Form 10-Q/A Home System Group

[Amend] Quarterly report pursuant to section 13 and 15(d)

What is Form 10-Q/A?
  • Accession No.: 0001204459-08-000824 Act: 34 File No.: 000-49770 Film No.: 08769667
  • CIK: 0001172319
  • Submitted: 2008-04-22
  • Period of Report: 2007-09-30

10-Q/A HTML

hsg09300710qa.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 Q/A
(Amendment No. 1)

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2007

or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________

Commission File Number: 000-49770

HOME SYSTEM GROUP
(Exact name of small business issuer as specified in its charter)

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

No. 5A, Zuanshi Ge
Fuqiang Yi Tian Ming Yuan
Fu Tian Qu, Shenzhen City,
People’s Republic of China

(Address of principal executive offices)

(86 755) 8357-0142
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Q         No ¨

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

Large Accelerated Filer ¨ Accelerated Filer ¨
       
Non-Accelerated Filer ¨ Smaller Reporting Company Q

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


EXPLANATORY NOTE

Home System Group (the "Company") is filing this Amendment No. 1 on Form 10-Q/A, to reflect the effect of (1) the Company’s voidance and termination of the Fixed Price Standby Equity Distribution Agreement, (2) the Company’s voidance and termination of the agreements to acquire Zhongshan Weihe Electrical Appliances Co., Ltd. ("Weihe") and Zhongshan Juxian Gas Oven Co., Ltd. ("Juxian") and (3) the correction of certain disclosures contained in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, as filed with the U.S. Securities and Exchange Commission on August 13, 2007 (the "Original Filing"), to reflect the restatement of the Company’s financial statements in connection with the foregoing terminations.

On May 23, 2007, the Company entered into a Fixed Price Standby Equity Distribution Agreement (the "Distribution Agreement"), with four investors (the "Investors"). Pursuant to the Distribution Agreement, the Company was required, at its discretion, to 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’ obligation to purchase shares of common stock under the Distribution Agreement was subject to certain conditions, including the Company obtaining an effective registration statement for the resale of the common stock sold under the Distribution Agreement. The Investors delivered 16.5% of the purchase price payable by wire transfer of immediately available funds to an account that the Company designated in writing to each investor prior to the closing date of the transactions. Also, the Investors delivered to the Company an executed Promissory Note for the payment of the remaining 83.75% of the remaining commitment under this agreement. However, on February 7, 2008, the Company entered into a termination and release agreement with the Investors, pursuant to which it agreed to terminate the Distribution Agreement and release each other from our respective obligations thereunder because performance of our respective obligations could not be completed without unreasonable expense or delay. Other than the Company’s obligation to repay the funds paid by the Investors, no termination penalties were incurred by the Company in connection with the termination of the Distribution Agreement.

On April 20, 2007, the Company entered into a share exchange agreement with Juxian and Juxian’s shareholders (the "Juxian Agreement"), for the acquisition of 100% of Juxian for an aggregate purchase price of $14,000,000, $10,000,000 of which was payable in cash and $4,000,000 of which was payable in 1,000,000 shares of our common stock valued at $4.00 per share. The cash portion of the purchase price was evidenced by non interest-bearing, unsecured promissory notes delivered by the Company to each of the Juxian shareholders, pursuant to which one-half of the cash portion was due and payable on July 2, 2008, the first anniversary of the closing, and the remaining half was due and payable on July 2, 2009, the second anniversary of the closing. On July 5, 2007, the Company entered into a share exchange agreement with Weihe and the Weihe shareholders (the "Weihe Agreement"), for the acquisition of 100% of the then outstanding shares of Weihe. In consideration for the shares of Weihe, the Company agreed to pay an aggregate price of $45,000,000, to be paid in a combination of 4,500,000 shares of our common stock, valued at $4.00 per share and $27,000,000 in cash. The obligation to pay the cash portion of the purchase price was evidenced by non-interest-bearing, unsecured promissory notes delivered by us to each of the Weihe shareholders at the closing. Pursuant to the promissory notes, 40% of the cash portion of the purchase price was due and payable on July 5, 2008, the first anniversary of the closing, and the remaining 60% was due and payable on July 5, 2009, the second anniversary of the closing. However, on February 7, 2008, the Company entered into two separate termination and release agreements with each of Juxian and Weihe and their respective shareholders, pursuant to which the Company agreed to void and terminate each of the Juxian Agreement and the Weihe Agreement and release each other from our respective obligations under each of the agreements, because performance of our respective obligations under the agreements could not be completed without unreasonable expense or delay. No termination penalties were incurred by the Company in connection with the termination of the Juxian Agreement and the Weihe Agreement.

The Company’s voidance and termination of the foregoing agreements significantly changed the Company’s financial position and accordingly, the financial statements for the three months and nine months ended September 30, 2007 are herein restated. In addition, the Company has corrected its disclosures throughout "ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Results of Operations - Comparison of Nine Months Ended September 30, 2007 and September 30, 2006" to generally reflect this restatement. No other information in the Original Filing is amended hereby. This Form 10-Q/A continues to describe conditions as of the date of the Original Filing, and accordingly, the Company has not updated the disclosures contained herein to reflect events that occurred at a later date.

As required by Rule 12b-15 promulgated under the Securities Exchange Act of 1934, as amended, the Company’s principal executive officer and principal financial officer are providing Rule 13a-14(a) certifications in connection with this Form 10-Q/A (but otherwise identical to their prior certifications) and are also furnishing, but not filing, Rule 13a-14(b) certifications in connection with this Form 10-Q/A (but otherwise identical to their prior certifications).


PART 1 – FINANCIAL INFORMATION

HOME SYSTEM GROUP AND SUBSIDIARIES

FINANCIAL STATEMENTS

FOR THE THREE MONTHS AND NINE MONTHS/PERIOD ENDED

SEPTEMBER 30, 2007 AND 2006

(UNAUDITED)

C O N T E N T S

  PAGE
   
CONSOLIDATED BALANCE SHEETS F-1
   
CONSOLIDATED STATEMENTS OF INCOME/OPERATIONS AND COMPREHENSIVE INCOME (LOSS) F-2
   
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY F-3
   
CONSOLIDATED STATEMENTS OF CASH FLOWS F-4
   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-5
   

HOME SYSTEM GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2007 AND DECEMBER 31, 2006
(Expressed in US dollars except for number of shares)

 

 

 September 30,

 

 December 31,

 

 

2007

 

2006

 

 

 (Unaudited)

 

 (Audited)  

 

 

 (Restated)

 

 

ASSETS

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

Cash and cash equivalents

$

             245,368

$

                6,012

Accounts receivable – trade

 

          2,189,341

 

         3,212,160

Other receivables

 

               842,901

 

                       -

Inventories

 

          3,140,509

 

         2,334,744

Trade deposits

 

        2,954,389

 

            112,824

Employee advances

 

                        -

 

                4,391

Tax refundable

 

               73,511

 

                       -

TOTAL CURRENT ASSETS

 

       9,446,019

 

5,670,131

 

 

 

 

 

Acquisition deposits

 

7,540,500

 

-

Property, plant and equipment - net

 

          5,429,235

 

         3,684,326

 

 

 

 

 

TOTAL ASSETS

$

22,415,754

$

9,354,457

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

Accounts payable – trade

$

6,359,857

$

2,353,705

Accrued expenses

 

          2,145,377

 

            389,455

Taxes payable

 

                        -

 

            122,262

Due to related party

 

4,000

 

         2,519,898

Due to stockholder

 

            271,401

 

                       -

Total current liabilities

 

         8,780,635

 

        5,385,320

 

 

 

 

 

NON-CURRENT LIABILITIES

 

 

 

 

Notes payable

 

         6,575,000

 

                      -

 

 

 

 

 

TOTAL LIABILITIES

 

       15,355,635

 

        5,385,320

 

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

Common stock - $0.001 par value; 200,000,000 shares authorized, 62,477,949 shares and 42,500,000 shares issued and outstanding at September 30, 2007 and December 31, 2006

 

               62,478

 

              42,500

Additional paid-in capital

 

          6,590,219

 

         3,709,025

Note receivable on stock issuance

 

            (900,000)

 

                       -

Retained earnings

 

             904,131

 

            118,249

Cumulative translation adjustment

 

             403,291

 

              99,363

 

 

 

 

 

TOTAL STOCKHOLDERS' EQUITY

 

          7,060,119

 

         3,969,137

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

22,415,754

$

9,354,457

 

 

 

 

 

See accompanying notes to consolidated financial statements

F-1


HOME SYSTEM GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME/OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2007 AND FOR THE PERIOD FROM APRIL 5, 2006
(DATE OF INCORPORATION) TO SEPTEMBER 30, 2006
(Expressed in US dollars except for number of shares)

(UNAUDITED)

 

 

Three Months Ended September 30

 

Nine Months Ended September 30,

 

Period from April 5, 2006 to  September 30,

 

 

2007

 

2006

 

2007

 

2006

 

 

(Restated)

 

 

 

(Restated)

 

 

 

 

 

 

 

 

 

 

 

NET SALES

$

2,862,340

 $

          449,502

 $

      25,806,019

 $

             449,502

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

Cost of sales

 

2,803,828

 

          365,366

 

      22,746,458

 

             365,366

General selling and administrative expenses

 

803,349

 

             54,627

 

        2,143,058

 

               55,145

 

 

3,607,177

 

          419,993

 

      24,889,516

 

             420,511

 

 

 

 

 

 

 

 

 

(LOSS) INCOME FROM OPERATIONS

 

(744,837)

 

             29,509

 

           916,503

 

               28,991

 

 

 

 

 

 

 

 

 

OTHER (EXPENSE) INCOME

 

 

 

 

 

 

 

 

Finance costs

 

(146,096)

 

(4,111)

 

(146,673)

 

(4,111)

Interest (expense) income

 

                 (5,872)

 

                     65

 

                2,141

 

                       95

Other income

 

                 13,401

 

                        -

 

              13,401

 

                           -

 

 

(138,567)

 

             (4,046)

 

          (131,131)

 

               (4,016)

(LOSS) INCOME BEFORE INCOME TAXES

 

(883,404)

 

             25,463

 

           785,372

 

               24,975

 

 

 

 

 

 

 

 

 

INCOME TAXES

 

72,993

 

(9,191)

 

510

 

(9,191)

 

 

 

 

 

 

 

 

 

NET (LOSS) INCOME

 

(810,411)

 

             16,272

 

           785,882

 

               15,784

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

96,094

 

                        -

 

           303,928

 

                           -

 

 

 

 

 

 

 

 

 

COMPREHENSIVE (LOSS) INCOME

$

(714,317)

 $

             16,272

 $

        1,089,810

 $

               15,784

 

 

 

 

 

 

 

 

 

BASIC AND DILUTED

 

 

 

 

 

 

 

 

EARNINGS (LOSS) PER SHARE

$

                   (0.01)

 $

                 0.00

 $

                  0.01

 $

                    0.00

 

 

 

 

 

 

 

 

 

BASIC AND DILUTED WEIGHTED

 

 

 

 

 

 

 

 

AVERAGE NUMBER OF SHARES

 

62,466,862

 

     42,500,000

 

      60,166,643

 

       42,500,000

See accompanying notes to consolidated financial statements

F-2


HOME SYSTEM GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND FOR THE PERIOD FROM APRIL 5, 2006
(DATE OF INCORPORATION) TO DECEMBER 31, 2006
(Expressed in US dollars except for number of shares)

 

 

Number of

 

 

 

 

 

 Note

 

 

 

 

 

 

 

 

Shares of

 

 

 

Additional

 

Receivable

 

 

 

Cumulative

 

 

 

 

Common

 

 Common

 

 Paid-in

 

 On Stock

 

Retained

 

Translation

 

 

 

 

 Stock

 

 Stock

 

 Capital

 

 Issuance

 

  Earnings

 

Adjustment

 

 Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT APRIL 5, 2006

 

-

$

-

$

-

$

-

$

-

$

-

$

-

Initial capitalization

 

10,000

 

   1,285

 

-

 

               -

 

-

 

-      

 

1,285

Contributed capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Cash

 

-

 

   -

 

1,123,140

 

               -

 

-

 

-      

 

1,123,140

   Property, plant and equipment

 

-

 

   -

 

2,627,100

 

               -

 

-

 

-      

 

2,627,100

Retroactive recapitalization

 

   42,490,000

 

   41,215

 

       (41,215)

 

-

 

-

 

-

 

-

Cumulative translation adjustment

 

-

 

-

 

-

 

-

 

-

 

99,363

 

99,363

Net income for the period

 

-

 

-

 

-

 

-

 

118,249

 

-

 

     118,249

BALANCE AT DECEMBER 31, 2006

 

