Form 10-Q Home System Group

Quarterly report pursuant to section 13 and 15(d)

What is Form 10-Q?
  • Accession No.: 0001193805-10-002201 Act: 34 File No.: 000-49770 Film No.: 101017603
  • CIK: 0001172319
  • Submitted: 2010-08-16
  • Period of Report: 2010-06-30

10-Q HTML

e607410_10q-home.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2010
 
Commission file number:  000-49770
 
Home System Group
(Exact name of registrant as specified in its charter)

Nevada
43-1954776
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

Oceanic Industry Park, Sha Gang Highway, Gang Kou Town
 
Zhongshan City, Guangdong
 
People's Republic of China
528447
(Address of principal executive offices)
(Zip Code)

(347)-624-5699
 (Registrant’s telephone number, including area code)

None
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o

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

Large accelerated filer       o
Accelerated filer                          o
Non-accelerated filer         o
Smaller reporting company       x

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class
 
Outstanding at August 13, 2010
Common Stock, $0.001 par value per share
 
67,490,166 shares

 
 

 
 
HOME SYSTEM GROUP
FORM 10-Q
Quarterly Period Ended June 30, 2010
 
TABLE OF CONTENTS
 
PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
Report of Independent Registered Public Accounting Firm
1
Consolidated Balance Sheets at June 30, 2010 and December 31, 2009
2
Consolidated Statements of Operation and Comprehensive Income for the Three and Six Months Ended June 30, 2010 and 2009
3
Consolidated Statement of Stockholders’ Equity for Six Months ended June 30, 2010 and Fiscal Year Ended December 31, 2009
4
Consolidated Statements of Cash Flows for Six Months Ended June 30, 2010 and 2009
5
Notes to Consolidated Financial Statements
6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
23
Item 3. Quantitative and Qualitative Disclosures about Market Risk
30
Item 4. Controls and Procedures
30
PART II - OTHER INFORMATION
 
Item 1. Legal Proceedings
31
Item 1A. Risk Factors
31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
31
Item 3. Defaults on Senior Securities
31
Item 4. Reserved
31
Item 5. Other Information
31
Item 6. Exhibits
31
SIGNATURES
32

Except as otherwise required by the context, all references in this report to “we”, “us”, “our”, or “Company” refer to the consolidated operations of Home System Group, a Nevada corporation, and its wholly owned subsidiaries.

 
 

 
 
 
ACSB
Acquavella, Chiarelli, Shuster, Berkower & Co., LLP
517 Route One
Iselin, New Jersey 08830
732.855.9600
Fax:732.855.9559
www.acsbco.com
C e r t i f i e d  P u b l i c  A c c o u n t a n t s  a n d  A d v i s o r s
One Penn Plaza, 36th Floor
New York, NY  10019
212.867.1319
 
INDEPENDENT ACCOUNTANTS’ REVIEW REPORT
 
 
To the Board of Directors and Stockholders of
Home System Group and Subsidiaries
 
We have reviewed the accompanying consolidated balance sheet of Home System Group and Subsidiaries (the “Company”) at June 30, 2010, and the consolidated statements of income and comprehensive income, stockholders’ equity and cash flows for the six months ended June 30, 2010 and 2009.  These financial statements are the responsibility of the Company’s management.
 
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review consists principally of inquiries of Company personnel and analytical procedures applied to financial data.  It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles.

We have previously audited, in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2009 and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for the year then ended; and in our report dated March 18, 2010, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2009, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.


/S/ ACQUAVELLA, CHIARELLI, SHUSTER, BERKOWER & CO., LLP
 
Iselin, New Jersey
August 13, 2010
 
 
1

 
 
Item 1 Financial Statements
 
HOME SYSTEM GROUP AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS

   
June 30, 2010
   
December 31, 2009
 
   
(unaudited)
   
(audited)
 
ASSETS
           
CURRENT ASSETS
           
Cash and cash equivalents
  $ 5,790,933     $ 3,985,782  
Accounts receivable – trade, net of allowances
    40,822,436       23,909,114  
Notes receivable - short term
    8,158,018       3,704,137  
Deposits and advances
    2,014,486       1,344,070  
Inventories
    11,225,256       18,304,015  
    Other assets
    2,813,885       1,161,057  
TOTAL CURRENT ASSETS
    70,825,014       52,408,175  
    Notes receivable - long-term
    98,310       236,334  
Acquisition deposit
    331,326       -  
Property, plant and equipment – net
    8,761,890       9,027,828  
Intangible assets
    1,581,877       1,751,567  
Goodwill
    25,025,292       25,025,292  
TOTAL ASSETS
  $ 106,623,709     $ 88,449,196  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES
               
Accounts payable - trade
  $ 16,842,284     $ 18,870,277  
Bills payable
    4,827,691       3,478,223  
Accrued expenses and other payables
    8,623,944       7,109,157  
Short term banks loans
    15,915,069       12,548,441  
Income taxes and other taxes payable
    2,501,028       1,028,403  
Notes payable - current portion
    2,779,109       6,575.000  
Due to stockholder & related parties - current portion
    2,947,713       4,040,896  
TOTAL CURRENT LIABILITIES
    54,436,838       53,650,390  
                 
NON-CURRENT LIABILITIES
               
Due to stockholder – long term portion
    1,660,204       1,308,433  
Long term bank loan
    2,929,845       1,464,515  
Notes payable - long term portion
    -       9,868,421  
TOTAL LIABILITIES
    59,026,887       66,291,759  
                 
STOCKHOLDERS' EQUITY
               
COMMON STOCK - $0.001 par value; 200,000,000 shares
               
authorized, 67,490,166 and  62,477,949 shares issued and outstanding
               
at June 30, 2010 and December 31, 2009, respectively
    67,490       62,478  
Additional paid-in capital
    25,942,241       6,581,717  
Statutory reserve
    681,914       681,914  
Retained earnings
    18,890,758       12,891,560  
Other comprehensive income
    2,014,419       1,939,768  
TOTAL STOCKHOLDERS' EQUITY
    47,596,822       22,157,437  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 106,623,709     $ 88,449,196  
 
The accompanying notes are an integral part of these financial statements.
 
 
2

 
 
HOME SYSTEM GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE THREE & SIX MONTHS ENDED JUNE 30, 2010 AND 2009
 (UNAUDITED)

    Three Months Ended June 30,    
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net Sales
  $ 27,260,274     $ 20,537,169     $ 57,320,911     $ 35,966,283  
Cost of Sales
    (20,935,778 )     (16,499,881 )     (44,050,279 )     (28,156,419 )
GROSS PROFIT
    6,324,496       4,037,188       13,270,632       7,809,864  
                                 
GENERAL, SELLING AND ADMINISTRATIVE EXPENSES
    (1,840,431 )     (1,548,697 )     (3,459,600 )     (2,963,472 )
                                 
INCOME FROM OPERATIONS
    4,484,065       2,488,591       9,811,032       4,846,392  
                                 
OTHER (EXPENSE) INCOME
                               
    Loss on debt conversion
    (1,747,762 )     -       (1,747,762 )     -  
Other income
    4,459       173,020       836,972       234,755  
Interest expenses, net
    (385,403 )     (703,114 )     (762,162 )     (1,073,502 )
      (2,128,706 )     (530,094 )     (1,672,952 )     (838,747 )
                                 
INCOME BEFORE INCOME TAXES
    2,355,359       1,958,497       8,138,080       4,007,645  
                                 
INCOME TAXES
    (944,838 )     (512,930 )     (2,138,882 )     (1,035,555 )
                                 
NET  INCOME
  $ 1,410,521     $ 1,445,567     $ 5,999,198     $ 2,972,090  
                                 
Basic & Diluted Weighted Average Shares
    67,490,166       62,477,949       64,997,903       62,477,949  
Basic & Diluted Earnings per Share
  $ 0.02     $ 0.02     $ 0.09     $ 0.05  
                                 
COMPREHENSIVE INCOME
                               
   Net Income
  $ 1,410,521     $ 1,445,567     $ 5,999,198     $ 2,972,090  
Foreign currency translation adjustment
    72,122       28,074       74,651       (27,555 )
                                 
COMPREHENSIVE INCOME
  $ 1,482,643     $ 1,473,641     $ 6,073,849     $ 2,944,535  
 
The accompanying notes are an integral part of these financial statement s.
 
