Form 10-Q Home System Group

Quarterly report pursuant to section 13 and 15(d)

What is Form 10-Q?
  • Accession No.: 0001214659-09-001416 Act: 34 File No.: 000-49770 Film No.: 09866285
  • CIK: 0001172319
  • Submitted: 2009-06-02
  • Period of Report: 2009-03-31

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009 HTML

a61910q.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 March 31, 2009
   
 
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
 
Zhongshan City, Guangdong
 
People's Republic of China
528447
(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.

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o  Accelerated filer o  
Non-accelerated filer o 
Smaller Reporting Company x

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding at June 1, 2009
Common Stock, $0.001 par value per share
 
62, 477, 949 shares
 



 
HOME SYSTEM GROUP
FORM 10-Q

TABLE OF CONTENTS
 


PART I - FINANCIAL INFORMATION 
 
Item 1. Financial Statements
 
Report of Independent Registered Public Accounting Firm
1
Consolidated Balance Sheets
2
Consolidated Statements of Income and Comprehensive Income
3
Consolidated Statement of Stockholders’ Equity
4
Consolidated Statements of Cash Flows
5
Notes to Consolidated Financial Statements
6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
24
Item 3. Quantitative and Qualitative Disclosures About Market Risk
25
Item 4T. Controls and Procedures
25
PART II - OTHER INFORMATION
 
Item 1. Legal Proceedings
26
Item 1A. Risk Factors
26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
26
Item 3. Defaults Upon Senior Securities
27
Item 4. Submission of Matters to a Vote of Security Holders
27
Item 5. Other Information
27
Item 6. Exhibits
27
SIGNATURES
28
 
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.
 

 
PART I—FINANCIAL INFORMATION




Item 1.  Financial Statements.








HOME SYSTEM GROUP AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009

  (UNAUDITED)


 
C O N T E N T S





   
PAGE
 
       
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
1
 
       
CONSOLIDATED BALANCE SHEETS
 
2
 
       
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 
3
 
       
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 
4
 
       
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
5
 
       
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
6-23
 


 
MORGENSTERN,SVOBODA & BAER, CPA’s, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
40 Exchange Place, Suite 1820
New York, NY 10005
TEL: (212) 925-9490
FAX: (212) 226-9134



Report of Independent Registered Public Accounting Firm



Board of Directors and Stockholders of
Home System Group

We have reviewed the accompanying consolidated balance sheets of Home System Group as of March 31, 2009, and the consolidated statements of operations for the three months ended March 31, 2009 and 2008 and the consolidated statements of cash flows and shareholders’ equity for the three months then ended.  Home System Group’s management is responsible for these financial statements.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

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

We have previously audited, in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Home System Group as of December 31, 2008, and the related consolidated statements of income, retained earnings and comprehensive income, and consolidated statements of cash flows for the year then ended; and in our report dated April 6, 2009, we expressed an unqualified opinion on those financial statements.  In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2008 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.






Morgenstern, Svoboda & Baer, CPA’s PC
Certified Public Accountants


New York, NY
May 21, 2009

1

 
HOME SYSTEM GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

   
March 31,
   
December 31,
 
   
2009
   
2008
 
   
(unaudited)
   
(audited)
 
ASSETS
           
             
CURRENT ASSETS
           
Cash and cash equivalents
  $ 12,387,783     $ 1,609,540  
Restricted cash
    1,953,693       1,617,000  
Accounts receivable – trade
    34,453,124       21,117,962  
Accounts receivable-related party
    -       10,619,911  
Other receivables
    11,060,177       9,512,666  
Inventories
    19,115,951       15,613,175  
Trade deposits
    373,733       -  
Due from related party
    -       -  
Deferred finance costs - acquisitions
    876,888       1,249,917  
Income tax refundable
 
816,113 
      1,076,646  
TOTAL CURRENT ASSETS
    81,037,462       62,416,817  
                 
Deferred finance costs - acquisitions
    255,230       255,230  
Acquisition deposits
    731,500       733,500  
 Land use right -net
    1,284,425       1,291,852  
Property, plant and equipment – net
    9,201,036       9,518,826  
Intangible assets
    2,006,102       2,090,947  
 Goodwill
    25,025,292       25,025,292  
                 
TOTAL ASSETS
  $ 119,541,047     $ 101,332,464  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
         
                 
CURRENT LIABILITIES
               
   Bank loan
  $ 11,922,821     $ 11,324,848  
   Bills payable
    15,549,131       9,598,621  
Accounts payable – trade
    22,998,531       21,166,318  
Accrued expenses and other payables
    12,468,904       6,096,820  
Income taxes payable
    522,008       722,033  
Other taxes payable
    -       424,968  
Promissory notes payable - current portion
    21,558,763       21,536,763  
Due to a stockholder – current portion
    1,236,473       1,574,573  
TOTAL CURRENT LIABILITIES
    86,256,631       72,444,944  
                 
NON-CURRENT LIABILITIES
               
         Long-term Loan
    2,926,000       -  
Due to a stockholder – non-current portion
    600,000       600,000  
Notes payable
    16,443,421       16,443,421  
                 
TOTAL LIABILITIES
    106,226,052     $ 89,488,365  
                 
STOCKHOLDERS' EQUITY
               
                 
COMMON STOCK - $0.001 par value; 200,000,000 shares
               
authorized, 62,477,949 shares issued and outstanding
    62,478       62,478  
at March 31, 2009 and December 31, 2008
               
