Form 10-Q Home System Group

Quarterly report pursuant to section 13 and 15(d)

What is Form 10-Q?
  • Accession No.: 0001144204-07-025729 Act: 34 File No.: 000-49770 Film No.: 07852621
  • CIK: 0001172319
  • Submitted: 2007-05-15
  • Period of Report: 2007-03-31

10-Q HTML

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 2007
 


o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT  
For the transition period from
 
to
 

Commission file number
000-49770


HOME SYSTEM GROUP
(Exact name of small business issuer as specified in its charter)
 
Nevada
(State or other jurisdiction of incorporation or organization)
43-1954776
(IRS Employer Identification No.)
 
No. 5A, Zuanshi Ge, Fuqiang Yi Tian Ming Yuan,
Fu Tian Qu, Shenzhen City, P.R. China 518000
 
___________________________________________
(Address of principal executive offices)
 
86 755 83570142
(Issuer’s telephone number)
 
Indicate by checkmark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

o Large accelerated filer     o Accelerated filer     x Non-accelerated filer

 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No x

As of May 14, 2007 the registrant had 62,447,949 shares of common stock outstanding.
 

 
 

 



HOME SYSTEM GROUP
INDEX




 
 
 
Page No.
Part 1 - Financial Information
 
 
Item 1. Financial Statements
1
 
 
Balance Sheets as of March 31, 2007 (unaudited)
and December 31, 2006
 
4
 
Statements of Operations for the Three Months
Ended March 31, 2007 and March 31, 2006 (unaudited) 
 
5
 
Statements of Changes in Shareholders’ Equity for the Three Months
ended March 31, 2007 (unaudited)
 
6
 
Statements of Cash Flows for the Three Months ended March 31, 2007 and 2006 (unaudited)
7
 
Notes to Financial Statements 
8-12
 
13
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
15
 
Item 4. Controls and Procedures
15
 
PART II - OTHER INFORMATION
16
 
Item 1. Legal Proceedings
16
 
Item 1A. Risk Factors
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
19
 
Item 3. Defaults Upon Senior Securities
19
 
Item 4. Submission of Matters to a Vote of Security Holders
19
 
Item 5. Other Information
19
 
Item 6. Exhibits
20
   
SIGNATURES
21
   

Exhibit 31.1
Certification by Li Wei Qiu, Chief Executive Officer, pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities and Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002 for the quarterly period ended March 31, 2007.
 
Exhibit 31.2
Certification by Kin Wai Cheung, Chief Financial Officer, pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities and Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the quarterly period ended March 31, 2007.
 
Exhibit 32.1
Certification by Li Wei Qiu, Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the quarterly period ended March 31, 2007.
 
Exhibit 32.2
Certification by Kin Wai Cheung, Chief Financial Officer pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the quarterly period ended March 31, 2007. 
 
 
 

2


 
PART 1 - Financial Information
 
 
The information in this report is for the three month period ended March 31, 2007, is unaudited but includes all adjustments (consisting only of normal recurring accruals, unless otherwise indicated) which Home System Group (the “Company”) considers necessary for a fair presentation of the financial position, results of operations, changes in stockholders’ equity and cash flows for those periods.
 
The interim financial statements present the balance sheet, statements of operations and cash flows of the Company. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States.
 
The interim financial information is unaudited. In the opinion of management, all adjustments necessary to present fairly the financial position as of March 31, 2007 and the results of operations and cash flows presented herein have been included in the financial statements. Interim results are not necessarily indicative of results of operations for the full year.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.


3



HOME SYSTEM GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2007 AND DECEMBER 31, 2006


   
March 31,
 
December 31,
 
   
2007
 
2006
 
   
(Unaudited)
 
(Audited)
 
ASSETS
         
           
CURRENT ASSETS
         
Cash
 
$
962,101
 
$
6,012
 
Accounts receivable
   
5,549,652
   
3,212,160
 
Prepaid expense
   
589,737
   
-
 
Inventory
   
6,220,984
   
2,334,744
 
Trade deposits
   
1,183,420
   
112,824
 
Employee advances
   
-
   
4,391
 
Due from stockholder
   
839,940
   
-
 
Due from related party
   
2,248,066
   
-
 
     
17,593,900
   
5,670,131
 
               
PROPERTY AND EQUIPMENT - Net
   
3,690,234
   
3,684,326
 
               
TOTAL ASSETS
 
$
21,284,134
 
$
9,354,457
 
               
LIABILITIES AND STOCKHOLDERS' EQUITY
             
               
CURRENT LIABILITIES
             
Bank loan
 
$
1,633,284
 
$
-
 
Accounts payable
   
11,940,244
   
2,353,705
 
Accrued expenses
   
696,694
   
389,455
 
Taxes payable
   
219,972
   
122,262
 
Due to directors
   
1,280
   
-
 
Due to related party
   
5,000
   
2,519,898
 
Due to stockholder
   
71,934
   
-
 
               
TOTAL LIABILITIES
   
14,568,408
   
5,385,320
 
               
STOCKHOLDERS' EQUITY
             
               
COMMON STOCK - $0.001 par value; 200,000,000 shares
             
authorized, 62,448,000 shares and 42,500,000 shares
             
issued and outstanding
   
62,448
   
42,500
 
               
PAID-IN CAPITAL
   
6,667,979
   
3,709,025
 
               
NOTE RECEIVABLE FOR STOCK ISSUANCE
   
(900,000
)
 
