected, the Company’s capital structure will continue to
include a supermajority voting class of preferred stock and our Board of
Directors believe that it is in the best interest of the Company to solely have
common stock outstanding at this time to provide us with greater flexibility
with respect to our capital structure for such purposes as additional equity
financings and future stock based acquisitions.
On the
Effective Date, 27 shares of Common Stock will automatically be combined and
changed into one share of Common Stock. No additional action on our part or any
stockholder will be required in order to effect the Reverse Split.
No
fractional shares of post-Reverse Split Common Stock will be issued to any
stockholder. Accordingly, stockholders of record who would otherwise be entitled
to receive fractional shares of post-Reverse Split Common Stock, will, if they
hold a fractional share, a full share of our Common Stock.
We will
obtain a new CUSIP number for our Common Stock at the time of the Reverse Split.
Following the effectiveness of the Reverse Split, every 27 shares of Common
Stock presently outstanding, without any action on the part of the stockholder,
will represent one share of Common Stock. Subject to the provisions for
elimination of fractional shares, as described above, consummation of the
Reverse Split will not result in a change in the relative equity position or
voting power of the holders of Common Stock.
There are
no arrears in dividends or defaults in principal or interest in respect to the
securities which are to be exchanged.
Federal
Income Tax Consequences of the Reverse Split
The
combination of 27 shares of pre-Reverse Split Common Stock into one share of
post-Reverse Split Common Stock should be a tax-free transaction under the
Internal Revenue Code of 1986, as amended, and the holding period and tax basis
of the pre-Reverse Split Common Stock will be transferred to the post-Reverse
Split Common Stock.
This
discussion should not be considered as tax or investment advice, and the tax
consequences of the Reverse Split may not be the same for all stockholders.
Stockholders should consult their own tax advisors to know their individual
Federal, state, local and foreign tax consequences.
Distribution
and Costs
We will
pay the cost of preparing, printing and distributing this Information
Statement.
Absence of Dissenters’ Rights of
Appraisal
Neither
the adoption by the board of directors, nor the approval by the majority
shareholder of the reverse split or the name change provides stockholders any
right to dissent and obtain appraisal of or payment for such shareholder's
shares under Section 262 of the DGCL, the certificate of incorporation or the
bylaws.
Potential
Anti-takeover Effects of Amendment
Release
No. 34-15230 of the staff of the SEC requires disclosure and discussion of the
effects of any stockholder proposal that may be used as an anti-takeover device.
The Reverse Split could have an anti-takeover effect because the authorized
shares are not being reduced by the reverse stock split, in that additional
shares could be issued (within the limits imposed by applicable law) in one or
more transactions that could make a change in control or takeover of the Company
more difficult then if the authorized shares were also reduced by a reverse
stock split. For example, we could issue additional shares so as to dilute the
stock ownership or voting rights of persons seeking to obtain control of the
Company. Similarly, the issuance of additional shares to certain
persons allied with our management could have the effect of making it more
difficult to remove our current management by diluting the stock ownership or
voting rights of persons seeking to cause such removal. However, the Reverse
Split has been effected for the primary purpose of facilitating the conversion
of the Series A Preferred Stock, as well as to provide us with greater
flexibility with respect to our capital structure for such purposes as
additional equity financings and future stock based acquisitions, and not to
construct or enable any anti-takeover defense or mechanism on behalf of the
Company. Although the remainder of significant amounts of authorized shares of
common stock could, under certain circumstances, have an anti-takeover effect,
the Reverse Split proposal is not being undertaken in response to any effort of
which our Board of Directors is aware to accumulate shares of our Common Stock
or obtain control of the Company.
Other
than this proposal, our Board of Directors does not currently contemplate the
adoption of any other amendments to our Certificate of Incorporation that could
be construed to affect the ability of third parties to take over or change the
control of the Company.
Our
Certificate of Incorporation and Bylaws contain certain provisions that may have
anti-takeover effects, making it more difficult for or preventing a third party
from acquiring control of the Company or changing its board of directors and
management. According to our Bylaws and Certificate of Incorporation, neither
the holders of the Company’s common stock nor the holders of the Company’s
preferred stock have cumulative voting rights in the election of our directors.
The combination of the present ownership by a few stockholders of a significant
portion of the Company’s issued and outstanding common stock and lack of
cumulative voting makes it more difficult for other stockholders to replace the
Company’s board of directors or for a third party to obtain control of the
Company by replacing its board of directors. In addition, our Board
of Directors may issue, without further stockholder approval, up to 10,000,000
shares of Preferred Stock, par value $0.0001 per share, in one or more classes
or series within a class. Any Preferred Stock issued in the future may rank
senior to our Common Stock with respect to the payment of dividends or amounts
upon liquidation, dissolution or winding up of us, or both. In addition, any
such shares of Preferred Stock may have class or series voting rights. The
issuance of Preferred Stock, while providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring, a majority of our outstanding voting
stock.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS
AND MANAGEMENT
The
following table sets forth, as of February 12, 2010, certain information with
respect to the beneficial ownership of our common stock, by (i) any person or
group with more than 5% of any class of voting securities, (ii) each director,
(iii) our chief executive officer and each other executive officer whose cash
compensation for the most recent fiscal year exceeded $100,000 and (iv) all
executive officers and directors as a group. The table reflects the ownership of
our equity securities by the foregoing parties before and after the 1 for 27
reverse stock split which will occur on the filing of a Certificate of Amendment
with the Secretary of State of the State of Delaware which filing will be made
no earlier than 20 days after the date the Information Statement on Schedule 14C
is first mailed to the our stockholders. Unless otherwise specified, the address
of each of the persons set forth below is in care of the Company, 269 First
Huashan Road, Jimo City, Qingdao, Shandong, China. Except as indicated in
the footnotes to this table and subject to applicable community property laws,
the persons named in the table to our knowledge have sole voting and investment
power with respect to all shares of securities shown as beneficially owned by
them. The information in this table is as of February 12, 2010 based upon (i)
8,100,000 shares of common stock outstanding prior to the Reverse Split and
10,000,000 shares of common stock outstanding after the Reverse Split and
(ii) 10,000 shares of Series A Preferred Stock outstanding prior to the Reverse
Split and 0 shares of Series A Preferred Stock outstanding after the Reverse
Split.
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Name and Address of
Beneficial Owner
|
Office, If
Any
|
Title of Class
Officers and Directors
|
Amount and
Nature of
Beneficial
Ownership
Prior to
Reverse
Stock Split
|
Amount and
Nature of
Beneficial
Ownership
After
Reverse
Stock Split
|
Percent Series
A Preferred
Stock Prior to
Reverse Stock
Split
|
Percent
Series A
Preferred
Stock
After
Reverse
Stock
Split
|
Percent
Common
Stock
Prior to
Reverse
Stock
Split
|
Percent
Common
Stock
After the
Reverse
Stock
Split
|
Percent of
Combined
Voting
Power of
Common
Stock and
Series A
Preferred
Stock
(1)
|
|||||||||||||||||||||||||
|
Tao
Wang
|
Chief
Executive Officer
|
Series
A Convertible Preferred Stock
|
6,495 | (2) | 0 | 65.0 | % | 0 | % | - | % | - | % | 63.0 | % | |||||||||||||||||||
|
Common
Stock
|
0 | 6,300,000 | - | - | 0 | 63.0 | - | |||||||||||||||||||||||||||
|
Joseph
Meuse
360
Main Street
PO
Box 393
Washington,
Virginia 22747
|
Director
|
Series
A Convertible Preferred Stock
|
873 | 0 | 8.7 | 0 | - | - | 8.5 | |||||||||||||||||||||||||
|
Common
Stock
|
0 | 846,810 | - | - | 0 | 8.5 | - | |||||||||||||||||||||||||||
|
Craig
Burton
|
Director
|
Common
Stock
|
115,000 | 4,260 | 0 | 0 | 1.4 | * | * | |||||||||||||||||||||||||
|
Joseph
J. Passalaqua
|
Director
|
Common
Stock
|
120,000 | 4,445 | 0 | 0 | 1.5 | * | * | |||||||||||||||||||||||||
|
All
officers and directors as a group (2 persons named above)
|
Series
A Convertible Preferred Stock
|
7,368
|
0 | 73.7 | 0 | 2.9 | 71.6 | 71.6 | ||||||||||||||||||||||||||
|
Common
Stock
|
235,000
|
7,155,664 | ||||||||||||||||||||||||||||||||
|
5%
Security Holders
|
||||||||||||||||||||||||||||||||||
|
Swift
Dynamic Limited
P.O.
Box 957,
Offshore
Incorporations Centre,
Road
Town,
British
Virgin Islands
|
Series
A Convertible Preferred Stock
|
6,495 | (2) | 0 | 65.0 | 0 | - | - | 63.0 | |||||||||||||||||||||||||
|
Common
Stock
|
0 | 6,300,000 | - | - | 0 | 63.0 | - | |||||||||||||||||||||||||||
|
Greenwich
Holdings, LLC (3)
106
Glenwood Drive
Liverpool
NY 13090
|
Common
Stock
|
6,792,781 | (3) | 251,585 | 0 | - | 83.9 | 2.5 | 2.5 | |||||||||||||||||||||||||
|
William
Luckman
360
Main Street
PO
Box 393
Washington,
Virginia 22747
|
Series
A Convertible Preferred Stock
|
874 | 0 | 8.7 | 0 | - | - | 8.5 | ||||||||||||||||||||||||||
|
Common
Stock
|
0 | 847,780 | - | - | 0 | 8.5 | - | |||||||||||||||||||||||||||
* Less
than 1%
-
N/A
(1)
Common Stock shares have one vote per share. Shares of Series A
Preferred Stock will automatically convert into shares of common stock on the
basis of one share of Series A Preferred Stock for 970 shares of common stock
upon the effectiveness of a planned 1-for-27 reverse split of our outstanding
common stock. Holders of Series A Preferred Stock vote with the
holders of common stock on all matters on an as-converted to common stock based
on an assumed post 1-for-27 reverse split basis.
(2)
Based on 6,495 shares of Series A Preferred Stock held by Swift Dynamic Limited,
a British Virgin Islands limited company. Tao Wang serves as Chief
Executive Officer and Director of Swift Dynamic Limited.
(3) Based
on 6,792,781 shares of Common Stock held by Greenwich Holdings,
LLC. Greenwich Holdings, LLC is a New York limited liability company
that is owned by Joseph C. Passalaqua, a resident of Liverpool, New
York.
SHARE
EXCHANGE TRANSACTION AND ACQUISITION OF QINGDAO SHOES
On
February 12, 2010, the Company entered into and closed a Share Purchase and
Exchange Agreement (the “Exchange Agreement”) with Glory Reach International
Limited, a Hong Kong limited company (“Glory Reach”), its shareholders (“Glory
Reach Shareholders”), Greenwich Holdings LLC, and Glory Reach’s wholly owned
subsidiary Hongguan Shoes Co., Ltd., a People’s Republic of China (“PRC”)
limited company (“Qingdao Shoes”). Pursuant to Exchange Agreement we
acquired 100% of the issued and outstanding capital stock of Glory Reach in
exchange for 10,000 shares of our Series A Preferred Stock, which constituted
97% of our issued and outstanding capital stock on an as-converted to common
stock basis.
Immediately
following the acquisition of Glory Reach, under an Agreement of Conveyance,
Transfer and Assignment of Assets and Assumption of Obligations (the “Conveyance
Agreement”), we transferred all of our pre-acquisition assets and liabilities to
our wholly-owned subsidiary, DT Communications,
Inc.
On
February 11, 2010, the Company entered into Indemnification Agreements with its
three directors. Pursuant to the Indemnification Agreements, the
Company agreed to indemnify and hold harmless the directors from certain losses
resulting from actions or failures to act in their capacity as directors or
officers or losses resulting from their status as directors or
officers. The indemnifiable losses do not include certain losses
where the directors are adjudged to be liable to the Company. The
indemnification obligations include the right to advancement by the Company of
expenses related to indemnifiable claims.
Contact
Information
The
Company is currently located at 269 First Huashan Road, Jimo City, Qingdao,
Shandong, People’s
Republic of China. The Company’s phone number is (86)
0532-86595999.
Glory
Reach principal executive office is also located at 269 First Huashan Road, Jimo
City, Qingdao, Shandong, People’s Republic of
China. Glory Reach’s phone number is (86)
0532-86595999.
Business
Conducted
Prior
to the Share Exchange Transaction, the Company was a provider of both privately
owned and company owned payphones and stations in New York. The Company received
revenues from the collection of the payphone coinage, a portion of usage of
service from each payphone and a percentage of long distance calls placed from
each payphone from the telecommunications service providers. In addition, the
Company also received revenues from the service and repair of privately owned
payphones and sales of payphone units.
Glory
Reach is a holding company formed in Hong Kong that operates through its wholly
owned operating subsidiary in China, Qingdao Shoes. Qingdao Shoes is
a designer and retailer of branded footwear in Northern China.
Terms
of the Transaction
A
brief description of the transaction
On
February 12, 2010, we completed a reverse acquisition transaction through a
share exchange with Glory Reach and its shareholders, or the Shareholders,
whereby we acquired 100% of the issued and outstanding capital stock of Glory
Reach in exchange for 10,000 shares of our Series A Preferred Stock which
constituted 97% of our issued and outstanding capital stock on an as-converted
to common stock basis as of and immediately after the consummation of the
reverse acquisition. As a result of the reverse acquisition, Glory Reach became
our wholly-owned subsidiary and the former shareholders of Glory Reach became
our controlling stockholders. Unless the context suggests otherwise,
when we refer in this Information Statement to business and financial
information for periods prior to the consummation of the reverse acquisition, we
are referring to the business and financial information of Glory Reach and its
consolidated subsidiaries.
Immediately
following closing of the reverse acquisition of Glory Reach, one Shareholder
transferred 337 of the 874 shares of Series A Preferred Stock issued
to him under the share exchange to certain persons who provided services to
Glory Reach’s subsidiaries, pursuant to share allocation agreements that
the Shareholder entered into with such service providers.
The
Consideration Offered to Security Holders
The
security holders of the Company received no consideration as a result of the
Share Exchange Transaction.
The
Reasons for Engaging in the Transaction
The
Company was originally incorporated in the State of Delaware on August 9, 2000.
The Company operated as a wholly-owned subsidiary of USIP.COM, Inc. On August
24, 2006, USIP decided to spin-off its subsidiary companies, one of which was
Datone, Inc. Datone, Inc. was a provider of both privately owned and
company owned payphones and stations in New York. Because this
business has not been successful, the Company was focused on the identification
of suitable businesses with which to enter into a business opportunity or
business combination until February 12, 2010, when it completed its reverse
acquisition of Glory Reach. Through Qingdao Shoes, its directly owned
operating subsidiary in China, the Company is engaged in the business of
designing and retailing branded footwear in Northern China.
Approval
of the Share Exchange Transaction
The
Share Exchange Transaction was approved by the Board of Directors of Datone,
Inc. on February 12, 2010. Approval by the
stockholders of Datone, Inc. of the Share Exchange Transaction was not required
under applicable state and federal law.
Explanation
of Any Material Differences in the Rights of Security Holders as a Result of the
Transaction, if Material
Pursuant
to Exchange Agreement we issued 10,000 shares of our Series A Preferred Stock,
which constituted 97% of our issued and outstanding capital stock on an
as-converted to common stock basis. Each holder of Series A Preferred
Stock is entitled to 26,190 votes per share. The holders of our
Series A Preferred Stock are entitled to vote on all matters together with all
other classes of stock. Holders of Series A Preferred Stock have
protective class voting veto rights on certain matters, such as increasing the
authorized shares of Series A Preferred Stock and modifying the rights of Series
A Preferred Stock.
There
are no other material differences in the rights of the stockholders of the
Company as a result of the Share Exchange Transaction.
Brief
statement as to the Accounting Treatment of the Share Exchange Transaction, if
Material
The
Share Exchange Transaction will be accounted for as a reverse acquisition
whereby Glory Reach (the legal acquiree) is treated as the acquirer and Datone,
Inc. (the legal acquirer) is considered the accounting acquired
party. The consolidated financial statements of the combined entity
will be in substance those of Glory Reach, with the assets and liabilities, and
revenues and expenses, of Datone, Inc. being included effective from the date of
consummation of the Share Exchange Transaction. The assets and liabilities of
the acquired entity have been brought forward at their book value and no
goodwill has been recognized.
U.S.
Federal Income Tax Consequences of the Share Exchange Transaction, if
Material
The
federal income tax consequences of the Share Exchange Transaction are not
material.
Regulatory
Approvals
No
United States federal or state regulatory requirements must be complied with or
approvals obtained as a condition of the Share Exchange
Transaction.
Reports,
Opinions, Appraisals
No
reports, opinions (other than opinions of counsel) or appraisals materially
relating to the Share Exchange Transaction have been received from an outside
party or are referred to in this Information Statement.
Past
Contacts, Transactions or Negotiations
Not
Applicable.
INFORMATION
OF THE COMPANY
We are
a designer and retailer of branded footwear in Northern China. Our
principal business includes (1) the design or selection of design for men’s and
women’s leather shoe lines, (2) sourcing and purchase of the contract
manufactured footwear and (3) retail and
sales of footwear under our proprietary brand, “Hongung”. We operate
a number of flagship stores throughout greater Qingdao. Our products
are also brought to market through our extensive distribution network of
authorized independent distributors as well as through third party retailers
selected to operate exclusive Hongung brand stores on our behalf. Our
company headquarters and main sales office is located in Shandong province in
northern China, in the city of Jimo, less than 25 miles from the major urban
center of Qingdao.
Corporate
History
On
February 12, 2010, we completed an acquisition of Glory Reach pursuant to the
Share Exchange Agreement. The acquisition was accounted for as a
recapitalization effected by a share exchange, wherein Glory Reach is considered
the acquirer for accounting and financial reporting purposes. As a
result of our acquisition of Glory Reach, we now own all of the issued and
outstanding capital stock of Glory Reach, which in turn owns all of the
outstanding capital stock of Qingdao Shoes.