ADDITIONAL PAID-IN CAPITAL
    6,581,717       6,581,717  
                 
NOTE RECEIVABLE ON STOCK ISSUANCE
    (900,000 )     (900,000 )
                 
STATUTORY RESERVES
    29,616       29,616  
                 
(ACCUMULATED DEFICIT) RETAINED EARNINGS
    5,744,351       4,217,826  
                 
CUMULATIVE TRANSLATION ADJUSTMENT
    1,796,833       1,852,462  
                 
TOTAL STOCKHOLDERS' EQUITY
  $ 13,314,995     $ 11,844,099  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 119,541,047     $ 101,332,464  

The accompanying notes are an integral part of these financial statements
 
2

 
HOME SYSTEM GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME /OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(UNAUDITED)

   
Three Months Ended March 31,
 
   
2009
   
2008
 
             
             
NET SALES
  $ 15,429,114     $ 7,678,489  
Cost of sales
    11,656,538       8,648,024  
GROSS (LOSS) PROFIT
    3,772,576       (969,535 )
                 
OPERATING EXPENSES
               
Provision for stock option costs written back
            (34,009 )
                 
General selling and administrative expenses
    1,414,775       837,088  
      1,414,775       803,079  
                 
INCOME(LOSS) FROM OPERATIONS
    2,357,801       (1,772,614 )
                 
OTHER (EXPENSE) INCOME
               
Other expenses
    (61,737 )     (1,259 )
Interest expenses
    369,641       (10,842 )
Interest income
    747    
- 
 
      308,651       (12,101 )
                 
                 
 INCOME(LOSS) BEFORE INCOME TAXES
    2,049,150       (1,784,715 )
                 
INCOME TAXES
    522,625       -  
                 
NET  INCOME(LOSS)
    1,526,525       (1,784,715 )
                 
OTHER COMPREHENSIVE (LOSS) INCOME
               
Foreign currency translation adjustment
    (55,629 )     544,786  
                 
COMPREHENSIVE (LOSS) INCOME
  $ 1,470,896     $ (1,239,929 )
                 
EARNINGS(LOSS)  PER SHARE
               
-BASIC
  $ 0.02     $ (0.03 )
-DILUTED
  $ 0.02     $ (0.03 )
                 
WEIGHTED AVERAGE NUMBER OF SHARES
               
-BASIC
    62,477,949       62,477,949  
-DILUTED
    62,477,949       62,477,949  
 
3

 
HOME SYSTEM GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND YEAR ENDED DECEMBER 31, 2008

   
Numer of
               
Note Receviable
               
Cumulative
       
   
Shares of
   
Common
   
Paid-in
   
for Stock
   
Statutory
   
Retained
   
Translation
       
   
Common Stock
   
Stock
   
Capital
   
Issuance
   
Reserve
   
Earnings
   
Adjustment
   
Total
 
                                                 
BALANCE AT DECEMBER 31, 2007
    62,477,949     $ 62,478     $ 6,615,726     $ (900,000 )   $ 29,616     $ 150,161     $ 741,511     $ 6,699,492  
                                                                 
Stocked based compensation
                    (34,009 )                                     (34,009 )
                                                                 
Cumulative translation adjustment
                                                    1,103,451       1,103,451  
                                                                 
Net income for year
 
 
   
 
   
 
   
 
   
 
      4,067,667    
 
      4,067,667  
                                                                 
BALANCE AT DECEMBER 31, 2008
    62,477,949       62,478       6,581,717       (900,000 )     29,616       4,217,826       1,852,462       11,844,099  
                                                                 
Stocked based compensation
                                                            -  
                                                                 
Cumulative translation adjustment
                                                    (55,629 )     (55,629 )
                                                                 
Net income for three months
                                            1,526,525               1,526,,525  
                                                                 
BALANCE AT March 31, 2009
    62,477,949       62,478       6,581,717       (900,000 )     29,616       5,744,351       1,796,833       13,314,995  

The accompanying notes are an integral part of these financial statements
 
4


SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Expressed in US dollars)
 (UNAUDITED)
   
Three Months Ended March 31,
 
   
2009
   
2008
 
             
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net (loss) income
  $ 1,526,525     $ (1,784,715 )
Adjustments to reconcile net (loss)income
               
to net cash (used in) provided by operating activities
               
Depreciation
    336,212       147,063  
Amortization of land use right
    7,427          
Amortization of intangible assets
    84,845          
Provision for stock option costs written back
            (34,009 )
Change in assets and liabilities:
               
(Increase) decrease in assets
               
Accounts receivable
    (2,805,507 )     4,485,044  
Other receivables
    (1,575,592 )     (185,192 )
Inventories
    (3,550,195 )     341,170  
Trade deposits
    (373,733 )     -  
Deferred interest expenses
    373,029          
Other taxes refundable
    1,075,178          
Increase (decrease) in liabilities
               
Bills payable
    404,833       2,292,530  
Accounts payable, other payables and accrued expenses
    7,884,605       (5,016,287 )
Taxes payable
    (1,439,945 )     (738,009 )
Net cash (used in) provided by  operating activities
    1,947,682       (492,405 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Capital expenditures
    (18,422 )     (28,723 )
Net cash (used in) investing activities
    (18,422 )     (28,723 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds (repayment) of bank loans
    3,559,711       699,000  
Notes payable
    5,984,853          
Restricted cash
    (341,568 )     (917,012 )
Net decrease in due to related party
    (1,172,000 )     (6,621 )
Increase in due from stockholder
    732,500       -  
Increase in due to stockholder
    104,000       305,255  
Dividend distribution for acquisition
 