     42,500,000

 

  42,500

 

     3,709,025

 

                    -

 

         118,249

 

      99,363

 

    3,969,137

Effect of reverse merger

 

  19,797,949

 

  19,798

 

     2,032,355

 

-

 

-

 

-

 

2,052,153

Notes receivable on acquisition merger

 

-

 

-

 

-

 

(900,000)

 

-

 

-

 

(900,000)

Issuance of common stock for prepaid expenses

 

    150,000

 

             150

 

          622,350

 

                      -

 

                     -

 

                     -

 

          622,500

Issuance of common stock for employees

 

        30,000

 

               30

 

        149,970

 

-

 

-

 

-

 

        150,000

Issuance of stock options

 

-

 

-

 

76,519

 

-

 

-

 

-

 

76,519

Cumulative translation adjustment

 

           -

 

        -

 

-

 

-

 

-

 

303,928

 

303,928

Net income for the nine months ended September 30, 2007 - restated

              -

 

         -

 

-

 

                      -

 

785,882

 

                     -

 

785,882

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT SEPTEMBER 30, 2007 (UNAUDITED)

 

  62,477,949

$

    62,478

$

6,590,219

$

    (900,000)

$

904,131

$

403,291

$

7,060,119

See accompanying notes to consolidated financial statements

F-3


HOME SYSTEM GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND FOR THE
PERIOD FROM APRIL 5, 2006 (DATE OF INCORPORATION) TO SEPTEMBER 30, 2006
(Expressed in US dollars)
(UNAUDITED)

 

 

Nine Months Ended September 30,

 

Period from April 5, 2006 to September 30,

 

 

2007

 

2006

 

 

(Restated)

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

Net income

$

785,882

$

15,784

Adjustments to reconcile net income

 

 

 

 

to net cash provided by (used in) operating activities

 

 

 

 

Depreciation

 

           285,905

 

            56,294

Stock-based compensation

 

           652,438

 

                     -

Change in assets and liabilities:

 

 

 

 

(Increase) decrease in assets

 

 

 

 

Accounts receivable – trade

 

        4,777,857

 

          (518,730)

Other receivables

 

           (28,325)

 

          (103,886)

Inventories

 

          (697,066)

 

       (1,494,552)

Trade deposits

 

           (11,195)

 

                     -

Employee advances

 

          (406,102)

 

                     -

Increase (decrease) in liabilities

 

 

 

 

Accounts payable

 

        1,182,606

 

        1,964,592

Other payable and accrued expenses

 

        1,549,453

 

 

Taxes payable

 

          (123,891)

 

                     -

 

 

 

 

 

Net cash provided by (used in) operating activities

 

        7,967,562

 

           (80,498)

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

Purchase of equipments

 

       (1,848,368)

 

       (3,693,643)

 

 

 

 

 

Net cash used in investing activities

 

       (1,848,368)

 

       (3,693,643)

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

Proceeds from issuance of share capital

 

                     -

 

        3,752,640

Cash acquired in merger

 

            55,980

 

                     -

Acquisition deposits

 

       (7,574,800)

 

                     -

Net repayments of bank loans

 

       (1,745,000)

 

                     -

Net decrease in due from related party

 

          (460,690)

 

                     -

Proceeds from note payable

 

        6,575,000

 

            33,914

Increase in due to stockholder

 

           266,043

 

                     -

Dividend distribution for acquisition

 

       (3,000,000)

 

                     -

 

 

 

 

 

Net cash (used in) provided by financing activities

 

       (5,883,467)

 

        3,786,554

 

 

 

 

 

EXCHANGE RATE EFFECT ON CASH

 

              3,629

 

                 243

NET INCREASE  IN CASH

 

           239,356

 

            12,656

 

 

 

 

 

CASH - BEGINNING OF PERIOD

 

              6,012

 

                     -

 

 

 

 

 

CASH - END OF PERIOD

$

245,368

$

12,656

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW

 

 

 

 

INFORMATION

 

 

 

 

Cash paid during the period for:

 

 

 

 

Interest

$

99,940

$

                   -   

Income taxes

$

            72,993

$

5,161

 

 

 

 

 

NONCASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Issuance of common stock for prepaid expenses

$

426,919

$

                   -   

Issuance of common stock for employees' compensation

$

150,000

$

                   -   

Issuance of stock option

$

76,519

$

                   -   

See accompanying notes to consolidated financial statements

F-4


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS

The accompanying unaudited consolidated financial statements have been prepared by Home System Group ("HSG") and Subsidiaries (collectively, the "Company"). These statements include all adjustments (consisting only of their normal recurring adjustments) which management believes necessary for a fair presentation of the statements and have been prepared on a consistent basis using the accounting policies described in the Form 10-KSB for the year ended December 31, 2006 ("2006 Form 10-KSB"). Certain financial information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company firmly believes that the accompanying disclosures are adequate to make the information presented not misleading. The Notes to Financial Statements included in the 2006 Form 10-KSB should be read in conjunction with the accompanying interim financial statements. The interim operating results for the nine months ended September 30, 2007 may not be indicative of operating results expected for the full year.

Restatement of Financial Statements

Subsequent to balance sheet date, the Company cancelled its investments in Zhongshan Weihe Electrical Appliances Co., Ltd. and Zhongshan Juxian Gas Oven Co., Ltd. Simultaneously, some tentative investors cancelled their plan to invest in the Company. These changes imposed significant changes to the Company’s financial position and accordingly, financial statements for the three months and nine months ended September 30, 2007 are restated.

Basis of Preparation

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

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

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

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

F-5


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS (Continued)

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

Zhongshan Weihe Electrical Appliances Co. Ltd. ("Weihe") was acquired on July 5, 2007 by Well Profit. The acquisition was a stock and cash transaction valued at approximately $45,000,000. Under the terms of the Share Exchange Agreement (the "Agreement"), the consideration consists of 4,500,000 newly issued shares of HSG’s common stock, (stock price valued at $4.66 per share – average share price 5 trading days in which there were transactions prior to the acquisition) which were divided proportionally among Weihe’s stockholders in accordance with their respective ownership interests in the Company immediately before the closing of the transaction. The cash consideration consists of $27,000,000 in cash, again divided proportionally among Weihe’s stockholders in accordance with their respective ownership interests in Weihe’s immediately before the closing of the transaction and payable as follows: $10,800,000 due on the first anniversary of the closing of the transaction, and $16,200,000 due on the second anniversary of closing of the transaction. The obligation to pay the cash consideration is evidenced by interest-free promissory notes between HSG and each of Weihe’s stockholders.

On April 20, 2007, the Company entered into a Share Exchange Agreement (the "Agreement") pursuant to which Well Profit acquired 100% of Zhongshan Juxian Gas Oven Co. Ltd. ("Juxian") in a stock and cash transaction valued at approximately $14,000,000. Under the Agreement, in exchange of surrendering their shares in Juxian, the stockholders of Juxian received both stock consideration, (stock price at $4.59 per share – average share price 5 trading days in which there were transactions prior to the acquisition) and cash consideration from HSG. The stock consideration consists of 1,000,000 newly issued shares of the HSG common stock, which will be divided proportionally among Juxian’s stockholders in accordance with their respective ownership interests in Juxian’s immediately before the closing of the transaction. The cash consideration consists of $10,000,000 in cash, again divided proportionally among Juxian’s stockholders in accordance with their respective ownership interests in the Company immediately before the closing of the transaction and payable as follows: $5,000,000 due on the first anniversary of the closing of the transaction, which was July 2, 2007 and $5,000,000 due on the second anniversary of closing of the transaction. The obligation to pay the cash consideration is evidenced by interest-free promissory notes between the Companies.

On February 7, 2008, the Company cancelled the acquisition of Weihe and Juxian and the Share Exchange Agreement.

NOTE 2 – BASIS OF CONSOLIDATION

The accompanying unaudited financial statements of the Company have been prepared in accordance with generally accepted accounting principles 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.

As agreements to acquire Zhongshan Weihe Electrical Appliances Co., Ltd. and Zhongshan Juxian Gas Oven Co., Ltd. have been cancelled subsequent to September 30, 2007, the accounts of these two companies have not been consolidated into these financial statements.

F-6


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Earnings (Loss) Per Share of Common Stock

The Company reports basic earnings per share in accordance with SFAS No. 128, "Earnings Per Share". Basic earnings per share is computed using the weighted average number of shares outstanding during the periods presented. The weighted average number of shares of the Company represents the common stock outstanding during the reporting periods.

Diluted earning per share is based on the assumption that all dilutive options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options are assumed to be exercised at the time of issuance, and as if funds obtained thereby were used to purchase common stock at the average market price during the year.

The Company reports its diluted earnings per share exclude all options because they are anti-dilutive.

Comprehensive Income

The Company follows the Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income." Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income.

Recently Issued Accounting Pronouncements

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

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS No. 157"). SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of SFAS No. 157 relate to the definition of fair value, the methods used to measure fair value and the expanded disclosures about fair value measurement. SFAS No. 157 is effective for fiscal years after November 15, 2007 and interim periods within those fiscal years. The Company does not believe that the adoption of the provisions of SFAS No. 157 will materially impact its financial statement and footnote disclosures.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities ("SFAS No. 159"). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and will become effective for the Company beginning with the first quarter of 2008. The Company has not yet determined the impact of the adoption of SFAS No. 159 on its financial statements and footnote disclosures.

F-7


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Issued Accounting Pronouncements (Continued)

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. This statement retains the fundamental requirements of the original pronouncement requiring that the acquisition method of accounting, or purchase method, be used for all business combinations. SFAS No. 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed and any noncontrolling interest at their fair values as of the acquisition date. In addition, SFAS No. 141(R) requires, among other things, expensing of acquisition related and restructuring related costs, measurement of pre–acquisition contingencies at fair value, measurement of equity securities issued for purchase at the date of close of the transaction and capitalization of in process research and development, all of which represent modifications to current accounting for business combinations. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008. Adoption is prospective and early adoption is not permitted. Adoption of SFAS No. 141(R) will not impact the Company’s accounting for business combinations closed prior to its adoption, but given the nature of the changes noted above, the Company expects that its accounting for business combinations occurring subsequent to adoption will be significantly different than that applied following current accounting literature.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, "Noncontrolling ("minority") Interests in Consolidated Financial Statements" ("FAS 160"). FAS 160 establishes accounting and reporting standards for the noncontrolling ("minority") interest in a subsidiary, commonly referred to as minority interest. Among other matters, FAS 160 requires (a) the noncontrolling ("minority") interest be reported within equity in the balance sheet and (b) the amount of consolidated net income attributable to the parent and to the noncontrolling ("minority") interest to be clearly presented in the statement of income. FAS 160 is effective for the Company’s 2009 fiscal year. FAS 160 is to be applied prospectively, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented. The Company is currently assessing the potential effect of FAS 160 on its financial statements.

Long-Lived Assets

Long-lived assets, other than goodwill, are reviewed for impairment 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. The Company measures 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.

Control By Principal Stockholders

The directors, executive officers and their affiliates or related parties, if they voted their shares uniformly, could have the ability to control the approval of most corporate actions, including increasing the authorized capital stock of the Company and the dissolution, merger or sale of the Company's assets.

Use Of Estimates

The preparation of the financial statements, in conformity with accounting principles generally accepted in the United States of America, 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. Actual results could differ from those estimates.

F-8


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Significant Estimates

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.

NOTE 4 –RELATED PARTIES TRANSACTIONS

Included in trade deposits of $2,954,389, there is an amount of $235,531 for future purchase of materials from a company whose director is also a director of the Company.

During the three month periods ended September 30, 2007 and 2006, the Company had the transactions with related companies in the normal course of business. Those related companies ceased to be related to the Company in August 2007 when two of the Company’s shareholders sold their interests. The value of transactions with those related companies up to August 2007 are as follows:

 

 

For the three months ended

September 30,

 

 

2007

 

2006

 

 

 

 

 

Sales to the related companies

$

2,319,661

$

-

Percentage of total net sales

 

81%

 

-

Purchases from the related companies

$

911,817

$

237,488

Percentage of total purchases

 

33%

 

65%

During the nine month periods ended September 30, 2007 and 2006, the Company had the following transactions with two related companies in the normal course of business.