 
3

 
 
HOME SYSTEM GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR SIX MONTHS ENDED JUNE 30, 2010 AND YEAR ENDED DECEMBER 31, 2009

   
Number of Shares of
               
Notes
Receivable
         
 
Other
             
   
Common
Stock
   
Common
Stock
   
Paid-in
Capital
   
For Stock Issuance
   
Statutory Reserve
   
Comprehensive Income
   
Retained Earnings
   
Total
 
BALANCE AT
DECEMBER 31, 2008
    62,477,949     $ 62,478     $ 6,581,717     $ (900,000 )   $ 29,616     $ 1,852,462     $ 4, 217, 826     $ 11,844,099  
                                                                 
Foreign currency translation adjustment
    -       -       -       -       -       87,306       -       87,306  
                                                                 
 Net income for 2009     -       -       -       -               -       9,326,032       9,326,032  
                                                                 
Satisfaction of subscription
    -       -       -       900,000       -       -       -       900,000  
                                                                 
Appropriation to statutory reserve fund
    -       -       -       -       652,298       -       (652,298 )     -  
                                                                 
BALANCE AT
DECEMBER 31, 2009
    62,477,949       62,478       6,581,717       -       681,914       1,939,768       12,891,560       22,157,437  
                                                                 
Foreign currency translation adjustment
    -       -       -       -       -       74,651       -       74,651  
                                                                 
Net income for six months ended June 30, 2010
    -       -       -       -       -               5,999,198       5,999,198  
                                                                 
Effect of the conversion of Debt to Equity
    5,012,217       5,012       19,360,524       -       -       -       -       19,365,536  
                                                                 
BALANCE AT
JUNE 30, 2010
    67,490,166     $ 67,490     $ 25,942,241     $ -     $ 681,914     $ 2,014,419     $ 18,890,758     $ 47,596,822  
 
The accompanying notes are an integral part of these financial statements.
 
 
4

 
 
HOME SYSTEM GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

   
Six Months Ended June 30,
 
   
2010
   
2009
 
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
           
Net income
  $ 5,999,198     $ 2,972,090  
Adjustments to reconcile net income
               
to net cash used in operating activities:
               
Loss on debt conversion
    1,747,762       -  
Depreciation
    503,020       556,124  
Amortization of intangible assets
    169,690       184,724  
Deferred finance costs amortized
    255,231       746,058  
Change in assets and liabilities
               
(Increase) decrease in assets:
               
Accounts receivable
    (16,785,508 )     5,112,785  
Deposits and advances
    (1,013,587 )     -  
Inventories
    7,136,316       (2,832,731 )
Other assets
    (1,539,451 )     (635,271 )
Increase (decrease) in liabilities:
               
Accounts payable
    (2,118,898 )     (6,086,138 )
Bills payable
    1,322,399       (1,820,459 )
Accrued expenses and other payables
    1,464,026       (773,188 )
Income taxes payable and other taxes
    1,458,201       (519,003 )
Net cash provided by Operating Activities
    (1,401,601 )     (3,095,009 )
                 
CASH FLOWS USED IN INVESTING ACTIVITIES
               
Capital expenditures
    (237,082 )     (22,092 )
Acquisition deposit
    (331,326 )     -  
Net cash used in Investing Activities
    (568,408 )     (22,092 )
                 
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
               
Proceeds of bank loans
    25,372,866       18,514,394  
Repayments of bank loans
    (20,540,908 )     (8,396,848 )
Increase in notes receivable
    (4,272,890 )     -  
Proceeds from notes payable
    -       1,515,628  
Repayments of notes payable
    -       (4,680,132 )
Restricted cash
    -       1,065,288  
Due to stockholder & related parties
    3,212,050       1,191,667  
Net cash provided by Financing Activities
    3,771,118       9,209,997  
Exchange rate effect on cash
    4,042       25,955  
Net increase in cash
    1,805,151       6,118,851  
Cash - begin of period
    3,985,782       1,609,540  
Cash - end of period
  $ 5,790,933     $ 7,728,391  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
               
Cash paid during the period for:
               
Interest
  $ 458,447     $ 1,083,568  
Income taxes
  $ 2,085,623     $ 1,244,594  
                 
Non Cash Transactions:
               
Debt converted to Equity
  $ 17,542,774     $ -  

The accompanying notes are an integral part of these financial statements 
 
 
5

 
 
HOME SYSTEM GROUP AND SUBSIDIARIES,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS

Home System Group (“HSG” or the “Company”) (formerly named Supreme Realty Investments, Inc. (“Supreme”)) is incorporated in the State of Nevada.   The Company has three operating subsidiaries as of June 30, 2010.

On August 4, 2006, Supreme was a public shell company and acquired Home System Group, Inc. (“HSGI”).  HSGI was incorporated as a limited liability company in the British Virgin Islands on February 28, 2003.  HSGI was inactive until June 30, 2006 when HSGI acquired all the 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 distributing gas grills, home electronic appliances and bin racks. Since the ownership of HSGI and Oceanic was the same, the merger was accounted for as a transaction between entities under common control, whereby HSGI recognized Oceanic’s assets and liabilities as being transferred at their carrying amounts. Under the terms of the merger agreement with Supreme, the stockholders of HSGI received 8,000,000 shares of Supreme’s common stock for 100% of HSGI’s outstanding common stock.  Following the merger, Supreme changed its name to Home System Group.  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 is identical to that resulting from a reverse acquisition, except no goodwill was 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 is considered to be the accounting acquirer, HSGI.  Shares and per share amounts stated have been adjusted to reflect the merger.
 
Holy (HK) Limited (“Holy”) 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 People’s Republic of China (“PRC”) on April 5, 2006 for the purpose of manufacturing gas grills, home electrical appliances and bin racks.

Holy 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 Well Profit’s 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.

On January 31, 2007, HSG acquired Holy and its wholly-owned subsidiary, Well Profit.  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 Holy by HSG 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.
 
On October 1, 2008, the Company purchased from the shareholders of Asia Forever Investment Limited (“Asia Forever”) all of Asia Forever’s outstanding stock for approximately $39.5 million.  Asia Forever had been incorporated as a limited liability company on April 1, 2008 in the Hong Kong Special Administrative Region, and it has 100% ownership interest of Zhongshan City Weihe Appliances Co., Ltd (“Weihe”). Weihe had been incorporated as a limited liability company on August 3, 1998 in the PRC, and it manufactures ceiling fans and residential lighting to be sold to the international consumer market through various distributors. The operations of Asia Forever are included in the consolidated financial statements since October 1, 2008.
 
NOTE 2 – BASIS OF PREPARATION AND CONSOLIDATION

The accompanying financial statements of the Company have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America. The consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant inter-company accounts and transactions have been eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements reflect the adjustments considered necessary for a fair presentation of the Company’s results as of June 30, 2010 and June 30, 2009, and for the periods then ended.

 
6

 
 
HOME SYSTEM GROUP AND SUBSIDIARIES,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basic and diluted earnings per share

The Company reports earnings per share in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 260 “Earnings per share”. The Company’s basic earnings per share is computed using the weighted average number of shares outstanding for the periods presented.  
 
Diluted earnings per share is based on the assumption that any dilutive options or warrants were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, the Company’s outstanding stock options are assumed to be exercised, and funds thus obtained were assumed to be used to purchase common stock at the average market price during the period. As of June 30, 2010 and June 30, 2009, there were no dilutive instruments that were included in the computation of the Company’s earnings per share for the periods the ended.

Cash and cash equivalents

Cash and cash equivalents include cash on hand, cash accounts, interest bearing savings accounts and time certificates of deposit with a maturity of three months or less when purchased.

Accounts receivable - trade

Accounts receivable - trade is stated net of allowance for doubtful accounts.  Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.  Reserves are recorded primarily on a specific identification basis.  The bad debt allowance was $16,182 and $16,182 as of June 30, 2010 and December 31, 2009, respectively.

Inventory

Inventory is stated at the lower of cost or market value. Raw material cost is determined by the weighted average method.  The cost of work-in-progress and finished goods inventories consist of raw materials, direct labor and overhead associated with the manufacturing process. Most of our inventory consists of raw materials such as stainless steel plate, metal plate or plastics.

Property, plant and equipment

The Company accounts for property, plant and equipment in accordance with the FASB ASC Topic 360, “Property, plant and equipment”. Property, plant and equipment is stated at cost including the cost of improvements.  Maintenance and repairs are charged to expense as incurred.  Assets under construction are not depreciated until construction is completed and the assets are ready for their intended use. Depreciation and amortization are provided on the straight-line method based on the estimated useful lives of the assets

Goodwill

Goodwill represents the cost of a business acquisition over the fair value of the net identified assets acquired.  In accordance with GAAP, indefinite-life identifiable intangible assets and goodwill are not amortized. GAAP requires that an annual impairment test of our goodwill be performed. Goodwill impairment is determined using a two-step process.  The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit, which we define as our business segments, with its net book value or carrying amount including goodwill.  If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary.  If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill.  If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.  The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination.  The fair value of the reporting unit is allocated to all of the assets and liabilities of that unit including any unrecognized intangible assets as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. As of June 30, 2010 and 2009, no impairment of goodwill was identified.
 