 
   
- 
 
Net cash provided by (used in) financing activities
    8,867,496       80,622  
                 
EXCHANGE RATE EFFECT ON CASH
    (18,513 )     22,055  
                 
NET INCREASE (DECREASE)  IN CASH
    10,778,243       (418,451 )
                 
CASH - BEGINNING OF PERIOD
    1,609,540       821,074  
                 
CASH - END OF PERIOD
  $ 12,387,783     $ 402,623  
                 
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
               
Cash paid during the period for:
               
Interest
  $ 369,641     $ 10,842  
Income taxes
  $ 792,454     $ -  

 
5

 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 
NOTE 1 – 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, 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.

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

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.

6

 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 
NOTE 1 – ORGANISATION AND NATURE OF BUSINESS (Continued)
 
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.

On September 1, 2008, Asia Forever completed its acquisition of 100% of Zhongshan Weihe Electrical Appliances Co. Ltd. ("Weihe") in cash transaction amounting $728,396 (RMB5,000,000). Weihe was incorporated with limited liability on August 3, 1998 in the People’s Republic of China (“PRC"). The Company manufactures ceiling fans and residential lighting for the international consumer market through various distributors.

On October 1, 2008, the Company issued promissory notes to the former Shareholders of Asia Forever Investment Limited (“Asia Forever”) as payment of the purchase price of approximately $39 million for the Company’s acquisition of Asia Forever. The notes have a maturity of 2 years and will bear no interest. Principal will be repaid as follows: 25% payable on or before December 31, 2008, the remaining principal amount to be repaid in 3 semi-annual installments with the final installment due on or before the maturity date. Asia Forever Investment Limited (the “Company”) was incorporated with limited liability on April 1, 2008 in the Hong Kong Special Administrative Region (“HK") and it was an investment holding company which is 100% holding of Zhongshan Weihe Electrical Appliances Co. Ltd.


NOTE 2 – BASIS OF PREPARATION AND CONSOLIDATION

The accompanying 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.

7

 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 
NOTE 3 – 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 (“SFAS”) No. 130, “Reporting Comprehensive Income.” Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income.

Cash and cash equivalents

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

Inventory

Inventory is stated at the lower of cost or market value.  The Company evaluates the net realizable value of its inventories on a regular basis and records a provision for loss to reduce the computed weighted-average cost if it exceeds the net realizable value.  Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to consummate the sale.  Raw materials are determined by the weighted average method.  Work-in-progress and finished goods inventories consist of raw materials, direct labor and overhead associated with the manufacturing process.

Trade accounts receivables

Trade accounts receivable are stated at cost, net of allowance for doubtful accounts.  The Company maintains reserves for potential credit losses on accounts receivable.  Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.  Reserves are recorded primarily on a specific identification basis.  There were $0 in allowances for doubtful accounts as of March 31, 2009 and December 31, 2008.

Revenue Recognition

The Company’s revenue recognition policies are in compliance with Staff Accounting Bulletin No. 104, “Revenue Recognition”. Revenue from sales of the Company’s products is recognized when the significant risks and rewards of ownership have been transferred to the buyer at the time when the products are delivered to and accepted by its customers, the price is fixed or determinable as stated on the sales contract, and collectability is reasonably assured.  Customers do not have a general right of return on products shipped. Product returns to the Company were insignificant during past years.  There are no post-shipment obligations, price protection and bill and hold arrangements.

8

 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Property, plant and equipment

Property, plant and equipment are stated at cost including the cost of improvements.  Maintenance and repairs are charged to expense as incurred.  Assets under construction are not depreciated until construction is completed and the assets are ready for their intended use.  Depreciation and amortization are provided on the straight-line method based on the estimated useful lives of the assets as follows:

Plant and machinery
5  to 12 years
Buildings
20 years
Furniture, fixtures and equipment
5 to 10 years
Motor vehicle
8 to 10 years

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.

Deferred Finance Costs

 
Deferred finance costs are being amortized over the term of the non-interest bearing promissory notes payable issued regarding the business acquisitions, using the effective interest method.
 

Income taxes

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns.  Under this method, deferred tax liabilities and assets are determined based on the temporary difference between the financial statement and tax basis of assets and liabilities using presently enacted tax rates in effect.  Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.  Income taxes are provided on an asset and liability approach for financial accounting and reporting of income taxes.  Any tax paid by subsidiaries during the year is recorded.  Current tax is based on the profit or loss from ordinary activities adjusted for items that are non-assessable or disallowable for income tax purposes and is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date.

A valuation allowance is recognized if it is more likely than not that some portion, or all, of a deferred tax asset will not be realized.

Related parties

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities.

9

 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Foreign Currency Translation

The consolidated financial statements of the Company are presented in United States Dollars (“US$”). Transactions in foreign currencies during the year are translated into US$ at the exchange rates prevailing at the transaction dates.  Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated into US$ at the exchange rates prevailing at that date.  All transaction differences are recorded in the income statement.