 

 

For the nine months ended

September 30,

 

 

2007

 

2006

 

 

 

 

 

Sales to the related companies

$

9,722,473

$

-

Percentage of total net sales

 

24%

 

-

Purchases from the related companies

$

4,276,390

$

237,488

Percentage of total purchases

 

11%

 

65%

F-9


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment consist of the following:


 

September 30,

2007

 

December 31,

2006

At cost:

 

 

 

 

Plant and machinery

$

5,713,519

$

3,773,252

Furniture, fixtures and equipment

 

59,982

 

41,068

 

 

 

 

 

Total

 

5,773,501

 

3,814,320

 

 

 

 

 

Less: accumulated depreciation

 

344,266

 

129,994

Net book value

$

5,429,235

$

3,684,326

During the nine months period ended September 30, 2007, depreciation expenses amounted to $285,905, among which $230,733 and $55,172 were recorded as cost of sales and administrative expense respectively.

During the period from April 5 to September 30, 2006, depreciation expenses amounted to $56,294, among which $54,915 and $1,379 were recorded as cost of sales and administrative expense respectively.

 

 

 

 

F-10


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – SEGMENT REPORTING

Statement of Financial Accounting Standards No 131 ("SFAS 131"), "Disclosure About Segments of an Enterprise and Related Information", requires use of the "management approach" model for segment reporting. Under this model, segment reporting is consistent with the way Company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

The Company has two reportable segments: (1) barbeque set products and (2) skateboards. These operating segments were determined based on the nature of the products and services offered. Overhead items that are specifically identifiable to a particular segment are applied to such a segment.

Operating segments are defined as 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's chief operation decision makers direct the allocation of resources to operating segments based on the profitability and cash flows of each respective segment.

The Company evaluates performance based on several factors, of which the primary financial measure is business segment income before taxes.

 

 

Barbeque set

 

Skateboards

 

Other home appliances

 

Corporate

 

Total

 

 

For the nine months ended September 30, 2007

 

Period from April 5 to September 30, 2006

 

For the nine months ended September 30, 2007

 

Period from April 5 to September 30, 2006

 

For the nine months ended September 30, 2007

 

Period from April 5 to September 30, 2006

 

For the nine
months ended September 30, 2007

 

Period from April 5 to September 30, 2006

 

For the nine months ended September 30, 2007

 

Period from April 5 to September 30, 2006

                                         

Net sales

$

23,495,009

$

449,502

$

2,202,976

$

-

$

108,034

$

-

$

-

$

-

$

25,806,019

$

449,502

                                         

Depreciation and amortization

$

143,409

$

56,294

$

117,652

$

-

$

24,844

$

-

$

-

$

-

$

285,905

$

56,294

                                         

Segment income before income taxes

$

1,720,795

$

24,975

$

37,436

$

-

$

2,385

$

-

$

 (975,244)

$

-

$

785,372

$

24,975

                                         

Segment assets

$

10,747,931

$

9,354,057

$

9,261,760

$

-

$

2,192,343

$

-

$

213,720

$

-

$

22,415,754

$

9,354,057

                                         

Capital expenditures

$

180,868

$

3,693,643

$

-

$

-

$

1,667,500

$

-

$

-

$

-

$

1,848,368

$

3,693,643

F-11


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 – INVENTORIES

Inventories consist of the following:

 

 

September 30,
2007

 

December 31,
2006

Raw materials

$

             712,528

$

563,097

Work in process

 

2,423,564

 

1,669,559

Finished goods

 

4,417

 

102,088

 

 

 

 

 

Total

$

3,140,509

$

2,334,744

NOTE 8 – SHIPPING AND HANDLING FEES AND COSTS

The Company follows Emerging Issues Task Force ("EITF") No. 00-10, Accounting for Shipping and Handling Fees and Costs. The Company does not charge its customers for shipping and handling. The Company classifies shipping and handling costs as part of the cost of goods sold which are $234,842 and $36,200 for the nine months ended September 30, 2007 and 2006 respectively and $55,640 and $36,200 for the three months ended September 30, 2007 and 2006.

NOTE 9 – TRADE DEPOSITS

Amount represents deposits held by suppliers to be used for future purchases.

NOTE 10 – DUE TO STOCKHOLDER

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

NOTE 11 – STOCK-BASED COMPENSATION

On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123R"), using the modified prospective method as permitted under SFAS No. 123R. Under this transition method, compensation cost recognized in 2006 includes compensation cost for all share-based payments granted prior to, but not yet vested as of, December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. In accordance with the modified prospective method of adoption, the Company’s results of operations and financial position for prior periods have not been restated. There was no unrecognized compensation cost as of December 31, 2006.

During the three and nine months ended September 30, 2007, the Company’s net income was approximately $272,100 and $653,438, respectively, lower due to stock-based compensation expense as a result of the adoption of SFAS No. 123R and the issuance of stock options, as shown below.

During the three months ended September 30, 2006 and period from April 5 to September 30, 2006, there is no stock-based compensation expense.

The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of an award, with the following assumptions: no dividend yield, expected volatility of 161%, and a risk-free interest rate of 4.2%. In determining volatility of the Company’s options, the Company used the average volatility of the Company’s stock.

F-12


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On August 7, 2007, the Company granted to the audit committee chairman and Board of Director of the Company an option to purchase 100,000 shares of the Company’s common stock at an exercise price of $6.00 per share. One-third of the option vested immediately, with the remaining portion vesting as follows: one-third on July 7, 2008 and one-third on July 7, 2009. The vesting of the option is contingent on continued participation as a Board of Director. The option expires in ten years. Based on the Black-Scholes option pricing model, the entire option was valued at $204,054. One-third of the value of the issuance was expensed immediately as it vested, with the remaining amount expensed monthly over the vesting period. In accordance with SFAS No. 123R, the Company has recorded stock-based compensation expense during the three and nine months ended September 30, 2007 of $76,519 in connection with the issuance of this option.

There were no stock options or warrants issued during the three months ended September 30, 2006 and period from April 5 to September 30, 2006.

The following table summarizes all Company stock option transactions between January 1, 2007 and September 30, 2007

 

Option Shares

 

Vested Shares

 

Exercise Price per Common Share Range

Balance, December 31, 2006

-

 

-

$

-

Granted or vested during the nine months ended September 30, 2007

100,000


33,333

$

6.00

Expired during the nine months ended September 30, 2007

-

 

-

 

-

Balance, September 30, 2007

100,000

 

33,333

$

6.00

The following table provides certain information with respect to the above referenced options outstanding at September 30, 2007:

 

Exercise Price

Weighted Average Exercise Price

Weighted Average Remaining Contractual Life Years

 

 

 

 

 

$6

$6

9.98

On March 13, 2007, the Company issued 150,000 shares of its common stock for consulting services to be performed from March 13, 2007 through December 31, 2007 valued at $622,500, fair value of $4.15 per share at the date of issuance, which is reflected in prepaid expenses and is being amortized over the terms of agreement.

On July 18, 2007, the Company issued 30,000 shares of its common stock to employees (100 shares to each of 300 employees) as a bonus payment. The shares were valued at $150,000, fair value of $5 per share on the date of issuance, and recorded as salary expense for the three and nine months ended September 30, 2007.

NOTE 12 – NOTE RECEIVABLE ON STOCK ISSUANCE

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

F-13


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13– INCOME TAXES

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

No provision for deferred taxes has been made as there were no material temporary differences at September 30, 2007 and 2006.

Well Profit being a foreign venture enterprise is entitled to, starting from the first profitable year, a two-year exemption from enterprise income tax followed by a three-year 50% reduction in its enterprise income tax rate ("Tax Holiday"). As such, after the application by Well Profit and approval by the relevant tax authority in 2007, Well Profit was exempted from enterprise income tax 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 15%.

NOTE 14 – WARRANTY

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

        Period from
    Nine months   April 5, 2006 to
    ended September   September 30,
    30, 2007   2006
Warranty accrual, beginning of period $

24,025

$ -
Warranty accrued during the period  

104,285

  -
Adjustments to pre-existing accruals  

-

  -
Actual warranty expenditures   (26,915)   -
         
Warranty, end of period $

101,395

$ -

NOTE 15 – CONCENTRATIONS, RISK AND UNCERTAINTIES

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

      Nine months  
      ended Period from
  Three months ended September 30 April 5, 2006 to
  September 30   September 30
  2007 2006 2007 2006
Zhongshan City Xinda Export & Import Company Limited - 100% 2% 100%
Zhongshan City Hengbao Export & Import Trading Company Limited 80% - 61% -
Zhongshan City Bao Chang Lung Export & Import Company Limited 2% - 8% -

F-14


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15 – CONCENTRATIONS, RISK AND UNCERTAINTIES (Continued)

The Company has the following concentrations of accounts receivable constituting greater than 10% of the Company’s accounts receivable:

  As at September 30
  2007 2006
Zhongshan City Hengbao Export & Import Trading Company Limited 77% -

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

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

  Nine months ended Period from
  September 30, 2007 April 5, 2006 to
    September 30, 2006
Zhongshan City Oceanic International Company Limited 26% 100%

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

NOTE 16 –FIXED PRICE STANDBY EQUITY DISTRIBUTION AGREEMENT

On May 23, 2007, the Company entered into a Fixed Price Standby Equity Distribution Agreement with four investors (the "Investors"). Pursuant to the Fixed Price Standby Equity Distribution Agreement, the Company may, 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’ obligation to purchase shares of common stock under the Fixed Price Standby Equity Distribution Agreement is subject to certain conditions, including the Company obtaining an effective registration statement for the resale of the common stock sold under the Fixed Price Standby Equity Distribution Agreement. The investors shall deliver 16.5% of the purchase price payable by wire transfer of immediately available funds to an account that the Company designated in writing to each investor prior to the closing date of the transactions. Also, the investors shall deliver to the Company an executed Promissory Note for the payment of the remaining 83.5% of the remaining commitment under this agreement.

F-15


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 Company rents factory premises for the production and manufacturing process. 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 rental agreements provide for regular increases to the base rental rate at specified intervals, which usually occur on an annual basis. The Company was obligated under operating leases requiring minimum rentals as follows:

    As of
  September 30, 2007
September 30,    
2008 $ 686,846
2009   686,846
2010   686,846
2011   545,018
2012   70,581
  $ 2,676,137

During the three and nine months ended September 30, 2007, rental expenses were $180,048 and $498,717 respectively.

NOTE 18 – SUBSEQUENT EVENT

On February 7, 2008, the Company cancelled the Fixed Price Standby Equity Distribution Agreement with the investors and the amount received to be refunded has been reflected as "Notes Payable". In addition, the Company is also required to pay to the investors an aggregate amount of $65,000 for the cancellation which accrued and recorded as general administrative expenses.

F-16


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

Subsequent to the cancellation of acquisition of Zhongshan Weihe Electrical Appliances Co., Ltd. and Zhongshan Juxian Gas Oven Co., Ltd., the Company restated the Consolidated Balance Sheets, Consolidated Statements of Operations and Comprehensive Income (Loss), Consolidated Statement of Stockholders’ Equity and Consolidated Statements of Cash Flows.

Restatement of Consolidated Balance Sheet as of September 30, 2007

  As Previously        
    Reported   Restatement   As Restated
      September 30, 2007    
ASSETS            
             
CURRENT ASSETS            

Cash and cash equivalents

$

2,839,850

$ (2,594,482) $

245,368

Restricted cash

 

1,187,153

  (1,187,153)  

-

Accounts receivable - trade

 

5,708,032

  (3,518,691)  

2,189,341

Other receivables

 

4,268,966

  (3,426,065)  

842,901

Inventories

 

8,388,230

  (5,247,721)  

3,140,509

Trade deposits

 

3,352,192

  (397,803)  

2,954,389

Due from related party

 

11,863,214

  (11,863,214)  

-

Deferred finance costs - acquisitions

 

1,761,112

  (1,761,112)  

-

Tax Refundable

 

-

 

73,511

 

73,511

TOTAL CURRENT ASSETS  

39,368,749

  (29,922,730)  

9,446,019

   

 

     

 

Acquisition deposits

 

-

 

7,540,500

 

7,540,500

Property and equipment - net

 

12,994,171

  (7,564,936)  

5,429,235

Goodwill - acquisition

 

18,833,315

  (18,833,315)  

-

Deferred finance costs - acquisitions

 

905,299

  (905,299)  

-

Intangible assets- customers relationships - net

 

17,891,651

  (17,891,651)  

-

Other assets

 

1,181,439

  (1,181,439)  

-

   

 

     

 

TOTAL ASSETS $

91,174,624

$ (68,758,870) $

22,415,754

LIABILITIES AND STOCKHOLDERS' EQUITY  

 

     

 

CURRENT LIABILITIES  

 

     

 

Bank loan

$

760,380

$ (760,380) $

-

Bank advances

 

4,026,023

  (4,026,023)  

-

Accounts payable - trade

 

13,346,150

  (6,986,293)  

6,359,857

Accrued expenses

 

4,348,650

  (2,203,273)  

2,145,377

Loan payable

 

138,669

  (138,669)  

-

Taxes payable

 

68,598

  (68,598)  