 
7

 

HOME SYSTEM GROUP AND SUBSIDIARIES,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 
Revenue recognition

The Company’s revenue recognition policies are in compliance with FASB ASC Topic 605, “Revenue Recognition”.  Revenue from sales of the Company’s products is recognized when the significant risks and rewards of ownership have been transferred to the buyer at the time when the products are shipped to customers, the price is fixed or determinable as stated on the sales contract, and collectability is reasonably assured.  Customers do not have a general right of return on products shipped. Product returns to the Company were insignificant during past years.  There are no post-shipment obligations, price protection or bill and hold arrangements.

Income taxes

The Company accounts for income taxes in accordance with FASB ASC Topic 740, “Income Taxes”, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns.  Under this method, deferred tax liabilities and assets are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using the tax rates presently in effect.  Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.  Income taxes are provided on an asset and liability approach for financial accounting and reporting of income taxes.  Current tax is based on the profit or loss from ordinary activities adjusted for items that are non-assessable or disallowable for income tax purposes and is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date. There were no deferred tax assets and liabilities as of June 30, 2010 or December 31, 2009 as there were no differences between the financial statement and the tax base of the Company’s assets or liabilities.

Long-Lived Assets

Long-lived assets, other than Goodwill, are reviewed for impairment at least once a year or whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable.

For long-lived assets used in operations, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted cash flows. We measure the impairment loss based on the difference between the carrying amount and estimated fair value.

Long-lived assets are considered held for sale when certain criteria are met, including: management’s commitment to a plan to sell the asset, the asset is available for sale in its immediate condition, and the sale is probable within one year of the reporting date. Assets held for sale are reported at the lower of cost or fair value less costs to sell. There was no impairment of Long-lived assets at June 30, 2010 and December 31, 2009.
 
Foreign currency translation

The Company operations are based in the PRC with its currency, the Renminbi (“RMB”), as the functional currency. In consolidation, the Company’s accounts are translated from RMB into US dollars in accordance with FASB ASC Topic 830, “Foreign currency matters”.  Accordingly, all assets and liabilities are translated at the exchange rates prevailing at the balance sheet dates and all income and expense items are translated at the average rates for each of the periods.
 
 
8

 
 
HOME SYSTEM GROUP AND SUBSIDIARIES,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 
All foreign exchange transactions involving RMB must take place either through the People’s Bank of China (the “PBOC”) or other institutions authorized to buy and sell foreign exchange. The exchange rates adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC. Translation of amounts from RMB into US dollars has been made at the following exchange rates:

For the period ended June 30, 2010:
       
Balance sheet
     
RMB 6.79 to US$ 1.00
Statement of operations
     
RMB 6.81 to US$ 1.00
         
For the period ended June 30, 2009:
       
Balance sheet
     
RMB 6.83 to US$ 1.00
Statement of operations
     
RMB 6.83 to US$ 1.00
         
For the period ended December 31, 2009:
       
Balance sheet
     
RMB 6.83 to US$ 1.00

The PBOC administers and regulates the exchange rate of US$ against RMB.

Use of estimates

The preparation of the financial statements, in conformity with 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 date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Several areas require management’s estimates relating to uncertainties for which it is reasonably possible that there will be a material change in the near term. The more significant areas requiring the use of management estimates related to valuation of intangible assets acquired in business acquisitions, accrued liabilities and the useful lives for amortization and depreciation. Actual results could differ from those estimates. 

Reclassifications

Certain items have been reclassified in the accompanying consolidated Financial Statements and Notes for prior periods to be comparable with the classification for the period ended June 30, 2010. The reclassification had no effect on previously reported Net income.

Certain prior period amounts have been reclassified to conform to the current presentation. Such reclassifications were limited to Balance Sheet and Cash Flow Statement presentation and did not impact the Statement of Income. Specially, the Company reclassified trade deposit from “Other assets” to “Deposit and advance”, with prior periods updated to conform to this presentation. In the Cash Flow, the Company separated the accounts payable from “Accounts payable, other payables and accrued expenses” to “Accounts payable” to conform to the current period’s presentation.

Concentration of risk

Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. The Company attempts to control risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts. As a consequence, the Company believes that its accounts receivable credit risk exposure beyond such allowance is limited.
 
 
9

 
 
HOME SYSTEM GROUP AND SUBSIDIARIES,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 
NOTE 4 - NOTES RECEIVABLE

The Company has an arrangement with Oceanic International (Zhongshan) Company Limited (“Zhongshan”), a Chinese company that is a supplier of raw material to Home System, whereby both companies have agreed to jointly obtain financing from certain financial institutions. Under this arrangement, the Company enters into a loan agreement with the financial institution, in which Home System, Zhongshan and the financial institutions agree that certain assets of both companies will be used as collateral to secure the loan.  These assets consist of Home System’s receivables and certain property and buildings of Zhongshan. Once the Company receives the funding, it then enters into an agreement with the Zhongshan under which a portion of the funds the Company receives from the financial institution is provided by the Company to Zhongshan, and is evidenced by a note from Zhongshan payable to Home System.  These notes are classified as Notes receivable and include interest and maturity dates that coincide with the underlying financing agreements. As of June 30, 2010 and December 31, 2009, these Notes receivable amounted to $8,256,328 and $3,940,471, respectively, with interest rates that ranged from 2.49% to 7.74%, and include maturities of less than one year, and more than one year. The related bank loans are from China Construction Bank Zhongshan Branch and Industrial and Commercial Bank of China amounted to $14,336,992 and $9,522,471 as of June 30, 2010 and December 31, 2009, respectively, and are discussed in NOTE 8 and NOTE 9.
 
As the Company’s bank loans are directly related to its agreement with Zhongshan, the Notes receivables from Zhongshan resulting from these loans are treated as a component of the Company's financing activities in the Statements of Cash Flow.

NOTE 5– INVENTORIES

Inventories consisted of the following:

   
June 30,
2010
   
December 31, 2009
 
Raw materials
  $ 6,557,882     $ 14,167,853  
Work in process
    3,740,453       3,548,298  
Finished goods
    926,921       587,864  
Total
  $ 11,225,256     $ 18,304,015  

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment consisted of the following:

 
 
Useful Life
 
June 30,
2010
   
December 31,
 2009
 
Plant and machinery
5 to 10 years
  $ 10,427,115     $ 10,336,935  
Buildings
        20 years
    312,028       312,028  
Furniture, fixtures and equipment
5 to 10 years
    203,198       200,622  
Motor vehicles
8 to 10 years
    156,731       12,405  
Total
      11,099,072       10,861,990  
Less: accumulated depreciation
      (2,337,182 )     (1,834,162 )
Net book value
    $ 8,761,890     $ 9,027,828  

During the three and six month periods ended June 30, 2010 and 2009, depreciation was recorded as follows,

   
Three months ended June 30,
 
Six months ended June 30,
   
2010
 
2009
 
2010
 
2009
Cost of sales
  $ 236,123     $ 213,948     $ 485,562     $ 465,693  
General, selling & administrative expenses
    9,509       5,963       17,458       90,431  
    $ 245,632     $ 219,911     $ 503,020     $ 556,124  

 
10

 
 
HOME SYSTEM GROUP AND SUBSIDIARIES,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 
NOTE 7 – INTANGIBLE ASSETS, NET

Intangible assets consisted of the following:

   
June 30,
2010
   
December 31,
2009
 
Customer relationships
  $ 2,030,000     $ 2,030,000  
Brand name
    145,792       145,792  
Sub-total
    2,175,792       2,175,792  
Less: accumulated amortization
    (593,915 )     (424,225 )
Total Intangible assets, net
  $ 1,581,877     $ 1,751,567  

During the three month periods ended June 30, 2010 and 2009, amortization expenses of intangible assets amounted to $84,845 and $84,845, respectively.  

During the six month periods ended June 30, 2010 and 2009, amortization expenses of intangible assets amounted to $169,690 and $169,690, respectively.
 
The intangible assets are carried at cost and are amortized over the expected useful lives. Customer relationships are being amortized over its expected useful life of six years. Brand name is being amortized over its expected useful life of 10 years.

