Form 10-Q Home System Group

Quarterly report pursuant to section 13 and 15(d)

What is Form 10-Q?
  • Accession No.: 0001204459-08-001028 Act: 34 File No.: 000-49770 Film No.: 08835966
  • CIK: 0001172319
  • Submitted: 2008-05-15
  • Period of Report: 2008-03-31

FORM 10-Q HTML

hsq05140810q.htm


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

FORM 10−Q

(Mark One)

Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2008

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

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

     
 
Oceanic Industry Park, Sha Gang Highway, Gang Kou Town
Zhongshan City, Guangdong

People's Republic of China, 528447

(Address of principal executive offices)

 

(86 755) 8357-0142 

(Registrant's telephone number, including area code)

 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 £                            No £ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer £      Accelerated filer £      Non-accelerated filer £ Smaller reporting company £

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  
 

 


Yes £                              No Q  


 

There were a total of 62,477,949 shares of the registrant's common stock outstanding as of May 7, 2008.

 

Documents Incorporated by Reference: None

 

 



 

PART 1 – FINANCIAL INFORMATION

HOME SYSTEM GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED

MARCH 31, 2008 AND 2007

(UNAUDITED)

CONTENTS

  PAGE
   
   
CONDENSED CONSOLIDATED BALANCE SHEETS 1
   
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS / INCOME AND COMPREHENSIVE (LOSS) INCOME 2
   
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 3
   
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 4
   
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5 - 16

HOME SYSTEM GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2008 AND DECEMBER 31, 2007
(Expressed in US dollars except for number of shares)

         
    March 31,   December 31,
    2008   2007
    (unaudited)   (audited)
ASSETS        
         
CURRENT ASSETS        

Cash and cash equivalents

$

402,623

$

821,074

Restricted cash

 

936,690

 

-

Accounts receivable – trade

 

6,570,083

 

10,706,256

Other receivables

 

1,290,086

 

1,056,946

Inventories

 

5,138,245

 

5,267,728

Trade deposits

 

434,734

 

434,734

Income tax refundable (is there and offset avail. w/Taxes

 

78,691

 

75,550

TOTAL CURRENT ASSETS

 

14,851,152

 

18,362,288

 

 

 

 

 

Acquisition deposits

 

7,854,000

 

7,540,500

Property, plant and equipment – net

 

6,114,843

 

5,986,847

 

 

 

 

 

TOTAL ASSETS

$

28,819,995

$

31,889,635

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

Bank loan

$

714,000

$

-

Bills payable

 

2,341,726

 

-

Accounts payable – trade

 

11,019,290

 

15,497,372

Accrued expenses and other payables

 

1,453,254

 

1,411,351

Taxes payable

 

81,553

 

802,054

Due to a stockholder – current portion

 

609,618

 

304,366

TOTAL CURRENT LIABILITIES

 

16,219,441

 

18,015,143

 

 

 

 

 

NON-CURRENT LIABILITIES

 

 

 

 

Due to a stockholder – non-current portion

 

600,000

 

600,000

Notes payable

 

6,575,000

 

6,575,000

 

 

 

 

 

TOTAL LIABILITIES

 

23,394,441

$

25,190,143

 

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

COMMON STOCK - $0.001 par value; 200,000,000 shares

 

 

 

 

authorized, 62,477,949 shares issued and outstanding

 

62,478

 

62,478

 

 

 

 

 

ADDITIONAL PAID-IN CAPITAL

 

6,581,717

 

6,615,726

 

 

 

 

 

NOTE RECEIVABLE ON STOCK ISSUANCE

 

(900,000)

 

(900,000)
 

 

 

 

 

STATUTORY RESERVES

 

29,616

 

29,616

 

 

 

 

 

(ACCUMULATED DEFICIT) RETAINED EARNINGS

 

(1,634,554)

 

150,161

CUMULATIVE TRANSLATION ADJUSTMENT

 

1,286,297

 

741,511

TOTAL STOCKHOLDERS' EQUITY

$

5,425,554

$

6,699,492

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

28,819,995

$

31,889,635

See accompanying notes to consolidated financial statements

-1-


HOME SYSTEM GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS / INCOME
AND COMPREHENSIVE (LOSS) INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(Expressed in US dollars except for number of shares)
(UNAUDITED)