-
 
               
RETAINED EARNINGS
   
745,881
   
118,249
 
               
CUMULATIVE TRANSLATION ADJUSTMENT
   
139,418
   
99,363
 
               
TOTAL STOCKHOLDERS' EQUITY
   
6,715,726
   
3,969,137
 
               
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
21,284,134
 
$
9,354,457
 
               
See accompanying notes to consolidated financial statements.

4


HOME SYSTEM GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2007
(UNAUDITED)

 
       
NET SALES
 
$
11,716,767
 
         
OPERATING EXPENSES
       
Cost of net sales
   
10,158,754
 
General and administrative expenses
   
555,221
 
     
10,713,975
 
         
INCOME FROM OPERATIONS
   
1,002,792
 
         
OTHER INCOME (EXPENSE)
       
Finance costs
   
-
 
Interest income
   
181
 
     
181
 
INCOME BEFORE INCOME TAXES
   
1,002,973
 
         
INCOME TAXES - CURRENT
   
71,092
 
         
NET INCOME
 
$
931,881
 
         
BASIC AND DILUTED EARNINGS
       
PER SHARE
 
$
0.02
 
         

 

See accompanying notes to consolidated financial statements.

5


HOME SYSTEM GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED MARCH 31, 2007









   
Numer of
Shares of
         
Note Receviable
     
Cumulative
     
   
Common
 
Common
 
Paid-in
 
for Stock
 
Retained
 
Translation
     
   
 Stock
 
Stock
 
Capital
 
Issuance
 
Earnings
 
Adjustment
 
Total
 
                               
BALANCE AT DECEMBER 31, 2006
   
10,000
 
$
1,285
 
$
3,750,240
 
$
-
 
$
118,249
 
$
99,363
 
$
3,969,137
 
                                             
Retroactive recapitalization
   
42,490,000
   
41,215
   
(41,215
)
 
-
   
-
   
-
   
-
 
                                             
BALANCE AT DECEMBER 31, 2006
   
42,500,000
   
42,500
   
3,709,025
   
-
   
118,249
   
99,363
   
3,969,137
 
                                             
Issuance of common stock at merger and note
                                           
receivable acquired in merger
   
19,797,949
   
19,798
   
5,032,355
   
(900,000
)
 
-
   
-
   
4,152,153
 
                                             
Issuance of common stock for prepaid expenses
   
150,000
   
150
   
622,350
   
-
   
-
   
-
   
622,500
 
                                             
Dividend distribution upon merger
   
-
   
-
   
(2,695,751
)
 
-
   
(304,249
)
 
-
   
(3,000,000
)
                                             
Cumulative translation adjustment
   
-
   
-
   
-
   
-
   
-
   
40,055
   
40,055
 
                                             
Net income for the three months ended March 31, 2007
   
-
   
-
   
-
   
-
   
931,881
   
-
   
931,881
 
                                             
BALANCE AT MARCH 31, 2007 (UNAUDITED)
   
62,447,949
 
$
62,448
 
$
6,667,979
 
$
(900,000
)
$
745,881
 
$
139,418
 
$
6,715,726
 
                                             

 

See accompanying notes to consolidated financial statements.

6


HOME SYSTEM GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2007
(UNAUDITED)


CASH FLOWS FROM OPERATING ACTIVITIES
     
Net income
 
$
931,881
 
Adjustments to reconcile net income
       
to net cash used in operating activities
       
Depreciation
   
64,419
 
Change in assets and liabilities, net of effects from acquisition:
       
(Increase) decrease in assets
       
Accounts receivable
   
1,319,154
 
Prepaid expense
   
72,763
 
Inventory
   
(3,886,240
)
Trade deposits
   
1,472,569
 
Employee advances
   
4,391
 
Increase in liabilities
       
Accounts payable and accrued expenses
   
7,195,084
 
Taxes payable
   
97,710
 
         
Net cash provided by operating activities
   
7,271,731
 
         
CASH FLOWS FROM INVESTING ACTIVITIES
       
Capital expenditures
   
(69,331
)
Cash acquired in merger
   
55,980
 
         
Net cash used in by investing activities
   
(13,351
)
         
CASH FLOWS FROM FINANCING ACTIVITIES
       
Increase in due from stockholder
   
(839,940
)
Net repayments of bank loans
   
(111,717
)
Net decrease in due to related party
   
(2,422,626
)
Increase in due to stockholder
   
71,934
 
Dividend distribution for acquisition
   
(3,000,000
)
         
Net cash used in financing activities
   
(6,302,349
)
         
EXCHANGE RATE EFFECT ON CASH
   
58
 
         
NET INCREASE IN CASH
   
956,089
 
         
CASH - BEGINNING OF PERIOD
   
6,012
 
         
CASH - END OF PERIOD
 
$
962,101
 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
       
INFORMATION
       
Cash paid during the period for:
       
Interest
 
$
82,112
 
         
Income taxes
 
$
51,495
 
         
         

See accompanying notes to consolidated financial statements.