Since
there is common control between the Glory Reach and Qingdao Shoes, for
accounting purposes, the acquisitions of Qingdao Shoes has been treated as a
recapitalization with no adjustment to the historical basis of their assets and
liabilities. The restructuring has been accounted for using the “as
if” pooling method of accounting and the operations were consolidated as if the
restructuring had occurred as of the beginning of the earliest period presented
in our consolidated financial statements and the current corporate structure had
been in existence throughout the periods covered by our consolidated financial
statements.
Immediately
following the acquisition of Glory Reach, under an Agreement of Conveyance,
Transfer and Assignment of Assets and Assumption of Obligations (the “Conveyance
Agreement”), we transferred all of our pre-acquisition assets and liabilities to
our wholly-owned subsidiary, DT Communications,
Inc.
Please
note that the information provided below relates to the combined enterprises
after the acquisition of Glory Reach except that information relating to the
periods prior to the date of the reverse acquisition only relate to Glory Reach
and its subsidiary Qingdao Shoes, rather than Datone, unless otherwise
specifically indicated.
Our
Corporate Structure
All of
our business operations are conducted through our Hong Kong and Chinese
subsidiaries. The chart below presents our corporate structure.
We
believe that the market for affordable, high quality footwear in China provides
us with attractive and sustainable growth opportunities.
We
intend to pursue the following strategies to achieve our goal:
|
1)
|
Continue our aggressive
marketing and advertising campaigns in order to gain brand
awareness.
|
|
2)
|
Expand distributor and third
party operator stores in prime locations to maximize
profits.
|
|
3)
|
Bring more self owned stores
online to increase higher margin
sales.
|
|
4)
|
Continue to strive for
excellence in quality, customer service and design in order to attract new
and retain repeat
customers.
|
|
5)
|
Leverage our growing
purchasing power with manufacturers to lower
costs.
|
Our
Products
Our
products consist of men and women’s footwear. Our designs are on the whole
targeted at consumers seeking business casual and formal leather shoes
appropriate for an office setting. Each year we design or commission designs for
more than 300 unique styles. We do not manufacture our products, but instead
outsource manufacturing to third parties. Our designs are split roughly evenly
between men’s and women’s products. Designs are made based on collaboration
between our sales department and design department regarding market demand and
assessment of what designs will be fashionable in the upcoming season. As of
December 31, 2009, Men’s footwear constituted 60% of revenue and women’s
footwear the remainder. As of December 31, 2009, 40% of sales were formal shoes,
and the remaining 60% are attributed to casual footwear.
Sourcing
and Purchase of Products
We are a
retailer and designer of footwear products, and as such we fully outsource
production of our footwear to third party manufacturers. Due to excess capacity
in the footwear manufacturing industry in the PRC, we have historically been
able to source our products at competitive prices that allow us to maintain
strong margins in comparison with our competitors that do not outsource
production. In this way, we avoid what we perceive to be the risks
and lower margins associated with manufacturing footwear and are able to focus
our energies on our brand building and retail business.
Our
contracts with suppliers are on an as ordered basis, with payment due at the end
of the month of delivery, and are usually for a term of one year. Prices are
negotiated based on a by design basis by our sourcing team. All of our suppliers
are subject to our strict quality control standards, and we are entitled to
return product without payment if it is not according to the quality set forth
in our agreement.
During
the year ended December 31, 2007, purchases from one vendor accounted for 13.2%
of the total merchandise purchased by the Company. There is no such
concentration for either the year ended December 31, 2008 or the year ended
December 31, 2009.
Sales
Channels
The
following diagram details our current distribution channels:
As of
December 31, 2009, we had 11 flagship stores, 11 exclusive third party managed
retail outlets, and 192 outlets managed by distributors.
|
|
Flagship Stores
|
Distributors
|
3rd Party Operators
|
|||||||||
|
Qingdao
|
11 | 26 | 4 | |||||||||
|
Shandong
|
0 | 155 | 6 | |||||||||
|
Xinjiang
|
0 | 1 | 0 | |||||||||
|
Shanxi
|
0 | 3 | 1 | |||||||||
|
Tianjiang
|
0 | 1 | 0 | |||||||||
|
Heilongjiang
|
0 | 1 | 0 | |||||||||
|
Hebei
|
0 | 2 | 0 | |||||||||
|
Liaoning
|
0 | 1 | 0 | |||||||||
|
Henan
|
0 | 1 | 0 | |||||||||
Flagship
Stores
We
directly own or lease and operate all of our flagship stores. All are located in
Jimo or greater Qingdao. Each store has an individual sales team and managers
that report to our central office in Qingdao. Our sales staff are compensated on
a commission based pay scale. Locations are selected according to management’s
estimation of market opportunity. Our flagship stores bear the Hongguan brand
name and exclusively retail Hongguan footwear.
During
the years ended December 31, 2009 and 2008, the sales generated by the Company’s
flagship stores accounted for 16% and 15% of total sales,
respectively.
Hongguan
Outlets in Jimo:
Stores
Managed by Third Party Operators
In
order to meet consumer demand for our products and efficiently expand of our
business, we also select certain third parties to operate Hongguan branded
outlets. We have rules and regulations regarding the location, size, store
layout, interior design and product display of their Hongguan retail stores. All
potential third party operators require prior approval before opening new
stores. We visit potential locations for new outlets and consider the
suitability of such locations before approval. Furthermore, all third party
operators must personally operate their stores.
These
operators are chosen based on the following criteria:
-
Management experience in retail operations and our confidence in their ability
to effectively meet our sales targets and high standards of
conduct.
- Good
credit and sufficient capital.
-
Proposed store location, size and condition.
After
approval, the third party operators must purchase a fixed amount of footwear
stock at wholesale prices and Hongguan branded decorations for proper interior
and exterior design. Third party operators then continue to pay wholesale prices
for footwear on an on demand basis. Contracts with third party operators are
typically for a period of two years.
Distributors
We
identify suitable distributors and enter into distributorship agreements,
usually for a term of two years. Distributors purchase wholesale priced shoes
and vend them at sales points throughout China. We require our distributors to
implement, monitor compliance with and enforce our retail store guidelines. Our
distributors are independent third parties that do not pay us any fee other than
the purchase price for the purchase of our products, nor do we pay them any
incentives or fees.
Our
distribution contracts usually contain the following terms:
Geographic limitation —
distributors must sell our Hongguan branded footwear within a specific
authorized location(s).
Payment and credit terms —
payment and credit terms are on a case by case basis. The credit period is
usually one month, and 25% percent of our distributors prepay for their
stock.
Performance — Qingdao Shoes
typically retains the right to end the agreement if a distributor fails to meet
sales targets.
Exclusivity — the
distributorship agreements allow our distributors to sell our products under the
Hongguan brand on an exclusive basis. If there are other brands
featured at the distributor’s outlet, Hongguan brand shoes must constitute a
certain percentage, generally a majority, of product on
display. Furthermore, the products must be displayed according to our
standards.
Training — training and
instructional materials are provided to all of our distributers regarding
product display, decoration, and sales techniques.
Renewal and termination — we
can renew contracts at our discretion and can terminate contracts if contractual
conditions including sales targets are not met.
We do
not have a return policy with our distributors. In the event a
distributor is unable to sell their stock, we will attempt to help them relocate
it to a nearby Qingdao Shoes outlet.
Purchasing
and Sales Prices
We
have historically organized one sales fair per year in which distributors and
third parties operators can view and select upcoming designs. We also maintain
several showrooms in our head office in Jimo with the current and future product
lines which our sales force visits on a regular basis.
We
intend to keep the pricing of our products at reasonable levels in the
foreseeable future in order to stay competitive and maintain product
demand. Our wholesale prices are generally not more than a 50%
discount to the sales price.
Employees
The
table below details the various departments and number of employees in each as
of December 31, 2009.
|
Management
and Sales
|
9
|
|||
|
Design
& Purchasing
|
3
|
|||
|
Accounting
|
5
|
|||
|
Warehouse
|
8
|
|||
|
Administration
|
7
|
|||
|
Sales
|
30
|
|||
|
Total
|
62
|
We
believe we are in material compliance with all applicable labor and safety laws
and regulations in the PRC, including the PRC Labor Contract Law, the PRC
Unemployment Insurance Law, the PRC Provisional Insurance Measures for Maternity
of Employees, PRC Interim Provisions on Registration of Social Insurance, PRC
Interim Regulation on the Collection and Payment of Social Insurance Premiums
and other related regulations, rules and provisions issued by the relevant
governmental authorities for our operations in the PRC. According to the PRC
Labor Contract Law, we are required to enter into labor contracts with our
employees and to pay them no less than local minimum wage.
Intellectual
Property
Our
products are sold under the Hongguan brand name, which is a registered trademark
in the PRC.
|
Trademarks (Mandarin)
|
Trademarks
|
Certificate #
|
Valid Term
|
||||
 |
Hongguan
|
3483788
|
March 14, 2005 to
March
13,
2015
|
||||
Our
Facilities and Property
Our
principal executive offices are in Jimo, China.
|
Certificate
No.
|
Jin
Guo Yong (2007) 534
|
|
User
of the Land
|
Wang
Tao
|
|
Location
|
West
#1 Huashan Road., Jimo City, Shandong Province
|
|
Usage
|
Industrial
|
|
Area
(sqm)
|
14,225
|
|
Form
of Acquisition
|
By
means of transfer
|
|
Expiration
Date
|
12/28/2052
|
The
Company leases one of its stores from Mr. Tao Wang under a four-year operating
lease expiring August 2011. For the years ended December 31, 2009 and 2008, rent
expense of $ 17,298 and $17,298, respectively, was included in total rent
expense for the respective years. The Company leases one of its warehouse
buildings to Weidong Liang, brother-in-law of Mr. Tao Wang, for three years
starting May 2008. Per the agreement, the lessee shall pay equal amount of
advertising expense on behalf of the lessor as the lease payment. For the year
ended December 31, 2009, the Company recorded other income of $57,660 from
leasing the aforementioned building and advertising expense.
Advertising
and Marketing Efforts
Our sales
and marketing department is responsible for the organization of sales fairs,
selection, review, execution and management of contracts with third parties and
distributers, and operation of our own retail outlets. We utilize television,
print media, radio, the internet and outdoor billboard displays to build brand
awareness. Chinese popular television star Ren Quan is currently the face of
Qingdao Shoes’ advertising campaign. In 2006, we entered into a contract with
Ren Quan and purchased the rights to use his image for our marketing purposes,
and he is often featured in our television commercials and our various
advertisements. We are contractually obligated to maintain confidentiality as to
the terms at which we acquired his rights. In 2010, we entered into a contract
with another Chinese popular television star Liu Xiaohu and purchased the rights
to use his image for our marketing purposes, and he also is featured in our
television commercials and our various advertisements.
Competition
The
retail and in particular the footwear retail industry are highly competitive in
the PRC. Our competitors are a number of international and domestic enterprises
with shoe sales operations in our target market, including but not limited to
Jinhou Footwear Company, Liangda Leather Company, Haining Leather Footwear
Company and Fude Leather Shoe Company. We expect the competition to become more
intensified due to the entry of new footwear retailers in the PRC and as a
result we may be subject to competitive pricing pressures in the future.
Quality, cutting edge style, brand awareness, customer service, highly motivated
sales force and affordable footwear prices are vital cornerstones to success in
our industry
Design
Team
Our
design team consists of three full time designers that are engaged in creating
new fashionable designs for upcoming seasons. They are also engaged in the
review, selection and alteration of designs proposed by contract manufacturers.
On average, our design team is responsible for the selection or creation 300
models of footwear per year.
Regulation
Because
our principal operating subsidiary, Qingdao Shoes, is located in the PRC, our
business is regulated by the national and local laws of the PRC. We believe our
conduct of business complies with existing PRC laws, rules and
regulations.
General
Regulation of Businesses
We
believe we are in material compliance with all applicable labor and safety laws
and regulations in the PRC, including the PRC Labor Contract Law, the PRC
Production Safety Law, the PRC Regulation for Insurance for Labor Injury, the
PRC Unemployment Insurance Law, the PRC Provisional Insurance Measures for
Maternity of Employees, PRC Interim Provisions on Registration of Social
Insurance, PRC Interim Regulation on the Collection and Payment of Social
Insurance Premiums and other related regulations, rules and provisions issued by
the relevant governmental authorities from time to time, for our operations in
the PRC.
According
to the PRC Labor Contract Law, we are required to enter into labor contracts
with our employees. We are required to pay no less than local minimum wages to
our employees. We are also required to provide employees with labor safety and
sanitation conditions meeting PRC government laws and regulations and carry out
regular health examinations of our employees engaged in hazardous
occupations.
Foreign
Currency Exchange
The
principal regulation governing foreign currency exchange in China is the Foreign
Currency Administration Rules (1996), as amended (2008). Under these Rules, RMB
is freely convertible for current account items, such as trade and
service-related foreign exchange transactions, but not for capital account
items, such as direct investment, loan or investment in securities outside China
unless the prior approval of, and/or registration with, the State Administration
of Foreign Exchange of the People’s Republic of China, or SAFE, or its local
counterparts (as the case may be) is obtained.
Pursuant
to the Foreign Currency Administration Rules, foreign invested enterprises, or
FIEs, in China may purchase foreign currency without the approval of SAFE for
trade and service-related foreign exchange transactions by providing commercial
documents evidencing these transactions. They may also retain foreign exchange
(subject to a cap approved by SAFE) to satisfy foreign exchange liabilities or
to pay dividends. In addition, if a foreign company acquires a company in China,
the acquired company will also become an FIE. However, the relevant PRC
government authorities may limit or eliminate the ability of FIEs to purchase
and retain foreign currencies in the future. In addition, foreign exchange
transactions for direct investment, loan and investment in securities outside
China are still subject to limitations and require approvals from, and/or
registration with, SAFE.
Regulation
of Income Taxes
On
March 16, 2007, the National People’s Congress of China passed a new Enterprise
Income Tax Law, or the New EIT Law, and implementing rules, both of which became
effective on January 1, 2008. Before the implementation of the New EIT Law, FIEs
established in the PRC, unless granted preferential tax treatments by the PRC
government, were generally subject to an earned income tax, or EIT, rate of
33.0%, which included a 30.0% state income tax and a 3.0% local income tax. The
New EIT Law and its implementing rules impose a unified EIT rate of 25.0% on all
domestic-invested enterprises and FIEs, unless they qualify under certain
limited exceptions.
In
addition to the changes to the current tax structure, under the New EIT Law, an
enterprise established outside of China with “de facto management bodies” within
China is considered a resident enterprise and will normally be subject to an EIT
of 25% on its global income. The implementing rules define the term “de facto
management bodies” as “an establishment that exercises, in substance, overall
management and control over the production, business, personnel, accounting,
etc., of a Chinese enterprise.” If the PRC tax authorities subsequently
determine that we should be classified as a resident enterprise, then our
organization’s global income will be subject to PRC income tax of
25%.
Our
future effective income tax rate depends on various factors, such as tax
legislation, the geographic composition of our pre-tax income and non-tax
deductible expenses incurred. Our management carefully monitors these legal
developments and will timely adjust our effective income tax rate when
necessary.
Dividend
Distribution
Under
applicable PRC regulations, FIEs in China may pay dividends only out of their
accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations. In addition, a FIE in China is required to set aside
at least 10.0% of its after-tax profit based on PRC accounting standards each
year to its general reserves until the accumulative amount of such reserves
reach 50.0% of its registered capital. These reserves are not distributable as
cash dividends. The board of directors of a FIE has the discretion to allocate a
portion of its after-tax profits to staff welfare and bonus funds, which may not
be distributed to equity owners except in the event of
liquidation.
The
New EIT Law and its implementing rules generally provide that a 10% withholding
tax applies to China-sourced income derived by non-resident enterprises for PRC
enterprise income tax purposes unless the jurisdiction of incorporation of such
enterprises’ shareholder has a tax treaty with China that provides for a
different withholding arrangement. Qingdao Shoes is considered an FIE and is
directly held by our subsidiary Glory Reach in Hong Kong. According to a 2006
tax treaty between the Mainland and Hong Kong, dividends payable by an FIE in
China to the company in Hong Kong who directly holds at least 25% of the equity
interests in the FIE will be subject to a no more than 5% withholding tax. We
expect that such 5% withholding tax will apply to dividends paid to Glory Reach
by Qingdao Shoes, but this treatment will depend on our status as a non-resident
enterprise.
Environmental
Matters
Our
operations are currently not subject to any environmental
regulations.
Insurance
Insurance
companies in China offer limited business insurance products. While business
interruption insurance is available to a limited extent in China, we have
determined that the risks of interruption, cost of such insurance and the
difficulties associated with acquiring such insurance on commercially reasonable
terms make it impractical for us to have such insurance.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Datone,
Inc.
Overview
During
the fiscal year 2009, Datone, Inc. was a provider of both privately owned and
company owned payphones (COCOT’s) and stations in New York. The Company receives
revenues from the collection of the payphone coinage, a portion of usage of
service from each payphone and a percentage of long distance calls placed from
each payphone from the telecommunications service providers. In addition, the
Company also receives revenues from the service and repair of privately owned
payphones, sales of payphone units.
Acquisition
of Glory Reach
On
February 12, 2010, we completed a reverse acquisition transaction through a
share exchange with Glory Reach and the shareholders of Glory Reach (the
“Shareholders”), whereby we acquired 100% of the issued and outstanding capital
stock of Glory Reach in exchange for 10,000 shares of our Series A Preferred
Stock, which constituted 97% of our issued and outstanding capital stock on an
as-converted to common stock basis as of and immediately after the consummation
of the reverse acquisition. As a result of the reverse acquisition, Glory Reach
became our wholly-owned subsidiary and the Shareholders became our beneficially
controlling stockholders. The share exchange transaction with Glory Reach was
treated as a reverse acquisition, with Glory Reach as the acquirer and Datone,
Inc. as the acquired party.
As a
result of our acquisition of Glory Reach, we now own all of the issued and
outstanding capital stock of Glory Reach, which in turn owns all of the
outstanding capital stock of Qingdao Shoes.