The estimated aggregate amortization expenses for the brand name and customer relationships for the five succeeding years are as follows:

Year
     
2010
  $ 339,380  
2011
  $ 339,380  
2012
  $ 339,380  
2013
  $ 339,380  
2014 and thereafter
  $ 224,357  
 
 
11

 
 
HOME SYSTEM GROUP AND SUBSIDIARIES,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 
NOTE 8– SHORT TERM BANK LOANS

The short term bank loans, denominated in Chinese Renminbi, are as follows:

   
June 30,
 2010
   
December 31, 2009
 
Loan from Standard Chartered Bank, interest rate at 7.74% (LIBOR+2%), due within 120 days, secured by accounts receivable held by a major customer
 
$
97,474
   
$
96,942
 
                 
Loan from China Construction Bank Zhongshan Branch, interest rate at 7.74% ( LIBOR+2%), due within 120 days, secured by accounts receivable held by a major customer
   
5,638,728
     
1,966,759
 
                 
Loans from China Construction Bank Zhongshan Branch, interest rate at 2.49%, due through July 2, 2010, secured by accounts receivable held by a major customer
   
2,912,427
     
2,896,517
 
                 
Loans from Industrial and Commercial Bank of China, interest rate at 7.74% (LIBOR+2%), due within 120 days, secured by the Company’s accounts receivables
   
2,554,251
     
3,194,680
 
                 
Loans from Industrial and Commercial Bank of China, interest rate at 4.86%, due through July 1, 2010, secured by the Company’s  accounts receivables
   
1,767,071
     
-
 
                 
Loan from CITIC Bank, interest rate at 5.84%, payments due through September 10, 2010, guaranteed by Li Weiqiu, a related party
   
2,945,118
     
2,929,030
 
                 
Loan from CITIC Bank, interest rate at 5.84%, payments due through June 9, 2010, guaranteed by Li Weiqiu, a related party
   
-
     
1,464,513
 
                 
Total Short term bank loans
 
$
15,915,069
   
$
12,548,441
 
 
Loans are from China Construction Bank Zhongshan Branch and Industrial and Commercial Bank of China are also collateralized by certain assets of Oceanic International (Zhongshan) Company Limited as discussed in Note 4.

NOTE 9– LONG TERM BANK LOANS

The Long term bank loans, denominated in Chinese Renminbi, are as follows:

   
June 30,
2010
   
December 31, 2009
 
Loan from Industrial and Commercial Bank of China, interest rate at 5.40%, due on March 9, 2012, secured by the Company’s assets
  $ 1,464,515     $ 1,464,515  
Loan from Industrial and Commercial Back of China, interest rate at 5.40%, due on January 3, 2013, secured by the Company’s  accounts receivables
    1,465,330       -  
Total Long term bank loans
  $ 2,929,845     $ 1,464,515  

These long term loans are also collateralized by certain assets of Oceanic International (Zhongshan) Company Limited as discussed in Note 4.

 
12

 
 
HOME SYSTEM GROUP AND SUBSIDIARIES,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 
NOTE 10 – NOTES PAYABLE

On May 23, 2007, the Company entered into a Fixed Price Standby Equity Distribution Agreement (the “Agreement”) with four investors (the “Investors”) who were related parties.  Pursuant to the Agreement, the Company could, at its discretion, periodically sell to the Investors up to 10 million shares of the Company’s common stock for a total purchase price of up to $40 million (a per share purchase price of $4.00 per share). The Investors paid 16.5% of the purchase price to the Company. Also, the Investors were to deliver to the Company an executed promissory note for the payment of the remaining 83.5% of the remaining commitment under this Agreement.
 
On February 7, 2008, the Company cancelled the Agreement with the Investors, and the amount of $6,500,000 that had been received by the Company was then reflected as a non-interest bearing Notes payable recorded under current liabilities and non-current liabilities at the end of December 31, 2009 and December 31, 2008, respectively. On April 1, 2010, the Investors and the Company entered into Note Conversion Agreements, in which the Investor agreed to convert the amount of $6,500,000 into 1,857,141 shares of the Company’s common stock at a conversion rate of $3.50 per share as set forth in detail below:

Note Holder
 
Principal Amount
   
Number of Shares Issued
 
Total Shine Group Limited
  $ 1,600,000       457,142  
Victory High Investments Limited
    2,000,000       571,428  
Think Big Trading Limited
    2,900,000       828,571  

Upon this conversion, the non-interesting bearing Notes payable has been canceled, resulting a $675,375 loss on debt conversion recorded in six months ended June 30, 2010 as the conversion rate of $3.50 per share is lower than $3.86, which was the average price of the common stock  over the 30 trading days prior to the time of the conversion.

On October 1, 2008, the Company issued promissory notes (“Notes”) in the amount equivalent to the purchase price of approximately $39.4 million to the former shareholders of Asia Forever for the Company’s acquisition of Asia Forever. The net present value of these Notes payable at October 1, 2008, after a payment of $8 million, was $29,900,000 and the deferred finance cost of $1,505,147 was recorded based on the Company’s 5.3% borrowing rate, to be amortized using the effective interest rate method. The Notes bear no interest, and principal was to be repaid as follows: 25% of the purchase price (approximately $9.87 million) was payable on or before December 31, 2008, with the remaining principal amount to be repaid in three equal semi-annual installments beginning on June 30, 2009.

On June 30, 2009, the Company entered into a Supplement Agreement to the Notes (“Supplement Agreement”) with the former shareholders of Asia Forever which amended the payment terms as set forth in the original promissory notes. Pursuant to the Supplement Agreement, the cash payments of  $1.8 million, which was past due from December 31, 2008, and $9.87 million which was due on June 30, 2009 were to be satisfied in total by: (i) $4.4 million in cash which was paid by the Company as of June 30, 2009; (ii) $1,464,000 in cash to be paid by the Company in two equal installments of $732,000 by July 31, 2009 and December 31, 2009; (iii) the transfer of buildings held by the Company including offices and production facilities totaling 41,067 square meters and the related land use rights, together valued at $6.1 million (the “Fixed Assets”). Such revised payment terms when fully completed would satisfy all payments due under the Notes for the December 31, 2008 and June 30, 2009 installments. The cash payments were made and on September 18, 2009, the Company completed the transfer of the Fixed Assets to former shareholders of Asia Forever.

On December 18, 2009, the Company executed an amendment to the Notes (the “Amended Note”), the former shareholder of Asia Forever agreed that the Company could defer the payment $9.87 million payment originally due on June 30, 2010 to June 30, 2011.  On April 1, 2010, the former shareholders of Asia Forever agreed to convert $7,089,312 of this final installment into the Company’s common stock at the conversion rate of $3.50 per share. After this conversion, the Company owes $2,779,109 to the former shareholders of Asia Forever which is due on June 30, 2011 and this transaction resulted in an loss on debt conversion of $736,607 in six months ended June 30, 2010 as the conversion rate was lower than $3.86, the average price of the common stock over the 30 trading days prior to the time of the conversion.
 
 
13

 
 
HOME SYSTEM GROUP AND SUBSIDIARIES,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 
Notes payable consisted of the following:
 
   
June 30,
2010
   
December 31, 2009
 
Notes payable related to the fixed price standby equity distribution agreement
 
$
-
   
$
6,575,000
 
Notes payable related to acquisition of subsidiary
   
2,779,109
     
9,868,421
 
Total  Notes Payable
   
 2,779,109
     
 16,443,421
 
Less: Current portion
   
(2,779,109)
     
(6,575,000)
 
Notes payable – long term portion
 
$
-
   
$
9,868,421
 
 
Deferred interest expenses consist of the following:

   
June 30,
2010
   
December 31, 2009
 
Deferred interest expenses, classified as Other Assets
 
$
-
   
$
255,230
 
 

NOTE 11 – DUE TO STOCKHOLDER & RELATED PARTIES

During the six months ended June 30, 2010, the Company received loans totally $1,323,343 from a stockholder. This was unsecured and did not bear interest. On April 1st, 2010, the Company entered into Note Conversion Agreement with the stockholder. The Note Conversion Agreement provides that $3,953,462 of the total amount be converted into Company’s common stock at the conversion rate of $3.50 per share. This transaction resulted in a loss on debt conversion of $410,780 in the six months ended June 30, 2010 as the conversion rate was lower than $3.86, the average price of the common stock over the 30 trading days prior to the time of the conversion. The Company owed $1,349,852 and $3,979,971 to the stockholder as of June 30, 2010 and December 31, 2009, respectively.  

In May, 2010, the Company received loans $666,667 and $666,667 from related parties, Li Weiqiu and Cheung Kinwa, respectively. These were unsecured and did not bear interest.

As discussion in NOTE 9, various Bank loans made to the Company have been secured or guaranteed by the related party, Li Weiqiu, the founder of Well Profit and a current shareholder of the Company.

On May 14, 2009, the Company received a loan from a related party, Cheung Kinwai, a director and shareholder of the Company, with the interest rate 7.844% due on May 14, 2014. The Company pays the principal amount and interest of approximately $29,280 (RMB 200,000) per month. As of June 30, 2010, the amount due to Cheung Kinwai was $1,188,452, with the current portion $264,527 due within twelve months.

On June 9, 2010, the Company received a loan from a related party, Li Weiqiu, the Chairman of Board of Directors of the Company, with floating interest rate 120% of the benchmark lending rate set by The People’s Bank of China. The Company pays the interest of approximately $4,124 per month and the principal will be paid off on the loan maturity date, ie June 9, 2015.  As of June 30, 2010, the amount due to Li Weiqiu was $736,279.