The Company’s subsidiaries in the PRC have their local currency, Renminbi (“RMB”), as their functional currency.  On consolidation, the financial statements of the Company’s subsidiaries in PRC are translated from RMB into US$ in accordance with SFAS No. 52, "Foreign Currency Translation".  Accordingly, all assets and liabilities are translated at the exchange rates prevailing at the balance sheet dates and all income and expenditure items are translated at the average rates for each of the years.

RMB is not a fully convertible currency.  All foreign exchange transactions involving RMB must take place either through the People’s Bank of China (the “PBOC”) or other institutions authorized to buy and sell foreign exchange.  The exchange rates adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC, which are determined largely by supply and demand.  Translation of amounts from RMB into US$ has been made at the following exchange rates for the respective years:

March 31, 2009
       
Balance sheet
     
USD0.1463  to RMB1.00
Statement of income and comprehensive income
     
USD0.1465  to RMB1.00
         
Balance sheet at December 31, 2008
     
USD0.1467  to RMB1.00
Statement of income and comprehensive income
     
USD0.1396  to RMB1.00
At March 31, 2008
       

Commencing from July 21, 2005, China has adopted a managed floating exchange rate regime based on market demand and supply with reference to a basket of currencies.  The exchange rate of the US$ against the RMB was adjusted from approximately RMB 8.28 per US$ to approximately RMB 8.11 per US$ on July 21, 2005.  Since then, the PBOC administers and regulates the exchange rate of US$ against RMB taking into account demand and supply of RMB, as well as domestic and foreign economic and financial conditions.

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.

Goodwill

We evaluate goodwill, at a minimum, on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. The fair values of the reporting units are estimated using discounted projected cash flows. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any. We will conduct our annual impairment test as of December 31 of each year, and will determine if there is any impairment.

10

 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

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.

11

 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.


NOTE 4– INVENTORIES

Inventories consist of the following:


             
   
March 31,
2009
   
December 31,
2008
 
             
Raw materials
  $ 8,704,855     $ 9,243,130  
Work in process
    4,252,565       5,352,141  
Consumable
    94,767       76,389  
Finished goods
    6,016,399       941,515  
Consign process product
    47,366          
Total
  $ 19,115,951     $ 15,613,175  
 
12

 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 
NOTE 5 – RESTRICTED CASH AND BILLS PAYABLE

Restricted cash consists of the following:
 
   
March 31,
   
December 31,
 
   
2009
   
2008
 
             
Bank deposit held as collateral for bills payable
  $ 1,953,693     $ 1,617,000  
 
The Company is requested by certain of its suppliers to settle amounts owed to such suppliers by the issuance of bills 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. In order to provide such guarantees for the bills, the Company’s subsidiaries, Well Profit and Weihe have entered into bank acceptance agreements with Bank.  Pursuant to the Bank’s acceptance agreements, the Bank provided its undertakings to guarantee payment of certain of the Company’s notes with an aggregate amount of approximately $9.6 million. 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 10% to 50% of the bills’ amount at the time of such issuance.

NOTE 6– ACQUISITION DEPOSIT

The acquisition deposit of $ 731,500 (RMB5 million) and $733,500 (RMB 5 million) as of March 31, 2009 and December 31, 2008 respectively, represented the partial payment of the cash portion of the consideration for the acquisition of Juxian and Weihe in September, 2007. 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 and Juxian. On February 7, 2008, the share exchange agreement for the acquisition of Weihe and Juxian were 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.

On October 1, 2008, the Company issued promissory notes to the former Shareholders of Asia Forever Investment Limited (“Asia Forever”) as payment of the purchase price for the Company’s acquisition of Asia Forever. On the same date, the acquisition deposits set off with the promissory note. The balance of $731,500 is the deposits paid to the shareholders of Juxian which the shareholders will refund the deposits to the Company in 2009.


NOTE 7– LAND USE RIGHT, NET

   
March 31,
2009
   
December 31,
2008
 
             
Land use right
  $ 1,299,172     $ 1,299,172  
Less: accumulated amortization
    14,747       7,320  
                 
Land use right, net
  $ 1,284,425     $ 1,291,852  
                 

The Company obtained the right from the relevant PRC land authority for periods of 50 years to use the lands on which the production facilities and warehouses of the Company are situated.

During the three months ended March 31, 2009 and 2008, amortization amounted to $7,427 and $0 respectively.

13

 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 
NOTE 7– LAND USE RIGHT, NET (Continued)

The estimated aggregate amortization expenses for land use right for the five succeeding years is as follows:

Year
     
2010
    29,708  
2011
    29,708  
2012
    29,708  
2013
    29,708  
2014
    29,708  
thereafter
  $ 1,135,885  
         
      1,284,425  


NOTE 8 – PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment consist of the following:

   
March 31,
2009
   
December 31,
2008
 
At cost:
           
             
Plant and machinery
  $ 8,266,547     $ 8,253,436  
Buildings
    2,145,009       2,145,009  
Furniture, fixtures and equipment
    147,836       142,525  
Motor vehicle
    12,405       12,405  
                 
Total
    10,571,797       10,553,375  
                 
Less: accumulated depreciation
    1,370,761       1,034,549  
                 
Net book value
  $ 9,201,036     $ 9,518,826  

During the three months period ended March 31, 2009, depreciation expenses amounted to $336,213, among which $251,745 and $84,468 were recorded as cost of sales and administrative expense respectively.

During the three months period ended March 31, 2008, depreciation expenses amounted to $147,063, among which $143,053 and $4,010 were recorded as cost of sales and administrative expense respectively.