Forward
Looking Statements
Some
of the information in this section contains forward-looking statements that
involve substantial risks and uncertainties. You can identify these statements
by forward-looking words such as "may," "will," "expect," "anticipate,"
"believe," "estimate" and "continue," or similar words. You should read
statements that contain these words carefully because they:
|
●
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discuss our future
expectations;
|
|
●
|
contain projections of our
future results of operations or of our financial condition;
and
|
|
●
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state other "forward-looking"
information.
|
We
believe it is important to communicate our expectations. However, there may be
events in the future that we are not able to accurately predict or over which we
have no control. Our actual results and the timing of certain events could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors.
Organization
and Basis of Presentation
Datone,
Inc. is currently a provider of both privately owned and company owned payphones
(COCOT’s) and stations in New York. The Company receives revenues from the
collection of the payphone coinage, a portion of usage of service from each
payphone and a percentage of long distance calls placed from each payphone from
the telecommunications service providers. In addition, the Company also receives
revenues from the service and repair of privately owned payphones, and sales of
payphone units.
Critical
Accounting Policies
The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect the
amounts reported in our consolidated financial statements and accompanying
notes. We base our estimates and judgments on historical experience and on
various other assumptions that we believe are reasonable under the
circumstances. However, future events are subject to change, and the best
estimates and judgments routinely require adjustment. The amounts of assets and
liabilities reported in our consolidated balance sheet, and the amounts of
revenues and expenses reported for each of our fiscal periods, are affected by
estimates and assumptions which are used for, but not limited to, the accounting
for allowance for doubtful accounts, goodwill and intangible asset impairments,
restructurings, inventory and income taxes. Actual results could differ from
these estimates. The following critical accounting policies are significantly
affected by judgments, assumptions and estimates used in the preparation of our
consolidated financial statements.
Revenue
Recognition Policies
During
2009 and 2008, the Company derived its primary revenue from the sources
described below, which includes dial around revenues, coin collections, and
telephone equipment repairs and sales. Other revenues generated by the company
include, and commissions.
Dial
around revenues are generated from calls to gain access to a different long
distance carrier than is already programmed into the phone. Revenues from dial
around calls are recorded based upon estimates until the coin collection
revenues are generated when callers deposit coins into the phones to make calls.
Coin revenues are recorded in an amount equal to the coins collected. Revenues
on commissions, and telephone equipment repairs and sales are realized when the
services are provided.
Revenue
Our
total revenue decreased by $4,997 or approximately 4%, from $121,436 in the
twelve months ended December 31, 2008 to $116,439 in the twelve months ended
December 31, 2009. This decrease was primarily attributable to a decrease in
coin revenue and payphone service revenue as well as a reduced number of
payphones coupled with increased competition from wireless communication
service.
Our
commissions increase by $2,596 or approximately 28%, from $9,416 in the twelve
months ended December 31, 2008 to $12,012 in the twelve months ended December
31, 2009. This increase was primarily attributable to a higher volume of
payphones usage in our network.
Our
coin call revenue decreased by $2,111 or approximately 6%, from $36,901 in the
twelve months ended December 31, 2008 to $34,790 in the twelve months ended
December 31, 2009. The decrease in coin call revenue was primarily attributable
to a reduced number of payphones in the network.
Our
non-coin call revenue, which consists primarily of dial-around revenue,
increased $3,695 or approximately 7% from $52,696 in the twelve months ended
December 31, 2008 to $49,001 in the twelve months ended December 31, 2009. This
increase was primarily attributed to a higher volume of toll free calling (ex.
1-800,1-888,1-877,1-866 calls) in this quarter.
Service
and Repair Sales decreased by $1,787 or approximately 8% to $20,636 for the
twelve months ended December 31, 2009 from $22,423 for the same period in 2008.
This decrease is due to less payphones to repair and service because the number
of payphones have decreased, the number of payphones breaking down and requiring
repair is consequently less. We only receive service revenue for company-owned
payphones and repair revenue for privately-owned payphones. Some privately-owned
payphones represent unprofitable locations that we previously owned but have
since sold to the site owner.
Cost
of Revenue
Our
overall cost of revenue increased by $3,341 or approximately 12%, from $27,346
in the twelve months ended December 31, 2008 to $30,687 in the twelve months
ended December 31, 2009. This increase in our overall cost of revenue is
primarily a decrease in telecommunication costs.
Our
telecommunication costs increased by $3,342 or approximately 13% from $26,692 in
the twelve months ending December 31, 2008 to $30,034 for the twelve months
ending December 31, 2009. Our ongoing strategy is to identify and remove
unprofitable payphones. Once a low revenue payphone is identified, we offer the
site owner an opportunity to purchase the equipment. If the site owner does not
purchase the payphone, we remove it from the site, which is evidenced by our
decreased telecommunication costs as a result of removing phones for the twelve
months ended December 31, 2009 over the same period in 2008. At the same time,
our plan is to continue to look out for ideal locations with high traffic to
install our payphones.
Depreciation
expense remained constant at $653 in the twelve months ending December 31, 2009
and 2008. This is due to certain assets being fully depreciated and our ongoing
strategy of identifying unprofitable payphones, and selling them to the site
owners. Once a payphone is sold to the site owner, it is removed from our assets
and depreciation schedules. We own telephone equipment and motor vehicles, which
provide a service for a number of years. The term of service is commonly
referred to as the “useful life” of the asset. Because an asset such as
telephone equipment or motor vehicle is expected to provide service for many
years, it is recorded as an asset, rather than an expense, in the year acquired.
A portion of the cost of the long-lived asset is reported as an expense during
the cost of an asset to expense over its life in a rational and systematic
manner.
Our
commissions expense increased by $4,902 or approximately 920% to $4,369 in the
twelve months ending December 31, 2009 from ($533) in the twelve months ending
December 31, 2008. This increase was due to new location who receives a monthly
commission.
Operating
Expenses
Operating
expenses decreased by $9,634 or approximately 5% to $173,064 for the twelve
months ended December 31, 2009 compared to $182,698 for the same period in 2008.
This was due to the fees we pay our accountants and attorneys for performing
they’re services.
Salaries
and related payroll taxes decreased by $5,654 or approximately 8% to $43,103 for
the twelve months ended December 31, 2009 compared to $48,757 for the same
period in 2008. This decrease is due to the employee taking less payroll in
2009.
Our
insurance expense decreased by $6,246 or approximately 93% to $469 for the
twelve months ended December 31, 2009 compared to $6,715 for the same period in
2008. This decrease was due to a decrease in insurance premiums and cancellation
of a policy.
Professional
fees increased by $835 or approximately 2% to $48,395 for the twelve months
ended December 31, 2009 compared to $47,560 for the same period in 2008. This
decrease is due to a decrease in fees we pay to accountants and attorneys
throughout the year for performing various tasks.
Our
telephone, utilities, office, and vehicle expenses, together account for a
decrease of $4,227 or approximately 17% to $21,297 for the twelve months ended
December 31, 2009 compared to $25,524 for the same period in
2008.
Interest
Expense
Interest
expense, increased $31,740 or approximately 105% to $61,923 for the twelve
months ended December 31, 2009 from $30,183 for the twelve months ended December
31, 2008. This increase was due to more interest-rate debt.
Net
Loss from Operations
We had
a net loss of $144,390 for the twelve months ended December 31, 2009 as compared
to a net loss of $118,791 for the twelve months ended December 31, 2008. The
increase is related to the reasons stated above.
Liquidity
and Capital Resources
Our
primary liquidity and capital resource needs are to finance the costs of our
operations and to make capital expenditure.
We had
no cash on hand as of December 31, 2009 and 2008.
We
believe that we will continue to need investing and financing activities to fund
operations.
Net
cash used in operating activities was $37,042 during the twelve month period
ended December 31, 2009, mainly representative of the decrease in accounts
payable and net loss incurred during 2009. This compares to net cash used in
operating activities of $37,527 for the twelve month period ended December 31,
2008 which resulted from a decrease in accounts payable.
Net
cash provided by investing activities was $200 during twelve month period ended
December 31, 2009, representing a sale of equipment. This compares to net cash
provided by financing activities of $0 for the twelve month period ended
December 31, 2008.
Net
cash provided by financing activities was $36,842 during twelve month period
ended December 31, 2009, mainly representing the proceeds from related party
notes. This compares to net cash provided by financing activities of $37,527 for
the twelve month period ended December 31, 2008 due to proceeds from related
party notes.
Our
expenses to date are largely due to rents for the office space, professional
fees for financial services performed and the cost of sales for telephone
communication costs.
We
believe that our results of financing activities will provide us with the
necessary funds to satisfy our liquidity needs for the next 6 months. To the
extent that such funds are insufficient, our principal stockholder has agreed to
fund our operations for the next six-month period and beyond in the form of a
loan or loans. However, there is no formal agreement with our principal
stockholder, Greenwich Holdings LLC in writing or otherwise to do so and
accordingly may not be enforced against Greenwich Holdings, Inc. in the event
that it decides not to continue to fund the Company.
Working
Capital
Critical
Accounting Policies
The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect the
amounts reported in our consolidated financial statements and accompanying
notes. We base our estimates and judgments on historical experience and on
various other assumptions that we believe are reasonable under the
circumstances. However, future events are subject to change, and the best
estimates and judgments routinely require adjustment. The amounts of assets and
liabilities reported in our consolidated balance sheet, and the amounts of
revenues and expenses reported for each of our fiscal periods, are affected by
estimates and assumptions which are used for, but not limited to, the accounting
for allowance for doubtful accounts, goodwill and intangible asset impairments,
restructurings, inventory and income taxes. Actual results could differ from
these estimates. The following critical accounting policies are significantly
affected by judgments, assumptions and estimates used in the preparation of our
consolidated financial statements.
Revenue
Recognition Policies
For
the fiscal year 2009, the Company derives its primary revenue from the sources
described below, which includes dial around revenues, coin collections, and
telephone equipment repairs and sales. Other revenues generated by the company
include commissions.
Dial
around revenues are generated from calls to gain access to a different long
distance carrier than is already programmed into the phone. Revenues from dial
around calls are recorded based upon estimates until the coin collection
revenues are generated when callers deposit coins into the phones to make calls.
Coin revenues are recorded in an amount equal to the coins collected. Revenues
on commissions and telephone equipment repairs and sales are realized when the
services are provided.
Off
Balance Sheet Arrangements
We do
not have any off balance sheet arrangements that have or are reasonably likely
to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity or
capital expenditures or capital resources that is material to an investor in our
securities.
Seasonality
Our
operating results and operating cash flows historically have not been subject to
seasonal variations. This pattern may change, however, as a result of new market
opportunities or new product introductions.
Recent
Accounting Pronouncement
In
June 2008, the FASB finalized FASB ASC 815-40-15, which outlines a procedure to
determine if an equity-linked financial instrument (or embedded feature) is
indexed to its own common stock. FASB ASC 815-40-15 is effective for fiscal
years beginning after December 15, 2008. The adoption of FASB ASC 815-40-15 did
not have an impact on our financial position, results of operations or cash
flows.
In May
2009, the FSAB issued FASB ASC 855 which is intended to establish general
standards of accounting for and disclosure of events that occur after the
balance sheet date, but before financial statements are issued or are available
to be issued. It requires the disclosure of the date through which an entity has
evaluated subsequent events and the basis for that date–that is, whether that
date represents the date the financial statements were issued or were available
to be issued. This disclosure should alert all users of financial statements
that an entity has not evaluated subsequent events after that date in the set of
financial statements being presented. ASC 855 is effective for financial
statements issued for fiscal years and interim periods ending after June 15,
2009.
In
July 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance
relating to the “FASB Accounting Standards Codification” at FASB ASC 105, as the
single source of authoritative nongovernmental U.S. generally accepted
accounting principles (GAAP). The codification is effective for interim periods
ending after September 15, 2009. All existing accounting standards are
superseded as described in FASB ASC 105. All other accounting literature not
included in the Codification is non-authoritative. The adoption of FASB ASC 105
did not impact our results of operations, financial position or cash
flows.
Glory
Reach International Limited
Results
of Operations
Comparison of Year Ended
December 31, 2009 and December 31, 2008
The
following table sets forth key components of our results of operations during
the twelve months periods ended December 31, 2009 and 2008, both in dollars and
as a percentage of our net sales. As the reverse acquisition of Glory Reach was
entered into after December 31, 2009 and during the periods indicated Qingdao
Hongguan Shoe Co. Ltd. was the only entity in our combined business that had
operations, the results of operations below refer only to that of Qingdao
Hongguan Shoe Co. Ltd. China.
|
Year
Ended
|
Year
Ended
|
|||||||||||||||
|
December
31, 2009
|
December
31, 2008
|
|||||||||||||||
|
%
of Net
|
%
of Net
|
|||||||||||||||
|
Amount
|
Sales
|
Amount
|
Sales
|
|||||||||||||
|
Net
Sales
|
$ | 17,863,891 | 100 | % | $ | 13,904,314 | 100 | % | ||||||||
|
Cost
of sales
|
10,162,778 | 57 | % | 8,246,592 | 59 | % | ||||||||||
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Gross
profit
|
7,701,113 | 43 | % | 5,657,722 | 41 | % | ||||||||||
|
Selling,
General and Administrative Expenses
|
969,645 | 5 | % | 814,830 | 6 | % | ||||||||||
|
Operating
Income
|
6,731,468 | 38 | % | 4,842,892 | 35 | % | ||||||||||
|
Other
income & interest expense
|
27,318 | 0 | % | 4,704 | 0 | % | ||||||||||
|
Income
Before Income Taxes
|
6,758,786 | 38 | % | 4,847,596 | 35 | % | ||||||||||
|
Income
taxes
|
1,689,697 | 9 | % | 1,211,899 | 9 | % | ||||||||||
|
Net
income
|
$ | 5,069,089 | 28 | % | $ | 3,635,697 | 26 | % | ||||||||
Net Sales.
Our net sales increased to $17,863,891 in the year ended December 31, 2009 from
$13,904,314 in 2008, representing a 28% increase year-over-year. This increase
was mainly due to an increase in the number of new stores and increase in sales
volume at existing stores.
Cost of
Sales. Our cost of sales increased to $10,162,778 in the year ended
December 31, 2009 from $8,246,592 in the year of 2008, on account of more goods
sold. The cost of goods sold to sales ratio changed from 59% to 57%,
mainly due to greater efficiencies in our cost control.
Gross Profit and
Gross Margin.
Our gross profit increased to $7,701,113 in the year ended December 31,
2009 from $5,657,722 in 2008. Gross profit as a percentage of net revenue was
43% and 41% for the year ended December 31, 2009 and 2008, respectively. The
slight increase in the gross margin was primarily due to the ability to raise
the selling price and greater efficiencies in cost control.
Selling, General
and Administrative Expenses. Our selling, general and administration grew
slightly to $969,645 in the year ended ended December 31, 2009 from $814,830 in
year 2008. This increase was mainly due to our rapid growth as we increased
sales volume.
Other
Income. Other income increased to $27,318 in the year ended December 31,
2009 from $4,704 in 2008.
Income Before
Income Taxes. Our income before income taxes increased to $6,758,786 in
the year ended December 31, 2009 from $4,847,596 in 2008. This increase was due
to the general expansion in our operational scope.
Income
Taxes. Income tax increased to $1,689,697 in the year ended December 31,
2009 from $1,211,899 in 2008. The increase was due to an increase in income, as
our income tax rate remained the same.
Net
Income. In the year ended December 31, 2009, we generated a net income of
$5,069,089 , an increase from $3,635,697 in 2008. This increase was primarily
due to successful scaling out of our business model.
Liquidity
And Capital Resources
As of
December 31, 2009, we had cash and cash equivalents of $61,131, primarily
consisting of cash on hand and demand deposits. The following table provides
detailed information about our net cash flow for all financial statement periods
presented in this report. To date, we have financed our operations primarily
through cash flows from operations and equity contributions by our
shareholders.
The
following table sets forth a summary of our cash flows for the periods
indicated:
Cash
Flows
(all
amounts in U.S. dollars)
|
Year
Ended
|
||||||||
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Net
cash provided by operating activities
|
$ | 9,846,859 | $ | 7,746,685 | ||||
|
Net
cash used in investing activities
|
(6,107,882 | ) | (5,823,377 | ) | ||||
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Net
cash used in financing activities
|
(3,799,530 | ) | (1,874,600 | ) | ||||
|
Effects
of Exchange Rate Change on Cash
|
3,150 | 35,218 | ||||||
|
Net
Increase (Decrease) in Cash
|
(57,403 | ) | 83,926 | |||||
|
Cash
at Beginning of the Year
|
118,534 | 34,608 | ||||||
|
Cash
at End of the Year
|
61,131 | 118,534 | ||||||
Operating
activities
Net
cash provided by operating activities was $9,846,859 for the year ended December
31, 2009, as compared to $7,746,685 for the year ended December 31, 2008. The
increase in net cash provided by operating activities was due to growth in the
scope of our business.
Investing
activities
Net
cash used in investing activities for the year ended December 31, 2009 was
$(6,107,882) as compared to $(5,823,377) for the year ended December 31, 2008.
The increase in net cash used in investing activities was mainly due to
additional purchase of property and equipment.
Net
cash used in financing activities for the year ended December 31, 2009 was
$(3,799,530), as compared to $(1,874,600) for the year ended December 31, 2008.
The significant increase in net cash used in financing activities was mainly due
to more distributions to shareholders during 2009.
We
believe that our cash on hand and cash flows from operations will meet part of
our present cash needs and we will require additional cash resources, to meet
our expected capital expenditure and working capital for the next 12 months. We
may, however, in the future, require additional cash resources due to changed
business conditions, implementation of our strategy to ramp up our marketing
efforts and increase brand awareness, or acquisitions we may decide to pursue.
If our own financial resources are insufficient to satisfy our capital
requirements, we may seek to sell additional equity or debt securities or obtain
additional credit facilities. The sale of additional equity securities could
result in dilution to our stockholders. The incurrence of indebtedness would
result in increased debt service obligations and could require us to agree to
operating and financial covenants that would restrict our operations. Financing
may not be available in amounts or on terms acceptable to us, if at all. Any
failure by us to raise additional funds on terms favorable to us, or at all,
could limit our ability to expand our business operations and could harm our
overall business prospects.