 
14

 
 
HOME SYSTEM GROUP AND SUBSIDIARIES,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 
   
June 30,
2010
   
December 31,
 2009
 
Due to a stockholder, unsecured and no interest
  $ 1,349,852     $ 3,979,971  
Due to a related party - Cheung Kinwan
    666,667       -  
Due to a related party - Li  Weiqiu
    666,667       -  
Due to a related party - Cheung Kinwai with interest of 7.844%
    1,188,452       1,369,358  
Due to a related party - Li Weiqiu with floating interest rate
    736,279       -  
      4,607,917       5,349,329  
                 
Less: Current portion
    (2,947,713 )     (4,040,896 )
                 
 Due to stockholder & related parties under non-current liabilities
  $ 1,660,204     $ 1,308,433  
 
The principal amounts due over the five succeeding years maturities are as follows:
 
Year
     
2010
  $ 2,947,713  
2011
    291,296  
2012
    314,986  
2013
    311,192  
2014 and thereafter
    742,730  
    $ 4,607,917  
 
NOTE 12 – 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 selling expenses, and these were $489,401 and $367,971 for the three month periods ended June 30, 2010 and 2009, respectively, and $1,103,619 and $694,100 for the six month periods ended June 30, 2010 and 2009, respectively.

NOTE 13 – WARRANTY

The Company evaluates its exposure to warranty claims based on both current and historical product sales data and warranty costs incurred.  The Company assesses its warranty liability annually and adjusts the amount as necessary.  As of June 30, 2010 the Company believed that it had no material warranty claims. The warranty liability would be included in accrued expenses in the accompanying balance sheet.  
  
NOTE 14– INCOME TAXES

The Company is incorporated in the U.S. and is subject to U.S. tax law. No provisions for U.S. income taxes have been made as the Company has no taxable income for reporting periods. HSGI is incorporated in the British Virgin Islands (“BVI”) and, under the current laws of the BVI, is not subject to income taxes.

The Company’s operations in China are subject to the income tax laws of PRC. All of the tax provisions for the three and six month periods ended June 30, 2010 and 2009 pertain to PRC taxes. Effective on January 1, 2008, the PRC Enterprise Income Tax (“EIT”) Law, and Implementing Rules impose a unified enterprise income tax rate of 25% on all domestic-invested enterprises and foreign investment enterprises in China, unless they qualify under certain limited exception. Most of the Company’s operations units are subject to this tax.
 
 
15

 
 
HOME SYSTEM GROUP AND SUBSIDIARIES,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 
The Company’s subsidiary, Well Profit, has been classified as a foreign venture enterprise within the PRC and thus is entitled to, starting from the first profitable year, a two-year exemption from the EIT followed by a three-year 50% reduction in its EIT tax rate (“Tax Holiday”). As such, after the application by Well Profit and approval by the relevant tax authority in 2007, Well Profit was fully exempted from EIT for the fiscal years 2007 and 2008.  For the following three fiscal years from 2009 to 2011, Well Profit will be subject to enterprise income tax at rate of 12.5%.

During three month periods ended June 30, 2010 and June 30, 2009, the benefit that the Company received from this Tax Holiday was $220,847 and $60,420, respectively. During six month periods ended June 30, 2010 and June 30, 2009, the benefit that the Company received from this Tax Holiday was $431,121 and $656,163, respectively.

The reconciliations of the PRC statutory tax rate to the Company’s effective tax rate for the six month periods ended June 30 of 2010 and 2009 are as follows:

   
Six months ended June 30,
   
2010
 
2009
PRC Statutory Tax rate
    25 %     25 %
Tax Holiday
    (5.2 )%     (4.8 )%
Tax Benefit in lower tax rate region (Hong Kong)
    (1.9 )%     n/m  
Inability to record tax benefit on U.S. losses
    1.6 %     1.3 %
Inability to record tax benefit on Debt conversion loss
    5.4 %     -  
Other
    1.6 %     4.3 %
Effective Tax Rate
    26.5 %     25.8 %
 
Due to the uncertainty surrounding the realization of the U.S. net operating losses (“NOL’s”) in future tax returns, the Company continued to record a full valuation allowance against our otherwise recognizable U.S. net deferred tax assets as of June 30, 2010 and December 31, 2009. These net operating losses expire from 2027 to 2030.

Deferred Tax Assets consist of the following:

   
As of June 30,
2010
   
As of December 31,
 2009
 
Deferred Tax Asset – U.S. NOL’s
  $ 717,100     $ 583,931  
Less: Valuation Allowance
    (717,100 )     (583,931 )
Total Deferred Taxes
  $ 0     $ 0  

The accumulated net operating losses incurred in U.S. are as follows:

   
As of June 30,
 2010
   
As of December 31, 2009
 
Accumulated operating losses
  $ 2,201,054     $ 1,668,375  
 
 
16

 
 
HOME SYSTEM GROUP AND SUBSIDIARIES,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 
NOTE 15 – SEGMENT REPORTING

Accounting Standards Codification (“ASC”) Topic 280, “Segment Reporting”, requires use of the “management approach” model for segment reporting. Under this model, segment reporting is consistent with how the Company’s management organizes segments within the Company for making operating decisions and assessing performance. Reportable segments can be based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. Reportable segments are components of an enterprise about which separate financial information is available, that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The Company’s chief executive officer and chief financial officer have been identified as the chief decision makers. The Company evaluates performance based on several factors, of which the primary financial measure is business segment income before taxes.

During the first quarter of 2010, management conducted the annual review of the Company’s segment reporting and decided to revise the segments in order to be consistent with the Company’s updated business operation. The Company now has four reportable segments:  (1) Barbeque grills and Skateboards (2) Fans and Lightings, (3) Other trading, (4) Corporate.

 
17

 
 
HOME SYSTEM GROUP AND SUBSIDIARIES,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 
Segment Results for the Three Months Ended June 30, 2010 and 2009
 
     
Barbeque grills & Skateboards
   
Fans & Lightings
   
Other Trading
   
Corporate
   
Total
 
   
For the three months ended
   
For the three months ended
   
For the three months ended
   
For the three months ended
   
For the three months ended
 
     
6/30/10
   
6/30/09
   
6/30/10
   
6/30/09
   
6/30/10
   
6/30/09
   
6/30/10
   
6/30/09
   
6/30/10
   
6/30/09
 
Net sales
  $ 3,926,028     $ 8,699,194     $ 23,219,747     $ 12,171,681     $ 114,499     $ (333,706 )   $ -     $ -     $ 27,260,274     $ 20,537,169  
Depreciation and amortization
  $ 46,103     $ 138,174     $ 284,374     $ 205,987     $ -     $ (17,048 )   $ -     $ -     $ 330,477     $ 327,113  
Segment operational income (loss)   $ 598,354     $ 1,511,363     $ 4,154,690     $ 1,309,691     $ (969 )   $ 143,447     $ (268,010 )   $ (475,910 )   $ 4,484,065     $ 2,488,591  
Total assets
    1,732,692       (3,965,415 )     7,177,070       (18,090,381 )     (2,744,967 )     1,901,868       (1,179,446 )     3,500,408       4,985,349       (16,410,731 )
Capital expenditures
  $ 826     $ 3,113     $ 110,222     $ -     $ -     $ 537     $ -     $ -     $ 111,048     $ 3,650  

 
18

 

HOME SYSTEM GROUP AND SUBSIDIARIES,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010

Segment Results for the Six Months Ended June 30, 2010 and 2009
 
     
Barbeque grills & Skateboards
   
Fans & Lightings
   
Other Trading
   
Corporate
   
Total
 
   
For the six months ended
   
For the six months ended
   
For the six months ended
   
For the six months ended
   
For the six months ended
 
     
6/30/10
   
6/30/09
   
6/30/10
   
6/30/09
   
6/30/10
   
6/30/09
   
6/30/10
   
6/30/09
   
6/30/10
   
6/30/09
 
Net sales
  $ 6,992,194     $ 14,939,423     $ 46,363,491     $ 20,153,637     $ 3,965,226     $ 873,223     $ -     $ -     $ 57,320,911     $ 35,966,283  
Depreciation and amortization
  $ 87,712     $ 313,855     $ 584,942     $ 423,398     $ 56     $ 18,345     $ -     $ -     $ 672,710     $ 755,598  
Segment operational income (loss)   $ 1,082,631     $ 2,040,817     $ 8,824,780     $ 3,335,135     $ 606,418     $ 144,506     $ (702,797 )   $ (674,066 )   $ 9,811,032     $ 4,846,392  
Total assets
    13,658,028       32,537,855       77,268,598       43,894,340       5,496,339       1,901,868       10,200,744       24,796,253       106,623,709       103,130,316  
Capital expenditures
  $ 1,437     $ 9,176     $ 235,645     $ 12,379     $ -     $ 537     $ -     $ -     $ 237,082     $ 22,092  
 
 
19

 
 
HOME SYSTEM GROUP AND SUBSIDIARIES,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 
NOTE 16– CONCENTRATIONS, RISK AND UNCERTAINTIES

The Company has the following concentrations of business with each customer constituting greater than 10% of the Company’s sales:

   
Six months ended June 30,
   
2010
 
2009
Zhongshan City Heng Bao Trading Co., Ltd.
 
57%
 
60%
WaiYi (HK) Limited
 
32%
 
39%

The Company has the following concentrations of accounts receivable constituting greater than 10% of the Company’s accounts receivable:
 
 
As of  June 30,
 
2010
 
2009
Zhongshan City Heng Bao Trading Co., Ltd.
81%
 
80%

This concentration makes the Company vulnerable to a near-term severe impact should the relationships be impaired or terminated.

