Form 10-Q Home System Group

Quarterly report pursuant to section 13 and 15(d)

What is Form 10-Q?
  • Accession No.: 0001214659-08-002555 Act: 34 File No.: 000-49770 Film No.: 081201347
  • CIK: 0001172319
  • Submitted: 2008-11-19
  • Period of Report: 2008-09-30

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008 HTML

s11198110q.htm



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

FORM 10-Q

ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended September 30, 2008
   
 
OR
   
o
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 registrant as specified in its charter)
 
 
Nevada
43-1954776
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
   
 
 

Oceanic Industry Park, Sha Gang Highway, Gang
Kou Town
528447
Zhongshan City, Guangdong
 
People's Republic of China
 
(Address of principal executive offices)
(Zip Code)
 
(86 755) 8357-0142 
 (Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [   ]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 x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes [   ]No  [ x ]

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

Class
 
Outstanding at November 17, 2008
Common Stock, $0.001 par value per share
 
295,686,713 shares
 




HOME SYSTEM GROUP
FORM 10-Q

TABLE OF CONTENTS
 


PART I - FINANCIAL INFORMATION 
3
   
Item 1. Financial Statements
3
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
25
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
28
   
Item 4T. Controls and Procedures
28
   
PART II - OTHER INFORMATION
29
   
Item 1. Legal Proceedings
29
   
Item 1A. Risk Factors
29
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
38
   
Item 3. Defaults Upon Senior Securities
38
   
Item 4. Submission of Matters to a Vote of Security Holders
38
   
Item 5. Other Information
38
   
Item 6. Exhibits
38
   
SIGNATURES
39
 
Except as otherwise required by the context, all references in this report to "we", "us”, "our",  or "Company" refer to the consolidated operations of Home System Group, a Nevada corporation, and its wholly owned subsidiaries.
 

 
 

 

Item 1. Financial Statements.
 









HOME SYSTEM GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED

SEPTEMBER 30, 2008 AND 2007

(UNAUDITED)




 
 

 

 

C O N T E N T S





           
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 - 18






 
 

 

HOME SYSTEM GROUP AND SUBSIDIARIES
CONDSENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2008 AND DECEMBER 31, 2007
(Expressed in US dollars except for number of shares)

   
September 30,
   
December 31,
 
   
2008
   
2007
 
   
(unaudited)
   
(audited)
 
ASSETS
           
             
CURRENT ASSETS
           
Cash and cash equivalents
  $ 619,077     $ 821,074  
Accounts receivable – trade
    8,884,688       10,706,256  
Other receivables
    1,221,343       1,056,946  
Inventories
    3,263,244       5,267,728  
Acquisition deposits
    8,046,500       -  
Trade deposits
    -       434,734  
Income tax refundable
    -       75,550  
TOTAL CURRENT ASSETS
    22,034,852       18,362,288  
                 
Acquisition deposits
    -       7,540,500  
Property, plant and equipment – net
    6,120,832       5,986,847  
                 
TOTAL ASSETS
  $ 28,155,684     $ 31,889,635  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES
               
Accounts payable – trade
  $ 9,260,170     $ 15,497,372  
Accrued expenses and other payables
    5,361,725       1,411,351  
Taxes payable
    205,302       802,054  
Due to a stockholder – current portion
    675,122       304,366  
TOTAL CURRENT LIABILITIES
    15,502,319       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
  $ 22,677,319     $ 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
    (2,063,722 )     150,161  
                 
CUMULATIVE TRANSLATION ADJUSTMENT
    1,768,276       741,511  
                 
TOTAL STOCKHOLDERS' EQUITY
  $ 5,478,365     $ 6,699,492  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 28,155,684     $ 31,889,635  

See accompanying notes to condensed consolidated financial statements
 
-1-


HOME SYSTEM GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS /INCOME
AND COMPREHENSIVE (LOSS) INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Expressed in US dollars except for number of shares)
(UNAUDITED)