Inflation
Inflation
and changing prices have not had a material effect on our business and we do not
expect that inflation or changing prices will materially affect our business in
the foreseeable future. However, our management will closely monitor the price
change in the industry and continually maintain effective cost control in
operations.
Off
Balance Sheet Arrangements
We do
not have any off balance sheet arrangements that have or are reasonably likely
to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity or
capital expenditures or capital resources that is material to an investor in our
securities.
Seasonality
Critical
Accounting Policies
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
assumptions, estimates and judgments that affect the amounts reported, including
the notes thereto, and related disclosures of commitments and contingencies, if
any. We have identified certain accounting policies that are significant to the
preparation of our financial statements. These accounting policies are important
for an understanding of our financial condition and results of operation.
Critical accounting policies are those that are most important to the portrayal
of our financial conditions and results of operations and require management’s
difficult, subjective, or complex judgment, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods. Certain accounting estimates are particularly
sensitive because of their significance to financial statements and because of
the possibility that future events affecting the estimate may differ
significantly from management’s current judgments. We believe the following
critical accounting policies involve the most significant estimates and
judgments used in the preparation of our financial statements:
Revenue
Recognition
Retail
sales are recognized at the point of sale to customers, are recorded net of
estimated returns, and exclude value added tax (“VAT”). Wholesales to its
contracted customers are recognized as revenue at the time the product is
shipped and title passes to the customer on an FOB shipping point
basis.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“US GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the amount of revenues and expenses
during the reporting periods. Management makes these estimates using
the best information available at the time the estimates are
made. However, actual results could differ materially from those
estimates.
Accounts
Receivable
Accounts
receivable consists of unpaid balances due from the whole-sale customers. Such
balances generally are cleared in the subsequent month when the whole-sale
customers place another order. The Company does not provide an allowance for
doubtful accounts because the Company has not experienced any credit losses in
collecting these amounts from whole-sale customers.
The
Company accounts for impairment of property and equipment and amortizable
intangible assets in accordance with ASC 360, “Accounting for Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of”, which requires the
Company to evaluate a long-lived asset for recoverability when there is event or
circumstance that indicate the carrying value of the asset may not be
recoverable. An impairment loss is recognized when the carrying amount of a
long-lived asset or asset group is not recoverable (when carrying amount exceeds
the gross, undiscounted cash flows from use and disposition) and is measured as
the excess of the carrying amount over the asset’s (or asset group’s) fair
value. There was no impairment of long-lived assets for the years ended December
31, 2009 and 2008.
Inventories
Merchandise
inventories are stated at the lower of cost or market. Cost is
determined on a weighted average basis and includes all expenditures incurred in
bringing the goods to the point of sale and putting them in a salable
condition. In assessing the ultimate realization of inventories, the
management makes judgments as to future demand requirements compared to current
or committed inventory levels. Our reserve requirements generally
increase as our projected demand requirements; or decrease due to market
conditions and product life cycle changes. The Company estimates the
demand requirements based on market conditions, forecasts prepared by its
customers, sales contracts and orders in hand.
In
addition, the Company estimates net realizable value based on intended use,
current market value and inventory ageing analyses. The Company
writes down inventories for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventories and their estimated
market value based upon assumptions about future demand and market
conditions.
Comprehensive
Income
The
Company has adopted the provisions of ASC 220 “Reporting Comprehensive Income”
which establishes standards for the reporting and display of comprehensive
income, its components and accumulated balances in a full set of general purpose
financial statements.
ASC
220 defines comprehensive income is comprised of net income and all changes to
the statements of stockholders' equity, except those due to investments by
stockholders, changes in paid-in capital and distributions to stockholders,
including adjustments to minimum pension liabilities, accumulated foreign
currency translation, and unrealized gains or losses on marketable securities.
The Company’s other comprehensive income arose from the effect of foreign
currency translation adjustments.
Foreign
Currency Translation
The
Company’s functional currency is Chinese currency Renminbi (“RMB”) and its
reporting currency is the U.S. dollar. Transactions denominated in foreign
currencies are translated into U.S. dollar at exchange rate in effect on the
date of the transactions. Exchange gains or losses on transaction are included
in earnings.
The
financial statements of the Company are translated into United States dollars in
accordance with the provisions of ASC 830 “Foreign Currency Matters”, using the
year-end rates of exchange for assets and liabilities, and average rates of
exchange for the period for revenues, costs, and expenses and historical rates
for the equity. Translation adjustments resulting from the process of
translating the local currency financial statements into U.S. dollars are
included in determining comprehensive income. At December 31, 2009 and 2008, the
cumulative translation adjustment of $440,775 and $437,665 were classified as an
item of accumulated other comprehensive income in the shareholders’ equity
section of the balance sheet respectively. For the years ended
December 31, 2009 and 2008, other comprehensive income was $3,110 and $232,047,
respectively.
Recent
Accounting Pronouncements
Fair Value Measurements and
Disclosures (Included in ASC 820, previously FSP No. 157-4, “Determining Whether
a Market is Not Active and a Transaction Is Not Distressed”).
FSP No. 157-4 clarifies when markets are illiquid or that
market pricing may not actually reflect the “real” value of an
asset. If a market is determined to be inactive and market price is
reflective of a distressed price then an alternative method of pricing can be
used, such as a present value technique to estimate fair value. FSP
No. 157-4 identifies factors to be considered when determining whether or not a
market is inactive. FSP No. 157-4 would be effective for interim and
annual periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009 and shall be applied
prospectively. The adoption of this standard had no material effect
on the Company's financial statements.
Interim Disclosures about Fair Value
of Financial Instruments (Included in ASC 825 “Financial Instruments”,
previously FSP SFAS No. 107-1). This guidance requires that
the fair value disclosures required for all financial instruments within the
scope of SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”,
be included in interim financial statements. This guidance also
requires entities to disclose the method and significant assumptions used to
estimate the fair value of financial instruments on an interim and annual basis
and to highlight any changes from prior periods. FSP 107-1 was
effective for interim periods ending after September 15, 2009. The
adoption of FSP 107-1 had no material impact on the Company’s financial
statements.
Consolidation of Variable Interest
Entities – Amended (To be included in ASC 810 “Consolidation”, previously SFAS
167 “Amendments to FASB Interpretation No. 46(R)”). SFAS 167 amends FASB
Interpretation No. 46 (revised December 2003), “Consolidation of Variable
Interest Entities,” to require an enterprise to perform an analysis to determine
the primary beneficiary of a variable interest entity; to require ongoing
reassessments of whether an enterprise is the primary beneficiary of a variable
interest entity and to eliminate the quantitative approach previously required
for determining the primary beneficiary of a variable interest
entity. SFAS 167 also requires enhanced disclosures that will provide
users of financial statements with more transparent information about an
enterprise’s involvement in a variable interest entity. SFAS 167 is
effective for the first annual reporting period beginning after November 15,
2009 and will be effective for us as of January 1, 2010. The
management is in the process of evaluating the impact of adopting this standard
on the Company’s financial statements.
FASB Accounting Standards
Codification (Accounting Standards Update “ASU” 2009-1). In June 2009,
the Financial Accounting Standard Board (“FASB”) approved its Accounting
Standards Codification (“Codification”) as the single source of authoritative
United States accounting and reporting standards applicable for all
non-governmental entities, with the exception of the SEC and its
staff. The Codification is effective for interim or annual financial
periods ending after September 15, 2009 and impacts our financial statements as
all future references to authoritative accounting literature will be referenced
in accordance with the Codification. There have been no changes to
the content of our financial statements or disclosures as a result of
implementing the Codification.
In
August 2009, the FASB issued Accounting Standards Update No. 2009-05 (“ASC
Update 2009-05”), an update to ASC 820, Fair Value Measurements and
Disclosures. This update provides amendments to reduce potential
ambiguity in financial reporting when measuring the fair value of
liabilities. Among other provisions, this update provides
clarification that in circumstances in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value using one or more of the valuation techniques described in
ASC Update 2009-05. ASC Update 2009-05 will become effective for the
Company’s annual financial statements for the year ended December 31, 2009. The
adoption of this standard had no material effect on the Company's financial
statements.
In
October 2009, the FASB issued Accounting Standards Update, 2009-13, Revenue
Recognition (Topic 605) “Multiple Deliverable Revenue Arrangements - A Consensus
of the FASB Emerging Issues Task Force”. This update provides
application guidance on whether multiple deliverables exist, how the
deliverables should be separated and how the consideration should be allocated
to one or more units of accounting. This update establishes a selling
price hierarchy for determining the selling price of a
deliverable. The selling price used for each deliverable will be
based on vendor-specific objective evidence, if available, third-party evidence
if vendor-specific objective evidence is not available, or estimated selling
price if neither vendor-specific or third-party evidence is
available. The Company will be required to apply this guidance
prospectively for revenue arrangements entered into or materially modified after
January 1, 2011; however, earlier application is permitted. The
management is in the process of evaluating the impact of adopting this standard
on the Company’s financial statements.
In
December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of
Financial Assets. This Accounting Standards Update amends the FASB Accounting
Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140. The amendments
in this Accounting Standards Update improve financial reporting by eliminating
the exceptions for qualifying special-purpose entities from the consolidation
guidance and the exception that permitted sale accounting for certain mortgage
securitizations when a transferor has not surrendered control over the
transferred financial assets. In addition, the amendments require
enhanced disclosures about the risks that a transferor continues to be exposed
to because of its continuing involvement in transferred financial assets.
Comparability and consistency in accounting for transferred financial assets
will also be improved through clarifications of the requirements for isolation
and limitations on portions of financial assets that are eligible for sale
accounting. The management is in the process of evaluating the impact
of adopting this standard on the Company’s financial
statements.
In
December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in this Accounting Standards Update
replace the quantitative-based risks and rewards calculation for determining
which reporting entity, if any, has a controlling financial interest in a
variable interest entity with an approach focused on identifying which reporting
entity has the power to direct the activities of a variable interest entity that
most significantly impact the entity’s economic performance and (1) the
obligation to absorb losses of the entity or (2) the right to receive benefits
from the entity. An approach that is expected to be primarily
qualitative will be more effective for identifying which reporting entity has a
controlling financial interest in a variable interest entity. The
amendments in this Update also require additional disclosures about a reporting
entity’s involvement in variable interest entities, which will enhance the
information provided to users of financial statements. The management
is in the process of evaluating the impact of adopting this standard on the
Company’s financial statements.
In
January 2010, FASB issued ASU
No. 2010-01- Accounting for Distributions to Shareholders with Components of
Stock and Cash. The amendments in this Update clarify that the
stock portion of a distribution to shareholders that allows them to elect to
receive cash or stock with a potential limitation on the total amount of cash
that all shareholders can elect to receive in the aggregate is considered a
share issuance that is reflected in EPS prospectively and is not a stock
dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per
Share). The management is in the process of evaluating the
impact of adopting this standard on the Company’s financial
statements.
In
January 2010, FASB issued ASU
No. 2010-02 – Accounting and Reporting for Decreases in Ownership of a
Subsidiary – a Scope Clarification. The amendments in this
Update affect accounting and reporting by an entity that experiences a decrease
in ownership in a subsidiary that is a business or nonprofit
activity. The amendments also affect accounting and reporting by an
entity that exchanges a group of assets that constitutes a business or nonprofit
activity for an equity interest in another entity. The amendments in this
update are effective beginning in the period that an entity adopts SFAS No. 160,
“Non-controlling Interests in Consolidated Financial Statements – An Amendment
of ARB No. 51.” If an entity has previously adopted SFAS No.160 as of
the date the amendments in this update are included in the Accounting Standards
Codification, the amendments in this update are effective beginning in the first
interim or annual reporting period ending on or after December 15,
2009. The amendments in this update should be applied retrospectively
to the first period that an entity adopted SFAS No. 160. The management
does not expect the adoption of this ASU to have a material impact on the
Company’s financial statements.
In
January 2010, FASB issued ASU
No. 2010-06 – Improving Disclosures about Fair Value
Measurements. This update provides amendments to Subtopic
820-10 that requires new disclosure as follows: 1) Transfers in and out of
Levels 1 and 2. A reporting entity should disclose separately the
amounts of significant transfers in and out of Level 1 and Level 2 fair value
measurements and describe the reasons for the transfers. 2)
Activity in Level 3 fair value measurements. In the reconciliation for
fair value measurements using significant unobservable inputs (Level 3), a
reporting entity should present separately information about purchases, sales,
issuances, and settlements (that is, on a gross basis rather than as one net
number). This update provides amendments to Subtopic 820-10 that
clarifies existing disclosures as follows: 1) Level of
disaggregation. A reporting entity should provide fair value
measurement disclosures for each class of assets and liabilities. A class is
often a subset of assets or liabilities within a line item in the statement of
financial position. A reporting entity needs to use judgment in
determining the appropriate classes of assets and liabilities.
2) Disclosures about inputs and valuation techniques. A
reporting entity should provide disclosures about the valuation techniques and
inputs used to measure fair value for both recurring and nonrecurring fair value
measurements. Those disclosures are required for fair value measurements that
fall in either Level 2 or Level 3. The new disclosures and
clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements. These disclosures are
effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years. The management does not expect the adoption
of this ASU to have a material impact on the Company’s financial
statements.
MARKET
PRICE AND DIVIDENDS ON OUR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market
Information
Glory
Reach’s common stock is not trading and has not traded on any public trading
market or stock exchange.
Datone
common stock is quoted on the Over-the-Counter Electronic Bulletin Board under
the symbol “DATI.OB”. Presented below is the high and low bid information of
Datone’s common stock for the periods indicated. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. No bid quotations were available for any of
quarterly periods for the year ended December 31, 2008.
|
Year
Ended December 31, 2009:
|
High
|
Low
|
||||||
|
3/31/2009
|
$ | 0.01 | $ | 0.00 | ||||
|
6/30/2009
|
$ | 0.10 | $ | 0.00 | ||||
|
9/30/2009
|
$ | 0.05 | $ | 0.00 | ||||
|
12/31/2009
|
$ | 0.05 | $ | 0.00 | ||||
|
Year
Ended December 31, 2010:
|
High
|
Low
|
||||||
|
3/31/2010
|
$ | 0.55 | $ | 0.00 | ||||
Our
common shares are issued in registered form. Fidelity Transfer Co. (Telephone:
801-562-1300; Facsimile: 801-233-0589) is the registrar and transfer agent for
our common shares.
Approximate
Number of Holders of Our Common Stock
As of
March 30, 2010, there were approximately 256 stockholders of record of
Datone common stock. This number does not include shares held by brokerage
clearing houses, depositories or others in unregistered form. Before
the Share Exchange Transaction, Glory Reach had 10 stockholders of
record.
Dividend
Policy
Neither
Datone nor Glory Reach has paid any cash dividends on its common stock. Any
future decisions regarding dividends will be made by our board of directors. We
currently intend to retain and use any future earnings for the development and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Our board of directors has complete discretion on whether to
pay dividends. Even if our board of directors decides to pay dividends, the
form, frequency and amount will depend upon our future operations and earnings,
capital requirements and surplus, general financial condition, contractual
restrictions and other factors that the board of directors may deem
relevant.
Securities
Authorized for Issuance Under Equity Compensation Plans
We do
not have in effect any compensation plans under which our equity securities are
authorized for issuance and we do not have any outstanding stock
options.
Recent
Sales of Unregistered Securities
During
the year ended December 31, 2009, we did not have any sales of securities that
were not registered under the Securities Act of 1933, as
amended.
On
February 12, 2010, we issued 10,000 shares of our Series A Convertible Preferred
stock (“Series A Preferred Stock”) to the shareholders of Glory Reach. The total
consideration for the 10,000 shares of our Series A Preferred Stock was 10,000
ordinary shares of Glory Reach, which is all the issued and outstanding capital
stock of Glory Reach. The number of our shares issued to the shareholders of
Glory Reach was determined based on an arms-length negotiation. The issuance of
our shares to these shareholders was made in reliance on the exemption provided
by Section 4(2) of the Securities Act for the offer and sale of securities not
involving a public offering and Regulation D promulgated
thereunder.
On
February 10, 2010, we issued 3,136,768 shares of common stock to our landlord to
extinguish approximately $47,052 of debt owed to Callaway Properties, our pre
reverse acquisition landlord. Callaway Properties’ sole shareholder is Mary
Passalaqua, wife of the Company’s former director and former secretary Joseph
Passalaqua.
We
issued securities in reliance upon Rule 506 of Regulation D of the Securities
Act. These shareholders who received the securities in such instances made
representations that (a) the shareholder is acquiring the securities for his,
her or its own account for investment and not for the account of any other
person and not with a view to or for distribution, assignment or resale in
connection with any distribution within the meaning of the Securities Act, (b)
the shareholder agrees not to sell or otherwise transfer the purchased shares
unless they are registered under the Securities Act and any applicable state
securities laws, or an exemption or exemptions from such registration are
available, (c) the shareholder has knowledge and experience in financial and
business matters such that he, she or it is capable of evaluating the merits and
risks of an investment in us, (d) the shareholder had access to all of our
documents, records, and books pertaining to the investment and was provided the
opportunity ask questions and receive answers regarding the terms and conditions
of the offering and to obtain any additional information which we possessed or
were able to acquire without unreasonable effort and expense, and (e) the
shareholder has no need for the liquidity in its investment in us and could
afford the complete loss of such investment. Management made the determination
that the investors in instances where we relied on Regulation D are accredited
investors (as defined in Regulation D) based upon management’s inquiry into
their sophistication and net worth. In addition, there was no general
solicitation or advertising for securities issued in reliance upon Regulation
D.
Purchases
of Our Equity Securities
No
repurchases of our common stock were made during the fourth quarter of our
fiscal year ended December 31, 2009.