  Three Months Ended March 31,
 

2008

2007
         
         
NET SALES

$

7,678,489

$

11,716,767

Cost of sales

 

8,648,024

 

10,158,754

GROSS (LOSS) PROFIT

 

(969,535)

 

1,558,013

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

Provision for stock option costs written back

 

(34,009)

 

-

General selling and administrative expenses

 

837,088

 

555,221

 

 

803,079

 

555,221

 

 

 

 

 

(LOSS) INCOME FROM OPERATIONS

 

(1,772,614)

 

1,002,792

 

 

 

 

 

OTHER (EXPENSE) INCOME

 

 

 

 

Other expenses

 

(1,259)

 

-

Interest expenses

 

(10,842)

 

-

Interest income

 

-

 

181

 

 

(12,101)

 

181

 

 

 

 

 

(LOSS) INCOME BEFORE INCOME TAXES

 

(1,784,715)

 

1,002,973

 

 

 

 

 

INCOME TAXES

 

-

 

(71,092)
 

 

 

 

 

NET (LOSS) INCOME

 

(1,784,715)

 

931,881

 

 

 

 

 

OTHER COMPREHENSIVE INCOME

 

 

 

 

Foreign currency translation adjustment

 

544,786

 

40,555

 

 

 

 

 

COMPREHENSIVE (LOSS) INCOME

$

(1,239,929)

$

972,436

 

 

 

 

 

(LOSS) EARNINGS PER SHARE

 

 

 

 

-BASIC

$

(0.028)

$

0.017

-DILUTED

$

(0.028)

$

0.017

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF SHARES

 

 

 

 

-BASIC

 

62,477,949

 

55,730,299

-DILUTED

 

62,477,949

 

55,730,299

         
See accompanying notes to consolidated financial statements

-2-


HOME SYSTEM GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2007 AND THREE MONTHS ENDED MARCH 31, 2008
(Expressed in US dollars except for number of shares)

                               
  Number of           Note       Retained        
  Shares of       Additional   Receivable       Earnings /        
  Common   Common   Paid-in   On Stock   Statutory   (Accumulated        
  Stock   Stock   Capital   Issuance   Reserves   Deficit)   Adjustment   Total
BALANCES AT DECEMBER                              
31, 2006(audited)

42,500,000

$

42,500

$

3,709,025

$

-

$

-

$

118,249

$

99,363

$

3,969,137

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effects 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options costs

-

 

-

 

102,026

 

-

 

-

 

-

 

-

 

102,026

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appropriation to reserves

-

 

-

 

-

 

-

 

29,616

 

(29,616)

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation

 

 

 

 

 

 

-

 

 

 

 

 

 

 

 

adjustment

-

 

-

 

-

 

 

 

-

 

-

 

642,148

 

642,148

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for the year

-

 

-

 

-

 

-

 

-

 

61,528

 

-

 

61,528

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCES AT DECEMBER

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31, 2007- (audited)

62,477,949

$

62,478

$

6,615,726

$

(900,000)

$

29,616

$

150,161

$

741,511

$

6,699,492

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for stock option costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

written back

-

 

-

 

(34,009)

 

-

 

-

 

-

 

-

 

(34,009)
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation adjustment

-

 

-

 

-

 

-

 

-

 

-

 

544,786

 

544,786

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) for the period

-

 

-

 

-

 

-

 

-

 

(1,784,715)

 

-

 

(1,784,715)
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT MARCH 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008 -(unaudited)

62,477,949

$

62,478

$

6,581,717

$

(900,000)

$

29,616

$

(1,634,554)

 

1,286,297

 

5,425,554

See accompanying notes to condensed consolidated financial statements

-3-


HOME SYSTEM GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(Expressed in US dollars)
(UNAUDITED)

  Three Months Ended March 31,
 

2008

2007
         
CASH FLOWS FROM OPERATING ACTIVITIES        

Net (loss) income

$

(1,784,715)

$

931,881

Adjustments to reconcile net (loss)income

 

 

 

 

to net cash (used in) provided by operating activities

 

 

 

 

Depreciation

 

147,063

 

64,419

Provision for stock option costs written back

 

(34,009)

 

-

Change in assets and liabilities:

 

 

 

 

(Increase) decrease in assets

 

 

 

 

Accounts receivable

 