7


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)




NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited consolidated financial statements have been prepared by Home System Group (“HSG”) and Subsidiaries (collectively, the “Company”). These statements include all adjustments (consisting only of their normal recurring adjustments) which management believes necessary for a fair presentation of the statements and have been prepared on a consistent basis using the accounting policies described in the Form 10-KSB for the year ended December 31, 2006 (“2006 Form 10-KSB”). Certain financial information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company firmly believes that the accompanying disclosures are adequate to make the information presented not misleading. The Notes to Financial Statements included in the 2006 Form 10-KSB should be read in conjunction with the accompanying interim financial statements. The interim operating results for the three months ended March 31, 2007 may not be indicative of operating results expected for the full year.

Basis of Preparation
 
Home System Group, Inc. (“HSGI”) was incorporated with limited liability in The British Virgin Islands on February 28, 2003. HSGI, with a minimum capitalization of $2, was inactive until June 30, 2006 when HSGI acquired all the issued and outstanding stock of Oceanic International (HK) Limited (“Oceanic”). Oceanic is an operating company organized under the laws of Hong Kong on June 23, 2004 for the purpose of trading gas grills, home electronic appliances and bin racks. Since the ownership of HSGI and Oceanic were the same, the merger was accounted for as a transaction between entities under common control, whereby HSGI recognized the assets and liabilities transferred at their carrying amounts.

On August 4, 2006, Supreme Realty Investments, Inc. (“Supreme”), a public shell company, acquired HSGI. Under the terms of the merger agreement, the stockholders of HSGI received 8,000,000 (post reverse stock split) shares of common stock of Supreme for 100% of HSGI’s outstanding common stock. Following the merger, the Company changed its name to Home System Group (“HSG”). Under accounting principles generally accepted in the United States, the share exchange is considered to be a capital transaction in substance, rather than a business combination. That is, the share exchange is equivalent to the issuance of stock by HSGI for the net monetary assets of Supreme, accompanied by a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the share exchange will be identical to that resulting from a reverse acquisition, except no goodwill will be recorded. Under reverse takeover accounting, the post reverse acquisition comparative historical financial statements of the legal acquirer, Supreme, are those of the legal acquiree which are considered to be the accounting acquirer, HSGI. Shares and per share amounts stated have been adjusted to reflect the merger.

Holy (HK) Limited was incorporated in Hong Kong on September 26, 2006 for the purpose of being a holding company. Oceanic Well Profit, Inc. (“Well Profit”), a wholly-owned subsidiary of Holy, was incorporated in the Peoples Republic of China (“PRC”) on April 5, 2006 for the purpose of manufacturing gas grills, home electronic appliances and bin racks.

Holy, with a minimum capitalization of $1,285, was inactive until October 26, 2006 when Holy acquired all the issued and outstanding stock of Well Profit for approximately $3,750,000, the net book value of Well Profit. Since the stockholders of Holy and Well Profit were related, and the control of the merged entity remained with the management of Well Profit, the merger was accounted for as a transaction between entities under common control, whereby Holy recognized the assets and liabilities transferred at their carrying amounts. The consolidated financial statements combine the historical financial statements of Holy and Well Profit as if the merger occurred at the beginning of the periods presented.


8


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)




NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

On January 31, 2007, Home System Group (“HSG”) acquired Holy (HK) Limited and its wholly-owned subsidiary Well Profit (collectively, “Holy”). Under the terms of the merger agreement, the stockholders of Holy received $3,000,000 and 42,500,000 shares of voting common stock of HSG in exchange for 100% of Holy’s outstanding common stock. For accounting purposes, the acquisition has been treated as an acquisition of HSG by Holy and as a recapitalization of Holy. The historical financial statements prior to January 31, 2007 are those of Holy. Share and per share amounts have been retroactively adjusted to reflect the acquisition.

Basis of Consolidation
 
The unaudited consolidated financial statements include the accounts of HSG and its wholly-owned subsidiaries Holy and Oceanic International (HK) Limited (“Oceanic”) (collectively, the “Company”). All material intercompany transactions have been eliminated in consolidation.

Recently Issued Accounting Pronouncements
 
In June 2006, the Financial Accounting Standards Board (“FASB”) issued interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 will be effective for fiscal years beginning after December 15, 2006 and the provisions of FIN 48 will be applied to all tax positions under Statement No. 109 upon initial adoption. The cumulative effect of applying the provisions of this interpretation will be reported as an adjustment to the opening balance of retained earnings for that fiscal year. The Company adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not require an adjustment to the opening balance of retained earnings as of January 1, 2007.