14

 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 
NOTE 9 – INTANGIBLE ASSETS, NET

Intangible assets consist of the following:

   
March 31,
2009
   
December 31,
2008
 
At cost:
           
             
Customer relationship
  $ 2,030,000     $ 2,030,000  
Brand name
    145,792       145,792  
                 
Total
    2,175,792       2,175,792  
                 
Less: accumulated amortization
    169,690       84,845  
                 
Net book value
  $ 2,006,102     $ 2,090,947  

During the three months period ended March 31, 2009 and 2008, amortization expenses of intangible assets amounted to $84,845 and $0 respectively.

The intangible assets are carried at cost and are amortized over the expected useful lives.  Brand name is expected to be amortized on a systematic basis over their expected useful lives of 10 years.  Expected amortization totals $14,579 each year in 2009 through 2013, and approximately $69,252 in the years thereafter.  Customer relationship is expected to be amortized on a systematic basis over their expected useful lives of 6.25 years.  Expected amortization totals $324,800 each year in 2009 through 2013, and approximately $324,800 in the years thereafter.

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

Year
     
2010
    339,380  
2011
    339,380  
2012
    339,380  
2013
    339,380  
2014
    339,380  
thereafter
  $ 309,202  
         
      2,006,102  


NOTE 10– BANK LOAN

The bank loans are the short term loans that denominated in Chinese Renminbi and are presented in US dollars as follows:

15

 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 
   
March 31,
2009
   
December 31,
2008
 
             
Loans repayable within one year
           
             
Loans from Bank of communication, interest rate
at 3.19% (LIBOR+2%), due within 90 days,
secured by accounts receivable, the related
company, WaiYi (Hong Kong) Limited.
  $ 471,367        
               
Loans from Bank of communication, interest rate
at 3.42% (LIBOR+2%), due within 120 days,
secured by accounts receivable, the related
company, WaiYi (Hong Kong) Limited.
    3,404,954        
               
Loans from Industrial and Commercial Bank of
China, interest rate at5.40%, due from January
21, 2009 to May 20, 2009, secured by Letter of
Credit.
    1,463,000        
               
Loans from Industrial and Commercial Bank of
China, interest rate at4.86%, due from January
22, 2009 to May 21, 2009, secured by Letter of
Credit.
    2,194,500        
               
Loans from Industrial and Commercial Bank of
China, interest rate at5.40%, due from January
20, 2009 to May 18, 2009, secured by Letter of
Credit.
    1,463,000        
 
 
 
             
Loans from CITIC Bank, interest rate at 7.62% per
annum, due from October 10, 2008 to October 9,
2009, secured by Li Weiqi, the general manager
of Well Profit.
  $ 2,926,000     $ 2,934,000  
                 
Loans from Bank of communication, interest rate
at 10.34% (LIBOR+4.6%), due within 90 days,
secured by accounts receivable, the related
company, WaiYi (Hong Kong) Limited.
            676,710  
                 
Loans from Guangdong Development Bank
(Zhongshan Branch), interest rate at 10.34%
(LIBOR+4.6%), due within 90 days, secured by
accounts receivable, the related company, WaiYi
(Hong Kong) Limited.
            2,312,593  
                 
Loans from Standard Chartered Bank, interest
rate at 10.74% (LIBRO+5%), due within 90 days,
secured by accounts receivable, the related
company, WaiYi (Hong Kong) Limited.
            267,045  
                 
Loans from Industrial and Commercial Bank of
China, interest rate at 6.21%, due from September
28, 2008 to January 22, 2009, secured by Letter
of Credit.
            3,667,500  
                 
Loans from Industrial and Commercial Bank of
China, interest rate at 6.21%, due from September
28, 2008 to January 16, 2009, secured by Letter
of Credit.
            1,467,000  
                 
Total
  $ 11,922,821     $ 11,324,848  

16

 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 
NOTE 11 – PROMISSORY NOTES PAYABLE AND DEFERRED FINANCING COST

Promissory notes payable consists of the following:

   
March 31,
2009
   
December 31,
2008
 
             
Notes payable related to the fixed prices standby equity distribution agreement
  $ 6,575,000     $ 6,575,000  
Notes payable related to acquisition of subsidiary
    31,427,184       31,405,184  
                 
      38,002,184       37,980,184  
                 
Less: Current portion
    21,558,763       21,536,763  
                 
Notes payable recorded under non-current liabilities
    16,443,421       16,443,421  
                 

Deferred financing cost consists of the following:

   
March 31,
2009
   
December 31,
2009
 
             
Deferred financing cost
  $ 1,132,119     $ 1,505,147  
                 
Less: Current portion
    876,889       1,249,917  
                 
Deferred financing cost recorded under non-current assets
  $ 255,230     $ 255,230  

(i)  
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 of $6,575,000 received to be refunded has been reflected as “Notes Payable” recorded under non-current liabilities.

17

 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 
NOTE 11 – PROMISSORY NOTES PAYABLE AND DEFERRED FINANCING COST (Continued)

(ii) Issuance of promissory note during the business acquisition

On October 1, 2008, the Company issued promissory note to the former Shareholders of Asia Forever Investment Limited (“Asia Forever”) as payment of the purchase price for the Company’s acquisition of Asia Forever. The notes have a maturity of 2 years and will bear no interest. Principal will be repaid as follows: 25% payable on or before December 31, 2008, the remaining principal amount to be repaid in 3 semi-annual installments with the final installment due on or before the maturity date.