LEGAL
PROCEEDINGS
From
time to time, we may become involved in various lawsuits and legal proceedings
which arise in the ordinary course of business. However, litigation is subject
to inherent uncertainties and an adverse result in these or other matters may
arise from time to time that may harm our business. We are currently not aware
of any such legal proceedings or claims that we believe will have a material
adverse affect on our business, financial condition or operating
results.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
CHANGES
TO OUR BUSINESS AND CHANGE OF CONTROL
The
Company was originally incorporated in the State of Delaware on August 9, 2000.
The Company operated as a wholly-owned subsidiary of USIP.COM, Inc. On August
24, 2006, USIP decided to spin-off its subsidiary companies, one of which was
Datone, Inc. Datone, Inc. was a provider of both privately owned and
company owned payphones and stations in New York. Because this
business has not been successful, the Company was focused on the identification
of suitable businesses with which to enter into a business opportunity or
business combination until February 12, 2010, when it completed its reverse
acquisition of Glory Reach. Through Qingdao Shoes, its directly owned
operating subsidiary in China, the Company is engaged in the business of
designing and retailing branded footwear in Northern China.
On
February 12, 2010, we completed a reverse acquisition transaction through a
share exchange with Glory Reach and its shareholders, or the Shareholders,
whereby we acquired 100% of the issued and outstanding capital stock of Glory
Reach in exchange for 10,000 shares of our Series A Preferred Stock which
constituted 97% of our issued and outstanding capital stock on an as-converted
to common stock basis as of and immediately after the consummation of the
reverse acquisition. As a result of the reverse acquisition, Glory Reach became
our wholly-owned subsidiary and the former shareholders of Glory Reach became
our controlling stockholders.
Immediately following
closing of the reverse acquisition of Glory Reach, one Shareholder
transferred 337 of the 874 shares of Series A Preferred Stock issued
to him under the share exchange to certain persons who provided services to
Glory Reach’s subsidiaries, pursuant to share allocation agreements that
the Shareholder entered into with such service providers.
Upon
the closing of the reverse acquisition, Craig H. Burton, our President and
Director, Joseph J. Passalaqua, our Secretary and Director, and Joseph Meuse,
our Director, submitted a resignation letter pursuant to which they resigned
from all offices that they held effective immediately and from
their position as our directors effective on March 18, 2010. In
addition, our board of directors on February 12 appointed Tao Wang (Chairman),
Renwei Ma and Lanhai Sun to fill the vacancies created by such resignations,
which appointments became effective on March 18, 2010. In addition,
our executive officers were replaced by the Qingdao Shoes’ executive officers
upon the closing of the reverse acquisition.
FINANCIAL
INFORMATION
Filed
herewith are the following financial statements:
|
1.
|
Audited
consolidated financial statements of Datone, Inc. and its subsidiaries for
the fiscal years ended December 31, 2009 and
2008.
|
|
2.
|
Audited
consolidated financial statements of Glory Reach International Limited for
the fiscal years ended December 31, 2009 and 2008.
|
|
3.
|
Pro
Forma financial statements
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Datone,
Inc.
Liverpool,
NY
We
have audited the accompanying consolidated balance sheets of Datone, Inc. and
Subsidiary (the “Company”) as of December 31, 2009 and 2008, and the related
consolidated statements of operations, stockholders’ deficit, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2009
and 2008 and the results of its operations and cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
The
accompanying financial statements have been prepared assuming that Datone, Inc.
will continue as a going concern. As discussed in Note 2 to the consolidated
financial statements, the Company has a working capital deficit and has incurred
losses since inception, which raises substantial doubt about its ability to
continue as a going concern. Management’s plans regarding those matters also are
described in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
/s/ MaloneBailey,
LLP
www.malonebailey.com
Houston,
Texas
March
30, 2010
F-1
DATONE,
INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
Current
Assets
|
||||||||
|
Commissions
and sales receivable, net
|
$ | 25,046 | $ | 29,151 | ||||
|
Total
Current Assets
|
25,046 | 29,151 | ||||||
|
Vehicles,
net of accumulated depreciation of $66,259 and
|
- | - | ||||||
|
$65,606,
respectively
|
5,016 | 5,669 | ||||||
|
TOTAL
ASSETS
|
$ | 30,062 | $ | 34,820 | ||||
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
||||||||
|
Current
Liabilities
|
||||||||
|
Accounts
payable
|
$ | 118,252 | $ | 148,447 | ||||
|
Accounts
payable - related parties
|
2,095 | - | ||||||
|
Bank
overdraft
|
8,402 | 8,313 | ||||||
|
Accrued
liabilities
|
76,102 | 64,572 | ||||||
|
Short-term
debt
|
- | 7,091 | ||||||
|
Short-term
debt - related parties, net of unamortized
discounts
of $12,159 and $0, respectively
|
434,724 | 338,234 | ||||||
|
Total
Current Liabilities
|
639,575 | 566,657 | ||||||
|
STOCKHOLDERS'
DEFICIT
|
||||||||
|
Common
Stock, .0001 par value 100,000,000 shares
|
||||||||
|
authorized,
4,963,226 shares issued and outstanding
|
496 | 496 | ||||||
|
Additional
paid-in capital
|
1,754,585 | 1,687,871 | ||||||
|
Accumulated
deficit
|
(2,364,594 | ) | (2,220,204 | ) | ||||
|
Total
Stockholders' Deficit
|
(609,513 | ) | (531,837 | ) | ||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$ | 30,062 | $ | 34,820 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-2
DATONE,
INC.AND SUBSIDIARY
CONSOLIADTED
STATEMENTS OF OPERATIONS
|
Years
Ended
|
||||||||
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
REVENUE
|
$
|
116,439
|
$
|
121,436
|
||||
|
COST
OF REVENUE
|
||||||||
|
Depreciation
|
653
|
654
|
||||||
|
Cost
of revenue
|
30,034
|
26,692
|
||||||
|
Total
cost of revenue
|
30,687
|
27,346
|
||||||
|
Gross
profit
|
85,752
|
94,090
|
||||||
|
OPERATING
EXPENSES:
|
||||||||
|
General
and administrative
|
173,264
|
182,698
|
||||||
|
Gain
on sale of equipment
|
(200
|
)
|
-
|
|||||
|
Total
operating expenses
|
173,064
|
182,698
|
||||||
|
Loss
from operations
|
(87,312
|
)
|
(88,608
|
)
|
||||
|
OTHER
INCOME (EXPENSES)
|
||||||||
|
Forgiveness
of debt
|
4,845
|
-
|
||||||
|
Interest
expense
|
(61,923
|
)
|
(30,183
|
)
|
||||
|
Total
other income (expenses)
|
(57,078
|
)
|
(30,183
|
)
|
||||
|
NET
LOSS
|
$
|
(144,390
|
)
|
$
|
(118,791
|
)
|
||
|
Net
Loss Per Share - Basic and Diluted
|
$
|
(0.03
|
)
|
$
|
(0.02
|
)
|
||
|
Weighted
Common Shares Outstanding -
|
||||||||
|
Basic
and Diluted
|
4,963,226
|
4,963,226
|
||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
DATONE,
INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' DEFICIT
|
Additional
|
Total
|
|||||||||||||||||||
|
Common Stock
|
Paid-in
|
Retained
|
Stockholders'
|
|||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Deficit
|
Deficit
|
||||||||||||||||
|
Balances
at December 31, 2007
|
4,963,226
|
$
|
496
|
$
|
1,600,571
|
$
|
(2,101,413
|
)
|
$
|
(500,346
|
)
|
|||||||||
|
Imputed
interest
|
-
|
-
|
21,300
|
-
|
21,300
|
|||||||||||||||
|
Extinguishment
of related party debt
|
-
|
-
|
66,000
|
-
|
66,000
|
|||||||||||||||
|
Net
Loss
|
-
|
-
|
-
|
(118,791
|
)
|
(118,791
|
)
|
|||||||||||||
|
Balances
at December 31, 2008
|
4,963,226
|
496
|
1,687,871
|
(2,220,204
|
)
|
(531,837
|
)
|
|||||||||||||
|
Imputed
interest
|
-
|
-
|
32,714
|
-
|
32,714
|
|||||||||||||||
|
Debt
discount from beneficial conversion feature
|
-
|
-
|
34,000
|
-
|
34,000
|
|||||||||||||||
|
Net
Loss
|
-
|
-
|
-
|
(144,390
|
)
|
(144,390
|
)
|
|||||||||||||
|
Balances
at December 31, 2009
|
4,963,226
|
$
|
496
|
$
|
1,754,585
|
$
|
(2,364,594
|
)
|
$
|
(609,513
|
)
|
|||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
DATONE,
INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Years Ended
|
||||||||
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
|
Net
Loss
|
$
|
(144,390
|
)
|
$
|
(118,791
|
)
|
||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
|
Depreciation
expense
|
653
|
653
|
||||||
|
Amortization
of debt discount
|
21,841
|
-
|
||||||
|
Imputed
interest
|
32,714
|
21,300
|
||||||
|
Forgiveness
of debt
|
(4,845
|
)
|
-
|
|||||
|
Related
party debt issued for rent expense
|
60,000
|
60,000
|
||||||
|
Related
party debt issued for interest expense
|
9,650
|
2,731
|
||||||
|
Gain
on sale of equipment
|
(200
|
)
|
-
|
|||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Receivables
|
4,105
|
6,832
|
||||||
|
Prepaid
expenses
|
-
|
35
|
||||||
|
Accounts
payable
|
(30,195
|
)
|
(23,839
|
)
|
||||
|
Accrued
expenses
|
11,530
|
13,552
|
||||||
|
Accounts
payable - related party
|
2,095
|
-
|
||||||
|
Net
Cash Used in Operating Activities
|
(37,042
|
)
|
(37,527
|
)
|
||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
|
Proceeds
from sale of equipment
|
200
|
-
|
||||||
|
Net
Cash Provided by Investing Activities
|
200
|
-
|
||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
|
Bank
Overdraft
|
89
|
4,773
|
||||||
|
Proceeds
from related party debt
|
39,000
|
36,000
|
||||||
|
Payments
made on debt
|
(2,247
|
)
|
(3,246
|
)
|
||||
|
Net
Cash Provided by Financing Activities
|
36,842
|
37,527
|
||||||
|
Net
Change in Cash
|
-
|
-
|
||||||
|
Cash
at Beginning of Period
|
-
|
-
|
||||||
|
Cash
at End of Period
|
$
|
-
|
$
|
-
|
||||
|
SUPPLEMENTAL
DISCLOSURES:
|
||||||||
|
Cash
paid for interest
|
$
|
94
|
$
|
5,585
|
||||
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
||||||||
|
Debt
discount from beneficial conversion feature
|
$
|
34,000
|
$
|
-
|
||||
|
Forgiveness
of related party debt
|
-
|
66,000
|
||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
DATONE,
INC. AND SUBSIDIARY
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature
of Business
Datone,
Inc. was originally incorporated on August 9, 2000 under the laws of the State
of Delaware. Datone operated as a wholly-owned subsidiary of USIP. On August 24,
2006 USIP spun-off its subsidiary companies, one of which was Datone Inc. On
February 1, 2008, Datone filed a Form 10-SB registration statement. On November
13, 2008, Datone went effective. Datone has 100,000,000 shares of stock
authorized and a wholly owned Subsidiary Datone Tel., Inc.
Datone,
Inc. and subsidiary (“Datone”) is currently a provider of both privately owned
and company owned payphones (COCOT’s) and stations in New York. Datone receives
revenues from the collection of the payphone coinage, a portion of usage of
service from each payphone and a percentage of long distance calls placed from
each payphone from the telecommunications service providers. In addition, Datone
also receives revenues from the service and repair of privately owned payphones,
sales of payphone units and the sales of prepaid phone cards.
Summary
of Significant Accounting Policies
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Concentrations
of Credit Risk
Datone’s
payphones are located primarily in New York and usage of those phones may be
affected by economic conditions in those areas.
Cash
and Cash Equivalents
Datone
considers all highly liquid instruments with a maturity of three months or less
when purchased to be cash equivalents for purposes of classification in the
balance sheets and statement of cash flows. Cash and Cash equivalents consists
of cash in bank (checking) accounts.
Property
and Equipment
Property
and equipment is stated at cost. Depreciation is calculated on a straight-line
basis over the useful lives of the related assets, which range from five to
seven years. Depreciation expense for the years ended December 31, 2009 and 2008
was $653 and $654, respectively.
Income
Taxes
Income
taxes are accounted for in accordance with FASB ASC 740, under which deferred
income taxes are recognized using the asset and liability method by applying tax
rates to cumulative temporary differences based on when and how they are
expected to affect the tax return. Deferred tax assets and liabilities are
adjusted for income tax rate changes.
Revenue
Recognition
Datone
derives its primary revenue from the sources described below, which includes
dial around revenues, coin collections, and telephone equipment repairs and
service. Other revenues generated by Datone include phone card sales, and
commissions.
Dial
around revenues are generated from calls to gain access to a different long
distance carrier than is already programmed into the phone. Datone records a
monthly accrual and adjusts the revenue to actual earned on a quarterly basis.
The revenue is estimated monthly, based on prior quarter’s actual receipts.
Datone uses prior quarter receipts as estimates because there has not been a
significant change to total payphones in the previous few quarters. Also,
historical figures have shown the revenue earned is not far different than
estimates made. Revenues on commissions, phone card sales, and telephone
equipment repairs and service are recognized when the services are
provided.
F-6
The
proceeds from the sales of pay telephones and other equipment are excluded from
revenues and reported as other operating income.
Basic
and Diluted Net Loss per Share
Basic
and diluted loss per share is calculated by dividing net loss by the
weighted-average number of shares of common stock outstanding during the
year.
Recently
Issued Accounting Pronouncements
In
June 2008, the FASB finalized FASB ASC 815-40-15, which outlines a procedure to
determine if an equity-linked financial instrument (or embedded feature) is
indexed to its own common stock. FASB ASC 815-40-15 is effective for fiscal
years beginning after December 15, 2008. The adoption of FASB ASC 815-40-15 did
not have an impact on Datone’s financial position, results of operations or cash
flows.
In May
2009, the FSAB issued FASB ASC 855 which is intended to establish general
standards of accounting for and disclosure of events that occur after the
balance sheet date, but before financial statements are issued or are available
to be issued. It requires the disclosure of the date through which an entity has
evaluated subsequent events and the basis for that date–that is, whether that
date represents the date the financial statements were issued or were available
to be issued. This disclosure should alert all users of financial statements
that an entity has not evaluated subsequent events after that date in the set of
financial statements being presented. ASC 855 is effective for financial
statements issued for fiscal years and interim periods ending after June 15,
2009.
In
July 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance
relating to the “FASB Accounting Standards Codification” at FASB ASC 105, as the
single source of authoritative nongovernmental U.S. generally accepted
accounting principles (GAAP). The codification is effective for interim periods
ending after September 15, 2009. All existing accounting standards are
superseded as described in FASB ASC 105. All other accounting literature not
included in the Codification is non-authoritative. The adoption of FASB ASC 105
did not impact Datone’s results of operations, financial position or cash
flows.
NOTE
2 – GOING CONCERN
The
accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States, which
contemplates Datone as a going concern. However, Datone has sustained
substantial operating losses in recent years and has a working capital deficit
of $614,529 and an accumulated deficit of $2,364,594 as of December 31, 2009.
These conditions raise substantial doubt as to Datone’s ability to continue as a
going concern. Datone’s ability to continue as a going concern is dependent upon
obtaining the additional capital as well as additional revenue to be successful
in its planned activity. Datone is actively pursuing alternative financing and
has had discussions with various third parties, although no firm commitments
have been obtained. In the interim, shareholders of Datone have committed to
meeting its minimal operating expenses. Management believes that actions
presently being taken to revise Datone’s operating and financial requirements
provide them with the opportunity to continue as a going
concern.
These
financial statements do not reflect adjustments that would be necessary if
Datone were unable to continue as a going concern. While management believes
that the actions already taken or planned, will mitigate the adverse conditions
and events which raise doubt about the validity of the going concern assumption
used in preparing these financial statements, there can be no assurance that
these actions will be successful.
If
Datone were unable to continue as a going concern, substantial adjustments would
be necessary to the carrying values of assets, the reported amounts of its
liabilities, the reported revenues and expenses, and the balance sheet
classifications used.
NOTE
3 – RELATED PARTY TRANSACTIONS
Datone
has six notes payable to Joseph Passalaqua, a Director and shareholder of
Datone. The notes are due on demand, unsecured and carry interest ranging from
10% to 18% per annum which is compounded on the unpaid principal and interest.
The outstanding principal and interest on the notes was $52,359 and $38,730 as
of December 31, 2009 and 2008, respectively.
Datone
also has six convertible notes payable to Joseph Passalaqua. The notes were
issued between April 30, 2009 and November 25, 2009. They are unsecured and bear
interest at 8% per annum which is compounded on the unpaid principal and
interest. The notes are convertible into common shares of Datone at a rate of
$0.001 per share and mature between November 1, 2009 and May 26, 2010. The
outstanding principal and interest on the notes was $35,021 as of December 30,
2009.
F-7
Datone
leases office space from the wife of Joseph Passalaqua (Callaway Properties) at
a monthly rate of $5,000. The rent expense is accrued as a related party note
payable that is unsecured, due on demand and does not bear interest. Datone
imputed interest on the note payable at a rate of 10% per annum. Imputed
interest expense was $32,714 and $21,300 for the years ended December 31, 2009
and 2008, respectively. The unpaid balance on the loan was $359,503 and $299,503
as of December 31, 2009 and 2008, respectively.