NOTE 2 - REVERSE MERGER

On January 31, 2007, HSG acquired all of the outstanding common stock of Holy. For accounting purposes, the acquisition has been treated as an acquisition of HSG by Holy and as a recapitalization of Holy. The historical financial statements prior to January 31, 2007 are those of Holy. Pro forma information giving effect to the acquisition as if the acquisition took place on January 1, 2007 is as follows:

   
For the Three
 
   
Months Ended
 
   
March 31, 2007
 
       
Net sales
 
$
14,140,917
 
Net income
 
$
1,319,712
 
Basic and diluted earnings per share
 
$
0.02
 




9


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)




NOTE 3 - INVENTORY

Inventory as of March 31, 2007 consists of the following:

       
Raw materials
 
$
778,789
 
Work in process
   
1,101,211
 
Finished goods
   
4,340,984
 
         
   
$
6,220,984
 
         


NOTE 4 - SHIPPING AND HANDLING FEES AND COSTS

The Company follows Emerging Issues Task Force (“EITF”) No. 00-10, Accounting for Shipping and Handling Fees and Costs. The Company does not charge its customers for shipping and handling. The Company classifies shipping and handling costs as part of the cost of goods sold. For the three months ended March 31, 2007, shipping and handling costs were $84,806.


NOTE 5 - DUE FROM STOCKHOLDER

Amount represents an advance to a stockholder of the Company which is expected to be repaid to the Company within the current year.


NOTE 6 - DUE FROM RELATED PARTY

Amount represents money due from a company that is controlled by a director of HSG and arose during normal business transactions. The amount due is unsecured with no stated interest or repayment terms.
 
NOTE 7 - TRADE DEPOSITS

Amount represents deposits held by suppliers to be used for future purchases.
 
NOTE 8 - BANK LOANS

The Company has entered into an agreement with a bank under which the Company maintains an Export Packing Loan credit line at $4,000,000 and a Short Term Revolving Loan of Accounts Receivable Financing (“Short Term Revolving Loan”) of up to $1,600,000. The Short Term Revolving Loan is collateralized by accounts receivable of customers approved by the bank. The loans bear interest at the Singapore Inter-Bank Offered Rate (“SIBOR”) plus 4%. The credit facilities are subject to recourse and are personally guaranteed by the two stockholders of the Company.


10


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)




NOTE 8 - BANK LOANS (Continued)

The bank debt consists of the following as of March 31, 2007:

Short Term Revolving Loans collateralized by $1,633,284 of accounts receivable, with recourse, interest rate of 9.35% at March 31, 2007.
 
$
1,633,284
 
         

There were no Export Packing Loans outstanding as of March 31, 2007.
 

NOTE 9 - DUE TO STOCKHOLDER

Amount represents advances from a stockholder during March 2007. The amount due is unsecured with no stated interest or repayment terms.

 
NOTE 10 - EQUITY

On March 13, 2007, the Company issued 150,000 shares of its common stock for consulting services to be performed from March 13, 2007 through December 31, 2007 valued at $622,500, fair value, which is reflected in prepaid expenses.

 
NOTE 11 - NOTE RECEIVABLE FOR STOCK ISSUANCE

The amount represents a promissory note received on May 4, 2006 for the issuance of 5,500,000 shares (post reverse stock split) of the Company’s common stock. The note receivable is reflected as a contra equity account since the proceeds have not been received as of the issuance of the financial statement. The payment of the promissory note is required when the registration statement covering the 5,500,000 shares is declared effective by the Securities and Exchange Commission.


NOTE 12 - INCOME TAXES

The Company utilizes the asset and liability method of accounting for income taxes in accordance with SFAS No. 109. Holy is considered a foreign venture enterprise. The statutory rate of 27% for a foreign venture enterprise is equivalent to the Company’s effective income tax rate. No Hong Kong Profits Tax has been provided in the financial statements as the business of Oceanic is carried outside Hong Kong and there was no income derived from or arising in Hong Kong during the period.

No provision for deferred taxes has been made as there were no material temporary differences at March 31, 2007.


11



HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)




NOTE 13 - WARRANTY

The Company accrues an estimate of its exposure to warranty claims based on both current and historical product sales data and warranty costs incurred. The Company assesses the adequacy of its recorded warranty liability annually and adjusts the amount as necessary. The warranty liability is included in accrued expenses in the accompanying balance sheet. Changes in the Company’s warranty liability were as follows:

Warranty accrual, beginning of period
 
$
24,025
 
Warranty accrued during the period
   
65,085
 
Adjustments to pre-existing accruals
   
-
 
Actual warranty expenditures
   
(26,223
)
         
   
$
62,887
 
         