The estimated initial fair value of the non-interest bearing promissory note payable is based on the discounted effective borrowing rate of the Company, discount rate of 5.31% (ie the company loan borrowing rate). The Company paid $8,068,500  (RMB 55 million) of the total consideration of $39,473,684 (RMB 270 million) at the closing date, leaving a balance due on the promissory note after the closing of $31,405,184. The net present value of this note payable at October 1, 2008 was $29,900,037 and deferred finance costs of $1,505,147 was recorded and amortized using the effective interest rate method.


NOTE 12 – DUE TO STOCKHOLDER

Amount represents advances from a stockholder as at March 31, 2009.  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 $ 1,236,473.



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 $326,129 and $309,026 for the three months period ended March 31, 2009 and 2008 respectively.


NOTE 14 – WARRANTY

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

   
Three months
ended March 31,
2009
   
December 31,
2008
 
Warranty accrual, beginning of period
  $ 22,688     $ 22,688  
Warranty accrued during the period
               
Actual warranty expenditures
    22,688       22,688  
                 
Warranty, end of period
  $ -     $ -  

18

 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 
NOTE 15– INCOME TAXES

UNITED STATES

The Company is incorporated in the United States of America and is subject to United States of America tax law. No provisions for income taxes have been made as the Company has no taxable income for reporting periods. The applicable income tax rates for the Company for the reporting periods are 34%.

BVI

HSGI is incorporated in the BVI and, under the current laws of the BVI, are not subject to income taxes.

HONG KONG

Holy is an investment holding company in Hong Kong. No provisions for income taxes have been made as the Company has no taxable income for reporting periods.

No Hong Kong Profits Tax has been provided in the financial statements as the business of Oceanic is carried outside Hong Kong and there was no income derived from or arising in Hong Kong during the period.

PRC

Well Profit being a foreign venture enterprise is entitled to, starting from the first profitable year, a two-year exemption from enterprise income tax followed by a three-year 50% reduction in its enterprise income tax rate (“Tax Holiday”). As such, after the application by Well Profit and approval by the relevant tax authority in 2007, Well Profit was exempted from enterprise income tax for the fiscal years 2007 and 2008.  For the following three fiscal years from 2009 to 2011, Well Profit will be subject to enterprise income tax at rate of 12.5%.

During three months ended March 31, 2009 and  year ended December 31, 2008, Well Profit received the tax holiday are $60,420 and $656,163 respectively. The affect on basic and diluted earnings per share for the months 2009 and  the year 2008 is an increase of $0.001 and $0.011 respectively.

In the fiscal year 2007,Zhongshan Weihe Electrical Appliances Co. Ltd. ("Weihe") is a domestic enterprise in the PRC and subject to enterprise income tax at 33%, in which 30% for national tax and 3% for local tax, of the assessable profits as reported in the statutory financial statements prepared under China Accounting regulations.

Effective on January 1, 2008, the PRC Enterprise Income Tax Law, or EIT Law, and Implementing Rules impose a unified enterprise income tax rate of 25% on all domestic-invested enterprises and foreign investment enterprises in China, unless they qualify under certain limited exception.

On January 1, 2007, the Company adopted FIN 48, which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken in the tax return. This interpretation also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.

 Until December 31, 2007, the directors considered that the Company had no uncertain tax positions affected its consolidated financial position and results of operations or cash flow, and will continue to evaluate for the uncertain position in future. There are no estimated interest costs and penalties provided in the Company’s financial statements for the year ended December 31, 2007.

No provision for deferred taxes has been made as there were no material temporary differences at December 31, 2008 and 2007.

19

 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 
NOTE 15– INCOME TAXES (Continued)

The income taxes provided represents the following:

   
March 31,
2009
   
March 31,
2008
 
             
PRC Enterprise Income Tax
           
Current
  $ 522,625     $ -  
Deferred tax provision
    -       -  
                 
    $ 522,625     $ -  

The effective income tax expenses differ from the PRC statutory income tax rate from continuing operations in the PRC as follows:

   
March 31,
2009
   
March 31,
2008
 
             
Provision for income taxes at statutory income tax rate – 25%
  $ 512,288     $ -  
Tax Holiday
    (60,420 )     -  
Income not subject to tax
    (71,843 )     -  
Loss from the subsidiaries
    142,601       -  
                 
    $ 522,625     $ -  
 
20

 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 
NOTE 16 – 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 six reportable segments: (1) barbeque set, (2) skateboards, (3) Other home appliances, (4) General trading, (5) Fans and (6) 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
     
Other trading
   
Corporate
   
Total
 
         
For the three months ended March 31, 2009
   
For the three months ended March 31, 2008
   
For the three months ended March 31, 2009
   
For the three months ended March 31, 2008
   
For the three months ended March 31, 2009
   
For the three months ended March 31, 2008
     
For the three months ended March 31, 2009
   
For the three months ended March 31, 2008
   
For the three months ended March 31, 2009
   
For the three months ended March 31, 2008
   
For the three months ended March 31, 2009
   
For the three months ended March 31, 2008
 
Net sales
        $ 5,416,067     $ 5,432,491     $ 824,162     $ 1,182,577     $ 9,188,885     $ 1,063,421       $       $       $ -     $ -     $ 15,429,114     $ 7,678,489  
Depreciation and amortization
        $ 153,007     $ 72,361     $ 22,674     $ 94     $ 252,804     $ 74,608       $       $       $ -     $ -     $ 428,485     $ 147,063  
Segment(loss)income before income taxes
        $ 919,814     $ (1,493,216 )   $ 139,968     $ 95,806     $ 1,560,554     $ (134,160 )     $       $       $ (571,186 )   $ (253,145 )   $ 2,049,150     $ (1,784,715 )
Capital expenditures
         