   
Three Months Ended
   
Nine Months Ended
 
   
September 30
   
September 30
 
   
2008
   
2007
   
2008
   
2007
 
                         
                         
NET SALES
  $ 4,211,095     $ 2,862,340     $ 20,464,702     $ 25,806,019  
Cost of sales
    4,048,717       2,803,828       20,821,020       22,746,458  
GROSS (LOSS) PROFIT
    162,378       58,512       (356,318 )     3,059,561  
                                 
OPERATING EXPENSES
                               
Provision for stock option costs written back
    -       -       (34,009 )     -  
General selling and administrative expenses
    704,796       803,349       2,322,120       2,143,058  
      704,796       803,349       2,288,111       2,143,058  
                                 
(LOSS) INCOME FROM OPERATIONS
    (542,418 )     (744,837 )     (2,644,429 )     916,503  
                                 
OTHER (EXPENSE) INCOME
                               
Finance costs
    -       (146,096 )     -       (146,673 )
Other (expenses) /income
    371,838       13,401       371,838       13,401  
Interest expenses
    -       (5,872 )     (27,835 )     2,141  
Interest income
 
19,542 
   
 
   
86,543 
   
 
 
TOTAL OTHER (EXPENSE) INCOME
    391,380       (138,567 )     430,546       (131,131 )
                                 
(LOSS) INCOME BEFORE INCOME TAXES
    (151,038 )     (883,404 )     (2,213,883 )     785,372  
                                 
INCOME TAXES
    -       72,993       -       510  
                                 
NET (LOSS) INCOME
  $ (151,038 )   $ (810,411 )   $ (2,213,883 )   $ 785,882  
                                 
OTHER COMPREHENSIVE INCOME
                               
Foreign currency translation adjustment
    201,715       96,094       1,026,765       303,928  
                                 
COMPREHENSIVE (LOSS) INCOME
  $ 50,677     $ (714,317 )   $ (1,187,118 )   $ 1,089,810  
                                 
(LOSS) EARNINGS PER SHARE
                               
-BASIC
  $ (0.002 )   $ (0.013 )   $ (0.035 )   $ 0.013  
-DILUTED
  $ (0.002 )   $ (0.013 )   $ (0.035 )   $ 0.013  
                                 
WEIGHTED AVERAGE NUMBER OF SHARES
                               
-BASIC
    62,477,949       62,466,862       62,477,949       60,166,643  
-DILUTED
    62,477,949       62,466,862       62,477,949       60,166,643  
 
See accompanying notes to condensed consolidated financial statements
 
-2-

 
HOME SYSTEM GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2007 AND NINE MONTHS ENDED SEPTEMBER 30, 2008
(Expressed in US dollars except for number of shares)

                     
Note
         
Retained
             
   
Number of
         
Additional
   
Receivable
         
Earnings /
   
Cumulative
       
   
Shares of
   
Common
   
Paid-in
   
On Stock
   
Statutory
   
(Accumulated
   
Translation
       
   
Common 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  
                                                                 
Translation adjustment
    -       -       -       -       -       -       1,026,765       1,026,765  
                                                                 
Provision for stock option costs
written back
    -       -       (34,009 )     -       -       -       -       (34,009 )
                                                                 
Net (loss) for the period
    -       -       -       -       -       (2,213,883 )     -       (2,213,883 )
                                                                 
BALANCE AT SEPTEMBER 30, 2008
-(unaudited)
    62,477,949     $ 62,478     $ 6,581,717     $ (900,000 )   $ 29,616     $ (2,063,722 )     1,768,276       5,478,365  
 
See accompanying notes to condensed consolidated financial statements
 
-3-


HOME SYSTEM GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Expressed in US dollars)
 (UNAUDITED)

 
Nine Months Ended September 30,
 
 
2008
   
2007
 
           
CASH FLOWS FROM OPERATING ACTIVITIES
         
Net income
  $ (2,213,883 )   $ 785,882  
Adjustments to reconcile net income
               
to net cash provided by (used in)
operating activities
               
Depreciation
    353,960       285,905  
Overprovision for stock-based compensation
    (34,009 )     652,438  
Change in assets and liabilities:
               