NOTE 14 - SUBSEQUENT EVENT

On April 20, 2007, the Company entered into a Share Exchange Agreement (the “Agreement”) pursuant to which Oceanic Well Profit, Inc., a wholly-owned subsidiary of HSG, will acquire 100% of Zhongshan City Juxian Gas Oven Co., Ltd. (“Juxian Gas”) in a stock and cash transaction valued at approximately $14,000,000. Under the Agreement, in exchange of surrendering their shares in Juxian Gas, the Juxian Gas stockholders will receive both stock consideration and cash consideration. The stock consideration consists of 1,000,000 newly issued shares of the Company’s common stock, which were divided proportionally among the Juxian Gas stockholders in accordance with their respective ownership interests in Juxian Gas immediately before the closing of the transaction. The cash consideration consists of $10,000,000 in cash, again divided proportionally among the Juxian Gas stockholders in accordance with their respective ownership interests in Juxian Gas immediately before the closing of the transaction and payable as follows: $5,000,000 due on the first anniversary of the closing of the transaction, and $5,000,000 due on the second anniversary of closing of the transaction. The obligation to pay the cash consideration is evidenced by interest-free promissory notes between the Company and each of the Juxian Gas stockholders.


12

 
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this quarterly report.


The information in this discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties, including statements regarding our capital needs, business strategy and expectations. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expect”, “plan”, “intend”, “anticipate”, “believe”, estimate”, “predict”, “potential” or “continue”, the negative of such terms or other comparable terminology. Actual events or results may differ materially. We disclaim any obligation to publicly update these statements, or disclose any difference between its actual results and those reflected in these statements.



Business Overview

Home System Group (the “Company”), formerly known as Supreme Realty Investment, Inc., was incorporated under the laws of the State of Nevada. On August 4, 2006, the Company entered into an Exchange Agreement with Home System Group, Inc., (“HSGI”) and Oceanic International (“HK”) Limited. HSGI owns all of the issued and outstanding shares of Oceanic International (HK) Limited. HSGI was incorporated under the laws of the British Virgin Islands on February 23, 2003. Oceanic International (HK) Limited was incorporated under the laws of Hong Kong, on June 23, 2004. Oceanic International (HK) Limited is an enterprise integrating the selling, circulation and modern logistics of home appliance products. Oceanic International (HK) Limited establishes strategic partnerships with some of the world famous enterprises. Oceanic International (HK) Limited is the strategic partner of the world well-known home grill manufacture, Nexgrill Industries Inc., in the greater China area. Oceanic International (HK) Limited is also one of the strategic partners of global famous retailer, Whalen Storage, in the greater China area. Products distributed by Oceanic International (HK) Limited have already entered into the US, Germany, France, and Australia markets, and continuously expands to other neighboring countries.

On January 31, 2007, Home System Group (“HSG”) acquired Holy (HK) Limited and its wholly-owned subsidiary Well Profit (collectively, “Holy”). Under the terms of the merger agreement, the stockholders of Holy received $3,000,000 and 42,500,000 shares of voting common stock of HSG in exchange for 100% of Holy’s outstanding common stock. For accounting purposes, the acquisition has been treated as an acquisition of HSG by Holy and as a recapitalization of Holy. The historical financial statements prior to January 31, 2007 are those of Holy. Share and per share amounts have been retroactively adjusted to reflect the acquisition. Oceanic Well Profit, located in Zhongshan City, Guangdong Province China, specializes in producing domestic electronic appliances. The company has a total area of 82.5 acres which includes a new 864,000-square-foot workshop with advanced equipment and a staff of 1,200 people. The company currently has five production lines which produce 450,000 grills, 3 million water pumps, and 2 million sets of tool and hardware cabinets annually.

Since Oceanic Well Profit was incorporated on April 5, 2006 and therefore there were no operations during the three months ended March 31, 2006 for comparison.

Results of Operations for the Year Ended March 31, 2007

Net Sales
 
Net sales for the three months ended March 31, 2007 totaled $11,716,767.
 
Cost of Sales
 
Cost of sales for the three months ended March 31, 2007 totaled $10,158,754 or approximately 86.7% of net sales.
 
Gross Profit Margin

Gross profit margin for the three months ending March 31, 2007 was 13.3%., which close in line with normal gross profit margin. 

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Operating Expense

General and administrative expense for the three months ending March 31, 2007 totaled $555,221 or approximately 4.7% of net sales. The Expense includes bill of lading fee, shipping costs, transportation costs, staff salaries, social security fee, personnel education, labor union expenditure, bank service fee, and bank interest rate.

Income from Operations

Income from operations for the three months ended March 31, 2007 was $1,002,792 or 8.6% of Net Sales.

Interest Expense

Interest expense for the three months ended March 31, 2007 totaled $181.

Net Income

Net income was $931,881 or 8.0% of net Sales for the three months ended March 31, 2007.

Liquidity and Capital Resources

Cash has historically been generated from operations. Operations and liquidity needs are funded primarily through cash flows from operations and short-term borrowings. Cash and cash equivalents were $962,101 at March 31, 2007. Cash flows from operating activities were $7,271,731 for the three-month period ended March 31, 2007. Cash flows from financing activities were ($6, 302,349). We expect that our cash and cash equivalents will be sufficient to satisfy our cash requirements for the next twelve months. On a long-term basis, our liquidity is dependent on successfully executing our business plan, receipt of revenues, and additional infusions of capital through equity and debt financing. Any funds rose from an offering of our equity or debt will be used to continue to develop and execute our business plan. However, there can be no assurance that we will be able to obtain additional equity or debt financing on terms acceptable to us.