$
    $ 24,389     $ -     $ -     $ 18,442     $ 4,334       $       $       $ -     $ -     $ 18,442     $ 28,723  
                                                                                                           
           
As of March 31, 2009
   
As of December 31, 2008
   
As of March 31, 2009
   
As of December 31, 2008
   
As of March 31, 2009
   
As of December 31, 2008
     
As of March 31, 2009
   
As of December 31, 2008
   
As of March 31, 2009
   
As of December 31, 2008
   
As of March 31, 2009
   
As of December 31, 2008
 
Segment assets
          $ 35,286,936     $ 8,425,680     $ 5,370,064     $ 7,953,810     $ 67,588,202     $ 9,351,407  
$
 
 
      45,278,782       11,295,845     $ 30,322,785     $ 119,541,047     $ 101,332,464  

21

 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 
NOTE 17 – 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, 2009 and March 31, 2009
 
   
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 )        
                         
Balance, January 1, 2009
    33,333       33,333       6.00  
                         
Balance, March 31, 2009
    33,333       33,333       6.00  
                         

The following table provides certain information with respect to the above referenced options outstanding at March 31, 2009:


Exercise Price
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining Contractual Life
Years
$6
 
$6
 
8.41
         


NOTE 18– CONCENTRATIONS, RISK AND UNCERTAINTIES

For the three months ending March 31, 2009, one customer accounted for more than 10% of the Company’s sales, totaling 49%.  For the three months ending March 31, 2008, 1 customer accounted for more than 10% of the Company’s sales, totaling 98%.

22

 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
 
NOTE 18- CONCENTRATIONS, RISK AND UNCERTAINTIES (CONTINUED)

For the three months ending March 31, 2009, two customers accounted for more than 96% of the Company’s accounts receivable. For the three months ending March 31, 2008, one customer accounted for more than 92% of the Company’s accounts receivable.

For the three months ending March 31, 2009, two suppliers accounted for more than 10% of the Company’s purchases, totaling 32%.  For the three months ending March 31, 2008, two suppliers accounted for more than 10% of the Company’s purchases, totaling 50%.

For the three months ending March 31, 2009 and 2008, no vendors accounted for more than 10% of the Company’s account payable.

NOTE 19 – 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, 2009
 
December 31,
     
2010
    360,027  
2011
    360,027  
2012
    360,027  
2013
    240,018  
    $ 1,320,099  

During the three months ended March 31, 2009 and 2008, rental expenses were $124,308 and $174,544 respectively.
 
23

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

Overview
 
Home System Group is a Nevada holding company with two China-based operating subsidiaries, Oceanic International (Hong Kong), Ltd., a Hong Kong company, or OCIL, and Oceanic Well Profit, Inc., a PRC company, or Well Profit.  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.  OCIL sales are mainly derived from exports, whereas Well Profit’s sales are largely derived from PRC manufacturing operations.  Our products are sold through distributors to retailers in the United States, Europe, Australia and China.
 
Results of Operations


   
Three-Month
   
Three-Month
   
Dollar ($)
   
Percentage
 
   
Period Ending
   
Period Ending
   
Increase
   
Increase
 
   
March 31,2009
   
March 31,2008
   
(Decrease)
   
(Decrease)
 
                         
Sales revenue
 
$
15,429,114
   
$
7,678,789
   
$
7,750,325
   
$
100.9
%
Costs of goods sold
   
11,656,538
     
8,648,024
     
3,008,514
     
34.8
%
Gross profit
   
3,772,576
     
(969,535
   
4,742,111
     
489.1
%
G&A expenses
   
1,414,775
     
837,088
     
577,687
     
69.01
%
Income from operation
   
2,357,801
     
(1,772,614
)
   
4,130,415
     
233
%
Net income (loss)
   
1,526,525
     
(1,784,715
)
   
3,311,240
     
185.5
%

Sales Revenue. We generated revenues of $15,429,114 for the three months ended March 31, 2009, an increase of $7,750,325 (or approximately 100.9%), compared to $ 7,678,789 for the three months ended March 31, 2008.
 
The increase in the first quarter of 2009 was primarily due to the newly added business of Lamp and Fans from our recent acquired subsidiary, Weihe, as compared to only Well Profit’s revenue in the 2008 first quarter period.  Revenues from Well Profit and Weihe accounted for 45.46% and 51.54% of our revenues during the first quarter of 2009, respectively
  
Costs of Sales. The cost of sales was $11,656,538 in the three months ended March 31, 2009, an increase of $3,008,514 (or approximately 34.8%) from the cost of sales of $8,648,024 in the three months ended March 31, 2008. The increase was primarily due to the increase in our sales volumes and cost of sales from newly added subsidiary, Weihe. However, Cost of sales as a percentage of revenue in the three months ended March 31, 2009 is much lower than the percentage in the three months ended March 31, 2008, resulting operating profit in 2009, because the general price level of raw material decreased large amount after the peak period which was from late 2007 to first half of 2008.