(Increase) decrease in assets
               
Accounts receivable
    2,361,969       4,777,857  
Other receivables
    (84,341 )     (28,325 )
Inventories
    2,302,408       (697,066 )
Trade deposits
    434,734       (11,195 )
Increase (decrease) in liabilities
            -  
Accounts payable
    (7,618,621 )     1,182,606  
Other payables and accrued expenses
    4,246,328       1,549,453  
Employee advances
    -       (406,102 )
Taxes payable
    (540,483 )     (123,891 )
                 
Net cash provided by (used in) operating activities
    (791,938 )     7,967,562  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Capital expenditures
    (92,917 )     (1,848,368 )
Cash acquired in merger
    -       55,980  
Acquisition deposit
    -       (7,574,800 )
                 
Net cash used in investing activities
    (92,917 )     (9,367,188 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds/ (repayment) of bank loans
    -       (1,745,000 )
Proceeds from note payable
    -       6,575,000  
Net (decrease) increase in due to related party
    (6,621 )     (460,690 )
Increase in due to stockholder
    662,767       266,043  
Dividend distribution for acquisition
    -       (3,000,000 )
                 
Net cash provided by financing activities
    656,146       1,635,353  
                 
EXCHANGE RATE EFFECT ON CASH
    26,712       3,629  
                 
NET INCREASE  IN CASH
    (201,997 )     239,356  
                 
CASH - BEGINNING OF YEAR/PERIOD
    821,074       6,012  
                 
CASH - END OF YEAR/PERIOD
  $ 619,077     $ 245,368  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
               
INFORMATION
               
Cash paid during the period for:
               
Interest
 
$
27,469
    $ 82,112  
Income taxes
 
$
-
    $ -  
 
See accompanying notes to condensed 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 nine months ended September 30, 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 $2,213,883 for the nine months ended September 30, 2008 and at that date, the Company also had an accumulated deficit of $2,063,722 and current liabilities exceeded current assets by $1,513,967.

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 shareholders 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 – ORGANISATION 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 – ORGANISATION 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 June 26, 2007, the Company entered into a share exchange agreement with Zhongshan Weihe Electrical Appliances Co. Ltd. ("Weihe") and Weihe's shareholders, pursuant to which the Company agreed to acquire 100% equity interests in Weihe for an aggregate consideration of approximately $45,000,000, consisting 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) and $27,000,000 in cash 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.
 
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 would receive 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 would consist of 1,000,000 newly issued shares of the HSG common stock. The cash consideration would consist of $10,000,000 in cash 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.
 
However, as the delivery of the Company's stock, which is traded on the OTCBB, has not been recognized as share exchange consideration by the relevant PRC government authority for the purposes of approval of the ownership transfer of Weihe and Juxian, on February 7, 2008, the Company cancelled the acquisition of Weihe and Juxian and both share exchange agreements.
 

 
NOTE 3 – REVERSE ACQUISITION
 
On January 31, 2007, HSG completed the acquisition of Holy (H.K.) Limited ("Holy") and Oceanic Well Profit Inc. ("Oceanic") (the "Transaction") pursuant to a share exchange agreement ("Share Exchange Agreement") between HSG, Holy, Oceanic and the then sole shareholder of Holy ("Holy Shareholder"). Pursuant to the Share Exchange Agreement, HSG issued 42,500,000 shares of its common stock, representing 68.2% of HSG's issued and outstanding common stock immediately following the Transaction, and paid $3,000,000 cash to Holy Shareholder in exchange of 100% equity interest in Holy. Holy was incorporated in Hong Kong as an investment holding company for the primary purpose of holding 100% ownership interest in Oceanic. Oceanic was incorporated in the PRC and engages in manufacturing of gas grills, home electronic appliances, skateboards and bin racks.
 