4,485,044

 

1,319,154

Other receivables

 

(185,192)

 

-

Prepaid expense

 

-

 

72,763

Inventories

 

341,170

 

(3,886,240)

Trade deposits

 

-

 

1,472,569

Increase (decrease) in liabilities

 

 

 

 

Bills payable

 

2,292,530

 

-

Accounts payable, other payables and accrued expenses

 

(5,016,287)

 

7,195,084

Employee advances

 

-

 

4,391

Taxes payable

 

(738,009)

 

97,710

Net cash (used in) provided by operating activities

 

(492,405)

 

7,271,731

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

Capital expenditures

 

(28,723)

 

(69,331)

Cash acquired in merger

 

-

 

55,980

Net cash (used in) investing activities

 

(28,723)

 

(13,351)
 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

Proceeds (repayment) of bank loans

 

699,000

 

(111,717)

Restricted cash

 

(917,012)

 

-

Net decrease in due to related party

 

(6,621)

 

(2,422,626)

Increase in due from stockholder

 

-

 

(839,940)

Increase in due to stockholder

 

305,255

 

71,934

Dividend distribution for acquisition

 

-

 

(3,000,000)

Net cash provided by (used in) financing activities

 

80,622

 

(6,302,349)
EXCHANGE RATE EFFECT ON CASH

 

22,055

 

58

 

 

 

 

 

NET (DECREASE) INCREASE IN CASH

 

(418,451)

 

956,089

 

 

 

 

 

CASH - BEGINNING OF PERIOD

 

821,074

 

6,012

CASH - END OF PERIOD

 

 

 

 

 

$

402,623

$

962,101

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

Cash paid during the period for:

 

 

 

 

Interest

$

10,842

$

82,112

Income taxes

$

-

$

51,495

See accompanying notes to consolidated financial statements

-4-


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PREPARATION

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, 2007 ("2007 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 2007 Form 10-KSB should be read in conjunction with the accompanying interim financial statements. The interim operating results for the three months ended March 31, 2008 may not be indicative of operating results expected for the full year.

The financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The Company had net loss of $1,784,715 for the three months ended March 31, 2008 and at that date, the Company also had an accumulated deficit of $1,634,554 and current liabilities exceeded current assets by $1,368,289.

Operations to date have been primarily financed by stockholder advances and private equity investments. As a result, the Company's future operations are dependent upon the identification and successful completion of permanent equity investment and/or financing, the continued support of stockholders and ultimately, the achievement of profitable operations. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts nor to amounts and classification of liabilities that may be necessary should it be unable to continue as a going concern.

NOTE 2 – ORGANIZATION AND NATURE OF BUSINESS

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 and, 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 is 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.

-5-


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – ORGANIZATION AND NATURE OF BUSINESS (Continued)

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 and, 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.

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.

On February 7, 2008, the Company cancelled the acquisition of Zhongshan Weihe Electrical Appliances Company Limited and Zhongshan Juxian Gas Oven Company Limited and the Share Exchange Agreement.

NOTE 3 – 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.

NOTE 4 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basic and Diluted Earnings (Loss) Per Share

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 ("SFAF") 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.

-6-


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Issued Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, Fair Value Measurements ("SFAS 157"), which is effective for fiscal years beginning after November 15, 2007 with earlier adoption encouraged. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157 which delayed the effective date of SFAS 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, until January 1, 2009. The Company has not yet determined the impact the implementation of SFAS 157 will have on the Company's non-financial assets and liabilities which are not recognized or disclosed on a recurring basis. However, the Company does not anticipate that the full adoption of SFAS 157 will significantly impact their consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115 ("SFAS 159"), which permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of SFAS 159 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. The Company adopted SFAS 159 on January 1, 2008, but the implementation of SFAS 159 did not have a significant impact on the Company's financial position or results of operations.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations ("SFAS 141R"). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This statement is effective for the Company beginning January 1, 2009. The Company is currently evaluating the potential impact of the adoption of SFAS 141R on its consolidated financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51 ("SFAS 160"). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This statement is effective for the Company beginning January 1, 2009. The Company is currently evaluating the potential impact of the adoption of SFAS 160 on its consolidated financial position, results of operations and cash flows.

-7-


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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. We measure the impairment loss based on the difference between the carrying amount and estimated fair value.