The Company has the following concentrations of business with each supplier constituting greater than 10% of the Company’s purchases:
 
 
Six months ended June 30,
 
2010
 
2009
Oceanic International (Zhongshan) Company Ltd.
34%
 
55%
 
 
20

 
 
HOME SYSTEM GROUP AND SUBSIDIARIES,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 
NOTE 17 – COMMITMENTS AND CONTINGENCIES

Operating Leases

In the normal course of business, the Company leases office and factory space under operating lease agreements. The operating lease agreements generally contain renewal options that may be exercised at the Company’s discretion after the completion of the base rental terms. In addition, many of the lease agreements provide for regular increases to the base lease rate at specified intervals, which usually occur on an annual basis. The Company was obligated under operating leases requiring minimum payments as follows:

Year
     
2010
  $ 668,647  
2011
    926,937  
2012
    516,578  
2013
    516,578  
2014 and thereafter
    1,033,156  
    $ 3,661,896  

Rental expenses were $181,752 and $139,702 for the three months ended June 30, 2010 and 2009, respectively. Rental expenses were $363,504 and $295,037 for the six months ended June 30, 2010 and 2009, respectively.

NOTE 18 – PENDING ACQUISITION

On May 31, 2010, the Company, through its wholly-owned subsidiary - Weihe, entered into an Equity Ownership Transfer Agreement (the “Acquisition Agreement”) with Zhongshan Sanfan Electrical Appliance Co., Ltd. (“Sanfan”) and all the shareholders of Sanfan (the “Sellers”), pursuant to which the Company has agreed to acquire and Sellers have agreed to sell 90% of the Sellers’ equity interest in Sanfan for cash consideration of approximately $12,000,000. The Company expects to close on the acquisition in the third quarter of 2010.  As of August 12, 2010, the Company totally paid $1,800,000 to the shareholders of Sanfan.

NOTE 19 – SUBSEQUENT EVENT

For the quarter ended June 30, 2010, the Company has evaluated subsequent events for potential recognition and disclosure from July 1, 2010 through the date of filing the financial statements with the SEC.

On July 15, 2010, the Company, through its wholly-owned subsidiaries, Weihe and Asia Forever, entered into an Equity Ownership Transfer Agreement (the “Acquisition Agreement”) with Jiangmen City Jinxinglong Electrical Appliance Co., Ltd. (“Jinxinglong”) and all the shareholders of Jinxinglong (the “Sellers”), pursuant to which Wehei and Asia Forever have agreed to acquire and Sellers have agreed to sell 100% of the Sellers’ equity interest in Jinxinglong.

Pursuant to the terms of the Acquisition Agreement, Weihe and Asia Forever will acquire, for cash consideration of $15,000,000, 70% and 30%, respectively, of all outstanding equity interest in Jinxinglong.
 
 
21

 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q, and in the Company’s December 31, 2009 Form 10-K.
 
Safe Harbor Regarding Forward-Looking Statements
 
The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 relating to future events or our future performance. Actual results may materially differ from those projected in the forward-looking statements as a result of certain risks and uncertainties set forth in
 this Form 10-Q and in the December 31, 2009 Form 10-K. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this report.

Overview
 
Home System Group is a Nevada holding company which has its operations based exclusively in China.  These operations are primarily engaged in the production of a variety of household appliances, including ceiling and table fans and decorative lightings, skateboards, trading and stainless steel gas grills and ovens and trading. Our products are primarily sold through distributors to retailers in America, Europe, Australia and Asia. 
 
Results of Operation

All amounts, other than percentages, in U.S. dollars
 
   
Three months ended
   
Increase
(Decrease)
   
Percentage Increase
(Decrease)
 
June 30, 2010
   
June 30, 2009
Net sales
 
$
27,260,274
   
$
20,537,169
   
$
6,723,105
     
32.7%
 
Costs of sales
   
(20,935,778
)    
(16,499,881
)    
4,435,897
     
26.9%
 
Gross profit
   
6,324,496
     
4,037,188
     
2,287,308
     
56.7%
 
General, selling and administrative expenses
   
(1,840,431
)    
(1,548,697
)    
291,734
     
18.8%
 
Income from operations
   
4,484,065
     
2,488,591
     
1,995,474
     
80.2%
 
Other income
   
4,459
     
173,020
     
(168,561
)    
n/m
 
Loss on debt conversion
   
(1,747,762
)    
-
     
(1,747,762
)    
n/m
 
Interest expense, net
   
(385,403
)    
(703,114
)    
(317,711
)    
(45.2)%
 
Income before taxes
   
2,355,359
     
1,958,497
     
396,862
     
20.3%
 
Income taxes
   
(944,838
)    
(512,930
)    
431,908
     
84.2%
 
Net income
 
$
1,410,521
   
$
1,445,567
   
$
(35,046
)    
(2.4)%
 

 
22

 
 
   
Six months ended
   
Increase
(Decrease)
   
Percentage Increase
(Decrease)
 
June 30, 2010
   
June 30, 2009
Net sales
 
$
57,320,911
   
$
35,966,283
   
$
21,354,628
     
59.4%
 
Costs of sales
   
(44,050,279
   
(28,156,419
   
15,893,860
     
56.5%
 
Gross profit
   
13,270,632
     
7,809,864
     
 5,460,768
     
69.9%
 
General, selling and administrative expenses
   
(3,459,600
   
(2,963,472
   
    496,128
     
16.7%
 
Income from operations
   
9,811,032
     
4,846,392
     
4,964,640
     
102.4%
 
Other income
   
   836,972
     
234,755
     
   602,217
     
265.5%
 
Loss on debt conversion
   
   (1,747,762
   
-
     
(1,747,762
   
n/m
 
Interest expense, net
   
  (762,162
   
(1,073,502
   
     (311,340
   
(29.0)%
 
Income before  taxes
   
8,138,080
     
4,007,645
     
4,130,435
     
103.1%
 
Income taxes
   
  (2,138,882
   
(1,035,555
   
1,103,327
     
106.5%
 
Net income
 
$
5,999,198
   
$
2,972,090
   
$
3,027,108
     
 101.9%
 
 
Net Sales

Total consolidated net sales for three months ended June 30, 2010 were $27,260,274, an increase of $6,723,105 as compared to $20,537,169 for three month period ended June 30, 2009, primarily driven by increased sales of fans and lightings of $11,048,066, partially offset by a decrease of $4,773,166 in sales of barbeque grills and skateboards.

Total consolidated net sales for six month period ended June 30, 2010 were $57,320,911, an increase of $21,354,628 from the corresponding 2009 level, primarily resulted from the higher sales of fans and lightings of $26,209,854 and higher sales of Other trading of $3,092,003, partially offset by a decrease of $7,947,229 in sales of barbeque grills and skateboards.
 
   
Three months ended
June 30, 2010
   
Three months ended
June 30, 2009
       
Segment
       
Percent of total
       
Percent of total
 
Increase
(Decrease)
 
Fans & Lightings
  $ 23,219,747       85.2 %   $ 12,171,681       59.3 %   $ 11,048,066  
Barbeque Grills & Skateboards
    3,926,028       14.4 %     8,699,194       42.3 %     (4,773,166 )
Other Trading
    114,499       0.4 %     (333,706 )     (1.6 )%     448,205  
Total
  $ 27,260,274       100 %   $ 20,537,169       100 %   $ 6,723,105  
 
   
Six months ended
June 30, 2010
   
Six months ended
June 30, 2009
       
Segment
       
Percent of total
       
Percent of total
 
Increase
(Decrease)
 
Fans & Lightings
  $ 46,363,491       80.9 %   $ 20,153,637       56.0 %   $ 26,209,854  
Barbeque Grills & Skateboards
    6,992,194       12.1 %     14,939,423       41.5 %     (7,947,229 )
Other Trading
    3,965,226       7.0 %     873,223       2.5 %     3,092,003  
Total
  $ 57,320,911       100 %   $ 35,966,283       100 %   $ 21,354,628  

 
23

 
 
Net revenue by Segment

   
Percent increase of net revenue
 
2010 vs. 2009
Segment
 
Three months ended June 30,
 
Six months ended June 30,
Fans & Lightings
 
90.7%
 
130%
Barbeque grills & Skateboards
 
(54.9)%
 
(53.2)%
Other trading
 
n/m
 
354%
 
The reasons for revenue for each segment are as follows:

Fans & Lightings – Fans and lightings became our major segment after the acquisition of Weihe in late 2008. Due to its higher gross profit margins, the Company has redistributed resources and facilities to the Fans and Lightings segment. As a result of Weihe’s strong stable sales network, product design and quality, the revenue of fans and lightings increased by $11,048,066 or 90.7% to $23,219,747 for the three months ended June 30, 2010. Net revenue was $46,363,491 for six months ended June 30, 2010, an increase of $26,209,854 (or approximately 130%) as compared to the corresponding period of 2009 due to the reasons discussed above.