24

 
Gross Profit.  Our gross profit for the three months ended March 31, 2009 was $3,772,576 compared to $(969,535) for the same period in 2008, an increase of $4,742,111 or 489.1% due to the reasons described 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 $1,414,775 for the three months ended March 31, 2009, an increase of $577,687 (or approximately 69.01%) from $837,088 incurred during the three months ended March 31, 2008 primarily from the new added business Weihe.
 
Income from Operations. Income from operations was $2,357,801 during the three months ended March 31, 2009, an increase of $4,130,415 from the loss from operations of $1,772,614 during the three months ended March 31, 2008. The increase was due to the reasons mentioned above.
 
Net Income (Loss). Net income of $1,526,525 was incurred for the three months ended March 31, 2009; an increase of $3,311,240 from net loss of $1,784,715 earned during the three months ended March 31, 2008 due to the reasons mentioned above.
 
Working Capital Requirements +
 
Historically, operations, short term financing and the sale of our company stock have been sufficient to meet our cash needs.  Recent increase in operating income has lessened the burden on our need for working capital.  The company believes that its cash balances are sufficient to fund operations as the company continues to generate operating gain in the future.  However, our actual working capital needs for the long and short term will depend upon numerous factors, including operating results, competition, and the availability of credit facilities, none of which can be predicted with certainty. Future expansion will be limited by the availability of financing products and raising capital.

Liquidity and Capital Resources
 
Cash has historically been generated from operations. Operations and liquidity needs are funded primarily through cash flows from operations and short-term borrowings. Cash and cash equivalents were $12,387,783 as of March 31, 2009. The current assets totaled $81,037,462 and total current liabilities were $86,256,631 as of March 31, 2009, respectively, resulting net working capital deficit of $5,219,169.

Net cash provided by operating activities totaled $ 1,947,682 for the three months ended March 31, 2009, compared with $(492,405) net chased used for the same periods ended March 31, 2008.

Net cash provided by financing activities totaled $8,867,496 for the three months ended March 31, 2009.

We will continue to evaluate alternative sources of capital to meet our growth requirements, including other asset or debt financing, issuing equity securities and entering into other financing arrangements. There can be no assurance, however, that any of the contemplated financing arrangements described herein will be available and, if available, can be obtained on terms favorable to us.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

The Company is subject to certain market risks, including changes in interest rates and currency exchange rates.  The Company does not undertake any specific actions to limit those exposures.
 
 Item 4T. Evaluation of Disclosure Controls and Procedures
 
25

 
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.
 
As required by Rule 13a-15 under the Exchange Act, under the supervision and with the participation of our management, including Fuying Wang our President and Chief Executive Officer and Jianming Xu, our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2009. Based on that evaluation, Messrs. Wang and Xu 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, 2009.
 
In order to further enhance our internal controls, our management, with the participation of Mr. Wang and Mr. Xu, has recommended the implementation of the following changes:
 
 
·
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.
 
Changes in Internal Control Over Financial Reporting
 
There were no changes in our internal control over financial reporting identified in connection with the evaluation performed that occurred during the fiscal quarter covered by this report that has materially affected or is reasonably likely to materially affect, our internal control over financial reporting.
  

PART II - OTHER INFORMATION
Item 1.    Legal Proceedings.
 
None.

Item 1A.    Risk Factors.
 
There has been no material change in the Company's risk factors as previously disclosed in the Company’s Annual Report on Form 10-K filed with the SEC on April 15, 2009.
 
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.
 
None. 
 
26

 
Item 3.    Defaults Upon Senior Securities.
 
None.
 
Item 4.   Submission of Matters to a Vote of Security Holders.
 
None.
 
Item 5.   Other Information.
 
None.
 
Item 6.   Exhibits.
 
Exhibit No.
  
Title of Document
     
31.1
 
Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended
     
31.2
 
Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended
     
32.1
 
Certification pursuant to Section 906 of Sarbanes Oxley Act of 2002 (Chief Executive Officer and Chief Financial Officer)
 
27

 
SIGNATURES
 
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
 
 
 
HOME SYSTEM GROUP
 
       
Date: June 1, 2009
By:
/s/ Fuying Wang 
 
   
Fuying Wang
 
   
Chief Executive Officer
 
       
       
       
Date: June 1, 2009
By: 
/s/ Jianming Xu 
 
   
Jianming Xu 
 
   
Chief Financial Officer
(Principal Financial and Accounting
Officer) 
 
       
 
 
 28


EX-31.1 HTML

ex31_1.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, Fuying Wang, certify that:

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

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the Company and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting; and

5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s Board of Directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: June 1, 2009
/s/ Fuying Wang
 
Fuying Wang
 
Principal Executive Officer
 
 

 

EX-31.2 HTML

ex31_2.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, Jianming Xu, certify that:

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

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the Company and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting; and

5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s Board of Directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: June 1, 2009
/s/ Jianming Xu
 
Jianming Xu
 
Principal Financial Officer and Accounting Officer
 
 


EX-32.1 HTML

ex32_1.htm

Exhibit 32.1
 
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
 
The undersigned, Fuying Wang and Jianming Xu, 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 quarter ended March 31, 2009 (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 1st the day of June, 2009.
 
 
/s/ Fuying Wang
 
Fuying Wang
 
Chief Executive Officer
 
(Principal Executive Officer)
   
   
 
/s/ Jianming Xu
 
Jianming Xu
 
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.