Before the Transaction, HSG conducted all of its substantive business through a wholly-owned subsidiary, Oceanic International (HK) Limited ("OCIL"). OCIL was a distributor of home appliance products without any manufacturing base or facilities.  In conjunction with the Transaction, management of the Company has determined to abandon and discontinue the operations of OCIL and has treated HSG as a shell corporation.
 
-6-

 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
As Holy Shareholder has become the majority shareholder of the consolidated entity comprising HSG and Holy, the Transaction has been accounted for as a reverse acquisition using the purchase method of accounting, where HSG (the legal acquirer) is deemed to be the accounting acquiree and Holy (the legal acquiree) to be the accounting acquirer. However, the Transaction is also considered to be a capital transaction in substance as Holy (a private operating company) has been merged into HSG (a public shell corporation with nominal non-monetary net assets) with the shareholders of HSG, the former public shell continuing only as passive investors.  Hence, the cost of the transaction has been measured at the carrying value of the net assets of HSG with no goodwill or other intangible being recorded in accordance with the accounting interpretation and guidance issued by the SEC staff.
 
HSG is deemed to be a continuation of the business of Holy and the financial statements prior to January 31, 2007 are those of Holy. The results of HSG have been consolidated from the date of the Transaction.
 
The allocation of the cost of the Transaction is as follows:
 
Cash
  $ 55,980  
Accounts receivable
    3,656,646  
Due from a related party
    2,344,415  
Trade deposits
    2,543,165  
Equipment
    998  
Bank loans
    (1,745,000 )
Accounts payable
    (2,696,515 )
Accrued expenses
    (2,179 )
Due to directors
    (1,280 )
Due to related party
    (4,077 )
      4,152,153  
Stock subscription receivable
    900,000  
Net assets of HSG deemed to be acquired by Holy
    5,052,153  
         
Satisfied by:
       
Shares of HSG
    2,052,153  
Cash
    3,000,000  
      5,052,153  
 
The following unaudited pro forma information assumes the Transaction occurred on the beginning of the year or the period presented respectively. These unaudited pro forma results have been prepared for informational purposes only and do not purport to represent what the results of operations would have been had the Transaction occurred as of the date indicated, nor of future results of operations. The unaudited pro forma results for the year ended December 31, 2007 and the period from April 5, 2006 to December 31, 2006 are as follows:
 
   
Year ended
December 31,
2007
   
Period from April
5 to December
31, 2006
 
             
Net sales
  $ 43,436,764     $ 30,329,606  
Net income
  $ 449,540     $ 1,472,052  
Earnings per share (basic and diluted)
  $ 0.007     $ 0.024  
                 
Weighted average number of shares (basic and diluted)
    62,430,689       62,297,949  
 
-7-

 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
NOTE 4 – 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.
 
 
 
 
 
 

 
-8-


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
NOTE 5 – 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.

Trade accounts receivable
 
Trade accounts receivable are stated at cost, net of allowance for doubtful accounts. Based on the above assessment, during the reporting years, the management establishes the general provisioning policy to make allowance. There are no  allowance for doubtful accounts as at September 30, 2008 and December 31, 2007 respectively.

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.
 
-9-

 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
Recently Issued Accounting Pronouncements

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.
 
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted Accounting Principles (“FAS 162"). This Standard identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. FAS 162 directs the hierarchy to the entity, rather than the independent auditors, as the entity is responsible for selecting accounting principles for financial statements that are presented in conformity with generally accepted accounting principles. The Standard is effective 60 days following SEC approval of the Public Company Accounting Oversight Board amendments to remove the hierarchy of generally accepted accounting principles from the auditing standards. FAS 162 is not expected to have an impact on the financial statements.

In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the Useful Life of Intangible Assets, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. This Staff Position is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. Application of this FSP is not expected to have a significant impact on the financial statements.

In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities. This FSP provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The Company does not currently have any share-based awards that would qualify as participating securities. Therefore, application of this FSP is not expected to have an effect on the Company's financial reporting.