-

Due to directors

 

238,293

  (238,293)  

-

Due to related party

 

4,000

 

-

 

4,000

Due to stockholder

 

266,952

 

4,449

 

271,401

Common stock to be issued

 

25,554,000

  (25,554,000)  

-

Promissory notes payable

 

8,191,946

  (8,191,946)  

-

   

56,943,661

  (48,163,026)  

8,780,635

NON-CURRENT LIABILITIES  

 

     

 

Notes payable

 

-

 

6,575,000

 

6,575,000

Promissory notes payable

 

21,200,000

  (21,200,000)  

-

   

 

     

 

TOTAL LIABILITIES  

78,143,661

  (62,788,026)  

15,355,635

STOCKHOLDERS' EQUITY  

 

     

 

Common stock - $0.001 par value; 200,000,000

 

 

     

 

shares authorized, 62,477,949 shares issued

 

 

     

 

and outstanding at September 30, 2007

 

62,478

 

-

 

62,478

Additional paid-in capital

 

6,894,468

  (304,249)  

6,590,219

Common stock subscribed

 

40,000,000

  (40,000,000)  

-

Subscription receivable

 

(33,425,000)

 

33,425,000

 

-

Note receivable on stock issuance

 

(900,000)

 

-

 

(900,000)

Retained earnings

 

(45,933)

 

950,064

 

904,131

Cumulative translation adjustment

 

444,950

  (41,659)  

403,291

TOTAL STOCKHOLDERS' EQUITY  

13,030,963

  (5,970,844)  

7,060,119

   

 

     

 

TOTAL LIABILITIES AND STOCKHOLDERS'  

 

     

 

EQUITY $

91,174,624

$ (68,758,870) $

22,415,754

F-17


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS – (Continued)

Restatement of Consolidated Statements of Operations and Comprehensive Loss For the Three Months Ended September 30, 2007

  As Previously        
    Reported   Restatement   As Restated
             
             
 

 

 

 

 

 

 

NET SALES

$

14,929,503

$

(12,067,163)

$

2,862,340

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

Cost of net sales

 

12,427,203

 

(9,623,375)

 

2,803,828

Amortization of intangible assets-

 

 

 

 

 

 

customers relationships

 

941,666

 

(941,666)

 

-

General selling and administrative

 

 

 

 

 

 

expenses

 

1,827,378

 

(1,024,029)

 

803,349

 

 

15,196,247

 

(11,589,070)

 

3,607,177

 

 

 

 

 

 

 

LOSS FROM OPERATIONS

 

(266,744)

 

(478,093)

 

(744,837)
 

 

 

 

 

 

 

OTHER EXPENSE

 

 

 

 

 

 

Finance costs

 

(739,276)

 

593,180

 

(146,096)

Interest income

 

41,173

 

(47,045)

 

(5,872)

Other income

 

-

 

13,401

 

13,401

 

 

(698,103)

 

559,536

 

(138,567)
LOSS BEFORE INCOME TAXES

 

(964,847)

 

81,443

 

(883,404)
 

 

 

 

 

 

 

INCOME TAXES

 

(491,379)

 

564,372

 

72,993

 

 

 

 

 

 

 

NET LOSS   (1,456,226)  

645,815

  (810,411)
 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME

 

 

 

 

 

 

Foreign currency translation

 

 

 

 

 

 

adjustment

 

237,116

 

(141,022)

 

96,094

 

 

 

 

 

 

 

COMPREHENSIVE LOSS

$

(1,219,110)

$

504,793

$

(714,317)
 

 

 

 

 

 

 

BASIC AND DILUTED

 

 

 

 

 

 

 

 

 

 

 

 

 

LOSS PER SHARE

$

(0.02)

 

 

$

(0.01)
 

 

 

 

 

 

 

BASIC AND DILUTED WEIGHTED

 

 

 

 

 

 

AVERAGE NUMBER OF SHARES

 

62,466,862

 

 

 

62,466,862

F-18


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS – (Continued)

Restatement of Consolidated Statements of Income and Comprehensive Income For the Nine Months Ended September 30, 2007

  As Previously        
    Reported   Restatement   As Restated
             
 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET SALES

$

37,873,182

$

(12,067,163)

$

25,806,019

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

Cost of net sales

 

32,369,833

 

(9,623,375)

 

22,746,458

Amortization of intangible assets-

 

 

 

 

 

 

customers relationships

 

941,666

 

(941,666)

 

-

General selling and administrative

 

 

 

 

 

 

expenses

 

3,167,087

 

(1,024,029)

 

2,143,058

 

 

36,478,586

 

(11,589,070)

 

24,889,516

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

1,394,596

 

(478,093)

 

916,503

 

 

 

 

 

 

 

OTHER (EXPENSE) INCOME

 

 

 

 

 

 

Finance costs

 

(739,853)

 

593,180

 

(146,673)

Interest income

 

49,186

 

(47,045)

 

2,141

Other income

 

0

 

13,401

 

13,401

 

 

(690,667)

 

559,536

 

(131,131)
INCOME BEFORE INCOME

 

 

 

 

 

 

TAXES

 

703,929

 

81,443

 

785,372

 

 

 

 

 

 

 

INCOME TAXES

 

(563,862)

 

564,372

 

510

 

 

 

 

 

 

 

NET INCOME

 

140,067

 

645,815

 

785,882

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME

 

 

 

 

 

 

Foreign currency translation adjustment

345,587

 

(41,659)

 

303,928

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

$

485,654

$

604,156

$

1,089,810

 

 

 

 

 

 

 

BASIC AND DILUTED

 

 

 

 

 

 

EARNINGS PER SHARE

$

0.00

 

 

 

0.01

 

 

 

 

 

 

 

BASIC AND DILUTED WEIGHTED

 

 

 

 

 

 

AVERAGE NUMBER OF SHARES

 

60,166,643

 

 

 

60,166,643

F-19


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS – (Continued)

Restatement of Consolidated Statements of Shareholders’ Equity For the Nine Months Ended September 30, 2007

  As Previously        
    Reported   Restatement   As Restated
             
Issuance of share capital on incorporation

$

3,751,525

$

-

$

3,751,525

 

 

 

 

 

 

 

Cumulative translation adjustment

 

99,363

 

-

 

99,363

 

 

 

 

 

 

 

Net income for the period

 

118,249

 

-

 

118,249

 

 

 

 

 

 

 

BALANCE AT DECEMBER 31, 2006

 

3,969,137

 

-

 

3,969,137

 

 

 

 

 

 

 

Issuance of common stock at merger and note receivable acquired in merger

 

4,152,153

 

(4,152,153)

 

-

 

 

 

 

 

 

 

Dividend distribution upon merger

 

(3,000,000)

 

3,000,000

 

-

 

 

 

 

 

 

 

Effect of reverse merger

 

-

 

2,052,153

 

2,052,153

 

 

 

 

 

 

 

Note receivable on acquisition merger

 

-

 

(900,000)

 

(900,000)
 

 

 

 

 

 

 

Issuance of common stock for prepaid expenses

 

622,500

 

-

 

622,500

 

 

 

 

 

 

 

Issuance of common stock for employee

 

150,000

 

-

 

150,000

 

 

 

 

 

 

 

Common stock subscribed – 10

 

 

 

 

 

 

millions shares at $4 per share

 

6,575,000

 

(6,575,000)

 

-

 

 

 

 

 

 

 

Issuance of stock options

 

76,519

 

-

 

76,519

 

 

 

 

 

 

 

Cumulative translation adjustment

 

345,587

 

(41,659)

 

303,928

 

 

 

 

 

 

 

Net income for the nine months ended September 30, 2007 - restated

 

140,067

 

645,815

 

785,882

 

 

 

 

 

 

 

BALANCE AT SEPTEMBER 30, 2007 (UNAUDITED)

$

13,030,963

$

(5,970,844)

$

7,060,119

F-20


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS – (Continued)

Restatement of Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2007

    As Previously        
    Reported   Restatement   As Restated
             
             
CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

140,067

$

645,815

$

785,882

Adjustments to reconcile net income

 

 

 

 

 

 

To net cash provided by operating activities

 

 

 

 

 

 

Depreciation

 

543,835

 

(257,930)

 

285,905

Amortization of intangible assets- customers

 

 

 

 

 

 

relationships

 

941,666

 

(941,666)

 

-

Stock-based compensation

 

226,519

 

425,919

 

652,438

Deferred finance cost - acquisition

 

440,278

 

(440,278)

 

-

Change in assets and liabilities:

 

 

 

 

 

 

(Increase) decrease in assets

 

 

 

 

 

 

Accounts receivable - trade

 

7,938,230

 

(3,160,373)

 

4,777,857

Other receivable

 

544,427

 

(572,752)

 

(28,325)

Loan receivable

 

(15,503)

 

15,503

 

-

Inventories

 

(2,051,402)

 

1,354,336

 

(697,066)

Trade deposits

 

6,260,947

 

(6,272,142)

 

(11,195)

Employee advances

 

(54,859)

 

(351,243)

 

(406,102)

Increase (decrease) in liabilities

 

 

 

 

 

 

Accounts payable

 

3,833,841

 

(2,651,235)

 

1,182,606

Other payable and accrued expenses

 

-

 

1,549,453

 

1,549,453

Taxes payable

 

(625,051)

 

501,160

 

(123,891)
 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

18,122,995

 

(10,155,433)

 

7,967,562

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Purchase of equipments

 

(1,869,605)

 

21,237

 

(1,848,368)

Cash acquired in merger

 

55,980

 

(55,980)

 

-

Cash acquired in acquisition

 

3,971,147

 

(3,971,147)

 

-

Acquisition of subsidiaries

 

(7,608,054)

 

7,608,054

 

-

 

 

 

 

 

 

 

Net cash used in investing activities

 

(5,450,532)

 

3,602,164

 

(1,848,368)

F-21


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS – (Continued)

  As Previously        
    Reported   Restatement   As Restated
             
 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Restricted cash

 

(1,179,144)

 

1,179,144

 

-

Cash acquired in merger

 

-

 

55,980

 

55,980

Cash acquired in acquisition

 

-

 

(7,574,800)

 

(7,574,800)

Net repayments of bank loans

 

(1,745,000)

 

-

 

(1,745,000)

Loan payable

 

137,734

 

(137,734)

 

-

Bank advances

 

(508,445)

 

508,445

 

-

Net decrease in due from related party

 

(1,377,335)

 

916,645

 

(460,690)

Net decrease in due to related party

 

(2,657,709)

 

2,657,709

 

 

Notes payable

 

-

 

6,575,000

 

6,575,000

Increase in due to directors

 

130,724

 

(130,724)

 

-

Increase in due to stockholder

 

266,953

 

(910)

 

266,043

Dividend distribution for acquisition

 

(3,000,000)

 

-

 

(3,000,000)
 

 

 

 

 

 

 

Net cash used in financing activities

 

(9,932,222)

 

4,048,755

 

(5,883,467)
 

 

 

 

 

 

 

EXCHANGE RATE EFFECT ON CASH

 

93,597

 

(89,968)

 

3,629

 

 

 

 

 

 

 

NET INCREASE IN CASH

 

2,833,838

 

(2,594,482)

 

239,356

 

 

 

 

 

 

 

CASH - BEGINNING OF PERIOD

 

6,012

 

-

 

6,012

 

 

 

 

 

 

 

CASH - END OF PERIOD

$

2,839,850

$

(2,594,482)

$

245,368

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW

 

 

 

 

 

 

INFORMATION

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

$

99,940

$

-

$

99,940

Income taxes

$

426,592

$

(353,599)

$

72,993

 

 

 

 

 

 

 

NONCASH INVESTING AND FINANCING

 

 

 

 

 

 

ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock for prepaid expenses

$

622,500

$

(195,581)

$

426,919

 

 

 

 

 

 

 

Common stock to be issued for investment in subsidiaries

$

25,554,000

$

(25,554,000)

$

-

 

 

 

 

 

 

 

Issuance of promissory note for investment in subsidiaries

$

29,391,946

$

(29,391,946)

$

-

 

 

 

 

 

 

 

Issuance of common stock for employees' compensation

$

-

$

150,000

$

150,000

 

 

 

 

 

 

 

Issuance of option stock for employees' compensation

$

-

$

76,519

$

76,519

 

 

 

 

 

 

 

Assets acquired for the acquisitions during the period

$

31,926,742

$

(31,926,742)

$

-

 

 

 

 

 

 

 

Liabilities assumed for the acquisitions during the period

$

14,132,777

$

(14,132,777)

$

-

F-22


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

The following discussion should be read in conjunction with the condensed interim consolidated financial statements and notes included in Item 1 of Part I of this Report.