Long-lived assets are considered held for sale when certain criteria are met, including: management's commitment to a plan to sell the asset, the asset is available for sale in its immediate condition, and the sale is probable within one year of the reporting date. Assets held for sale are reported at the lower of cost or fair value less costs to sell.

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.

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.

-8-


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 –RELATED PARTIES TRANSACTIONS

During the three month periods ended March 31, 2008, the Company had the transactions with certain former 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 March 2007 when they related to the Company are as follows:

  For the three months
  ended March 31, 2007
     
     
Sales to the related companies

$

3,899,573

Percentage of total net sales

 

33%

Purchases from the related companies

 

 

 

$

4,083,252

Percentage of total purchases

 

40%

Rental expenses paid to related companies

 

 

 

 

135,510

Building management fee paid to related companies

 

4,954

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment consist of the following:

    March 31,   December 31,
    2008   2007
At cost:        
Plant and machinery

$

6,152,056

$

6,278,535

Furniture, fixtures and equipment

 

524,330

 

87,831

 

 

 

 

 

Total

 

6,676,386

 

6,366,366

 

 

 

 

 

Less: accumulated depreciation

 

561,543

 

379,519

Net book value

$

6,114,843

$

5,986,847

-9-


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 – BANK LOAN

    March 31,   December 31,
    2008   2007
         
Bank loan repayable within 1 year

$

714,000

$

-

The bank loan is denominated in RMB and carries interest at the rate of 8.54% per annum with maturity dates within 6 months. The bank loan was guaranteed by Zhongshan City Oceanic International Company Limited, Zhongshan Weihe Electrical Appliances Co., Limited and the personal guarantee by certain persons including a director.

NOTE 8 – RESTRICTED CASH AND BILLS PAYABLE

    March 31,   December 31,
    2008   2007
         
Bank deposits held as collateral for bills payable

$

936,690

$

-

 

 

 

 

 

Bills payable

$

2,341,726

$

-

The Company is requested by certain of its suppliers to settle amounts owed to such suppliers by the issuance of usance bills of exchange through banks for which the banks undertake to guarantee the Company's settlement of these amounts at maturity. These bills are interest free with maturity dates of six months from the date of issuance. As security for the banks' undertakings, the Company is required to pay the banks' charges as well as deposit with such banks amounts equal to 40% of the bills' amount at the time of such issuance.

-10-


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 – 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 four reportable segments: (1) barbeque set products, (2) skateboards, (3) Other home appliances and (4) Corporate. 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

 

 

 

 

 

 

 

 

 

 

 

 

For the

 

For the

 

For the

 

For the

 

For the

 

For the

 

 

 

 

 

For the

 

 

 

 

three

 

three

 

three

 

three

 

three

 

three For the three

 

Corporate

 

For the three

 

three

 

Total

 

 

months

 

months

 

months

 

months

 

months

 

months

 

months

 

months

 

months

 

For the three

 

 

ended

 

ended

 

ended

 

ended

 

ended

 

ended

 

ended

 

ended

 

ended

 

months

 

 

March 31,

 

March 31,

 

March 31,

 

March 31,

 

March 31,

 

March 31,

 

March 31,

 

March 31,

 

March 31,

 

ended March

 

 

2008

 

2007

 

2008

 

2007

 

2008

 

2007

 

2008

 

2007

 

2008

 

31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

5,432,491

$

11,716,767

$

1,182,577 $

 

-

$

1,063,421

$

-

$

-

$

-

$

7,678,489

$

11,716,767

Depreciation and amortization

$

72,361

$

64,419

$

94

$

-

$

74,608

$

-

$

-

$

-

$

147,063

$

64,419

Segment (loss) income before income taxes

$

(1,493,216)

$

1,002,973

$

95,806

$

-

$

(134,160)

$

-

$

(253,145)

$

-

$

(1,784,715)

$

1,002,973

Capital expenditures

$

24,389

$

69,331

$

-

$

-

$

4,334

$

-

$

-

$

-

$

28,723

$

69,331

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

As of

 

As of

 

As of

 

As of

 

As of

 

As of

 

As of

 

As of

 

As of

 

 

March 31,

 

December

 

March 31,

 

December

 

March 31,

 

December 

 

March

 

December

 

March 31,

 