In May 2008, the FASB issued FASB Staff Position (FSP) APB 14-1, Accounting for Convertible Debt That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) ("FSP 14-1"). FSP 14-1 will be effective for financial statements issued for fiscal years beginning after December 15, 2008. The FSP includes guidance that convertible debt instruments that may be settled in cash upon conversion should be separated between the liability and equity components, with each component being accounted for in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest costs are recognized in subsequent periods. FSP 14-1 is not currently applicable to the Company since the Company does not have convertible debt.

In May 2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60 (SFAS 163). This statement clarifies accounting for financial guarantee insurance contracts by insurance enterprises under FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises. SFAS 163 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2008. Because the Company does not issue financial guarantee insurance contracts, the Company does not expect the adoption of this standard to have an effect on our financial position or results of operations.
 
-10-

 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED 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. 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.
 
 
 
-11-


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
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 6 –RELATED PARTIES TRANSACTIONS
 
During the nine month periods ended September 30, 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 June 2007 when they related to the Company are as follows:
 
   
For the nine
months
ended
September
30, 2008
   
For the nine
months
ended
September
30, 2007
 
             
Sales to the related companies
  $ -     $ 9,722,473  
Percentage of total net sales
    - %     24 %
Purchases from the related companies
  $ -     $ 4,276,390  
Percentage of total purchases
    - %     11 %
Rental expenses paid to related companies
  $ -     $ 230,483  
Building management fee paid to related companies
  $ -     $ 4,954  
 
NOTE 7 – PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment consist of the following:

   
September 30,
2008
   
December 31,
2007
 
At cost:
           
Plant and machinery
  $ 6,333,806     $ 6,278,535  
Furniture, fixtures and equipment
    502,357       87,831  
                 
Total
    6,836,163       6,366,366  
                 
Less: accumulated depreciation
    715,331       379,519  
Net book value
  $ 6,120,832     $ 5,986,847  

During the three months ended September 30, 2008, depreciation expenses amounted to $104,648, among which $100,455 and $4,193 were recorded as cost of sales and administrative expense respectively.

During the three months ended September 30, 2007, depreciation expenses amounted to $113,810, among which $78,542 and $35,268 were recorded as cost of sales and administrative expense respectively.

During the nine months ended September 30, 2008, depreciation expenses amounted to $353,960, among which $341,674 and $12,286 were recorded as cost of sales and administrative expense respectively.

During the nine months 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.
 
-12-


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
NOTE 8 – ACQUISITION DEPOSIT

The acquisition deposit of $8,046,500 and $7,540,500 as of September 30, 2008 and December 31, 2007 respectively, represented the partial payment of the cash portion of the consideration for the acquisition of Weihe, as further discussed in Note 2. However, the delivery of the Company's stock, which is traded on the OTCBB, has not been recognized as a share exchange consideration by the relevant PRC government authority for the purposes of approval of the ownership transfer of Weihe. On February 7, 2008, the share exchange agreement for the acquisition of Weihe was cancelled. The Company has been in negotiation with the shareholders of Weihe for new terms of the acquisition of Weihe and intends to enter into a new agreement to acquire Weihe. The deposit paid under the original agreement will be applied to the new agreement.

NOTE 9 – RESTRICTED CASH AND BILLS PAYABLE

There is no restricted cash and bills payable as at September 30, 2008 and December 31, 2007.

NOTE 10 – INVENTORIES

Inventories consist of the following:

   
September 30, 2008
   
December 31, 2007
 
Raw materials
  $ 1,198,883     $ 1,695,194  
Work in process
    1,787,508       2,167,281  
Consumable
    84,104       70,950  
Finished goods
    192,749       1,334,303  
                 
Total
  $ 3,263,244     $ 5,267,728  

NOTE 11 – 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.
 