Forward-Looking Statements

This report contains forward-looking statements. The forward-looking statements are contained principally in the section entitled "Management’s Discussion and Analysis or Plan of Operation." These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described in the section captioned "Risk Factors Associated With Our Business" in our Annual Report on Form 10-KSB for the year ended December 31, 2006. In some cases, you can identify forward-looking statements by terms such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "would" and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements include, among other things, statements relating to:

  • our expectations regarding the market for small household appliances;
     

  • our expectations regarding the continued growth of the small household appliance industry;
     

  • our beliefs regarding the competitiveness of our products;
     

  • our expectations regarding the expansion of our manufacturing capacity;
     

  • our expectations with respect to increased revenue growth and our ability to achieve profitability resulting from increases in our production volumes;
     

  • our future business development, results of operations and financial condition; and
     

  • competition from other manufacturers of small household appliance products.

Also, forward-looking statements represent our estimates and assumptions only as of the date of this report. You should read this report and the documents that we reference in this report, or that we filed as exhibits to this report, completely and with the understanding that our actual future results may be materially different from what we expect.

Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

Use of Terms

Except as otherwise indicated by the context, references in this report to:

  • "Home System," "we," "us," or "our," are references to the combined business of Home System Group and its direct and indirect subsidiaries: Home System Group, Inc., a BVI company, or HSGI; Holy (HK) Limited, a Hong Kong holding company, or Holy HK; Oceanic International (Hong Kong), Ltd., a Hong Kong company, or OCIL; and Oceanic Well Profit, Inc., a Chinese operating company, or Well Profit;
     

  • "BVI" are to the British Virgin Islands;
     

  • "China" and "PRC" are to the People’s Republic of China;
     

  • "RMB" are to Renminbi, the legal currency of China;
     

  • "U.S. dollar," "$" and "US$" are to the legal currency of the United States;
     

  • the "SEC" are to the Untied States Securities and Exchange Commission;
     

  • the "Securities Act" are to Securities Act of 1933, as amended; and the "Exchange Act" are to the Securities Exchange Act of 1934, as amended.

1


Our Business

Home System Group is a Nevada holding company whose China-based operating subsidiaries, OCIL and Well Profit, are primarily engaged in the production of a variety of small household appliances, including stainless steel gas grills and ovens, gas and electric heaters and residential water pumps. Our products are sold through distributors to retailers in the United States, Europe, Australia and China. Our sales revenues for the period from April 5, 2006 (when we commenced operations) to September 31, 2006, and for the nine-month period ended September 30, 2007 were approximately $449,502 and $25,806,019, respectively, and our net income after taxes was approximately $15,784 and $785,882, respectively.

Overview of Business Operations in the Third Quarter of 2007

The third quarter is traditionally a low season for sales of BBQ grills, and we saw a decrease in our net revenues due to a variety of factors including an increase in the cost of raw materials during the nine months ended September 30, 2007. During the period we also focused on developing our newly acquired coffee pot product line.

Through additional mergers and acquisitions, we hope to achieve product diversification and enhance our research and development capability and manufacturing, production and processing capacity for our products. Our long-term goal is to focus on the future development of our Company, to increase our international market share and enhance investor confidence.

Principal Factors Affecting Our Financial Performance

Growth of China’s small household appliance manufacturing industry.

China’s small household appliance industry has been growing at a rapid pace since 2005 and does not have onerous entry barriers. As a result, we compete with many small manufacturers and distributors of household products. We also compete with established companies, a number of which have substantially greater facilities, personnel, financial and other resources than we have. If we are unable to compete effectively with these manufacturers and distributors in the areas of product design and innovation, quality, price, product features, merchandising, promotion and warranty, our results of operations could be materially adversely affected.

Fluctuations and increases in raw material costs.

One of our primary challenges is the unstable domestic market for stainless steel plates, our main raw material. We rely on a steady supply of stainless steel plates to manufacture our products but in recent years the price of metal materials has increased, which has increased the pressure on our production costs. While the expansion of our Company has necessitated the purchase of larger amounts of raw materials from our suppliers, our purchase volumes have allowed us to bargain with our suppliers to receive a lower price for the purchase of such large quantities. In addition, we are seeking to identify alternative raw material suppliers to the extent that there are viable alternatives. In the long term, we are also seeking to expand our use of alternative raw materials. Should fluctuations and increases in the price of our main raw material become severe, the consequent price movements may have a direct and substantial negative impact on our gross margin.

Taxation

Our subsidiary Well Profit is subject to a preferential corporate income tax rate of 27% of assessable profits, consisting of a 24 % national tax and a 3% local tax. As approved by the relevant PRC tax authority, Well Profit is entitled to a two-year exemption from EIT from January 2007 to the end of December 2008, followed by 50% tax exemption from January 2009 through December 2011, and a valued added tax rate of 17%. Well Profit will not have any urban construction tax or education surtax but embankment fees will be charged on 1/1000 of Well Profit’s sales income.

On March 16, 2007, the National People’s Congress of the PRC passed the new EIT Law, which will take effect as of January 1, 2008. Under the new EIT Law, an enterprise established outside of the PRC with "de facto management bodies" within the PRC is considered a resident enterprise and will normally be subject to the enterprise income tax at the rate of 25.0% on its global income. The new EIT Law, however, does not define the term "de facto management bodies." If the PRC tax authorities subsequently determine that we should be classified as a resident enterprise, then our global income will be subject to PRC income tax at a tax rate of 25.0%. In addition, under the new EIT Law, dividends from our PRC subsidiaries to us will be subject to a withholding tax. The rate of the withholding tax has not yet been finalized, pending promulgation of implementing regulations. Furthermore, the ultimate tax rate will be determined by treaty between the PRC and the tax residence of the shareholders of the PRC subsidiary. We are actively monitoring the proposed withholding tax and are evaluating appropriate organizational changes to minimize the corresponding tax impact. The new EIT Law imposes a unified income tax rate of 25.0% on all domestic-invested enterprises and FIEs, such as our PRC operating subsidiaries, unless they qualify under certain limited exceptions, but the EIT Law permits companies to continue to enjoy their existing preferential tax treatments until such treatments expire in accordance with their current terms. We expect details of the transitional arrangement for the five-year period from January 1, 2008 to December 31, 2012 applicable to enterprises approved for establishment prior to March 16, 2007 to be set out in more detailed implementing rules to be adopted in the future. Any increase in our effective tax rate as a result of the above may adversely affect our operating results. However, details regarding implementation of this new law are expected to be provided in the form of one or more implementing regulations to be promulgated by the PRC government, and the timing of the issuance of such implementing regulations is currently unclear.

2


Private-label Brands

With the growing trend towards the concentration of our small electric household appliance sales among a few retailers, our distributors are increasingly dependent upon fewer customers whose bargaining strength is growing as a result of concentration. Through our distributors a substantial quantity of our products to mass merchandisers, national department stores, variety store chains, drug store chains, specialty home retailers and other retail outlets. These retailers generally purchase a limited selection of small electric household appliances. As a result, we compete for retail shelf space with our competitors. In addition, certain of our larger customers are using their own private label brands on household appliances that compete directly with some of our products. As the retailers in the small electric household appliance industry become more concentrated, competition for sales to these retailers may increase, which could adversely affect our results of operations.

Results of Operations

Comparison of Three-Month and Nine-Month Periods ended September 30, 2007 and September 30, 2006

The following table summarizes the results of our operations during the three-month periods ended on September 30, 2007 and September 30, 2006, and provides information regarding the dollar and percentage increase or (decrease) of the three-month and nine-month periods ended September 30, 2007, compared to the three-month and nine-month periods ended on September 30, 2006. Although our results for the three and nine month periods ended September 30, 2007 and 2006 are presented below, such results are not comparable because we did not begin our business operations until April 5, 2006.

All amounts, other than percentages, in U.S. dollars

         
  Three-Month Three-Month Dollar ($) Percentage
  Period Ended on Period Ended on Increase Increase
  September 30, 2007 September 30, 2006 (Decrease) (Decrease)
         
Sales revenue

$2,862,340

$449,502

$2,412,838

536.8%

Costs of goods sold

$2,803,828

$365,366

$2,438,462

667.4%

Gross profit

$58,512

$84,136

($25,624) (30.5%)
General and

 

 

 

 

administrative expenses

$803,349

$54,627

$748,722

1370.6%

Income (loss) before

 

 

 

 

income taxes $(883,404)

$25,463

($908,867) (3569.4%)
Income tax

$72,993

($9,191)

$82,184

894.2%

Net income (loss) ($810,411)

$16,272

($826,683) (5080.4%)

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All amounts, other than percentages, in U.S. dollars

  Nine-Month Nine-Month Dollar ($) Percentage
  Period Ended on Period Ended on Increase Increase
  September 30, 2007 September 30, 2006 (Decrease) (Decrease)
         
         
Sales revenue $25,806,019 $449,502 $25,356,517 5641.0%
Costs of sales $22,746,458 $365,366 $22,381,092 6125.7%
Gross profit $3,059,561 $84,136 $2,975,425 3536.4%
General and        
administrative expenses $2,143,058 $55,145 $2,087,913 3786.2%
Income before taxes $785,372 $24,975 $760,397 3044.6%
Income taxes $510 ($9,191) $9,701 105.5%
Net income $785,882 $15,784 $770,098 4879.0%

Sales Revenue

We generated revenues of $2,862,340 for the three months ended September 30, 2007, an increase of $2,412,838 (or approximately 536.8%), compared to $449,502 for the three months ended September 30, 2006. The increase in revenue was partly because we did not generate any revenues until September 2006 and partly because during the 2007 period we expanded the variety of products that we offer. As a result of our efforts, new products such as stainless steel vacuum containers and skate boards produced by Well Profit has generated significant revenue.

Sales Revenues were $25,806,019 for the nine months ended September 30, 2007, an increase of $25,356,517 (or approximately 5641.0%) from revenues of $449,502 for the nine months ended September 30, 2006. The increase in sales revenue for the nine months ended September 30, 2007 is primarily due to the significant gain in revenues generated by our new products.

Costs of Sales

During the three months ended September 30, 2007, The cost of sales was $2,803,828 for the three months ended September 30, 2007, an increase of $2,438,462 (or approximately 667.4%) from the cost of sales of $365,366 during the three months ended September 30, 2006. The increase in cost of sales was largely due to the expansion of our business operations.

The cost of sales was $22,746,458 for the nine months end September 30, 2007, an increase of $22,381,092 (or approximately 6125.7%), from cost of sales of $365,366 for the nine months ended September 30, 2006. The increase in the cost of sales resulted primarily from the increase in the cost of raw materials during the 2007 period.

Gross Profit

Our gross profit for the three months ended September 30, 2007 was $58,512, compared to $84,136 for the three months ended September 30, 2006, a decrease of $25,624, or 30.5%. Our gross profit margin for the three months ended September 30, 2007 was 2%, compared to 18.7% for the three months ended September 30, 2006.

Our gross profit for the nine months ended September 30, 2007 was $3,059,561, compared to $84,136 for the nine months ended September 30, 2006, an increase of $2,975,425, or 3536.4%. Our Gross profit margin for the nine months ended September 30, 2007 was 11.9%, compared to 18.7% for the same period in 2006. Both increases were due to the higher cost of raw materials. In addition, since most of our sale prices were fixed when our sale agreements were consummated during the first six months of 2007, sales prices could not be adjusted in response to the fluctuating raw material cost in the third quarter of year 2007.

4


General and Administrative Expenses

General and administrative expenses consist of the costs associated with staff and support personnel who manage our business activities and professional fees paid to third parties. General and administrative expenses were $803,349 for the three months ended September 30, 2007, an increase of $748,722 (or approximately 1370.6%), from $54,627 incurred during the three months ended September 30, 2006. General and administrative expenses were $2,143,058 for the nine months ended September 30, 2007, an increase of $2,087,913 (or approximately 3786.2%) from the general and administrative expenses of $55,145 during the comparable period in 2006. This significant increase in general and administrative expenses for both the three and nine-month periods ended September 30, 2006 and 2007 is primarily attributable to an increase in our business activities and our business expansion during the 2007 period.

Income (Loss) from Operation

Loss from operations was $744,837 during the three months ended September 30, 2007, an increase of $774,346 from the income from operations of $29,509 during the three months ended September 30, 2006. For the nine months ended September 30, 2007, income from operations was $916,503, an increase of $887,512 from income from operations of $28,991 during the comparable period in 2006. The increase for both the three and nine-month periods ended September 30, 2006 and 2007 was primarily due a decrease in the profit margin from the sale of our BBQ Grills and due to an increase in our general and administrative expenses related to the expansion of our business during the 2007 period.