NOTE
4 - DEBT
A
summary of the debt outstanding at December 31, 2009 and December 31, 2008 is as
follows:
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Unrelated Parties:
|
||||||||
|
Note
payable to bank, monthly installments of $261, interest of 4.5% per annum,
maturing August 2009.
|
$
|
-
|
$
|
2,246
|
||||
|
Note
payable to Key Bank, interest of 9.25% per annum, due on
demand.
|
-
|
4,845
|
||||||
|
Related Parties:
|
||||||||
|
Note
payable to Callaway Properties, no interest, due on
demand
|
359,503
|
299,503
|
||||||
|
Notes
payable to Joseph Passalaqua, interest of 10% to 18% per annum, due on
demand
|
52,359
|
38,730
|
||||||
|
Convertible
notes payable to Joseph Passalaqua, interest of 8% per annum, maturing
November 1, 2009 – February 17, 2010, convertible at $0.001 per
share
|
35,021
|
-
|
||||||
|
446,883
|
345,325
|
|||||||
|
Less: Unamortized
discount from beneficial conversion feature
|
(12,159
|
)
|
-
|
|||||
|
Total
debt
|
$
|
434,724
|
$
|
345,325
|
||||
Datone
evaluated the Joseph Passalaqua convertible notes for derivative accounting
consideration under FASB ASC 815-15 and FASB ASC 815-40. Datone determined the
embedded conversion option in the convertible notes met the criteria for
classification in stockholders’ equity under FASB ASC 815-15 and FASB ASC
815-40. Therefore, derivative accounting was not applicable for these
convertible notes.
Datone
then evaluated the conversion options under FASB ASC 470-20 and determined there
was a beneficial conversion feature associated with the conversion options.
Datone calculated the intrinsic value of the conversion options and recorded an
aggregate discount on the loans of $34,000. The discount is being amortized over
the life of the loans using the effective interest rate method. Amortization
expense for the year ended December 31, 2009 was $21,841.
NOTE
5 – MAJOR CUSTOMERS
Datone
received approximately 95% of total dial around and commissions revenue from two
customers.
NOTE
6 – INCOME TAXES
Deferred
taxes are provided on a liability method whereby deferred tax assets are
recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax basis. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates.
Net
deferred tax assets consisted of the following as of December 31, 2009 and
2008:
F-8
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Deferred
tax assets
|
$
|
(922,192
|
)
|
$
|
(865,880
|
)
|
||
|
Valuation
allowance
|
922,192
|
865,880
|
||||||
|
Net
deferred tax assets
|
$
|
-
|
$
|
-
|
||||
At
December 31, 2009 and 2008, Datone had net operating loss carry forwards of
approximately $2,364,594 and $2,220,204, respectively that may be offset against
future taxable income through 2028.
NOTE
7 – SUBSEQUENT EVENTS
On
January 26, 2010, Datone formed a new entity, DT Communications, Inc.,
incorporated under the laws of the State of Delaware. DT Communications is a
wholly owned subsidiary of Datone. Datone plans to spin-off all of its assets
and liabilities to DT Communications.
On
February 10, 2010, Datone issued 3,136,768 common shares to Calloway Properties
to repay $43,500 of debt.
On
February 12, 2010, Datone entered into and closed a Share Purchase and Exchange
Agreement with Glory Reach International Limited, a Hong Kong limited company,
its shareholders, Greenwich Holdings LLC, and Glory Reach’s wholly owned
subsidiary Hongguan Shoes Co., Ltd., a People’s Republic of China limited
company. Pursuant to the Exchange Agreement, Datone acquired all of
the outstanding shares of Glory Reach from the Glory Reach Shareholders; and the
Glory Reach Shareholders transferred and contributed all of their Interests to
us. In exchange, Datone issued to the Glory Reach Shareholders 10,000 shares of
Series A Preferred Stock, which constituted 97% of Datone’s issued and
outstanding capital stock on an as-converted to common stock basis as of and
immediately after the consummation of the transactions contemplated by the Share
Exchange Agreement. Therefore, Glory Reach became a wholly-owned
subsidiary of Datone. The Share Exchange resulted in a change in control of the
Company.
On
February 12, 2010, Datone borrowed $15,000 from Joseph Passalaqua, a Director
and shareholder of Datone. The note is unsecured, due on demand and bears
interest at 18% per annum.
F-9
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of
Glory
Reach International Limited.
Hong
Kong, PRC
We
have audited the accompanying consolidated balance sheets of Glory Reach
International Limited. (the “Company”) as of December 31, 2009 and 2008, and the
related statements of operations, shareholders’ equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We
conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements of the Company referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2009 and 2008 and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/
MALONEBAILEY, LLP
MALONEBAILEY,
LLP
www.malonebailey.com
Houston,
Texas
April
16, 2010
F-10
GLORY
REACH INTERNATIONAL LIMITED
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31, 2009 AND 2008
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets
|
||||||||
|
Cash
|
$ | 61,131 | $ | 118,534 | ||||
|
Accounts
receivable
|
98,962 | 3,534 | ||||||
|
Inventories
|
344,512 | 189,535 | ||||||
|
Prepaid
expenses
|
57,311 | 58,490 | ||||||
|
Due
from related parties
|
- | 4,373,588 | ||||||
|
Total
current assets
|
561,916 | 4,743,681 | ||||||
|
Property,
plant and equipment, net
|
930,451 | 602,831 | ||||||
|
Intangible
assets
|
208,167 | 213,008 | ||||||
|
Total
Assets
|
$ | 1,700,534 | $ | 5,559,520 | ||||
|
LIABILITIES AND SHAREHOLDERS'
EQUITY
|
||||||||
|
Current
liabilities
|
||||||||
|
Short-term
loans
|
$ | 718,830 | $ | 704,160 | ||||
|
Accounts
payable
|
15,727 | 546 | ||||||
|
Taxes
payable
|
2,627 | 2,114 | ||||||
|
Duet
to related parties
|
221,871 | - | ||||||
|
Total
current liabilities
|
959,055 | 706,820 | ||||||
|
Long-term
debt
|
249,390 | - | ||||||
|
Total
Liabilities
|
$ | 1,208,445 | $ | 706,820 | ||||
|
Shareholders'
Equity
|
||||||||
|
Common
shares, authorized, issued and outstanding; 10,000 and 10,000 shares
respectively, par value $0.129 per share
|
1,290 | 1,290 | ||||||
|
Additional
paid-in capital
|
319,190 | 319,190 | ||||||
|
Accumulated
other comprehensive income
|
440,775 | 437,665 | ||||||
|
Retained
earnings (deficits)
|
(269,166 | ) | 4,094,555 | |||||
|
Total
Shareholders' Equity
|
$ | 492,089 | $ | 4,852,700 | ||||
|
Total
Liabilities and Shareholders' Equity
|
$ | 1,700,534 | $ | 5,559,520 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-11
GLORY
REACH INTERNATIONAL LIMITED
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
2009
|
2008
|
|||||||
|
Net
sales
|
$ | 17,863,891 | $ | 13,904,314 | ||||
|
Cost
of goods sold
|
10,162,778 | 8,246,592 | ||||||
|
Gross
profit
|
7,701,113 | 5,657,722 | ||||||
|
Operating
expenses:
|
||||||||
|
Selling,
general and administrative expenses
|
907,807 | 759,470 | ||||||
|
Depreciation
and Amortization Expense
|
61,838 | 55,360 | ||||||
|
Profit
from operations
|
6,731,468 | 4,842,892 | ||||||
|
Other
income (expense)
|
||||||||
|
Other
income
|
87,966 | 57,660 | ||||||
|
Interest
income
|
1,144 | 8,949 | ||||||
|
Interest
(expense)
|
(61,792 | ) | (61,905 | ) | ||||
|
Income
before income taxes
|
6,758,786 | 4,847,596 | ||||||
|
Income
taxes
|
1,689,697 | 1,211,899 | ||||||
|
Net
income
|
$ | 5,069,089 | $ | 3,635,697 | ||||
|
Net
income per share - basic and diluted
|
$ | 507 | $ | 364 | ||||
|
Weighted
average shares outstanding
|
10,000 | 10,000 | ||||||
|
Net
income
|
$ | 5,069,089 | $ | 3,635,697 | ||||
|
Other
comprehensive income
|
||||||||
|
Foreign
currency translation
|
3,110 | 232,047 | ||||||
|
Comprehensive
income
|
$ | 5,072,199 | $ | 3,867,744 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-12
GLORY
REACH INTERNATIONAL LIMITED
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
2009
|
2008
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net
income
|
$ | 5,069,089 | $ | 3,635,697 | ||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
|
Depreciation
and amortization
|
61,838 | 55,360 | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(95,428 | ) | 1,028 | |||||
|
Inventories
|
(154,977 | ) | 246,700 | |||||
|
Prepaid
expenses
|
1,179 | 10,427 | ||||||
|
Accounts
payable
|
15,180 | (2,527 | ) | |||||
|
Tax
payable
|
4,949,978 | 3,800,000 | ||||||
|
Net
cash provided by operating activities
|
9,846,859 | 7,746,685 | ||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
|
Advance
to related party
|
(5,723,550 | ) | (5,785,433 | ) | ||||
|
Purchase
of property and equipment
|
(384,332 | ) | (37,944 | ) | ||||
|
Net
cash used in investing activities
|
(6,107,882 | ) | (5,823,377 | ) | ||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
|
Distribution
to shareholders
|
(4,063,590 | ) | (1,874,600 | ) | ||||
|
Proceeds
from loans
|
1,701,720 | 850,860 | ||||||
|
Repayments
on loans
|
(1,437,660 | ) | (850,860 | ) | ||||
|
Net
cash used in financing activities
|
(3,799,530 | ) | (1,874,600 | ) | ||||
|
Effect
of exchange rate changes on cash
|
3,150 | 35,218 | ||||||
|
Net
increase (decrease) in cash
|
$ | (57,403 | ) | $ | 83,926 | |||
|
Cash,
beginning of year
|
118,534 | 34,608 | ||||||
|
Cash,
end of year
|
$ | 61,131 | $ | 118,534 | ||||
|
SUPPLEMENTARY
DISCLOSURE:
|
||||||||
|
Interest
paid
|
$ | 61,792 | $ | 61,905 | ||||
|
Income
tax paid
|
$ | 3,763 | $ | 2,539 | ||||
|
NON-CASH INVESTING AND FINANCING
ACTIVITIES
|
||||||||
|
Transfer
of taxes payable to due from related party
|
$ | 4,949,466 | $ | 3,799,872 | ||||
|
Transfer
of shareholder distribution to due from related party
|
$ | 5,251,860 | $ | - | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-13
GLORY
REACH INTERNATIONAL LIMITED
CONSOLIDATED
STATEMENT OF SHAREHOLDERS' EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
Common Stock
|
Additional Paid-
in Capital
|
Accumulated Other
Comprehensive
Income
|
Retained Earnings
|
Total Shareholders'
Equity
|
||||||||||||||||
|
Balance,
December 31, 2007
|
$ | 1,290 | $ | 319,190 | $ | 205,618 | $ | 2,333,458 | $ | 2,859,556 | ||||||||||
|
Distribution
to shareholders
|
- | - | - | (1,874,600 | ) | (1,874,600 | ) | |||||||||||||
|
Net
income
|
- | - | - | 3,635,697 | 3,635,697 | |||||||||||||||
|
Foreign
currency translation gain
|
- | - | 232,047 | - | 232,047 | |||||||||||||||
|
Balance,
December 31, 2008
|
$ | 1,290 | $ | 319,190 | $ | 437,665 | $ | 4,094,555 | $ | 4,852,700 | ||||||||||
|
Distribution
to shareholders
|
- | - | - | (9,432,810 | ) | (9,432,810 | ) | |||||||||||||
|
Net
income
|
- | - | - | 5,069,089 | 5,069,089 | |||||||||||||||
|
Foreign
currency translation gain
|
- | - | 3,110 | - | 3,110 | |||||||||||||||
|
Balance,
December 31, 2009
|
$ | 1,290 | $ | 319,190 | $ | 440,775 | $ | (269,166 | ) | $ | 492,089 | |||||||||
The
accompanying notes are an integral part of these financial
statements
F-14
GLORY
REACH INTERNATIONAL LIMITED
NOTES
TO FINANCIAL STATEMENTS
NOTE
1 - ORGANIZATION AND BUSINESS OPERATIONS
Qingdao
Hongguan Shoes Co., Ltd. (”Hongguan”) was incorporated on March 11, 2003 in Jimo
County, Qingdao City, Shandong Province, People’s Republic of China (the “PRC”)
with registered capital of $320,480. Prior to December 18, 2009, Mr. Tao Wang
owned 80% of Hongguan and the remaining 20% was owned by Mr. Renwei Ma. Starting
from December 18, 2009, Mr. Tao Wang owned 80% of Hongguan, Mr. Renwei Ma owned
15% and Mr. Wenyi Chen owned the remaining 5% of Hongguan. Hongguan is the owner
of the brand name “Hongguan” and principally engaged in the wholesale and retail
sales of fashion footwear primarily in the northeast region of
China.
Glory
Reach International Limited (the “Company”) was established in Hong Kong on
November 18, 2009 to serve as an intermediate holding company. Mr. Tao Wang, the
controlling interest holder of Hongguan also controls the Company. On February
8, 2010, also pursuant to the restructuring plan, the Company acquired 100% of
the equity interests in Hongguan.
Since
the Company and Hongguan are under common control, for accounting purposes, the
acquisitions of Hongguan has been treated as a recapitalization with no
adjustment to the historical basis of their assets and liabilities. The
restructuring has been accounted for using the “as if” pooling method of
accounting and the operations were consolidated as if the restructuring had
occurred as of the beginning of the earliest period presented in our
consolidated financial statements and the current corporate structure had been
in existence throughout the periods covered by our consolidated financial
statements.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
The
financial statements reflect the financial position, results of operations and
cash flows of the Company and all of its wholly owned and majority owned
subsidiaries as of December 31, 2009 and 2008, and for the years ended December
31, 2009 and 2008. All intercompany items are eliminated during
consolidation.
Use of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“US GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the amount of revenues and expenses
during the reporting periods. Management makes these estimates using the best
information available at the time the estimates are made. However, actual
results could differ materially from those estimates.
Risks and
Uncertainties
The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history, foreign currency exchange rates and the volatility of
public markets.
Concentration of Credit
Risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and trade receivables. As of December
31, 2009 and 2008, substantially all of the Company’s cash were held by major
financial institutions located in the PRC, which management believes are of high
credit quality. With respect to trade receivables, the Company rarely extends
credit to its customers. The Company generally does not require collateral for
trade receivables and has not experienced any credit losses in collecting the
trade receivables.
F-15
The
Company operates principally in the PRC and grants credit to its customers in
this geographic region. Although the PRC is economically stable, it is always
possible that unanticipated events in foreign countries could disrupt the
Company’s operations.
Comprehensive
Income
The
Company has adopted the provisions of ASC 220 “Reporting Comprehensive Income”
which establishes standards for the reporting and display of comprehensive
income, its components and accumulated balances in a full set of general purpose
financial statements.
ASC
220 defines comprehensive income is comprised of net income and all changes to
the statements of stockholders' equity, except those due to investments by
stockholders, changes in paid-in capital and distributions to stockholders,
including adjustments to minimum pension liabilities, accumulated foreign
currency translation, and unrealized gains or losses on marketable securities.
The Company’s other comprehensive income arose from the effect of foreign
currency translation adjustments.
Foreign Currency
Translation
The
Company’s functional currency is Chinese currency Renminbi (“RMB”) and its
reporting currency is the U.S. dollar. Transactions denominated in foreign
currencies are translated into U.S. dollar at exchange rate in effect on the
date of the transactions. Exchange gains or losses on transaction are included
in earnings.
The
financial statements of the Company are translated into United States dollars in
accordance with the provisions of ASC 830 “Foreign Currency Matters”, using the
year-end rates of exchange for assets and liabilities, and average rates of
exchange for the period for revenues, costs, and expenses and historical rates
for the equity. Translation adjustments resulting from the process of
translating the local currency financial statements into U.S. dollars are
included in determining comprehensive income. At December 31, 2009 and 2008, the
cumulative translation adjustment of $440,775 and $437,665 were classified as an
item of accumulated other comprehensive income in the shareholders’ equity
section of the balance sheet respectively. For the years ended December 31, 2009
and 2008, other comprehensive income was $3,110 and $232,047,
respectively.
Accounts
Receivable
Accounts
receivable consists of unpaid balances due from the whole-sale customers. Such
balances generally are cleared in the subsequent month when the whole-sale
customers place another order. The Company does not provide an allowance for
doubtful accounts because the Company has not experienced any credit losses in
collecting these amounts from whole-sale customers.
Inventories
Merchandise
inventories are stated at the lower of cost or market. Cost is determined on a
weighted average basis and includes all expenditures incurred in bringing the
goods to the point of sale and putting them in a salable condition. In assessing
the ultimate realization of inventories, the management makes judgments as to
future demand requirements compared to current or committed inventory levels.
Our reserve requirements generally increase as our projected demand
requirements; or decrease due to market conditions and product life cycle
changes. The Company estimates the demand requirements based on market
conditions, forecasts prepared by its customers, sales contracts and orders in
hand.
In
addition, the Company estimates net realizable value based on intended use,
current market value and inventory ageing analysis. The Company writes down
inventories for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventories and their estimated market value
based upon assumptions about future demand and market
conditions.
F-16
Property, Plant and
Equipment
Property,
plant and equipment are recorded at cost. Gains or losses on disposals are
reflected as gain or loss in the year of disposal. Major renewals and
betterments are charged to the property accounts while replacements, maintenance
and repairs, which do not improve or extend the lives of the respective assets,
are expensed in the current period.
Depreciation
for financial reporting purposes is provided using the straight-line method over
the estimated useful lives of assets as set out below.
|
Estimated
Useful Life
|
||
|
Plant
and building
|
20
years
|
|
|
Office
furniture and equipment
|
5
years
|
|
|
Transportation
equipment
|
5
years
|
Land Use
Rights
Land
use right is stated at cost less accumulated
amortization. Amortization is provided using the straight-line method
over the designated terms of the lease of 50 years obtained from the relevant
PRC land authority.
Impairment of Long-Lived
Assets
The
Company accounts for impairment of property and equipment and amortizable
intangible assets in accordance with ASC 360, “Accounting for Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of”, which requires the
Company to evaluate a long-lived asset for recoverability when there is event or
circumstance that indicate the carrying value of the asset may not be
recoverable. An impairment loss is recognized when the carrying
amount of a long-lived asset or asset group is not recoverable (when carrying
amount exceeds the gross, undiscounted cash flows from use and disposition) and
is measured as the excess of the carrying amount over the asset’s (or asset
group’s) fair value. There was no impairment of long-lived assets for
the years ended December 31, 2009 and 2008.