Working Capital Requirements 
 
Historically operations and short term financing have been sufficient to meet our cash needs. We believe that we will be able to generate revenues from sales and raise capital through private placement offerings of our equity securities to provide the necessary cash flow to meet anticipated working capital requirements. However, our actual working capital needs for the long and short term will depend upon numerous factors, including operating results, competition, and the availability of credit facilities, none of which can be predicted with certainty. Future expansion will be limited by the availability of financing products and raising capital.

Off-Balance Sheet Arrangements
 
We have never entered into any off-balance sheet financing arrangements and have never established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
 
Our exposure to market risk is currently confined to our short term bank loan. Because we currently do not hedge interest exposure, also we have not used derivative financial instruments; therefore, the interest rate is exposed to fluctuation. If interest rate goes up, it will have adverse effect on the company’s earnings. However, because the short term loan will be matured in a year. We do not believe that an increase would have any significant impact on our bottom line.
 
Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures
 
As of March 31, 2007, the end of the period covered by this report, our Chief Executive Officer and our Chief Financial Officer reviewed and evaluated the effectiveness of the our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)), which are designed to ensure that material information we must disclose in our report filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported on a timely basis, and have concluded, based on that evaluation, that as of such date, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Control over Financial Reporting
 
There was no change in our internal control over financial reporting that occurred during the fiscal quarter covered by this report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION
 
 
 
 
Risks associated with our Common Stock

There is a limited public market for our common stock

There is currently a limited public market for the common stock. Holders of our common stock may, therefore, have difficulty selling their common stock, should they decide to do so. In addition, there can be no assurances that such markets will continue or that any shares of common stock, which may be purchased, may be sold without incurring a loss. Any such market price of the common stock may not necessarily bear any relationship to our book value, assets, past operating results, financial condition or any other established criteria of value, and may not be indicative of the market price for the common stock in the future. Further, the market price for the common stock may be volatile depending on a number of factors, including business performance, industry dynamics, news announcements or changes in general economic conditions.
 
Our common stock may be deemed penny stock with a limited trading market

Our common stock is currently listed for trading in the Over-The-Counter Market on the NASD Electronic Bulletin Board or in the “pink sheets” maintained by the National Quotation Bureau, Inc., which are generally considered to be less efficient markets than markets such as NASDAQ or other national exchanges, and which may cause difficulty in conducting trades and difficulty in obtaining future financing. Further, our securities are subject to the “penny stock rules” adopted pursuant to Section 15 (g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The penny stock rules apply to non-NASDAQ companies whose common stock trades at less than $5.00 per share or which have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years). Such rules require, among other things, that brokers who trade “penny stock” to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade “penny stock” because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. In the event that we remain subject to the “penny stock rules” for any significant period, there may develop an adverse impact on the market, if any, for our securities. Because our securities are subject to the “penny stock rules,” investors will find it more difficult to dispose of our securities. Further, for companies whose securities are traded in the Over-The-Counter Market, it is more difficult: (i) to obtain accurate quotations, (ii) to obtain coverage for significant news events because major wire services, such as the Dow Jones News Service, generally do not publish press releases about such companies, and (iii) to obtain needed capital.



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We do not intend to pay dividends on our common stock

We have never paid dividends in the past and there are no plans for paying dividends in the foreseeable future. We intend to retain earnings, if any, to provide funds for the implementation of our new business plan.  We do not intend to declare or pay any dividends in the foreseeable future.  Therefore, there can be no assurance that holders of common stock will receive any additional cash, stock or other dividends on their shares of common stock until we have funds, which the Board of Directors determines, can be allocated to dividends.

Risks related to doing business in China

Our business operations take place primarily in China. Because Chinese laws, regulations and policies are continually changing, our Chinese operations will face several risks summarized below.

Limitations on Chinese economic market reforms may discourage foreign investment in Chinese businesses 

The value of investments in Chinese businesses could be adversely affected by political, economic and social uncertainties in China. The economic reforms in China in recent years are regarded by China's central government as a way to introduce economic market forces into China. Given the overriding desire of the central government leadership to maintain stability in China amid rapid social and economic changes in the country, the economic market reforms of recent years could be slowed, or even reversed.

Any change in policy by the Chinese government could adversely affect investments in Chinese businesses

Changes in policy could result in imposition of restrictions on currency conversion, imports or the source of suppliers, as well as new laws affecting joint ventures and foreign-owned enterprises doing business in China. Although China has been pursuing economic reforms for the past two decades, events such as a change in leadership or social disruptions that may occur upon the proposed privatization of certain state-owned industries could significantly affect the government's ability to continue with its reform.
 