Other Expense

Other expense was $138,567 for the three months ended September 30, 2007, an increase of $134,521 from $4,046 for the three months ended September 30, 2006. Other expense was $131,131 for the nine months ended September 30 2007, an increase of $127,115 (or approximately 3165.2%) from other expense of $4,016 during the comparable period of 2006. These significant increases were primarily due to the increase of business activities in 2007 compare to only few business activities at the company’s early developing stage of 2006.

Net Income (Loss)

We incurred a net loss of $810,411 for the three months ended September 30, 2007, a decrease of $826,683 from net income of $16,272 earned during the three months ended September 30, 2006. The primary reason for this decrease is the significant increase in the cost of our raw materials and our general and administrative expenses during the 2007 period.

We earned a net income of $785,882 for the nine months ended September 30, 2007, an increase of $770,098 (or approximately 4880.0%) from a net income of $15,784 earned in the comparable period of 2006. The increase in our net income was primarily due to the large increase in our sales revenue during the first six months of year 2007.

5


Liquidity and Capital Resources

As of September 30, 2007, we had cash and cash equivalents of $245,368. The following table sets forth a summary of our cash flows for the periods indicated:

  Nine Months Nine Months
  Ended Ended
  September 30, September 30,
  2007 2006
     
Net cash (used in) / provided by operating activities

$7,967,562

$(80,498)
Net cash used in investing activities $(1,848,368) $(3,693,643)
Net cash (used in) / provided by financing activities $(5,883,467)

$3,786,554

Effect of exchange rate changes on cash and cash equivalents

$3,629

$243

Net increase in cash and cash equivalent

$239,356

$12,656

Cash and cash equivalents at the beginning of period

$6,012

-

Cash and cash equivalents at the end of period

$245,368

$12,656

Cash has historically been generated from operations and has provided sufficient liquidity to support our working capital requirements, planned capital expenditures, completion of current and future reorganization and acquisition-related programs, and debt obligations.

Operating Activities

Net cash provided by our operating activities was $7,967,562 for the nine months ended September 30, 2007, as compared to net cash of $80,498 used in our operating activities during the 2006 period, an increase of $8,048,060. The change is mainly due to an increase in our operating income of $887,512 a decrease in accounts receivable of $4,777,857 and a decrease in accounts payable of $1,182,606 for the nine months ended September 30, 2007.

Investing Activities

Net cash used by our investing activities was $1,848,368 for nine months ended September 30 2007, compared to net cash of $3,693,643 used during the 2006 period, a decrease of $1,845,275, or 50.0%. The decrease in cash used in investing activities is primarily due to our purchase of manufacturing when our business operations commenced during the 2006 period.

Financing Activities

Net cash used in financing activities in the nine-month period ended September 30, 2007, totaled $5,883,467, compared to $3,786,554 in net cash provided during the 2006 period, a decrease of $9,670,021. The increase in cash used by financing activities was primarily due to our loss of $7,574,800 deposited in connection with the acquisition of Weihe and due to bank loan repayment amount of $1,745,000 by OCIL.

In the third quarter, funds were mainly contributed from our sales revenue. In the future, we expect that cash flows will be generated from expansion of operations, receipt of revenues, additional infusions of capital and debt financing. The Company is planning to raise capital through debt financing and from bank borrowings and equity financing from potential investors and partners.

6


Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to its stockholders.

Critical Accounting Policies

General

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The following policies, we believe, are our most critical accounting policies, are important to our financial position and results of operations, and require significant judgment and estimates on the part of management. Those policies, that in the belief of management are critical and require the use of judgment in their application, are disclosed on Form 10KSB for the year ended December 31, 2006. Since December 31, 2006, there have been no material changes to our critical accounting policies, except as disclosed in our quarterly reports on Form 10-Q during the interim periods.

We have identified the following policies as critical to our business and the understanding of its results of operations. The impact of these policies is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where these policies affect reported and anticipated financial results. Preparation of this report requires our use of estimates and assumptions that affect the reported amounts of assets, liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported revenue and expense amounts for the periods being reported. On an ongoing basis, we evaluate these estimates, including those related to the valuation of accounts receivable, and the potential impairment of long lived assets. We base the estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Revenue Recognition

In accordance with Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition, the Company recognizes revenue when persuasive evidence of a customer or distributor arrangement exists or acceptance occurs, receipt of goods by customer occurs, the price is fixed or determinable, and the sales revenues are considered collectible. Subject to these criteria, the Company generally recognizes revenue at the time product is shipped to the customer.

The Company follows Emerging Issues Task Force ("EITF") No. 99-19, Reporting Revenue as a Principal versus Net as an Agent. Under the guidance of this EITF, the assessment of whether revenue should be reported gross with separate display of cost of sales to arrive at gross profit should be based on the following considerations: the Company acts as principal in the transaction, takes title to the products and has the risk and rewards of ownership (such as the risk of loss for collection, delivery or returns). Based on EITF No. 99-19, the Company recognizes all revenue on a gross basis.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Credit Risk

Were are exposed to credit risk from our cash in bank and fixed deposits and bills and accounts receivable. The credit risk on cash in bank and fixed deposits is limited because the counterparties are recognized financial institutions. Bills and accounts receivable are subjected to credit evaluations. An allowance has been made for estimated irrecoverable amounts which has been determined by reference to past default experience and the current economic environment.

Foreign Exchange Risk

The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions. Since July 2005, the Renminbi has no longer been pegged to the U.S. Dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the Renminbi may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in the Renminbi exchange rate and lessen intervention in the foreign exchange market.

7


Because substantially all of our earnings and cash assets are denominated in Renminbi, but our reporting currency is the U.S. dollar, fluctuations in the exchange rate between the U.S. dollar and the Renminbi will affect our balance sheet and our earnings per share in U.S. dollars. In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue in the future that will be exchanged into U.S. dollars and earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.

Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currencies.

Most of our transactions are settled in Renminbi and U.S. dollars. In the opinion of our directors, we are not exposed to significant foreign currency risk.

Inflation

Inflationary factors, such as increases in the cost of our products and overhead costs, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of sales revenue if the selling prices of our products do not increase with these increased costs.

Substantial Operations in Foreign Countries

Substantially all of our operations are conducted in China and are subject to various political, economic, and other risks and uncertainties inherent in conducting business in China. Among other risks, the Group’s operations are subject to the risks of restrictions on transfer of funds; export duties, quotas, and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations. Additional information regarding such risks can be found under the heading "Risk Factors" in this Form 10-Q.

Concentration Risk and Uncertainties

We obtain a majority of our products from only a few suppliers whose nonperformance would have a near-term severe impact on our operations. During the three months period ended September 30, 2007, we purchased 41%% of our products from two suppliers[MSOffice1] and during the nine months period ended September 30, 2007, we purchased 45% of our products from one supplier. At the three and nine months period ended September 30, 2007, amounts due to those suppliers included in accounts payable were $676,380 and $674,734, respectively.

This concentration makes us vulnerable to a near-term severe impact, should the relationships be terminated. Such failure could cause us to experience delivery delays or failures caused by production issues or could cause us to deliver of non-conforming products.

We sell a majority of our products to only a few distributors which makes us vulnerable to any changes in their business operations. During the nine-month period ended September 30, 2007, we sold 71% of our products to three customers: Zhongshan City Hengbao Export and Import Co., Ltd. and Import Co., Ltd., or Hengbao, Xinda Export & Import Trading Company Limited or Xinda, and Baochang Long Export and Import Co., Ltd., or Baochang, who distribute our products to retailers in China, the United States, Europe and Australia These customers accounted for approximately 61%, 2% and 8% of our total sales revenue, respectively, during the nine-month period ended September 30, 2007. Hengbao is indirectly owned by Oceanic PRC, which until March 2007, was indirectly owned and controlled by Mr. Weiqiu Li, our director and Chief Executive Officer.

8


Our sales concentration with Hengbao, Xinda and Baochang makes us vulnerable to any changes in the business environment in which these companies operate. We may be adversely affected should orders decrease or the relationship terminated. See "Risk Factors" for more details regarding this risk.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures. The term internal disclosure controls and procedures, as defined by regulations of the SEC, means controls and other procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit to the SEC, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules, regulations and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit to the SEC under the Exchange Act is accumulated and communicated to the our management, including our principal executive officer and our principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions to be made regarding required disclosure. Weiqiu Li, our Chief Executive Officer and Kin Wai Cheung, our Chief Financial Officer, have evaluated the design and operating effectiveness of our disclosure controls and procedures as of September 30, 2007. Based upon their evaluation, these executive officers have concluded that our disclosure controls and procedures are effective.

Internal Control Over Financial Reporting

We also maintain internal control over financial reporting. The term internal control over financial reporting, as defined by regulations of the SEC, means a process designed by, or under the supervision of, our principal executive and principal financial officers, or persons performing similar functions, and effected by the our board of directors, management and other personnel, 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 procedures in the U.S. (GAAP), and includes those policies and procedures that:

  • Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

  • Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

  • Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation performed that occurred during the fiscal quarter covered by this report that has materially affected or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

To the Company’s knowledge, the Company is not a party to any pending legal proceeding, and the Company’s property is not the subject of a pending legal proceeding. There are also no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

ITEM 1A. RISK FACTORS.

RISKS RELATED TO OUR BUSINESS

9


The increasing concentration of our small electric household appliance sales among a few retailers and the trend toward private-label brands could negatively affect sales levels or profits.

With the growing trend towards the concentration of our small electric household appliance sales among a few retailers, we are increasingly dependent upon fewer customers whose bargaining strength is growing as a result of this concentration. We sell a substantial quantity of our products to mass merchandisers, national department stores, variety store chains, drug store chains, specialty home retailers and other retail outlets. These retailers generally purchase a limited selection of small electric household appliances. As a result, we compete for retail shelf space with our competitors. In addition, certain of our larger customers are using their own private label brands on household appliances that compete directly with some of our products. As the retailers in the small electric household appliance industry become more concentrated, competition for sales to these retailers may increase, which could adversely affect our results of operations.

We are susceptible to a material decrease in business if our customers decide not to utilize our services

Our customers might utilize the services of a different distributor or they might or directly import the products themselves from other manufacturers. If we were to lose one of our major customers our revenues will materially decrease. Through our acquisition of Juxian and Weihe, we now have our own production facilities in China, to facilitate a vertical integration with production being part of our operation. However, there is no guarantee that we will be able to establish our own production facility and if we do there is no guarantee that we will be successful.

Our business could be adversely affected by retailer inventory management.

Changes in retailer inventory management strategies could make inventory management more difficult for us. As a result of the desire of retailers to more closely manage inventory levels, there is a growing trend among retailers to make purchases on a "just-in-time" basis. This requires us to shorten our lead time for production in certain cases and more closely anticipate demand, which could in the future require the carrying of additional inventories or require us to incur additional expenses to expedite delivery. Because of our reliance on unaffiliated third-party suppliers primarily in China, our production lead times are relatively long. Therefore, we generally commit to production in advance of customer orders. If retailers significantly change their inventory management strategies or if they or we fail to forecast customer or consumer demand accurately, we may encounter difficulties in filling customer orders or in liquidating excess inventories, or may find that customers are canceling orders or returning products. Distribution difficulties may have an adverse effect on our business by increasing the amount of inventory and the cost of warehousing inventory. Any of these results could have a material adverse effect on us.

We rely on only a few suppliers for our raw materials and their non-performance would adversely affect our operations.

We obtain a majority of our products from only a few suppliers whose nonperformance would have a near-term severe impact on our operations. During 2006, we purchased 91% of our products from only three suppliers and during 2005 we purchased 82% of our products from only two suppliers. At December 31, 2006 and 2005, amounts due to those suppliers included in accounts payable were $1,665,092 and $1,573,549, respectively. This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated. Such failure could cause us to experience delivery delays or failures caused by production issues or could cause us to deliver of non-conforming products.

We rely on three customers for the majority of our sales revenues and should their orders decrease or their relationship with us be terminated our business and operations would be adversely affected.

Well Profit sells a majority of its products to Hengbao, Rich Empire and Baochang, its exclusive distributors, through an unwritten commercial arrangement between Well Profit and each of them. Hengbao is indirectly owned by Oceanic PRC, which until March 2007, was indirectly owned and controlled by Mr. Weiqiu Li, our director and Chief Executive Officer. During the nine-month period ended September 30, 2007, Hengbao, Xinda and Baochang were responsible for 61%, 2% and 8%, respectively, of Well Profit’s sales revenues. In addition, for the fiscal years ended December 31, 2006, our sales to Hengbao accounted for $3,212,160, or 100% of our receivables, all of which remains outstanding as at September 30, 2007, with no stated interest rate or repayment terms. Since Well Profit accounted for 100% and 61.75% of our sales during the fiscal year ended December 31, 2006 and the nine-month period ended September 30, 2007, respectively, its concentration of sales with Hengbao, Xinda and Baochang makes us vulnerable to any changes in the business environment in which they operate. Any adverse effects on their business and operations may adversely affect our business and operations.