-13-


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
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
three
months
ended
September
30, 2008
   
For the
three
months
ended
September
30, 2007
   
For the
three
months
ended
September
30, 2008
   
For the
three
months
ended
September
30, 2007
   
For the
three
months
ended
September
30, 2008
   
For the
three
months
ended
September
30, 2007
   
For the
three
months
ended
September
30, 2008
   
For the
three
months
ended
September
30, 2007
   
For the
three
months
ended
September
30,2008
   
For the
three
months
ended
September
30, 2007
 
Net sales
  $ 40,393     $ 551,330     $ 1,571,614     $ 2,202,976     $ 2,599,088     $ 108,034     $ -     $ -     $ 4,211,095     $ 2,862,340  
Depreciation and amortization
  $ 998     $ 10,325     $ 38,823     $ 117,652     $ 64,827     $ 24,844     $ -     $ -     $ 104,648     $ 152,821  
Segment
(loss) income  
before income
taxes
  $ 211     $ (190,958 )   $ 8,214     $ 37,436     $ 13,584     $ 2,385     $ (173,047 )   $ (732,267 )   $ (151,038 )   $ (883,404 )
Capital
expenditures
  $ -     $ 23,037     $ -     $ 2,846     $ 34,451     $       $ -     $ -     $ 34,451     $ 25,883  

 
 
 
-14-

 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
   
Barbeque set
   
Skateboards
   
Other home appliances
   
Corporate
   
Total
 
   
For the nine
months
ended
September
30, 2008
   
For the nine
months
 ended
September
30, 2007
   
For the
nine
months
ended
September
30, 2008
   
For the
nine
months
ended
September
30, 2007
   
For the
nine
months
ended
September
30, 2008
   
For the nine
months
ended
September
30, 2007
   
For the
nine
months
ended
September
30, 2008
   
For the
nine
months
 ended
September
30, 2007
   
For the nine
months
ended
September
30, 2008
   
For the nine
months
ended
September 30,
2007
 
Net sales
  $ 9,125,750     $ 23,495,009     $ 5,879,912     $ 2,202,976     $ 5,459,040     $ 108,034     $ -     $ -     $ 20,464,702     $ 25,806,019  
Depreciation
and
amortization
  $ 133,200     $ 143,409     $ 39,011     $ 117,652     $ 181,749     $ 24,844     $ -     $ -     $ 353,960     $ 285,905  
Segment
(loss) income  
before
income taxes
  $ (1,610,916 )   $ 1,720,795     $ 149,645     $ 37,436     $ (43,769 )   $ 2,385     $ (708,843 )   $ (975,244 )   $ (2,213,883 )   $ 785,372  
Capital
expenditures
  $ 47,865     $ 180,868     $ -     $ -     $ 45,052     $ 1,667,500     $ -     $ -     $ 92,917     $ 1,848,368  
                                                                                 
   
As of
September
30, 2008
   
As of
December
31, 2007
   
As of
September
30, 2008
   
As of
December
31, 2007
   
As of
September
30, 2008
   
As of
December
31, 2007
   
As of
September
30, 2008
   
As of
December
31, 2007
   
As of 
September
30, 2008
   
As of
December
31, 2007
 
                                                                                 
Segment
assets
  $ 13,052,975     $ 3,195,451     $ 2,762,073     $ 7,894,668     $ 5,234,141     $ 2,274,377     $ 7,106,495     $ 8,711,268     $ 28,155,684     $ 31,889,635  

 

 
-15-


HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
NOTE 13 – 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 $373,553 and $303,422 for the nine months ended September 30, 2008 and 2007, and $72,884 and $39,403 for the three months ended September 30, 2008 and 2007.

NOTE 14 – TRADE DEPOSITS

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

NOTE 15 – DUE TO STOCKHOLDER

Amount represents advances from a stockholder as at June 30, 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 $ 675,122 is repayable on demand which recorded under current liabilities.

NOTE 16 – 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 a 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 September 30, 2008:

   
Share options
under option
scheme
   
Provision of
option shares
   
Exercise Price
per Common
Share Range
 
Balance, January 1, 2008
    100,000       50,000     $ 6.00  
Written back on termination of
services
    (66,667 )     (16,667 )     6.00  
Balance, September 30, 2008
    33,333       33,333          
 
 
The following table provides certain information with respect to the above referenced options outstanding at September 30, 2008:
 
Exercise Price
 
Weighted Average
Exercise Price
 
Weighted Average Remaining
Contractual Life Years
         
$6
 
$6
 
8.9
 
-16-

 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
NOTE 17 – 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.