Barbeque Grills & Skateboards – The Company recorded revenue of $3,926,028 and $6,992,194 for the three and six months ended June 30, 2010, respectively, decreased by $4,773,166 and $7,947,229 over the comparable periods of 2009, respectively. The significant decreases were driven by poor performance of barbeque grills. During the three and six months ended June 30, 2010, the revenues of barbeque grills were $197,872 and $697,483, respectively, decreases of $8,198,390 and $12,916,974 from the corresponding 2009 level, respectively. The dramatic decreases were resulted from the general weakness of gas grills market and the Company’s decision to allocate more production resources to the Fans and Lightings segments, in part due to the financial issues at one of our major gas grills’ clients, and order levels decreased below levels felt necessary to provide adequate profit margins. As a result, management decided to not accepting orders with low profit margin, to restructure our product composition and provide the resources to fans and lightings. Within the segment, the revenues of skateboards for three and six months ended June 30, 2010 were strong, with increases of $3,476,994 and $4,969,745 over the three and six months ended June 30, 2009, respectively, but were more than offset by the significant decline in the revenue of barbeque grills.

Other Trading – This segment consists of the Company’s purchasing small home appliances from local manufacturers in China, and then exporting those goods to international buyers. In the second quarter of 2010, the revenue was $114,499. The revenue for six months ended June 30, 2010 was $3,965,226, an increase of 354% as compared to the same period in 2009 due to some large transactions in the first quarter of 2010.
 
 
24

 
 
Costs of Sales and Gross Profit
 
 
Three months ended June 30,
 
   
2010
   
2009
 
         
% of Sales Revenue
         
% of Sales Revenue
 
Cost of Sales
  $ 20,935,778       76.7 %   $ 16,499,881       80.0 %
Gross Profit
  $ 6,324,496       23.3 %   $ 4,037,188       20.0 %
 
 
 
Six months ended June 30,
 
   
2010
   
2009
 
         
% of Sales Revenue
         
% of Sales Revenue
 
Cost of Sales
  $ 44,050,279       76.8 %   $ 28,156,419       78.3 %
Gross Profit
  $ 13,270,632       23.2 %   $ 7,809,864       21.7 %
 
The Company reported cost of sales of $20,935,778 for the three months ended June 30, 2010, an increase of $4,435,897 from the corresponding 2009 level.  This increase was primarily the result of the higher volume and mix of Fans and Lightings sales, which resulted in increased cost of sales of $8,614,923 over the comparable period of 2009. This was partially offset by lower cost of sales of Barbeque Grills & Skateboards segment due to its lower revenue as discussed above. Cost of sales as a percentage of revenue for the three months ended June 30, 2009 decreased 3.3% compared to the prior year’s comparable three month period because higher sales of Fans and Lightings, which has higher gross profit margin then barbeque grills.

The cost of sales for the six months ended June 30, 2010 was $44,050,279, as compared to a cost of sales of $28,156,419 for the corresponding period in 2009.  The $15,893,860 increase was driven by the higher cost of sales of $19,601,333 from fans and lightings, partially offset by lower cost of sales of $9,935,692 of barbeque grills in 2010 compared to corresponding prior year period. Moreover, the cost of sales as a percentage of revenue in the six months ended June 30, 2010 was 76.8%, as compared to 78.3% for the corresponding period in 2009, resulting in an improvement in the Company’s gross profit and gross profit margin in 2010. This improvement was due to Fans and Lightings lower percentage cost of sales of approximately 77.9% and lower percentage cost of sales of 73.9% of skateboards for the first half year of 2010.

General, Selling and Administrative Expenses

The Company’s general, selling and administrative expenses increased by $291,734 and $496,128 for the three and six month periods ended June 30, 2010, respectively, as compared to the corresponding 2009 period. These increases were higher primarily due to the higher payroll expense resulted from increased sales volume as discussed above and the rent for Weihe’s facilities due to the transfer of Weihe’s fixed asset to shareholders’ of Asia Forever in the third quarter of 2009.
 
Income from Operations

Income from operations for the Company increased by $1,995,474 and $4,964,640, or up 80% and 102%, respectively, for the three months and six months ended June 30, 2010, as compared to three months and six months ended June 30, 2009, largely due to the increased revenue and operating profit resulted from favorable performance in the sales of the Fans and Lightings segment as discussed above.

 
25

 

   
Three months ended
June 30, 2010
   
Three months ended
June 30, 2009
 
Segment
       
Percent of Income
       
Percent of Income
Fans & Lightings
  $ 4,154,690       92.6 %   $ 1,309,691       52.6 %
Barbeque Grills & Skateboards
    598,354       13.3 %     1,511,363       60.7 %
Other Trading
    (969 )     0.0 %     143,447       5.8 %
Corporate
    (268,010 )     (5.9 )%     (475,910 )     19.1 %
Total
  $ 4,484,065       100 %   $ 2,488,591       100 %

 
   
Six months ended
June 30, 2010
   
Six months ended
June 30, 2009
 
Segment
       
Percent of Income
       
Percent of Income
Fans & Lightings
  $ 8,824,780       89.9 %   $ 3,335,135       68.8 %
Barbeque Grills & Skateboards
    1,082,631       11.0 %     2,040,817       42.1 %
Other Trading
    606,418       6.2 %     144,506       2.9 %
Corporate
    (702,797 )     (7.1 )%     (674,066 )     (13.8 )%
Total
  $ 9,811,032       100 %   $ 4,846,392       100 %

Income from Fans and Lightings increased by $2,844,999 and $5,489,645 during the three and six month periods ended June 30, 2010, as compared to the three and six months ended June 30, 2009, results from the higher revenue as discussed above.

Income from operations of Barbeque Grills and Skateboards was $598,354 during the three months period ended June 30, 2010, a decrease of $913,009 or 60.4% compared to the corresponding period 2009 level. The decrease is primarily due to the lower revenue of $4,773,166.

Income from operations of Other Trading decreased by $144,416 for the three months ended June 30, 2010 and increased by $461,912 for six month period ended June 30, 2010 as compared to the comparable prior year periods.

Other Income
 
Other income decreased by $168,561 for the three months ended June 30, 2010 as compared the three months ended June 30, 2009 and increased by $602,217 for the six months ended June 30, 2010 over the comparable period of 2009. The increase for the six month period was largely due to the gain on sales of excess raw materials consisting of stainless steel cold coil during the first quarter of 2010 in the amount of $682,647.

Loss on Debt Conversion
 
On April 1, 2010, the Company converted $17,542,774 of debt into equity at a conversion rate of $3.50 per share, resulting in the Company’s recording loss of $1,747,762 as that conversion rate is lower than $3.86, which was the average price of the common stock over the 30 trading days prior to the time of the conversion.

Interest Expenses, Net
 
The Interest expense, net decreased by $317,711 and $311,340 for the three and six months periods ended June 30, 2010 as compared to the prior year periods due to lower bank borrowings.
 
 
26

 
 
Net Income before Income Taxes

The Company reported net income before taxes of $2,355,359 for the three months ended June 30, 2010, representing an increase of $396,862 as compared to the pre-tax income of $1,958,497 recorded during second quarter of 2009. This increase was primarily driven by the higher revenue and gross profit resulting from higher sales of Fans and Lightings, but largely offset by the non-cash loss on Debt conversion of $1,747,762 in the second quarter of 2010.

Net income before taxes of $8,138,080 for the six months ended June 30, 2010 was an increase of $4,130,435 as compared to the net income before taxes of $4,007,645 incurred during the comparable period of 2009. The increase was primarily driven by the higher operating profits resulting from increased sales in the Fans and Lightings segment as discussed above, which more than offset the loss on debt conversion.

Taxes

The Company recorded a tax provision of $944,838 for the three months ended June 30, 2010, representing 41.1% of the pre-tax income.  This is a large increase in percentage over the comparable period in 2009 tax provision of $512,930, or 26.2% of pre-tax income due to the inability to record tax benefit on the loss on debt conversion of $1,747,762.
 