10


The small electric household and appliance industry is consolidating, which could have a material adverse effect on our success.

Over the past several years, the small electric household and appliance industry has undergone substantial consolidation, and further consolidation is likely. As a result of this consolidation, the small electric household and appliance industry could largely consist of a limited number of large distributors. To the extent that we do not continue to be a major participant in the small electric household and appliance industry, our ability to compete effectively with these larger distributors could be negatively impacted. As a result, our results of operations could be materially adversely affected.

Competition may materially adversely affect our results of operations.

The small electric household and appliance industry does not have onerous entry barriers. As a result, we compete with many small manufacturers and distributors of household products. Additional competitors may also enter this market and cause competition to intensify. We believe that competition is based upon several factors, including product design and innovation, quality, price, product features, merchandising, promotion and warranty. If we fail to compete effectively with these manufacturers and distributors, our results of operations could be materially adversely affected.

We also compete with established companies, a number of which have substantially greater facilities, personnel, financial and other resources than we have. In addition, we compete with our retail customers, who use their own private label brands, and with exporters and foreign manufacturers of unbranded products. Some competitors may be willing to reduce prices and accept lower profit margins to compete with us. As a result of this competition, we could lose market share and sales, or be forced to reduce our prices to meet competition.

We depend on consumer spending, which fluctuates for a variety of reasons, including seasonality.

Sales of our products are related to consumer spending. Any downturn in the general economy or a shift in consumer spending away from small electric household appliances would adversely affect our business. In addition, the market for small electric household appliances is highly seasonal in nature. We often recognize a substantial portion of our sales during the third and fourth quarters of the fiscal year due to increased demand by consumers in late summer and fall for the Holiday season. Any economic downturn, decrease in consumer spending or a shift in consumer spending away from small electric household appliances could materially adversely impact our results of operations.

The failure of our business strategy could have a materially adverse effect on our business.

As part of our business strategy, we plan to:

  • continue cost reductions throughout the entire company and at our suppliers;

  • reduce product returns and improve the quality of our products;

  • pursue innovation in our product categories through our ability to research, design and test new product concepts;

  • and develop and sustain industry-leading sales, marketing and branding programs in our industry.

Our strategic objectives may not be realized or, if realized, may not result in increased revenue, profitability or market presence. Executing our strategy may also place a strain on our suppliers, information technology systems and other resources. To manage growth effectively, we must maintain a high level of quality, properly manage our third-party suppliers, continue to enhance our operational, financial and management systems and expand, train and manage our employee base. We may not be able to effectively manage our growth in any one or more of these areas, which could have a materially adverse effect on our business.

Our future success depends on the development of new and innovative products on a consistent basis in order to increase revenues and we may not be able to do so.

11


We believe that our future success is heavily dependent upon our ability to continue to make innovations in our existing products and to develop, source and market new products, which generally carry higher margins. We may not be successful in the introduction, marketing and sourcing of any new products or product innovations and we may not be able to develop and introduce in a timely manner innovations to our existing products that satisfy customer needs or achieve market acceptance.

Our business can be adversely affected by newly acquired businesses or product lines.

We will continue to acquire partial or full ownership in businesses and may acquire rights to market and distribute particular products or lines of products. The acquisition of a business or of the rights to market specific products or use specific product names usually involve a financial commitment by us, either in the form of cash or stock consideration. Our delivery of unsecured promissory notes to the Juxian and Weihe shareholders in connection with our recent acquisition of Juxian and Weihe are examples of such a financial commitment. In the case of a new license, such commitments are usually in the form of prepaid royalties and future minimum royalty payments. We may not be able to acquire businesses and develop products that will contribute positively to our earnings. Anticipated synergies may not materialize, cost savings may be less than expected, sales of products may not meet expectations and acquired businesses may carry unexpected liabilities.

Government regulations could adversely impact our operations.

Throughout the world, electrical appliances are subject to various mandatory and voluntary safety standards, including requirements in certain jurisdictions that products be listed by Underwriters Laboratories, Inc. or other such recognized laboratories. Many foreign, federal, state and local governments also have enacted laws and regulations that govern the labeling and packaging of products and limit the sale of product containing certain materials deemed to be environmentally sensitive. Our products may be found to be noncompliant. A determination that we are not in compliance with such rules, regulations or standards could result in the imposition of fines or an award of damages to private litigants.

Our business involves the potential for product recalls and product liability claims.

As distributors of consumer products to consumers in the United States, we are subject to the Consumer Products Safety Act, which empowers the U.S. Consumer Products Safety Commission to exclude from the market products that are found to be unsafe or hazardous. Under certain circumstances, the U.S. Consumer Products Safety Commission could require us to repair, replace or refund the purchase price of one or more of our products, or we may voluntarily do so. If we were required to remove, or we voluntarily remove, our products from the market, our reputation or brands could be tarnished and we might have large quantities of finished products that could not be sold. Furthermore, failure to timely notify the U.S. Consumer Product Safety Commission of a potential safety hazard can result in fines being assessed against us. Additionally, laws regulating certain consumer products exist in some states, as well as in other countries in which we sell our products, and more restrictive laws and regulations may be adopted in the future. We also face exposure to product liability claims if one of our products is alleged to have caused property damage, bodily injury or other adverse effects. We are self-insured to specified levels of those claims.

Our results of operations are also susceptible to adverse publicity regarding the quality and safety of our products. In particular, product recalls or product liability claims challenging the safety of our products may result in a decline in sales for a particular product. This could be true even if the claims themselves are ultimately settled for immaterial amounts. This type of adverse publicity could occur and product liability claims could be made in the future.

If we grow through acquisitions and fail to successfully integrate acquired companies, our operations could be disrupted and management could become distracted by integration issues.

As part of our business strategy, we plan to grow in part by acquiring other product lines, technologies or facilities that complement or expand our existing business. We may be unable to implement this part of our business strategy and may not be able to continue making acquisitions to continue our growth. There is significant competition for acquisition targets in the small household appliance industry. We may not be able to identify suitable acquisition candidates or negotiate attractive terms. In addition, we may have difficulty obtaining the financing necessary to complete transactions that we pursue. Future acquisitions may involve the issuance of our equity securities as payment, in part or in full, for the businesses or assets acquired. Any future issuances of equity securities would dilute your ownership interests. In addition, future acquisitions might not increase, and may even decrease, our earnings or earnings per share and the benefits derived by us from an acquisition might not outweigh or might not exceed the dilutive effect of the acquisition. We also may incur additional debt or suffer adverse tax and accounting consequences in connection with any future acquisitions, although we currently do not have any identified future acquisition targets.

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Where we are successful in completing acquisitions, we might experience difficulties in integrating the acquired business or assets. Acquisitions might result in unanticipated liabilities, unforeseen expenses and distraction of management’s time and attention. We cannot assure you that our acquisition strategy will be successful.

Expansion of our business may put added pressure on our management and operational infrastructure impeding our ability to meet any increased demand for our products and possibly hurting our operating results.

Our business plan is to significantly grow our operations to meet anticipated growth in demand for existing products, and by the introduction of new product offerings. Our planned growth includes the construction of new production lines to be put into operation over the next twelve months. Growth in our business may place a significant strain on our personnel, management, financial systems and other resources. The evolution of our business also presents numerous risks and challenges, including:

  • our ability to successfully and rapidly expand sales to potential customers in response to potentially increasing demand;

  • the costs associated with such growth, which are difficult to quantify, but could be significant;

  • and rapid technological change.

To accommodate any such growth and compete effectively, we may need to obtain additional funding to improve information systems, procedures and controls and expand, train, motivate and manage our employees, and such funding may not be available in sufficient quantities, if at all. If we are not able to manage these activities and implement these strategies successfully to expand to meet any increased demand, our operating results could suffer.

We depend heavily on key personnel, and turnover of key employees and senior management could harm our business.

Our future business and results of operations depend in significant part upon the continued contributions of our key technical and senior management personnel, particularly Kin Wai Cheung, our Chief Financial Officer and Weiqiu Li, our Chief Executive Officer. They also depend in significant part upon our ability to attract and retain additional qualified management, technical, marketing and sales and support personnel for our operations. If we lose a key employee or if a key employee fails to perform in his or her current position, or if we are not able to attract and retain skilled employees as needed, our business could suffer. Significant turnover in our senior management could significantly deplete our institutional knowledge held by our existing senior management team. We do not maintain key man life insurance on any of these individuals. We depend on the skills and abilities of these key employees in managing the manufacturing, technical, marketing and sales aspects of our business, any part of which could be harmed by further turnover.

We may be exposed to potential risks relating to our internal controls over financial reporting and our ability to have those controls attested to by our independent auditors.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002 or SOX 404, the SEC adopted rules requiring public companies to include a report of management on the company’s internal controls over financial reporting in their annual reports. In addition, the independent registered public accounting firm auditing a company’s financial statements must also attest to and report on management’s assessment of the effectiveness of the company’s internal controls over financial reporting as well as the operating effectiveness of the company’s internal controls. We are not subject to these requirements for the fiscal year ended December 31, 2006, accordingly we have not evaluated our internal control systems in order to allow our management to report on, and our independent auditors to attest to, our internal controls as required by these requirements of SOX 404. Under current law, we will be subject to these requirements beginning with our annual report for the fiscal year ended December 31, 2007, although the auditor attestation will not be required until our annual report for the fiscal year ended on December 31, 2008. We can provide no assurance that we will comply with all of the requirements imposed thereby. There can be no positive assurance that we will receive a positive attestation from our independent auditors. In the event we identify significant deficiencies or material weaknesses in our internal controls that we cannot remediate in a timely manner or we are unable to receive a positive attestation from our independent auditors with respect to our internal controls, investors and others may lose confidence in the reliability of our financial statements.

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RISKS RELATED TO DOING BUSINESS IN CHINA

Our agreements to purchase all of the equity interests in Juxian and Weihe for both cash and stock consideration are subject to approval by the PRC government, which cannot be obtained so long as we are listed and traded on the OTCBB. Our failure to obtain this approval may result in renegotiation of the terms of our agreements in a manner that is adverse to us or in an unwinding of the Juxian and Weihe transactions.

The delivery of shares our shares of common stock in connection with the acquisition of Juxian and Weihe is not permitted pursuant to applicable PRC law, so long as we are listed and traded on the OTCBB, rather than an exchange recognized by the applicable PRC governmental authorities, such as Nasdaq, AMEX and the NYSE. As a result, to date, we have only paid the cash portion of the purchase price to the Juxian and Weihe stockholders and we have not delivered the stock portion. In addition, all our filings for approval of the transaction with the local PRC authorities have requested approval based only on the cash portion of the total consideration. We have not made an application for listing on any other exchange and currently does not satisfy the listing requirements of such exchanges. We are unable to list on an exchange in a timely manner such that delivery of the shares would be permissible, we may be required to renegotiate the original terms of the acquisition with the Juxian and Weihe stockholders in order to avoid a breach of the agreement and a demand for, or award of, damages to the Juxian and Weihe shareholders. Such renegotiation may result in the payment of additional cash or other consideration to the Juxian and Weihe shareholders. We cannot currently estimate the amount of such additional consideration, if any. We may also face certain fines and/or penalties under PRC law in connection with our agreements to deliver the share consideration for Juxian and Weihe and with the related PRC filings, including but not limited to an unwinding of the acquisitions. The Company intends to promptly amend the terms of the Juxian and Weihe agreements as well as the current reports on Form 8-K filed by the Company in connection with each these agreements, to clarify that payment of the share consideration will be made only as permitted under PRC law and/or other amendment of the transaction consideration.

Adverse changes in political and economic policies of the PRC government could impede the overall economic growth of China, which could reduce the demand for our products and damage our business.

We conduct substantially all of our operations and generate most of our revenue in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The PRC economy differs from the economies of most developed countries in many respects, including:

  • the higher level of government involvement;

  • the early stage of development of the market-oriented sector of the economy;

  • the rapid growth rate;

  • the higher level of control over foreign exchange;

  • and the allocation of resources.

As the PRC economy has been transitioning from a planned economy to a more market-oriented economy, the PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. While these measures may benefit the overall PRC economy, they may also have a negative effect on us.

Although the PRC government has in recent years implemented measures emphasizing the utilization of market forces for economic reform, the PRC government continues to exercise significant control over economic growth in China through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and imposing policies that impact particular industries or companies in different ways.