NOTE 18– 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 arised 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 19 – 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.    During the three months ended June 30, 2008, the Company decided not to provide the warranty and guarantee to the customers since the Company provided good quality products to customers. As at September 30, 2008, there is no warranty liability recorded in the balance sheet.  Changes in the Company’s warranty liability were as follows:

   
Nine months
ended
September 30,
2008
   
Nine months
ended
September 30,
2007
 
Warranty accrual, beginning of period
  $ 22,688     $ 24,025  
Warranty accrued during the period
    -       116,361  
Adjustments to pre-existing accruals
    (22,688 )     (16,406 )
Actual warranty expenditures
    -       (26,265 )
                 
Warranty, end of period
  $ -     $ 97,715  
 
-17-

 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
NOTE 20 – 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
September 30
   
Nine months ended
September 30
 
   
2008
   
2007
   
2008
   
2007
 
Company A
    88 %     75 %     96 %     53 %
                                 

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

   
As at September 30,
 
   
2008
   
2007
 
Company A
    95 %     78 %
      - %     10 %

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
September 30
   
Nine months ended
September 30
 
   
2008
   
2007
   
2008
   
2007
 
Company B
    13 %     -       22 %     -  
Company C
    -       -       -       22 %

During the nine months ended September 30, 2007, the Company purchased 22% of its raw materials from Company C.

NOTE 21 –NOTES PAYABLE AND 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” and recorded as non-current liabilities. The Company negotiated with the investors and the investors plan to invest to the Company in future and this amount will ultimately be transferred to equity.
 
-18-

 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
NOTE 22 – 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, 2008
 
December 31,
     
2008
  $ 192,516  
2009
    764,210  
2010
    761,282  
2011
    444,368  
2012
    48,409  
         
    $ 2,210,785  

Rental expenses were $209,947 and $252,136 for the three months ended September 30, 2008 and 2007. Rental expenses were $568,522 and $134,616 for the nine months ended September 30, 2008 and 2007, respectively.


NOTE 23 – SUBSEQUENT SETTLEMENT

On October 1, 2008, the Company completed its acquisition of 100% of Asia Forever in cash transaction amounting $39,473,684 (RMB 270,000.000).
 
 
 
 
 
-19-


 
 
 
 
 
 
 
HOME SYSTEM GROUP, INC.


UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
 
 
 
-20-

 
HOME SYSTEM GROUP, INC.

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
 
Basis of Presentation

The following unaudited pro forma financial statements for Home System Group Inc. (“HSG” or “the Company”) have been prepared to illustrate the acquisition of Asia Forever Investment Limited on September 2008 by HSG and the acquisition of Zhongshan Weihe Electrical Appliances Co., Limited (“Weihe”) by Asia Forever on July 1, 2008.

The acquisition of Asia Forever Investment Limited by HSG on October 1, 2008

The following pro forma consolidated condensed statements of operations for the nine months ended September 30, 2008 and reflect the financial results of Asia Forever as if the acquisition had occurred retroactively.

On October 1, 2008, the Company completed its acquisition of 100% of Asia Forever in cash transaction amounting $39,473,684 (RMB 270,000.000).

The acquisition of Zhongshan Weihe Electrical Appliances Co., Limited.

The following pro forma consolidated condensed statements of operations for the nine months ended September 30, 2008 and reflect the financial results of Weihe as if the acquisition had occurred retroactively.

On September 1, 2008, Asia Forever completed its acquisition of 100% of Weihe in cash transaction amounting $728,396 (RMB 5,000.000).