December

 

 

2008

 

31, 2007

 

2008

 

31, 2007

 

2008

 

31, 2007

 

31, 2008

 

31, 2007

 

2008

 

31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment assets

$

12,412,065

$

13,009,322

$

4,362,221

$

7,894,668

$

4,188,793

$

2,274,377

$

7,856,916

$

8,711,268

$

28,819,995

$

31,889,635

-11-


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – INVENTORIES

Inventories consist of the following:

    March 31,   December 31,
    2008   2007
Raw materials

$

1,030,728

$

1,695,194

Work in process

 

2,955,345

 

2,167,281

Consumable

 

73,679

 

70,950

Finished goods

 

1,078,493

 

1,334,303

 

 

 

 

 

Total

$

5,138,245

$

5,267,728

NOTE 11 – 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 $164,191 and $84,806 for the three months ended March 31, 2008 and 2007 respectively.

NOTE 12 – TRADE DEPOSITS

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

NOTE 13 – DUE TO STOCKHOLDER

Amount represents advances from a stockholder as at March 31, 2008. The amount due is unsecured with no stated interest. Amount of $600,000 is not repayable within twelve months from the balance sheet date which recorded under non-current liabilities and the remaining amount of $ 609,618 is repayable on demand which recorded under current liabilities.

-12-


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 – STOCK OPTIONS

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.

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. By a resolution of all directors dated April 29 2008, the service agreement with the chairman of the audit committee was terminated. Accordingly, 16,667 option shares not yet vested will be cancelled.

The following table summarizes all Company stock option transactions between January 1, 2008 and March 31, 2008

    Share options       Exercise Price per
    under option   Provision for   Common Share
    scheme   option shares   Range
             
Balance, January 1, 2008  

100,000

 

50,000

$

6.00

Written back on termination of  

 

 

 

 

 

services

  (66,667)

 

(16,667)

$

6.00

Balance, March 31, 2008  

33,333

 

33,333

 

 

The following table provides certain information with respect to the above referenced options outstanding at March 31, 2008:

    Weighted Average   Weighted Average Remaining
Exercise Price   Exercise Price   Contractual Life Years
         
$6   $6   9.93

NOTE 15 – 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 statements. 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.

-13-


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16– INCOME TAXES

The Company utilizes the asset and liability method of accounting for income taxes in accordance with SFAS No. 109. No United States Income Tax and Hong Kong Profits Tax have been provided in the financial statements as no income was arose from the United States and Hong Kong companies during the period.

Well Profit being a foreign venture enterprise in the PRC 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%.

No provision for deferred taxes assets in respect of unutilized tax losses has been made due to the unpredictability of future profit streams.

NOTE 17 – 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:

    Three months   Three months
    ended March 31,   ended March 31,
    2008   2007
Warranty accrual, beginning of period

$

22,688

$

24,025

Warranty accrued during the period

 

-

 

65,085

Actual warranty expenditures

 

(5,696)

 

(26,223)
 

 

 

 

 

Warranty, end of period

$

16,992

$

62,887

-14-


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18 – CONCENTRATIONS, RISK AND UNCERTAINTIES

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

  Three months ended March
  31
  2008   2007
Company A 98%   33%
Company B -   13%

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

  As at March 31,
  2008   2007
Company A 92%   -

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:

  Three months ended   Three months ended
  March 31, 2008   March 31, 2007
Company C 20%   34%
Company D 30%   -

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

NOTE 19 –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.

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".

-15-


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 20 – 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
    March 31, 2008
December 31,    
2008

$

610,266

2009

 

729,808

2010

 

727,012

2011

 

424,364

2012

 

46,230

 

$

2,537,680

During the three months ended March 31, 2008 and 2007, rental expenses were $174,544 and $135,510 respectively.

-16-


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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 of Financial Condition and Results of Operations." 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-K for the year ended December 31, 2007. 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:

(a) our expectations regarding the market for small household appliances;

(b) our expectations regarding the continued growth of the small household appliance industry;

(c) our beliefs regarding the competitiveness of our products;

(d) our expectations regarding the expansion of our manufacturing capacity;

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

(f) our future business development, results of operations and financial condition; and

(g) 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.