Any adverse change in the economic conditions or government policies in China could have a material adverse effect on the overall economic growth and the level of automotive investments and expenditures in China, which in turn could lead to a reduction in demand for our products and consequently have a material adverse effect on our business and prospects.

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Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us.

We conduct substantially all of our business through our operating subsidiaries in the PRC. Our operating subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to foreign-invested enterprises. The PRC legal system is based on written statutes, and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. In addition, all of our executive officers and all but one of our directors are residents of China and not of the United States, and substantially all the assets of these persons are located outside the United States. As a result, it could be difficult for investors to affect service of process in the United States or to enforce a judgment obtained in the United States against our Chinese operations and subsidiaries.

The PRC government exerts substantial influence over the manner in which we must conduct our business activities.

The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.

Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.

Restrictions on currency exchange may limit our ability to receive and use our sales revenue effectively.

Most of our sales revenue and expenses are denominated in RMB. Under PRC law, the RMB is currently convertible under the "current account," which includes dividends and trade and service-related foreign exchange transactions, but not under the "capital account," which includes foreign direct investment and loans. Currently, our PRC operating subsidiaries may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us, without the approval of the State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, the relevant PRC government authorities may limit or eliminate our ability to purchase foreign currencies in the future. Since a significant amount of our future revenue will be denominated in RMB, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in RMB to fund our business activities outside China that are denominated in foreign currencies.

Foreign exchange transactions by PRC operating subsidiaries under the capital account continue to be subject to significant foreign exchange controls and require the approval of or need to register with PRC government authorities, including SAFE. In particular, if our PRC operating subsidiaries borrow foreign currency through loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance the subsidiaries by means of additional capital contributions, these capital contributions must be approved by certain government authorities, including the Ministry of Commerce, or MOFCOM, or their respective local counterparts. These limitations could affect their ability to obtain foreign exchange through debt or equity financing.

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Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident stockholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us or otherwise materially adversely affect us.

In October 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, generally referred to as Circular 75, which required PRC residents to register with the competent local SAFE branch before establishing or acquiring control over an offshore special purpose company, or SPV, for the purpose of engaging in an equity financing outside of China on the strength of domestic PRC assets originally held by those residents. Internal implementing guidelines issued by SAFE, which became public in June 2007 (known as Notice 106), expanded the reach of Circular 75 by (1) purporting to cover the establishment or acquisition of control by PRC residents of offshore entities which merely acquire "control" over domestic companies or assets, even in the absence of legal ownership; (2) adding requirements relating to the source of the PRC resident’s funds used to establish or acquire the offshore entity; (3) covering the use of existing offshore entities for offshore financings; (4) purporting to cover situations in which an offshore SPV establishes a new subsidiary in China or acquires an unrelated company or unrelated assets in China; and (5) making the domestic affiliate of the SPV responsible for the accuracy of certain documents which must be filed in connection with any such registration, notably, the business plan which describes the overseas financing and the use of proceeds. Amendments to registrations made under Circular 75 are required in connection with any increase or decrease of capital, transfer of shares, mergers and acquisitions, equity investment or creation of any security interest in any assets located in China to guarantee offshore obligations, and Notice 106 makes the offshore SPV jointly responsible for these filings. In the case of an SPV which was established, and which acquired a related domestic company or assets, before the implementation date of Circular 75, a retroactive SAFE registration was required to have been completed before March 31, 2006; this date was subsequently extended indefinitely by Notice 106, which also required that the registrant establish that all foreign exchange transactions undertaken by the SPV and its affiliates were in compliance with applicable laws and regulations. Failure to comply with the requirements of Circular 75, as applied by SAFE in accordance with Notice 106, may result in fines and other penalties under PRC laws for evasion of applicable foreign exchange restrictions. Any such failure could also result in the SPV’s affiliates being impeded or prevented from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the SPV, or from engaging in other transfers of funds into or out of China.

We believe our stockholders who are PRC residents as defined in Circular 75 have registered with the relevant branch of SAFE, as currently required, in connection with their equity interests in us and our acquisitions of equity interests in our PRC subsidiaries. However, we cannot provide any assurances that their existing registrations have fully complied with, and they have made all necessary amendments to their registration to fully comply with, all applicable registrations or approvals required by Circular 75. Moreover, because of uncertainty over how Circular 75 will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies. For example, our present and prospective PRC subsidiaries’ ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with Circular 75 by our PRC resident beneficial holders. In addition, such PRC residents may not always be able to complete the necessary registration procedures required by Circular 75. We also have little control over either our present or prospective direct or indirect stockholders or the outcome of such registration procedures. A failure by our PRC resident beneficial holders or future PRC resident stockholders to comply with Circular 75, if SAFE requires it, could subject these PRC resident beneficial holders to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.

We may be unable to complete a business combination transaction efficiently or on favorable terms due to complicated merger and acquisition regulations which became effective on September 8, 2006.

On August 8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which became effective on September 8, 2006. This new regulation, among other things, governs the approval process by which a PRC company may participate in an acquisition of assets or equity interests. Depending on the structure of the transaction, the new regulation will require the PRC parties to make a series of applications and supplemental applications to the government agencies. In some instances, the application process may require the presentation of economic data concerning a transaction, including appraisals of the target business and evaluations of the acquirer, which are designed to allow the government to assess the transaction. Government approvals will have expiration dates by which a transaction must be completed and reported to the government agencies. Compliance with the new regulations is likely to be more time consuming and expensive than in the past and the government can now exert more control over the combination of two businesses. Accordingly, due to the new regulation, our ability to engage in business combination transactions has become significantly more complicated, time consuming and expensive, and we may not be able to negotiate a transaction that is acceptable to our stockholders or sufficiently protect their interests in a transaction.

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The new regulation allows PRC government agencies to assess the economic terms of a business combination transaction. Parties to a business combination transaction may have to submit to the Ministry of Commerce and other relevant government agencies an appraisal report, an evaluation report and the acquisition agreement, all of which form part of the application for approval, depending on the structure of the transaction. The regulations also prohibit a transaction at an acquisition price obviously lower than the appraised value of the PRC business or assets and in certain transaction structures, require that consideration must be paid within defined periods, generally not in excess of a year. The regulation also limits our ability to negotiate various terms of the acquisition, including aspects of the initial consideration, contingent consideration, holdback provisions, indemnification provisions and provisions relating to the assumption and allocation of assets and liabilities. Transaction structures involving trusts, nominees and similar entities are prohibited. Therefore, such regulation may impede our ability to negotiate and complete a business combination transaction on financial terms that satisfy our investors and protect our stockholders’ economic interests.

Fluctuations in exchange rates could adversely affect our business and the value of our securities.

The value of our common stock will be indirectly affected by the foreign exchange rate between U.S. dollars and RMB and between those currencies and other currencies in which our sales may be denominated. Because substantially all of our earnings and cash assets are denominated in RMB, appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue that will be exchanged into U.S. dollars and earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.

Since July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.

Currently, some of our raw materials and major equipment are imported. In the event that the U.S. dollars appreciate against RMB, our costs will increase. If we cannot pass the resulting cost increases on to our customers, our profitability and operating results will suffer. In addition, since our sales to international customers are growing rapidly, we are increasingly subject to the risk of foreign currency depreciation.

RISKS RELATED TO THE MARKET FOR OUR STOCK GENERALLY

The market price of our common stock is volatile, leading to the possibility of its value being depressed at a time when you want to sell your holdings.

The market price of our common stock is volatile, and this volatility may continue. For instance, between December 15, 2006 and September 30, 2007, the bid price of our common stock, as reported on the markets on which our securities have traded, ranged between $0.50 and $4.75. Numerous factors, many of which are beyond our control, may cause the market price of our common stock to fluctuate significantly. These factors include:

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  • our earnings releases, actual or anticipated changes in our earnings, fluctuations in our operating results or our failure to meet the expectations of financial market analysts and investors;

  • changes in financial estimates by us or by any securities analysts who might cover our stock;

  • speculation about our business in the press or the investment community;

  • significant developments relating to our relationships with our customers or suppliers;

  • stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in the small household appliance industry;

  • customer demand for our products;

  • investor perceptions of the small household appliance industry in general and our company in particular;

  • the operating and stock performance of comparable companies;

  • general economic conditions and trends;

  • announcements by us or our competitors of new products, significant acquisitions, strategic partnerships or divestitures;

  • changes in accounting standards, policies, guidance, interpretation or principles;

  • loss of external funding sources;

  • sales of our common stock, including sales by our directors, officers or significant stockholders;

  • and additions or departures of key personnel.

Securities class action litigation is often instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs to us and divert our management’s attention and resources.

Moreover, securities markets may from time to time experience significant price and volume fluctuations for reasons unrelated to operating performance of particular companies. For example, in late February 2007, the securities markets in the United States, China and other jurisdictions experienced the largest decline in share prices since September 2001. These market fluctuations may adversely affect the price of our common stock and other interests in our company at a time when you want to sell your interest in us.

We do not intend to pay dividends on shares of our common stock for the foreseeable future, but if we intend to do so our holding company structure may limit the payment of dividends to our stockholders.

We have no direct business operations, other than our ownership of our subsidiaries. While we have no current intention of paying dividends, should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries and other holdings and investments. In addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions as discussed below. If future dividends are paid in RMB, fluctuations in the exchange rate for the conversion of RMB into U.S. dollars may reduce the amount received by U.S. stockholders upon conversion of the dividend payment into U.S. dollars.

Chinese regulations currently permit the payment of dividends only out of accumulated profits as determined in accordance with Chinese accounting standards and regulations. Our subsidiaries in China are also required to set aside a portion of their after tax profits according to Chinese accounting standards and regulations to fund certain reserve funds. Currently, our subsidiaries in China are the only sources of revenues or investment holdings for the payment of dividends. If they do not accumulate sufficient profits under Chinese accounting standards and regulations to first fund certain reserve funds as required by Chinese accounting standards, we will be unable to pay any dividends.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

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We have not sold any equity securities during the fiscal quarter ended September 30, 2007 that were not previously disclosed in a quarterly report on Form 10-Q or a current report on Form 8-K that was filed during that period.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

Number   Description
31.1   Chief Executive Officer Certification furnished pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Chief Financial Officer Certification furnished pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32   Chief Executive Officer and Chief Financial Officer Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: April 22, 2008 HOME SYSTEM GROUP
   
   
  By:  /s/ Weiqiu Li
    Weiqiu Li, Chief Executive Officer
     
     
  By: /s/ Kinwai Cheung
    Kinwai Cheung, Chief Financial Officer

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EXHIBITS

Number   Description
31.1   Chief Executive Officer Certification furnished pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Chief Financial Officer Certification furnished pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32   Chief Executive Officer and Chief Financial Officer Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 



EXHIBIT 31.1 HTML

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EXHIBIT 31.1

CERTIFICATION PURSUANT TO
RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Weiqiu Li, certify that:

1.

 I have reviewed this quarterly report on Form 10-Q of the Company;

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 Company as of, and for, the periods presented in this report;

4.

The Company’s other certifying officer 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 Company 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 Company, 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 Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting; and

5.

The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’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 Company’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 Company’s internal control over financial reporting.

Date: April 22, 2008 /s/ Weiqiu Li
  Weiqiu Li
  Principal Executive Officer

 



EXHIBIT 31.2 HTML

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EXHIBIT 31.2

CERTIFICATION PURSUANT TO
RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Kinwai Cheung, certify that:

1.

I have reviewed this annual report on Form 10-Q of the Company;

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 Company as of, and for, the periods presented in this report;

4.

The Company’s other certifying officer 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 Company 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 Company, 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 Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting; and

5.

The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’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 Company’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 Company’s internal control over financial reporting.

Date: April 22, 2008 /s/ Kinwai Cheung
  Kinwai Cheung
  Principal Financial Officer and Accounting Officer

 



EXHIBIT 32 HTML

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EXHIBIT 32

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

The undersigned, Weiqiu Li and Kinwai Cheung, the Chief Executive Officer and Chief Financial Officer, respectively, of HOME SYSTEM GROUP (the "Company"), DO HEREBY CERTIFY that:

1.

The Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2007 (the "Report"), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

2.

Information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

IN WITNESS WHEREOF, each of the undersigned has executed this statement this 22nd day of April, 2008.

/s/ Weiqiu Li                                      
Weiqiu Li
Chief Executive Officer
(Principal Executive Officer)
 
 
/s/ Kinwai Cheung                              
Kinwai Cheung
Chief Financial Officer
(Principal Financial Officer and Accounting Officer)

A signed original of this written statement required by Section 906 has been provided to Home System Group and will be retained by Home System Group and furnished to the Securities and Exchange Commission or its staff upon request.

The forgoing certification is being furnished to the Securities and Exchange Commission pursuant to §18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.


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