Revenue
Recognition
Retail
sales are recognized at the point of sale to customers, are recorded net of
estimated returns, and exclude value added tax (“VAT”). Whole-sales
to its contracted customers are recognized as revenue at the time the product is
shipped and title passes to the customer on an FOB shipping point
basis.
Cost of
Sales
Cost
of sales includes the cost of merchandise, buying costs, and occupancy
costs.
Advertising
Expense
The
Company expenses cost of advertising, including the cost of TV commercials,
outdoor bulletin boards, promotional materials, and in-store displays as
advertising expense, when incurred. Advertising expenses included in
selling, general and administrative expenses were $87,966 and $57,660 for the
years ended December 31, 2009 and 2008, respectively.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740 “Income
Taxes”. ASC 740 requires an asset and liability approach for
financial accounting and reporting for income taxes and allows recognition and
measurement of deferred tax assets based upon the likelihood of realization of
tax benefits in future years. Under the asset and liability approach,
deferred taxes are provided for the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation
allowance is provided for deferred tax assets if it is more likely than not
these items will either expire before the Company is able to realize their
benefits, or that future deductibility is uncertain. There was no
deferred tax asset or liability for the years ended December 31, 2009 and
2008.
F-17
Value Added
Taxes
The
Company is subject to value added tax (“VAT”) for selling
merchandise. The applicable VAT rate is 17% for products sold in the
PRC. The amount of VAT liability is determined by applying the
applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT
paid on purchases made with the relevant supporting invoices (input
VAT). Under the commercial practice of the PRC, the Company pays VAT
based on tax invoices issued. The tax invoices may be issued
subsequent to the date on which revenue is recognized, and there may be a
considerable delay between the date on which the revenue is recognized and the
date on which the tax invoice is issued. In the event that the PRC
tax authorities dispute the date on which revenue is recognized for tax
purposes, the PRC tax office has the right to assess a penalty based on the
amount of the taxes which are determined to be late or deficient, and will be
expensed in the period if and when a determination is made by the tax
authorities that a penalty is due.
VAT on
sales and VAT on purchases amounted to $3,038,726 and $83,851, respectively, for
the year ended December 31, 2009. VAT on sales and VAT on purchases
amounted to $2,405,548 and $81,464, respectively, for the year ended December
31, 2008. Sales and purchases are recorded net of VAT collected and
paid as the Company acts as an agent for the government.
Fair Value of Financial
Instruments
ASC
820 “Fair Value Measurements and Disclosures”, adopted January 1, 2008, defines
fair value, establishes a three-level valuation hierarchy for disclosures of
fair value measurement and enhances disclosure requirements for fair value
measures. The carrying amounts reported in the balance sheets for current
receivables and payables qualify as financial instruments. Management concluded
the carrying values are a reasonable estimate of fair value because of the short
period of time between the origination of such instruments and their expected
realization and if applicable, their stated interest rate approximates current
rates available. The three levels are defined as
follows:
l Level
1 - inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets.
l Level
2 - inputs to the valuation methodology include quoted prices for similar assets
and liabilities in active markets, and inputs that are observable for the assets
or liability, either directly or indirectly, for substantially the full term of
the financial instruments.
l Level
3 - inputs to the valuation methodology are unobservable and significant to the
fair value.
It is
management’s opinion that as of December 31, 2009 and 2008, the estimated fair
values of the financial instruments were not materially different from their
carrying values as presented on the balance sheets. This is attributed to the
short maturities of the instruments (less than two years) and that interest
rates on the borrowings approximately those that would have been available for
loans of similar remaining maturity and risk profile at respective balance sheet
dates. The carrying amounts of the loans approximately their fair values because
the applicable interest rates approximate current market rates.
Recent Accounting
Pronouncements
Fair Value Measurements and
Disclosures (Included in ASC 820, previously FSP No. 157-4, “Determining Whether
a Market is Not Active and a Transaction Is Not
Distressed”). FSP No. 157-4 clarifies when markets are
illiquid or that market pricing may not actually reflect the “real” value of an
asset. If a market is determined to be inactive and market price is
reflective of a distressed price then an alternative method of pricing can be
used, such as a present value technique to estimate fair value. FSP
No. 157-4 identifies factors to be considered when determining whether or not a
market is inactive. FSP No. 157-4 would be effective for interim and
annual periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009 and shall be applied
prospectively. The adoption of this standard had no material effect
on the Company's financial statements.
F-18
Interim Disclosures about Fair Value
of Financial Instruments (Included in ASC 825 “Financial Instruments”,
previously FSP SFAS No. 107-1). This guidance requires that
the fair value disclosures required for all financial instruments within the
scope of SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”,
be included in interim financial statements. This guidance also
requires entities to disclose the method and significant assumptions used to
estimate the fair value of financial instruments on an interim and annual basis
and to highlight any changes from prior periods. FSP 107-1 was
effective for interim periods ending after September 15, 2009. The
adoption of FSP 107-1 had no material impact on the Company’s financial
statements.
Consolidation of Variable Interest
Entities – Amended (To be included in ASC 810 “Consolidation”, previously SFAS
167 “Amendments to FASB Interpretation No. 46(R)”). SFAS 167 amends FASB
Interpretation No. 46 (revised December 2003), “Consolidation of Variable
Interest Entities,” to require an enterprise to perform an analysis to determine
the primary beneficiary of a variable interest entity; to require ongoing
reassessments of whether an enterprise is the primary beneficiary of a variable
interest entity and to eliminate the quantitative approach previously required
for determining the primary beneficiary of a variable interest
entity. SFAS 167 also requires enhanced disclosures that will provide
users of financial statements with more transparent information about an
enterprise’s involvement in a variable interest entity. SFAS 167 is
effective for the first annual reporting period beginning after November 15,
2009 and will be effective for us as of January 1, 2010. The
management is in the process of evaluating the impact of adopting this standard
on the Company’s financial statements.
FASB Accounting Standards
Codification (Accounting Standards Update “ASU” 2009-1). In June 2009,
the Financial Accounting Standard Board (“FASB”) approved its Accounting
Standards Codification (“Codification”) as the single source of authoritative
United States accounting and reporting standards applicable for all
non-governmental entities, with the exception of the SEC and its
staff. The Codification is effective for interim or annual financial
periods ending after September 15, 2009 and impacts our financial statements as
all future references to authoritative accounting literature will be referenced
in accordance with the Codification. There have been no changes to
the content of our financial statements or disclosures as a result of
implementing the Codification.
In
August 2009, the FASB issued Accounting Standards Update No. 2009-05 (“ASC Update 2009-05”), an
update to ASC 820, Fair Value Measurements and Disclosures. This
update provides amendments to reduce potential ambiguity in financial reporting
when measuring the fair value of liabilities. Among other provisions,
this update provides clarification that in circumstances in which a quoted price
in an active market for the identical liability is not available, a reporting
entity is required to measure fair value using one or more of the valuation
techniques described in ASC Update 2009-05. ASC Update 2009-05 will
become effective for the Company’s annual financial statements for the year
ended December 31, 2009. The adoption of this standard had no
material effect on the Company's financial statements.
In
October 2009, the FASB issued Accounting Standards Update, 2009-13, Revenue
Recognition (Topic 605) “Multiple Deliverable Revenue
Arrangements - A Consensus of the FASB Emerging Issues Task
Force”. This update provides application guidance on whether
multiple deliverables exist, how the deliverables should be separated and how
the consideration should be allocated to one or more units of
accounting. This update establishes a selling price hierarchy for
determining the selling price of a deliverable. The selling price
used for each deliverable will be based on vendor-specific objective evidence,
if available, third-party evidence if vendor-specific objective evidence is not
available, or estimated selling price if neither vendor-specific or third-party
evidence is available. The Company will be required to apply this
guidance prospectively for revenue arrangements entered into or materially
modified after January 1, 2011; however, earlier application is
permitted. The management is in the process of evaluating the impact
of adopting this standard on the Company’s financial
statements.
In
December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of
Financial Assets. This Accounting Standards Update amends the FASB Accounting
Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140. The amendments
in this Accounting Standards Update improve financial reporting by eliminating
the exceptions for qualifying special-purpose entities from the consolidation
guidance and the exception that permitted sale accounting for certain mortgage
securitizations when a transferor has not surrendered control over the
transferred financial assets. In addition, the amendments require
enhanced disclosures about the risks that a transferor continues to be exposed
to because of its continuing involvement in transferred financial assets.
Comparability and consistency in accounting for transferred financial assets
will also be improved through clarifications of the requirements for isolation
and limitations on portions of financial assets that are eligible for sale
accounting. The management is in the process of evaluating the impact
of adopting this standard on the Company’s financial
statements.
F-19
In
December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in this Accounting Standards Update
replace the quantitative-based risks and rewards calculation for determining
which reporting entity, if any, has a controlling financial interest in a
variable interest entity with an approach focused on identifying which reporting
entity has the power to direct the activities of a variable interest entity that
most significantly impact the entity’s economic performance and (1) the
obligation to absorb losses of the entity or (2) the right to receive benefits
from the entity. An approach that is expected to be primarily
qualitative will be more effective for identifying which reporting entity has a
controlling financial interest in a variable interest entity. The
amendments in this Update also require additional disclosures about a reporting
entity’s involvement in variable interest entities, which will enhance the
information provided to users of financial statements. The management
is in the process of evaluating the impact of adopting this standard on the
Company’s financial statements.
In
January 2010, FASB issued ASU
No. 2010-01- Accounting for Distributions to Shareholders with Components of
Stock and Cash. The amendments in this Update clarify that the
stock portion of a distribution to shareholders that allows them to elect to
receive cash or stock with a potential limitation on the total amount of cash
that all shareholders can elect to receive in the aggregate is considered a
share issuance that is reflected in EPS prospectively and is not a stock
dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per
Share). The management is in the process of evaluating the
impact of adopting this standard on the Company’s financial
statements.
In
January 2010, FASB issued ASU
No. 2010-02 – Accounting and Reporting for Decreases in Ownership of a
Subsidiary – a Scope Clarification. The amendments in this
Update affect accounting and reporting by an entity that experiences a decrease
in ownership in a subsidiary that is a business or nonprofit
activity. The amendments also affect accounting and reporting by an
entity that exchanges a group of assets that constitutes a business or nonprofit
activity for an equity interest in another entity. The amendments in this
update are effective beginning in the period that an entity adopts SFAS No. 160,
“Non-controlling Interests in Consolidated Financial Statements – An Amendment
of ARB No. 51.” If an entity has previously adopted SFAS No.160 as of
the date the amendments in this update are included in the Accounting Standards
Codification, the amendments in this update are effective beginning in the first
interim or annual reporting period ending on or after December 15,
2009. The amendments in this update should be applied retrospectively
to the first period that an entity adopted SFAS No. 160. The management
does not expect the adoption of this ASU to have a material impact on the
Company’s financial statements.
In
January 2010, FASB issued ASU
No. 2010-06 – Improving Disclosures about Fair Value
Measurements. This update provides amendments to Subtopic
820-10 that requires new disclosure as follows: 1) Transfers in and out of
Levels 1 and 2. A reporting entity should disclose separately the
amounts of significant transfers in and out of Level 1 and Level 2 fair value
measurements and describe the reasons for the transfers. 2)
Activity in Level 3 fair value measurements. In the reconciliation for
fair value measurements using significant unobservable inputs (Level 3), a
reporting entity should present separately information about purchases, sales,
issuances, and settlements (that is, on a gross basis rather than as one net
number). This update provides amendments to Subtopic 820-10 that
clarifies existing disclosures as follows: 1) Level of
disaggregation. A reporting entity should provide fair value
measurement disclosures for each class of assets and liabilities. A class is
often a subset of assets or liabilities within a line item in the statement of
financial position. A reporting entity needs to use judgment in
determining the appropriate classes of assets and liabilities.
2) Disclosures about inputs and valuation techniques. A
reporting entity should provide disclosures about the valuation techniques and
inputs used to measure fair value for both recurring and nonrecurring fair value
measurements. Those disclosures are required for fair value measurements that
fall in either Level 2 or Level 3. The new disclosures and
clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements. These disclosures are
effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years. The management does not expect the adoption
of this ASU to have a material impact on the Company’s financial
statements.
F-20
NOTE
3 – INVENTORY
As of
December 31, 2009 and 2008, inventory consists of the
following:
|
December
31, 2009
|
December
31, 2008
|
|||||||
|
Finished
goods
|
$ | 344,512 | $ | 189,535 | ||||
|
Total
inventory
|
$ | 344,512 | $ | 189,535 | ||||
NOTE
4 - PREPAID EXPENSES
As of
December 31, 2009 and 2008, the prepaid expenses consisted of the
following:
|
December
31, 2009
|
December
31, 2008
|
|||||||
|
Retail
store rental prepayment
|
$ | 18,778 | $ | 18,778 | ||||
|
Prepaid
to suppliers
|
38,533 | 39,712 | ||||||
|
Total
prepaid expenses
|
$ | 57,311 | $ | 58,490 | ||||
NOTE
5 - PROPERTY, PLANT AND EQUIPMENT
As of
December 31, 2009 and 2008, property, plant and equipment consisted of the
following:
|
December
31, 2009
|
December
31, 2008
|
|||||||
|
Plant
and building
|
$ | 1,096,639 | $ | 731,918 | ||||
|
Office
furniture and equipment
|
24,789 | 12,304 | ||||||
|
Transportation
equipment
|
155,763 | 148,314 | ||||||
|
Total
at cost
|
1,277,191 | 892,536 | ||||||
|
Less:
Accumulated depreciation
|
(346,740 | ) | (289,705 | ) | ||||
|
Total
property, plant and equipment, net
|
$ | 930,451 | $ | 602,831 | ||||
Depreciation
for the years ended December 31, 2009 and 2008 was $57,000 and $50,603
respectively.
NOTE
6 - INTANGIBLE ASSETS
The
Company obtained the right from the relevant PRC land authority for fifty years
to use the land on which the office premises and warehouse of the Company are
situated. As of December 31, 2009 and 2008, intangible assets
consisted of the following:
|
December
31, 2009
|
December
31, 2008
|
|||||||
|
Cost
of land use rights
|
$ | 242,055 | $ | 242,055 | ||||
|
Less:
Accumulated amortization
|
(33,888 | ) | (29,047 | ) | ||||
|
Total
intangible assets, net
|
$ | 208,167 | $ | 213,008 | ||||
F-21
Amortization
expense for the years ended December 31, 2009 and 2008 was $4,838 and $4,757
respectively.
NOTE
7 - SHORT TERM LOANS
Short-term
loans are due to two financial institutions which are normally due within one
year. As of December 31, 2009 and December 31, 2008, the Company’s
short term loans consisted of the following:
|
December
31, 2009
|
December
31, 2008
|
|||||||
|
Jimo
Rural Cooperative Bank of Qingdao (JMRB), two 12-month bank loans both due
in November 2009, bear interest at 10.85% average, secured by third
parties and repaid in November 2009.
|
$ | - | $ | 293,400 | ||||
|
Bank
of Qingdao Jimo Branch (BOQ), 12-month bank loan due in September 2009,
bears interest at 8.25% average, pledged by Company's building and land
use right and repaid in August 2009.
|
- | 410,760 | ||||||
|
JMRB,
two 12-month bank loans both due in November 2010, bears annual interest
at 7.965% average, secured by third parties
|
293,400 | - | ||||||
|
BOQ,
12-month bank loan due in September 2010, bears annual interest at 6.372%
average, pledged by Company's building and land use
right
|
425,430 | - | ||||||
|
Total
short-term debt
|
$ | 718,830 | $ | 704,160 | ||||
The
above indebtedness to JMRB at December 31, 2009 and 2008 has been guaranteed by
two unrelated companies.
NOTE
8 – LONG TERM LOANS
On
December 16, 2009, the Company entered into a 2-year loan agreement with JMRB.
The Company borrowed $249,390 with an annual interest rate equal to 7.02% and is
due in December 2011. The loan is guaranteed by the relatives of Mr. Tao Wang,
the CEO and major shareholder of the Company and is collateralized by the
property of his relatives.
NOTE
9 - RELATED PARTY BALANCES AND TRANSCATIONS
Due from related
party
Due
from related party at December 31, 2008 is receivables from Mr. Tao Wang, the
CEO and major shareholder of the Company in the amount of $4,373,588. Theses
borrowings bear no interest and were repaid in 2009. As of December 31, 2009,
the recorded balance of due from related parties was Nil.
Due to related
party
The
Company borrowed money from Mr. Tao Wang, the CEO and major shareholder of the
Company. These borrowings bear no interest and no repayment terms, which is due
on demand. As of December 31, 2009 and December 31, 2008, the balances of such
loans are $104,511 and Nil respectively.
F-22
The
Company declared distribution and paid dividends to the shareholders in 2009.
The balance of dividend payable was $117,360 and Nil as of December 31, 2009 and
2008 respectively, which represented the dividend payable to Mr. Renwei Ma, the
shareholder of the Company.
Related party
transactions
Mr.
Tao Wang entered into the contract with the Company to assume fiscal
responsibilities for all tax liabilities recorded and potential penalties
relating to all tax liabilities before December 31, 2009. As of December 31,
2009 and 2008, the assumed amount was $4,949,466 and $3,799,872, respectively,
which mainly included VAT tax payable and income tax payable. According to PRC
tax law, late or deficient tax payment could subject to significant tax penalty.
On December 25, 2009, the local tax authority in Jimo City issued a “Tax Review
Report”, stating that the tax authority reviewed the Company’s income tax, VAT
tax, stamp tax and invoices for the period between June 2006 and November 2009
and noting that the Company had paid off all its tax liability by December 21,
2009.
During
year 2009, the Company advanced to Mr. Tao Wang with the total amount of
$5,723,550.