-17-


Overview of 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 primarily manufactured in Well Profit's facilities, which are located on over 82.5 acres of land in Oceanic Industry Park, Sha Gang Highway, Gang Kou Town, Zhongshan, Guangdong Province, China. Well Profit currently has five (5) assembly lines for stainless steel BBQ grills with a total annual production capacity of approximately 710,000 units of BBQ grills, and two (2) skateboard production lines with a total annual production capacity of approximately 100,000 units. Our current annual production output is approximately 220,000 BBQ grills, 100,000 sets of shelves, 20 million pump units. Our products are sold through distributors to retailers in the United States, Europe, Australia and China.

Overview of Business Operations in the First Quarter of 2008

Our sales revenue was $7,678,489 and $11,716,767 for the three-month periods ended March 31, 2008 and 2007, respectively. We incurred a net loss of $1,784,715 for the three-month period ended March 31, 2008, compared with income of $931,881 for similar period in 2007. During the first quarter of 2008, we saw a decline in sales of our BBQ grills, which resulted in a reduction of our gross margin from 13% in 2007 to (26%) in 2008. Our sales revenue generated from sales of our grills and ovens was $4,323,450, or 56% of our sales revenue during the first quarter of 2008.

We have started developing our new coffee pot product line which we acquired at the end of the second quarter of 2007. So far the product line has generated $140,579, or 1.8% of our revenues. 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.

Results of Operations

Comparison of Three-Month Periods ended March 31, 2008 and March 31, 2007

The following table summarizes the results of our operations during the three-month periods ended on March 31, 2008 and March 31, 2007, and provides information regarding the dollar and percentage increase or (decrease). between such periods.

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

         
  Three-Month Three-Month Dollar ($) Percentage
  Period Ended on Period Ended on Increase Increase
  March 31, 2008 March 31, 2007 (Decrease) (Decrease)
         
Sales revenue

$7,678,489

$11,716,767

($4,038,278)

-34%

Costs of sales

$8,648,024

$10,158,754

($1,510,730)

-15%

Gross profit ($969,535)

$1,558,013

($2,527,548)

-162%

General and administrative expenses

$837,088

$555,221

$281,867

51%

(Loss) Income from operations ($1,772,614)

$1,002,792

($2,775,406)

-277%

Other (expenses) income ($12,101)

$181

($12,282)

-6786%

Income (loss) before income taxes ($1,784,715)

$1,002,973

($2,787,688)

-278%

Income tax

0

($71,092)

$71,092

 

Net income (loss) ($1,784,715)

$931,881

($2,716,596)

-292%

Sales Revenue

We generated revenues of $7,678,489 for the three months ended March 31, 2008, a decrease of $4,038,278 (or approximately 34%), compared to $11,716,767 for the three months ended March 31, 2007. We believe that our decrease in revenues is partially attributable to the uncertain economic environment in the Unites Sates, our customers' largest revenue-generating market, and partially to the loss by our major customer, Hengbao, of certain income tax subsidies. We believe that this uncertain economic environment in the United States has reduced the overall demand for household appliances and has resulted in a decrease in orders placed and has correspondingly contributed to a decrease our revenues. In addition, our major customer, Hengbao, has been getting subsidized tax refunds from the PRC government on its sales because it was founded and registered as an international trading company in the PRC. However, as a result of the passage of the China Unified Corporate Income Tax Law, or the Unified Tax Law, which became effective on January 1, 2008, Hengbao's tax subsidies have decreased which has directly affected their profit. As a result, we have elected to lower the sale price for our products in recognition of this change.

Costs of Sales

During the three months ended March 31, 2008, the cost of sales was $8,648,024, or approximately 113% of total sales revenue, a decrease of $1,510,730, or approximately 15%, from cost of sales of $10,158,574, or approximately 87% of the total sale revenue, during the three months ended March 31, 2007. The 25.9% increase in cost of sales as a percentage of net sales was due to the depreciation in the value of the U.S. dollar, the rising cost of raw materials and the increase in our labor costs. Our labor costs increased dramatically during the first quarter due to the January 1, 2008 implementation of new PRC Labor Law requiring, among other things, minimum wages and calculation on overtime payments. In addition, the cost of steel sheet has raised 10% to approximately $768,900 from the price during the same 2007 period.