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We face economic risks in doing business in China 

As a developing nation, China's economy is more volatile than that of developed Western industrial economies. It differs significantly from that of the U.S. or a Western European Country in such respects as structure, level of development, capital reinvestment, resource allocation and self-sufficiency. Only in recent years has the Chinese economy moved from what had been a command economy through the 1970s to one that during the 1990s encouraged substantial private economic activity. In 1993, the Constitution of China was amended to reinforce such economic reforms. The trends of the 1990s indicate that future policies of the Chinese government will emphasize greater utilization of market forces. For example, in 1999 the Government announced plans to amend the Chinese Constitution to recognize private property, although private business will officially remain subordinated to the state-owned companies, which are the mainstay of the Chinese economy. However, there can be no assurance that, under some circumstances, the government's pursuit of economic reforms will not be restrained or curtailed. Actions by the central government of China could have a significant adverse effect on economic conditions in the country as a whole and on the economic prospects for our Chinese operations.

The Chinese legal and judicial system may negatively impact foreign investors

In 1982, the National People's Congress amended the Constitution of China to authorize foreign investment and guarantee the "lawful rights and interests" of foreign investors in China. However, China's system of laws is not yet comprehensive. The legal and judicial systems in China are still rudimentary, and enforcement of existing laws is inconsistent. Many judges in China lack the depth of legal training and experience that would be expected of a judge in a more developed country. Because the Chinese judiciary is relatively inexperienced in enforcing the laws that do exist, anticipation of judicial decision-making is more uncertain than would be expected in a more developed country. It may be impossible to obtain swift and equitable enforcement of laws that do exist, or to obtain enforcement of the judgment of one court by a court of another jurisdiction. China's legal system is based on written statutes; a decision by one judge does not set a legal precedent that is required to be followed by judges in other cases. In addition, the interpretation of Chinese laws may be varied to reflect domestic political changes.

The promulgation of new laws, changes to existing laws and the pre-emption of local regulations by national laws may adversely affect foreign investors. However, the trend of legislation over the last 20 years has significantly enhanced the protection of foreign investment and allowed for more control by foreign parties of their investments in Chinese enterprises. There can be no assurance that a change in leadership, social or political disruption, or unforeseen circumstances affecting China's political, economic or social life, will not affect the Chinese government's ability to continue to support and pursue these reforms. Such a shift could have a material adverse effect on our business and prospects.

The practical effect of the People's Republic of China legal system on our business operations in China can be viewed from two separate but intertwined considerations. First, as a matter of substantive law, the Foreign Invested Enterprise laws provide significant protection from government interference. In addition, these laws guarantee the full enjoyment of the benefits of corporate Articles and contracts to Foreign Invested Enterprise participants. These laws, however, do impose standards concerning corporate formation and governance, which are not qualitatively different from the general corporation laws of the several states. Similarly, the People's Republic of China accounting laws mandate accounting practices, which are not consistent with U.S. Generally Accepted Accounting Principles. China’s accounting laws require that an annual "statutory audit" be performed in accordance with People's Republic of China accounting standards and that the books of account of Foreign Invested Enterprises are maintained in accordance with Chinese accounting laws. Article 14 of the People's Republic of China Wholly Foreign-Owned Enterprise Law requires a Wholly Foreign-Owned Enterprise to submit certain periodic fiscal reports and statements to designated financial and tax authorities, at the risk of business license revocation. Second, while the enforcement of substantive rights may appear less clear than United States procedures, the Foreign Invested Enterprises and Wholly Foreign- Owned Enterprises are Chinese registered companies, which enjoy the same status as other Chinese registered companies in business-to-business dispute resolution. Generally, the Articles of Association provide that all business disputes pertaining to Foreign Invested Enterprises are to be resolved by the Arbitration Institute of the Stockholm Chamber of Commerce in Stockholm, Sweden applying Chinese substantive law. Any award rendered by this arbitration tribunal is, by the express terms of the respective Articles of Association, enforceable in accordance with the "United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958)." Therefore, as a practical matter, although no assurances can be given, the Chinese legal infrastructure, while different in operation from its United States counterpart, should not present any significant impediment to the operation of Foreign Invested Enterprises.
 


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Economic Reform Issues

Although the Chinese government owns the majority of productive assets in China, in the past several years the government has implemented economic reform measures that emphasize decentralization and encourage private economic activity. Because these economic reform measures may be inconsistent or ineffectual, there are no assurances that:

-
We will be able to capitalize on economic reforms;
-
The Chinese government will continue its pursuit of economic reform policies;
-
The economic policies, even if pursued, will be successful;
-
Economic policies will not be significantly altered from time to time; and
-
Business operations in China will not become subject to the risk of nationalization.

Since 1979, the Chinese government has reformed its economic systems. Because many reforms are unprecedented or experimental, they are expected to be refined and improved. Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or in the disparities in per capita wealth between regions within China, could lead to further readjustment of the reform measures. This refining and readjustment process may negatively affect our operations.