Net Income

As a result of the increased level of net income before taxes, the Company realized net income of $1,410,521 and $5,999,198 for the three months and six months ended June 30, 2010, a decrease of $35,046 and an increase $3,027,108 from the prior year, respectively.
 
Liquidity and Capital Resources
 
As of June 30, 2010, cash and cash equivalents were $5,790,933 as compared to $3,985,782 as of December 31, 2009. The components of this increase of $1,805,151 are reflected below.

Cash Flow
 
   
Six months ended June 30,
 
   
2010
   
2009
 
Net cash used in operating activities
  $ (1,401,601 )   $ (3,095,009 )
Net cash used in investing activities
    (568,408 )     (22,092 )
Net cash provided by financing activities
    3,771,118       9,209,997  
Exchange rate effect on cash
    4,042       25,955  
Net cash inflow
  $ 1,805,151     $ 6,118,851  
 
Net cash used in operating activities

Cash has historically been generated from operations and short-term borrowings. The negative cash flow from operating activities was principally attributed to the net income generated during the six months ended June 30, 2010, which was $5,999,198 and reduced inventories of $7,136,316, being more than offset by an increase of $16,785,508 of account receivables, the result of the higher revenue of $21,354,628 in the first half year of 2010 over the comparable period in 2009, and reduced levels of accounts payable.
 
Net cash used in investing activities
 
There were no significant needs for plant and facility expansion during the first six months of 2010 and thus only $237,082 of cash was used in the purchase of plant & equipment during that period.
 
 
27

 
 
On May 31, 2010, the Company entered into an Equity Ownership Transfer Agreement (“Agreement”), to acquire Zhongshan Sanfan Electrical Appliance Co., Ltd. (“Sanfan”) and prepaid $331,326 as an acquisition deposit to the shareholders of Sanfan according to the terms of the Agreement as of June 30, 2010.
 
Net cash provided by financing activities

Net cash provided by financing activities was $3,771,118, mainly from obtaining $4,831,958 net increased funding from bank loans and $3,212,050 net funding from stockholder and related parties, partially offset by the increase of $4,272,890 in notes receivables.
 
Working capital at June 30, 2010 increased substantially to $16,388,176 from the a deficit $1,242,215 at December 31, 2009, driven by higher level of accounts receivable of $16,785,508 and the debt conversion on April 1, 2010, which converted short term debt of $17,542,774 into common shares, partially offset by lower inventories of $7,136,316 and funding received from related parties.

During the second and the third quarters, the Company entered into two Equity Ownership Transfer agreements with two fan manufacturers. Pursuant to terms of the agreements, the Company will acquire these two manufacturers for a cash consideration of approximately $12 million and $15 million, respectively. The payments will be made five installments with the final installment due on December 31, 2011 and we expected to be funded by current cash balances, cash from operation and bank borrowingings.

We believe that our available funds and cash flows generated from operations and short term borrowings will be sufficient to meet our anticipated ongoing operating needs for the next twelve months. However it is possible that the Company might need to raise additional capital if it decides to make one or more substantial acquisitions. There can be no guarantee that we will be able to obtain such funding, whether through the issuance of debt or equity, on terms satisfactory to management and our Board of Directors.

Off-Balance Sheet Arrangements

We do not have any off-balance arrangements.

 
28

 
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not Applicable.

Item 4. Evaluation of Disclosure Controls and Procedures.

Evaluation of Disclosure Controls and Procedures
 
An evaluation was conducted under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”), its principal executive officer, and Chief Financial Officer (“CFO”), its principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of June 30, 2010 ( the “Evaluation Date”). The evaluation of our disclosure controls and procedures included a review of our processes and the effect on the information generated for use in this Quarterly Report on Form 10-Q. In the course of this evaluation, we sought to identify any material weaknesses in our disclosure controls and procedures and to confirm that any necessary corrective action, including process improvements, was taken. The purpose of this evaluation is to determine if, as of the Evaluation Date, our disclosure controls and procedures were operating effectively such that the information, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) was recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

During the course of preparation of our financial statements for second quarter of 2010, our CEO and CFO have concluded that our disclosure controls and procedures were not effective as of June 30, 2010 due to some significant deficiencies (as defined in Public Company Accounting Oversight Board Standard No. 2) in the Company’s internal controls over financial reporting. This is due to the fact that the Company lacks sufficient personnel with the appropriate level of knowledge, experience and training in the application of US generally accepted accounting principles (“GAAP”) standards, especially related to complicated accounting issues. This could cause the Company to be unable to fully identify and resolve certain accounting and disclosure issues that could lead to a failure to maintain effective controls over preparation, review and approval of certain significant account reconciliation from Chinese GAAP to US GAAP and necessary journal entries.

Based on the control deficiency identified above, we have designed and plan to implement, or in some cases have already implemented, the specific remediation initiatives described below:
 
 
We are evaluating the roles of our existing accounting personnel in an effort to realign the reporting structure of our internal auditing staff in China that will test and monitor the implementation of our accounting and internal control procedures.

 
We are in the process of completing a review and revision of the documentation of the Company’s internal control procedures and policies.

 
We will increase our accounting and financing personnel resources, by retaining more U.S. GAAP knowledgeable financial professionals.
 
Changes in Internal Control over Financial Reporting

Other than the efforts described above to improve its internal controls both before and after the end of the reporting period, there were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
 
29

 
 
PART II – OTHER INFORMATION
 
Item 1.   Legal Proceedings.

None.

Item 1A.   Risk Factors.

Not Applicable.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.   Defaults On Senior Securities.

None.

Item 4.  Reserved

None.

Item 5.  Other Information

Item 6.  Exhibits

Exhibit No.
Title of Document
     
31.1*
 
Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended
     
31.2*
 
Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended
     
32.1*
 
Certification pursuant to 18 U.S.C section 1350, adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
 
32.2*
 
Certification pursuant to 18 U.S.C section 1350, adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
 
*Filed herewith
 
 
30

 
 
SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, there unto duly authorized.

 
HOME SYSTEM GROUP
 
       
Date: August 16, 2010
By:
/s/ Lei Yu
 
   
Lei Yu
 
   
Chief Executive Officer
 
   
(Principal Executive Officer)
 
       
       
Date: August 16, 2010
By:
/s/ Jianming Xu
 
   
Jianming Xu
 
   
Chief Financial Officer
(Principal Financial and Accounting Officer)
 
 
 
31

 
 
EXHIBIT INDEX

Exhibit No.
Title of Document
     
31.1*
 
Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended
     
31.2*
 
Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended
     
32.1*
 
Certification pursuant to 18 U.S.C section 1350, adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
 
32.2*
 
Certification pursuant to 18 U.S.C section 1350, adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
 
  
*Filed herewith


EX-31.1 HTML

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Exhibit 31.1
 
CERTIFICATION PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-14(a) and 15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002
 
I, Lei Yu, certify that:
 
1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 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 period covered by this report;
 
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 registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
 
(a)         designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)         designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements, for external purposes in accordance with generally accepted accounting principles;
 
(c)         evaluated the effectiveness of the registrant’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 period covered by this report based on such evaluation; and
 
(d)         disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)         all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)         any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: August 16, 2010
 
By:
/s/ Lei Yu
 
 
Lei Yu
Chief Executive Officer
(Principal Executive Officer)
 
 

EX-31.2 HTML

e607410_ex31-2.htm

 
Exhibit 31.2
 
CERTIFICATION PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-14(a) and 15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002
 
I, Jianming Xu, certify that:
 
1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 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 period covered by this report;
 
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 registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
 
(a)         designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)         designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements, for external purposes in accordance with generally accepted accounting principles;
 
(c)         evaluated the effectiveness of the registrant’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 period covered by this report based on such evaluation; and
 
(d)         disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)         all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)         any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: August 16, 2010
 
By:
/s/ Jianming Xu
 
 
Jianming Xu
Chief Financial Officer (Principal Accounting and Financial Officer)
 

EX-32.1 HTML

e607410_ex32-1.htm


 
CERTIFICATION PURSUANT TO
 
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Home Systems Group on Form 10-Q for the fiscal quarter ended June 30, 2010 as filed with the Securities and Exchange Commission on the date here of, I, Yu Lei, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 
1. The Report 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 result of operations of the Company.
 
Date: August 16, 2010
 
/s/ Lei Yu 
 
Lei Yu
Chief Executive Officer (Principal Executive Officer)
 
 

EX-32.2 HTML

e607410_ex32-2.htm

 
CERTIFICATION PURSUANT TO
 
18 U.S.C. SECTION 1350, ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Home Systems Group on Form 10-Q for the fiscal quarter ended June 30, 2010 as filed with the Securities and Exchange Commission on the date hereof, I, Jianming Xu, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 
1. The Report complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and