Gross Profit

We incurred a gross loss for the three months ended March 31, 2008 of ($969,535), compared to a gross profits of $1,558,013 for the three months ended March 31, 2007, a decline of $2,527,498, or 162.2%. Our gross profit margin for the three months ended March 31, 2008 was (12.6%), compared to 13.3% for the three months ended March 31, 2007. The decline in gross profit for the first quarter of 2008 compared to the same quarter in 2007 is primarily attributable to the decrease in revenues from sales due to the reasons discussed above.

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 $837,088 for the three months ended March 31, 2008, an increase of $281,867, or approximately 50.8%, from $555,221 incurred during the three months ended March 31, 2007. This increase in general and administrative expenses is primarily due to the elevated labor costs in China that have resulted from the new "Law of Labor Contract" in China. The law requires private sector companies to provide contracts with all employees, register them in a social security fund, pay a minimum wage, overtime and holiday premiums, and include other social security benefits. In addition, companies will now bear the new administrative and professional costs in connection with issuing the contracts, registering workers, making social security contributions and handling disputes.

Income (Loss) from Operation

Loss from operations was ($1,772,614) during the three months ended March 31, 2008, a decrease of $2,775,406 from the income from operations of $1,002,792 during the three months ended March 31, 2007. The decrease was primarily due to our higher costs and expenses and reduced sales revenues the reasons for which were discussed above.

-18-


Other (Expense) Income

Other expense for the three months ended March 31, 2008, was ($12,101), a decrease of $12,282 from $181 for the three months ended March 31, 2007. This decline was primarily due to interest related payments for our short term bank loan in the amount of $714,000, with a yearly interest rate that is 30% higher than the premium rate set by the People's Bank of China. The loan is due and payable on June 30, 2008.

Net Income (Loss)

We incurred a net loss of $1,784,715 for the three months ended March 31, 2008, a decrease of $2,716,596 from net income of $931,881earned during the three months ended March 31, 2007. The primary reason for this decrease is due to the lower sales revenue and increasing costs and expenses which were discussed above.

Liquidity and Capital Resources

As of March 31, 2008, we had cash and cash equivalents of $402,623. The following table sets forth a summary of our cash flows for the periods indicated:

  Three Months Three Months
  Ended Ended March
  March 31, 2008 31, 2007
     
Net cash (used in) / provided by operating activities ($492,405)

$7,271,731

Net cash (used in) investing activities ($28,723) ($13,351)
Net cash (used in) / provided by financing activities

$80,622

($6,302,349)
Effect of exchange rate changes on cash and cash equivalents

$22,055

$58

Net (decrease) increase in cash and cash equivalent ($418,451)

$956,089

Cash and cash equivalents at the beginning of period

$821,074

$6,012

Cash and cash equivalents at the end of period

$402,623

$962,101

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.

In the first quarter of 2008, funds were mainly contributed from our sales revenue. In the following 12 months, 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.

Operating Activities

Net cash used in our operating activities was $492,405 for the three months ended March 31, 2008, as compared to net cash of $7,271,731 provided by our operating activities during the 2007 period, a decrease of $7,764,136. The change is mainly due to the decrease of 5,016,287 for accounts payable, other payables and accrued and a net loss of 1,784,715. We believe that due to the general uncertainty in the global economy many of our vendors required earlier payment of their outstanding accounts which in turn increased our use of cash.

Investing Activities

Net cash used in our investing activities was $28,723 for three months ended March 31, 2008, compared to net cash $13,351 used during the 2007 period, an increase of $15,372, or 115.1%. The increase is mainly contributable to the purchase of equipment, including approximately $8,347 for office-use computers and $20,991 for small production devices and equipments.

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Financing Activities

Net cash provided by financing activities in the three-month period ended March 31, 2008 was, $80,622, compared to $6,302,349 in net cash used during the 2007 period, an increase of $6,382,971. The increase in cash provided by financing activities was primarily due to the fact we did not have any advances to related parties during the 2007 period and some of the advances that we made during the 2007 period were repaid during the same period. In addition, during the 2007 period we received proceeds from a bank loan totaling $699,000.

During the first quarter of 2008 we also obtained a bank loan for approximately $714,000. The loan carries interest at a rate of 8.54% per annum and matures in June 2008. Our ability to repay the loan was guaranteed by Oceanic PRC, Weihe and by our president, Weiqiu Li.