Over the last few years, China's economy has registered a high growth rate. Recently, there have been indications that rates of inflation have increased. In response, the Chinese government recently has taken measures to curb this excessively expansive economy. These measures have included devaluations of the Chinese currency, the Renminbi (RMB), restrictions on the availability of domestic credit, reducing the purchasing capability of certain of its customers, and limited re-centralization of the approval process for purchases of some foreign products. These austerity measures alone may not succeed in slowing down the economy's excessive expansion or control inflation, and may result in severe dislocations in the Chinese economy. The Chinese government may adopt additional measures to further combat inflation, including the establishment of freezes or restraints on certain projects or markets.


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To date reforms to China's economic system have not adversely impacted our operations and are not expected to adversely impact operations in the foreseeable future; however, there can be no assurance that the reforms to China's economic system will continue or that we will not be adversely affected by changes in China's political, economic, and social conditions and by changes in policies of the Chinese government, such as changes in laws and regulations, measures which may be introduced to control inflation, changes in the rate or method of taxation, imposition of additional restrictions on currency conversion and remittance abroad, and reduction in tariff protection and other import restrictions.

 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
 
Item 3.  Defaults Upon Senior Securities
 
Not applicable.
 
 
Not applicable.

 
None.
 
 
 
Exhibit
Number
 
 
Exhibit Title
31.1
 
Certificate of CEO/CFO as Required by Rule 13a-14(a)/15d-14
31.2
 
Certificate of CEO/CFO as Required by Rule Rule 13a-14(b) and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code
32.1
 
Certificate of CEO as Required by Rule Rule 13a-14(b) and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code
 
 

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SIGNATURES
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
HOME SYSTEM GROUP
Date: May 15, 2007
 
 
By:
 
 
 
  /s/ Wei Qui Li,
 
Wei Qui Li, Executive Officer
   
 
  /s/  Kin Wai Cheung
 
Kin Wai Cheung, Chief Financial Officer

 

21


 


EX-31.1 HTML

v075392_ex31-1.htm

 
CERTIFICATION
 
 
I, Kin Wai Cheung, certify that:
 
 
1.
I have reviewed this quarterly report on Form 10-Q of Home System Group;
 
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the fiscal quarter ending March 31, 2007;
 
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the fiscal quarter ended March 31, 2007;
 
 
4.
The company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15) for the company and have:
 
 
 
a.
Designed such disclosure controls and procedures to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the fiscal quarter ended March 31, 2007;
 
 
b.
Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the fiscal quarter ended March 31, 2007, based on such evaluation; and
 
 
c.
Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the company’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
 
 
 
5.
The company’s other certifying officers and I have disclosed, based on our most recent evaluation, to the company’s auditors and the audit committee of company’s board of directors (or persons performing the equivalent functions):
 
 
 
a.
All significant deficiencies in the design or operation of internal controls which could adversely affect the company’s ability to record, process, summarize and report financial data and have identified for the company’s auditors any material weaknesses in internal controls; and
 
 
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal controls.
 
 

 
Date: May 15, 2007
/s/ Kin Wai Cheung
 
Kin Wai Cheung, Chief Financial Officer
 

EX-31.2 HTML

v075392_ex31-2.htm


 
 
CERTIFICATION
 
 
I, Li Wei Qiu, certify that:
 
 
1.
I have reviewed this Quarterly report on Form 10-Q of Home System Group;
 
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the fiscal quarter ending March 31, 2007;
 
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the fiscal quarter ended March 31, 2007;
 
 
4.
The company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15) for the company and have:
 
 
 
a.
Designed such disclosure controls and procedures to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the fiscal quarter ended March 31, 2007;
 
 
b.
Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the fiscal quarter ended March 31, 2007, based on such evaluation; and
 
 
c.
Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the company’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
 
 
 
5.
The company’s other certifying officers and I have disclosed, based on our most recent evaluation, to the company’s auditors and the audit committee of company’s board of directors (or persons performing the equivalent functions):
 
 
 
a.
All significant deficiencies in the design or operation of internal controls which could adversely affect the company’s ability to record, process, summarize and report financial data and have identified for the company’s auditors any material weaknesses in internal controls; and
 
 
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal controls.
 
 
 
Date: May 15, 2007
/s/ Li Wei Qiu
 
Li Wei Qiu, Chief Executive Officer
 

EX-32.1 HTML

v075392_ex32-1.htm


 
 
CERTIFICATION PURSUANT TO
 
18 U.S.C. 1350,
 
AS ADOPTED PURSUANT TO
 
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
 
 
In connection with the Quarterly Report of Home System Group (the “Company”) on Form 10-Q for the three months ended March 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Li Wei Qiu, in my capacity as Chief Executive Officer, and I, Kin Wai Cheung, in my capacity as Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
 
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
 
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
 
Date: May 15, 2007
/s/ Li Wei Qiu
 
Li Wei Qiu
Chief Executive Officer
 
 
 
/s/ Kin Wai Cheung
 
Kin Wai Cheung
Chief Financial Officer