The unaudited pro forma financial information

The unaudited pro forma financial information combines the historical financial information of the Company, Asia Forever and Weihe as of September 30, 2008 and for the nine months ended September 30, 2008. The unaudited pro forma balance sheet assumes the acquisitions were completed on September 30, 2008. The unaudited pro forma statements of operations give effect to the acquisitions as if the and acquisitions had been completed on January 1, 2008.

These unaudited pro forma financial statements are for information purposes only. They do not purport to indicate the results that would have actually been obtained had the merger and acquisitions been completed on the assumed dates or for the periods presented, or which may be realized in the future. The accounting adjustments reflected in these unaudited pro forma consolidated financial statements included herein are preliminary and are subject to change. The accompanying notes are an integral part of these pro forma consolidated financial statements.

-21-


HOME SYSTEM GROUP, INC.

UNAUDITED PRO FORMA CONSOLIDATED PROFIT AND LOSS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

   
Zhongshan Weihe Electrical Appliances Co., Limited
   
Asia Forever Limited
   
Home System Group
   
Pro Forma Adjustment
   
Pro Forma
Total
 
                               
NET SALES
  $ 34,716,997     $ -     $ 20,464,702.00     $       $ 55,181,699  
Cost of sales
    29,192,227       -       20,821,020.00               50,013,247  
GROSS PROFIT (LOSS)
    5,524,771       -       (356,318.00 )             5,168,453  
                                         
OPERATING EXPENSES
                                       
Provision for stock option costs written back
    -       -       (34,009.00 )             (34,009 )
General and administrative expenses
    1,657,860       256       2,322,120.00               3,980,236  
      1,657,860       256       2,288,111.00               3,946,227  
                                         
INCOME (LOSS) FROM OPERATIONS
    3,866,911       (256 )     (2,644,429.00 )             1,222,226  
                                         
OTHER INCOME (EXPENSE)
                                       
Other income
    27,432       -       371,838.00               399,270  
Finance costs
    (399,568 )     -       (27,835.00 )             (427,403 )
Interest income
    -       -       86,543.00               86,543  
      (372,136 )     -       430,546.00               58,410  
INCOME (LOSS) BEFORE INCOME TAXES
    3,494,775       (256 )     (2,213,883.00 )             1,280,636  
                                         
INCOME TAXES - CURRENT
    (971,138 )     -       -               (971,138 )
                                         
NET INCOME (LOSS)
  $ 2,523,637     $ (256 )   $ (2,213,883.00 )   $       $ 309,498  
                                         
                                         
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
      (0.02 )             0.01  
                                         
                                         
BASIC AND DILUTED WEIGHTED AVERAGE PER SHARE
      62,447,949.00               62,447,949  

-22-

 
HOME SYSTEM GROUP, INC.

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS AT SEPTEMBER 30, 2008
   
 Zhongshan
Weihe
Electrical
Appliances
Co., Limited
 
Asia
Forever
Investment
Limited
 
Pro forma
Adjustment
 
Consolidation
 
Home System Group
 
Pro forma Adjustment
 
Pro Forma Total
CURRENT ASSETS
                           
Cash and cash equivalent
$
3,084,808
$
1,025
   
$
3,085,833
$
619,077
   
$
3,704,910
Restricted cash
 
-
         
-
 
-
     
-
Account receivable - trade
 
5,339,719
         
5,339,719
 
8,884,688
     
14,224,407
Inventories
 
12,183,829
         
12,183,829
 
3,263,244
     
15,447,073
Other receivables and prepayments
 
3,222,413
         
3,222,413
 
1,221,343
     
4,443,756
Prepaid land use rights - current portion
 
-
                       
Loans receivables
 
-
                       
Due from related company
 
-
                       
Investment in subsidiary
 
-
   
(1)
728,396
 
728,396
 
-
(3)
39,473,684
 
-
         
(2)
(728,396)
 
(728,396)
 
-
(4)
(39,473,684)
   
Goodwill
 
-
         
-
 
-
(4)
29,434,628
 
29,434,628
Trade deposits
 
-
         
-
 
-
     
-
Income tax refundable
 
-