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

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The policies, that in the belief of management are critical and require the use of judgment in their application, are disclosed on our Form 10K for the year ended December 31, 2007. Since December 31, 2007, there have been no material changes to our critical accounting policies.

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 March 31, 2008, we purchased 50% of our products from two suppliers. 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. At March 31, 2008, amounts due to those suppliers included in accounts payable were $61,455 and $578,455, respectively.

We sell a majority of our products to only a few distributors which make us vulnerable to any changes in their business operations. During the three-month period ended March 31, 2008, we sold 98% of our products to Zhongshan City Hengbao Export & Import Trading Company Limited. 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. At March 31, 2008, $6,449,116, or 98% of our accounts receivable were attributable to Hengbao. We may be adversely affected should orders from Hengbao decrease or if the relationship with Hengbao is terminated. In addition, since we do not have a written commercial arrangement with Hengbao, we may have limited or no recourse to recover outstanding amounts payable to us by Hengbao for products that have been delivered.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEMS 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including to the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

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As required by Rule 13a-15 under the Exchange Act, under the supervision and with the participation of our management, including Weiqiu Li our President and Chief Executive Officer and Kinwai Cheung, our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2008. Based on that evaluation, Messrs. Li and Cheung concluded that because of the material weakness in internal control over financial reporting described below, our disclosure controls and procedures were not effective as of March 31, 2008.

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.

In connection with their review of our internal controls over financial reporting for the fiscal year ended December 31, 2007, our management concluded that there were several significant deficiencies, that when combined, resulted in a material weakness in our internal controls over our ability to produce financial statements free from material misstatements. The material weakness resulted from a combination of the following significant deficiencies:

  • Lack of documentation and review of financial information by our accounting personnel with direct oversight responsibility, and lack of analysis and reconciliation of certain accounts on a periodic basis, and the failure of the accounting system to provide information related to expenditures on a project-by-project basis;
     

  • Lack of timely identification, research and resolution of accounting issues and lack of documentation of consideration of recent accounting pronouncements;
     

  • Absence of documented controls over our related party transactions; and
     

  • Lack of technical accounting expertise among senior financial staff regarding US GAAP and the requirements of the PCAOB, and regarding the preparation of draft financial statements.

In order to further enhance our internal controls, our management, with the participation of Messrs. Li and Cheung, has recommended the implementation of the following changes by the end of fiscal year 2008:

  • the restructuring of our relationships with related parties to address our controls over related party transactions;
     

  • the hiring of additional accounting personnel to assist us in the timely identification, research and resolution of accounting issues and with our documentation processes;
     

  • the hiring of additional high-level accounting personnel with experience in US GAAP to monitor all financial and accounting affairs throughout the Company; and
     

  • the engagement of a third-party financial consulting firm to assist management in evaluating complex accounting issues on an as-needed basis, and the implementation of systems to improve control and review procedures over all financial statement and account balances.

We expect that these steps, when taken, will correct the material weaknesses described above. We do not believe that the costs of remediation for the above material weaknesses will have a material effect on our financial position, cash flow, or results of operations.

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.

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ITEM 1A. RISK FACTORS

Not applicable.

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

We have not sold any equity securities during the fiscal quarter ended March 31, 2008 that were not previously disclosed in 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

No matters were submitted to our security holders during the first fiscal quarter of 2008 that were not previously disclosed in a current report on Form 8-K that was filed during that period.

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.
   
32.1 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: May 15, 2008 HOME SYSTEM GROUP
   
   
  By: /s/ Wei Qiu Li
  Wei Qiu Li, Executive Officer
   
   
  By: /s/ Kin Wai Cheung
  Kin Wai 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.
   
32.1 Chief Executive Officer and Chief Financial Officer Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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EXHIBIT 31.1 HTML

exh311.htm


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, President and Chief Executive Officer of Home System Group, a Nevada corporation (the "Company"), 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.

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: May 15, 2008

/s/ Weiqiu Li                       
Weiqiu Li
Principal Executive Officer



EXHIBIT 31.2 HTML

exh312.htm


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, Chief Financial Officer of Home System Group, a Nevada corporation (the "Company"), 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.

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: May 15, 2008

/s/ Kinwai Cheung              
Kinwai Cheung
Principal Financial and Principal 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 March 31, 2008 (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 15th day of May, 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.