During
year 2009, the Company distributed $9,432,810 to its shareholders, Mr. Tao Wang
and Mr. Renwei Ma, in which $4,063,590 was distributed in cash, $5,251,860 was
used to offset advance to Mr. Tao Wang and the remaining $117,360 was the
dividend payable to Mr. Renwei Ma that the Company expects to pay in the first
quarter of 2010.
The
Company leases one of its stores from Mr. Tao Wang under a four-year operating
lease expiring August 2011. For the years ended December 31, 2009 and 2008,
related party rent expense of $17,593 and $17,298, respectively, was included in
total rent expense of the year.
The
Company leases one of its warehouse buildings to Weidong, Liang, brother-in-law
of Mr. Tao Wang, for three years starting May 2008. Per the agreement, the
lessee shall pay equal amount of advertising expense on behalf of the lessor as
the lease payment. For the year ended December 31, 2009 and 2008, the Company
recorded other income of $87,966 and $57,660, respectively, from leasing the
aforementioned building and advertising expense of the same amount
respectively.
NOTE
10 – OPERATING LEASES
The
Company leases store spaces under noncancelable operating leases expiring at
various dates through 2013. Rent expense was $90,165 and $88,652 for the years
ended December 31, 2009 and 2008, respectively.
Future
minimum lease payments at December 31, 2009 are as follows:
|
Year:
|
||||
|
2010
|
86,647 | |||
|
2011
|
50,727 | |||
|
2012
|
8,797 | |||
|
2013
|
4,398 | |||
| $ | 150,569 | |||
NOTE
11 - INCOME TAX
The
Company is governed by the Income Tax Law of the PRC concerning the private-run
enterprises, which are generally subject to tax at a statutory rate of 25% on
income reported in the statutory financial statements after appropriated tax
adjustments in 2009 and 2008 respectively.
|
2009
|
2008
|
|||||||
|
Income
before income taxes
|
$ | 6,758,786 | $ | 4,847,596 | ||||
|
Income
taxes
|
$ | 1,689,697 | $ | 1,211,899 | ||||
F-23
There
is no significant temporary difference between book and tax
income.
The
Company has no United States corporate income tax liabilities as of December 31,
2009 and 2008.
The
following table reconciles the U.S. statutory corporate income rates to the
Company’s effective tax rate for the years ended December 31, 2009 and
2008:
|
2009
|
2008
|
|||||||
|
US
statutory rates
|
34.0 | % | 34.0 | % | ||||
|
Tax
rate difference
|
(9.0 | )% | (9.0 | )% | ||||
|
Tax
per financial statements
|
25.0 | % | 25.0 | % | ||||
NOTE
12 – SHAREHOLDERS’ EQUITY
During
year 2009, the Company distributed $9,432,810 to its shareholders, Mr. Tao Wang
and Mr. Renwei Ma, in which $4,063,590 was distributed in cash, $5,251,860 was
used to offset advance to Mr. Tao Wang and the remaining $117,360 was the
dividend payable to Mr. Renwei Ma that the Company expects to pay in the first
quarter of 2010.
During
year 2008, the Company distributed $1,874,600 to its two owners, Mr. Tao Wang
and Mr. Renwei Ma.
NOTE
13 – COMMITMENTS AND CONTINGECIES
Social insurance for
employees
According
to the prevailing laws and regulations of the PRC, the Company is required to
cover its employees with medical, retirement and unemployment insurance
programs. Management believes that due to the transient nature of its
employees, the Company does not need to provide all employees with such social
insurances, and has paid the social insurances for the Company’s employees who
have completed three months’ continuous employment with the
Company.
In the
event that any current or former employee files a complaint with the PRC
government, the Company may be subject to making up the social insurances as
well as administrative fines. As the Company believes that these fines
would not be material, no provision has been made in this
regard.
Guarantees
At
December 31, 2009, we had two outstanding guarantees provided to two unrelated
companies for the amount of $293,400 and $146,700, respectively. The two
unrelated companies also provided guarantees to us for a bank loan amounted
$293,400 (Note 7).
Tax
liabilities
The
tax authority of the PRC Government conducts periodic and ad hoc tax filing
reviews on business enterprises operating in the PRC after those enterprises had
completed their relevant tax filings, hence the Company’s tax filings may not be
finalized. It is therefore uncertain as to whether the PRC tax authority
may take different views about the Company’s tax filings which may lead to
additional tax liabilities.
Mr.
Tao Wang entered into the contract with the Company to assume fiscal
responsibilities for all tax liabilities recorded and potential penalties
relating to all the tax liabilities before December 31, 2009. As of
December 31, 2009 and 2008, the assumed amount was $4,949,466 and $3,799,872,
respectively, which mainly included VAT tax payable and income tax payable.
According to PRC tax law, late or deficient tax payment could subject to tax
penalty. On December 25, 2009, the local tax authority in Jimo City issued a
“Tax Review Report”, stating that the tax authority reviewed the Company’s
income tax, VAT tax, stamp tax and invoices for the period between June 2006 and
November 2009 and noting that the Company had paid off all its tax liability by
December 21, 2009.
F-24
NOTE
14 - OPERATING RISKS
(a)
Country
risk
The
Company has significant investments in the PRC. The operating results of the
Company may be adversely affected by changes in the political and social
conditions in the PRC and by changes in Chinese government policies with respect
to laws and regulations, anti-inflationary measures, currency conversion and
remittance abroad, and rates and methods of taxation, among other things. The
Company can give no assurance that those changes in political and other
conditions will not result in a material adverse effect upon the Company’s
business and financial condition.
(b)
Exchange
risk
The
Company cannot guarantee the Renminbi, US dollar exchange rate will remain
steady, therefore the Company could post the same profit for two comparable
periods and post higher or lower profit depending on exchange rate of Renminbi
and US dollars. The exchange rate could fluctuate depending on
changes in the political and economic environments without
notice.
(c)
Interest
risk
The
Company is exposed to interest rate risk arising from short-term variable rate
borrowings from time to time. The Company’s future interest expense will
fluctuate in line with any change in borrowing rates. The Company
does not have any derivative financial instruments as of December 31, 2009 and
2008 and believes its exposure to interest rate risk is not
material.
NOTE
15 – CONCENTRATION
During
the years ended December 31, 2009 and 2008, the sales generated by the Company’s
owned stores accounted for 15.6% and 15% of total sales,
respectively.
NOTE
16 - SUBSEQUENT EVENTS
On
February 12, 2010, the Company entered into and closed a Share Purchase and
Exchange Agreement (the “Exchange Agreement”) with Datone, Inc., a Delaware
public shell company. Pursuant to the Exchange Agreement, Datone, Inc. acquired
all of the outstanding shares of the Company. In exchange, Datone, Inc. issued
to the Company shareholders, their designees or assigns, 10,000 shares of its
Series A Preferred stock, which constituted 97% of its issued and outstanding
capital stock on an as-converted to common stock basis as of and immediately
after the consummation of the transactions contemplated by the Exchange
Agreement Therefore, the Company became a wholly-owned subsidiary of Datone,
Inc. The share exchange resulted in a change in control of Datone, Inc. The
transaction is deemed as a reverse merger and the Company is deemed as the
accounting acquirer.
The
Company obtained an eleven-month loan from JMRB in January 2010, with principal
amount of $440,100 bearing monthly interest of 0.66375% and matures in December
2010.
F-25
UNAUDITED
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER
31, 2009
GLORY
REACH INTERNATIONAL LIMITED
|
GLORY
REACH
|
PRO-FORMA
|
|||||||||||||||||||
|
INTERNATIONAL
|
PRO-FORMA
|
CONSOLIDATED
|
||||||||||||||||||
|
LIMITED
|
DATONE,
INC
|
ADJUSTMENTS
|
BALANCE
SHEET
|
|||||||||||||||||
|
ASSETS
|
||||||||||||||||||||
|
Current
assets
|
||||||||||||||||||||
|
Cash
|
$ | 61,131 | $ | - | $ | - | $ | 61,131 | ||||||||||||
|
Accounts
receivable
|
98,962 | 25,046 | (25,046 | ) | a | 98,962 | ||||||||||||||
|
Inventories
|
344,512 | - | - | 344,512 | ||||||||||||||||
|
Prepaid
expenses
|
57,311 | - | - | 57,311 | ||||||||||||||||
|
Due
from related party
|
- | - | - | - | ||||||||||||||||
|
Total
current assets
|
561,916 | 25,046 | (25,046 | ) | a | 561,916 | ||||||||||||||
|
Property,
plant and equipment, net
|
930,451 | 5,016 | (5,016 | ) | a | 930,451 | ||||||||||||||
|
Intangible
assets
|
208,167 | - | - | 208,167 | ||||||||||||||||
|
Total
Assets
|
$ | 1,700,534 | $ | 30,062 | $ | (30,062 | ) | $ | 1,700,534 | |||||||||||
|
LIABILITIES AND SHAREHOLDERS'
EQUITY
|
||||||||||||||||||||
|
Current
liabilities
|
||||||||||||||||||||
|
Accounts
payable
|
$ | 15,727 | $ | 118,252 | $ | (118,252 | ) | a | $ | 15,727 | ||||||||||
|
Accounts
payable - related parties
|
- | 2,095 | (2,095 | ) | a | - | ||||||||||||||
|
Bank
overdraft
|
- | 8,402 | (8,402 | ) | a | - | ||||||||||||||
|
Accrued
liabilities
|
- | 76,102 | (76,102 | ) | a | - | ||||||||||||||
|
Taxes
payable
|
2,627 | - | - | 2,627 | ||||||||||||||||
|
Due
to related parties
|
221,871 | - | - | 221,871 | ||||||||||||||||
|
Short-term
debt - related parties
|
- | 434,724 | (434,724 | ) | a | - | ||||||||||||||
|
Short-term
loans
|
718,830 | - | - | 718,830 | ||||||||||||||||
|
Total
current liabilities
|
959,055 | 639,575 | (639,575 | ) | 959,055 | |||||||||||||||
|
Long-term
debt
|
249,390 | - | - | 249,390 | ||||||||||||||||
|
Total
Liabilities
|
$ | 1,208,445 | $ | 639,575 | $ | (639,575 | ) | $ | 1,208,445 | |||||||||||
|
Shareholders'
Equity
|
||||||||||||||||||||
|
Convertible
series A preferred stock, 1,000,000 authorized, 10,000 shares issued and
outstanding, par value $.0001
|
- | - | 1 | c | 1 | |||||||||||||||
|
Common
Stock
|
1,290 | 496 | (1,290 | ) | b | 496 | ||||||||||||||
|
Additional
paid-in capital
|
319,190 | 1,754,585 | (1,753,792 | ) | b | 319,983 | ||||||||||||||
|
Accumulated
other comprehensive income
|
440,775 | - | - | 440,775 | ||||||||||||||||
|
Retained
earnings
|
(269,166 | ) | (2,364,594 | ) | 2,364,594 | b | (269,166 | ) | ||||||||||||
|
Total
Shareholders' Equity
|
492,089 | (609,513 | ) | 609,513 | 492,089 | |||||||||||||||
|
Total
Liabilities and Shareholders' Equity
|
$ | 1,700,534 | $ | 30,062 | $ | (30,062 | ) | $ | 1,700,534 | |||||||||||
The
accompanying notes are an integral part of these financial
statements.
F-26
|
UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATION
|
|
FOR THE YEAR ENDED DECEMBER 31,
2009
|
|
GLORY REACH INTERNATIONAL
LIMITED
|
|
PRO-FORMA
|
|||||||||||||||||
|
GLORY
REACH
|
CONSOLIDATED
|
||||||||||||||||
|
INTERNATIONAL
|
PRO-FORMA
|
STATEMENT
OF
|
|||||||||||||||
|
LIMITED
|
DATONE,
INC
|
ADJUSTMENTS
|
OPERATION
|
||||||||||||||
|
Net
sales
|
$ | 17,863,891 | $ | 116,439 | $ | (116,439 | ) |
a
|
$ | 17,863,891 | |||||||
|
Cost of
sales
|
10,162,778 | 30,687 | (30,687 |
)
|
a
|
10,162,778 | |||||||||||
|
Gross
profit
|
7,701,113 | 85,752 | (85,752 | ) | 7,701,113 | ||||||||||||
|
Operating
expenses:
|
|||||||||||||||||
|
Selling, general and
administrative expenses
|
907,807 | 173,064 | - | 1,080,871 | |||||||||||||
|
Depreciation and amortization
expense
|
61,838 | - | - | 61,838 | |||||||||||||
|
Profit from
operations
|
6,731,468 | (87,312 | ) | (85,752 | ) | 6,558,404 | |||||||||||
|
Other income
(expenses):
|
|||||||||||||||||
|
Other
income
|
87,966 | 4,845 | - | 92,811 | |||||||||||||
|
Interest
income
|
1,144 | - | - | 1,144 | |||||||||||||
|
Interest
expense
|
(61,792 | ) | (61,923 | ) | - | (123,715 | ) | ||||||||||
|
Income before income
taxes
|
6,758,786 | (144,390 | ) | (85,752 | ) | 6,528,644 | |||||||||||
|
Income
taxes
|
1,689,697 | - | - | 1,689,697 | |||||||||||||
|
Net
income
|
$ | 5,069,089 | $ | (144,390 | ) | $ | (85,752 | ) | $ | 4,838,947 | |||||||
|
Other comprehensive
income
|
|||||||||||||||||
|
Foreign currency
translation
|
3,110 | - | - | 3,110 | |||||||||||||
|
Comprehensive
income
|
$ | 5,072,199 | $ | (144,390 | ) | $ | (85,752 | ) | $ | 4,842,057 | |||||||
The accompanying notes are an
integral part of these financial statements.
F-27
NOTES
TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1
– BASIS OF PRESENTATION
In
February, 2010, Glory Reach International Limited (the “Company”) completed a
reverse acquisition transaction through a share exchange with Datone, Inc.
(“Datone”), whereby Datone acquired 100% of the issued and outstanding capital
stock of the Company in exchange for 10,000 shares of the Series A Convertible
Preferred Stock of Dadone. As a result of the reverse acquisition, the Company
became Datone’s wholly-owned subsidiary and the former shareholders of the
Company became controlling stockholders of Datone. The share exchange
transaction with Datone was treated as a reverse acquisition, with the Company
as the accounting acquirer and Datone as the acquired party.
Consequently,
the assets and liabilities and the historical operations that will be reflected
in the consolidated financial statements for periods prior to the Share Exchange
Agreement will be those of the Company and will be recorded at the historical
cost basis. After the completion of the Share Exchange Agreement, the
Company’s consolidated financial statements will include the assets and
liabilities of the Company and Datone, the historical operations of the Company
and the operations of Datone from the closing date of the Share Exchange
Agreement.
These
pro forma consolidated financial statements are prepared assuming the above
transaction occurred on December 31, 2009 (as to the balance sheet) and on
January 1, 2009 (as to the income statements).
Audited
financial statements of the Company and Datone have been used in the preparation
of these pro forma consolidated financial statements. These pro forma
consolidated financial statements should be read in conjunction with the
historical financial statements of Datone and the Company.
Note 2
– PRO FORMA ASSUMPTIONS AND ADJUSTMENTS
|
(a)
|
To
reflect the spinoff of Datone, Inc.’s assets and liabilities to DT
Communications, Inc. As part of the agreement, the assets and liabilities
of Datone, Inc. will be spun off to DT Communications, Inc. after the
reverse merger.
|
|
(b)
|
To
eliminate the equity of the accounting acquiree, Datone, Inc., and to
reflect the recapitalization of the common stock and additional paid in
capital of the Company as a result of the reverse
merger.
|
|
(c)
|
To
reflect the issuance of the convertible Series A preferred stock of 10,000
shares per the Share Exchange
Agreement.
|
F-28
WHERE
YOU CAN FIND MORE INFORMATION
We file
annual, quarterly and special reports, proxy statements and other information
with the SEC. The periodic reports and other information we have filed with the
SEC, may be inspected and copied at the SEC’s Public Reference Room at 100 F
Street, N.E., Washington DC 20549. You may obtain information as to the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC also maintains a Web site that contains reports, proxy statements and other
information about issuers, like the Company, who file electronically with the
SEC. The address of that site is www.sec.gov. Copies of these documents may also
be obtained by writing our secretary at the address specified
above.
F-29
Appendix
A
CERTIFICATE
OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
DATONE,
INC.
The
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware does hereby certify:
FIRST: That by
unanimous written consent of the Board of Directors of Datone, Inc. (the
“Corporation”) resolutions were duly adopted setting forth a proposed amendment
of the Corporation’s Certificate of Incorporation, declaring said amendment to
be advisable and requesting a majority of the stockholders of the Corporation to
give their consent in writing thereto. The resolutions setting forth
the proposed amendments are as follows:
RESOLVED, that Article I of
the Certificate of Incorporation of the Corporation be amended and restated to
read as follows:
The name
of the corporation is “Qingdao Footwear, Inc.”
RESOLVED, that Article IV of
the Certificate of Incorporation of the Corporation be amended by adding the
following paragraph at the end thereof:
“Effective
as of the filing date of this Certificate of Amendment with the Secretary of
State of the State of Delaware the outstanding shares of common stock of the
Corporation on the basis that 27 of such shares of common stock shall become one
(1) share of common stock without changing the par value of the shares of the
Corporation (the “Reverse Split”); provided that no fractional shares of the
Corporation shall be issued in connection with the Reverse Split and the number
of shares to be received by a stockholder shall be rounded up to the nearest
whole number of shares in the event that such stockholder would otherwise be
entitled to receive a fractional share as a result of the Reverse
Split.”
SECOND: That thereafter,
pursuant to resolution of its Board of Directors, a majority of the stockholders
of said corporation gave their consent in writing to the preceding resolutions
in lieu of meeting of stockholders pursuant to Section 228 of the General
Corporation Law of the State of Delaware.
THIRD: That said
amendments were duly adopted in accordance with the provisions of Section 242 of
the General Corporation Law of the State of Delaware.
IN
WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to
Certificate of Incorporation to be signed this _____ day of April,
2010.
|
By:
|
||
|
Tao
Wang, Chief Executive
Officer
|