Form 10-Q Home System Group

Quarterly report pursuant to section 13 and 15(d)

What is Form 10-Q?
  • Accession No.: 0001437749-10-001580 Act: 34 File No.: 000-49770 Film No.: 10839168
  • CIK: 0001172319
  • Submitted: 2010-05-17
  • Period of Report: 2010-03-31

FORM 10-Q HTML

hsyt_10q-033110.htm

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

FORM 10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2010
   
 
OR
   
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________________ to ________________

Commission file number:  000-49770

Home System Group
(Exact name of registrant as specified in its charter)

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

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

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

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

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

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 [  ] No [  ]

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [  ] 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 May 17, 2010
Common Stock, $0.001 par value per share
 
67,490,166 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
20
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
26
Item 4. Other Information
26
Item 5. Exhibits
26
SIGNATURES
27

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.

 
 

 
 
Report of Independent Registered Public Accounting Firm


Board of Directors and Shareholders of
Home System Group and Subsidiaries

We have reviewed the accompanying consolidated balance sheet of Home System Group and Subsidiaries at March 31, 2010 and the consolidated statements of operations, cash flows and stockholders’ equity for the nine months then ended. These financial statements are the responsibility of the Company's management.

We conducted our review in accordance with 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.



 

/s/ Acquavella, Chiarelli, Shuster, Berkower & Co., LLP
Certified Public Accountants

New York, NY
May 17, 2010




 
1

 
 
PART I - FINANCIAL INFORMATION
 
Item 1 Financial Statements.
HOME SYSTEM GROUP AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS

   
March 31, 2010
   
December 31, 2009
 
   
(unaudited)
   
(audited)
 
ASSETS
           
CURRENT ASSETS
           
Cash and cash equivalents
  $ 4,028,710     $ 3,985,782  
Accounts receivable – trade net of allowance
    37,844,878       23,909,114  
Notes receivables-short term
    8,658,229       3,704,137  
Deposits and advances
    3,545,250       1,344,070  
Inventories
    11,581,396       18,304,015  
    Other assets
    211,600       1,161,057  
TOTAL CURRENT ASSETS
    65,870,063       52,408,175  
    Notes receivable - long-term
    179,809       236,334  
Property, plant and equipment – net
    8,896,474       9,027,828  
Intangible assets
    1,666,722       1,751,567  
Goodwill
    25,025,292       25,025,292  
TOTAL ASSETS
  $ 101,638,360     $ 88,449,196  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES
               
Accounts payable  trade
  $ 19,464,906     $ 18,870,277  
Bills payable
    -       3,478,223  
Accrued expenses and other payables
    6,804,126       7,109,157  
Banks loans
    22,201,385       12,548,441  
Income taxes payable and other tax payable
    1,378,977       1,028,403  
Notes payable - current portion
    13,664,312       6,575.000  
Due to stockholder - current portion
    4,684,051       4,040,896  
TOTAL CURRENT LIABILITIES
    68,197,757       53,650,390  
                 
NON-CURRENT LIABILITIES
               
Due to stockholder
    983,006       1,308,433  
Long term bank loan
    2,929,845       1,464,515  
Notes payable - long term portion
    2,779,109       9,868,421  
TOTAL LIABILITIES
    74,889,717       66,291,759  
                 
STOCKHOLDERS' EQUITY
               
COMMON STOCK - $0.001 par value; 200,000,000 shares
               
authorized, 62,477,949 shares issued and outstanding
               
at March 31, 2010 and December 31, 2009
    62,478       62,478  
Additional paid-in capital
    6,581,717       6,581,717  
Statutory reserve
    681,914       681,914  
Retained earnings
    17,480,237       12,891,560  
Other comprehensive income
    1,942,297       1,939,768  
TOTAL STOCKHOLDERS' EQUITY
    26,748,643       22,157,437  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 101,638,360     $ 88,449,196  
 
The accompanying notes are an integral part of these financial statements.
 
 
2

 
 
HOME SYSTEM GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
 (UNAUDITED)

   
Three Months Ended March 31,
 
   
2010
   
2009
 
Net Sales
  $ 30,060,637     $ 15,429,114  
Cost of sales
    (23,114,501 )     (11,656,538 )
GROSS PROFIT
    6,946,136       3,772,576  
                 
GENERAL SELLING AND ADMINSTRATIVE EXPENSE
    (1,619,169 )     (1,414,775 )
                 
INCOME FROM OPERATIONS
    5,326,967       2,357,801  
             
OTHER (EXPENSE) INCOME
           
Other income
    832,513       61,737  
Interest expenses, net
    (376,759 )     (370,388 )
      455,754       (308,651 )
                 
INCOME BEFORE INCOME TAXES
    5,782,721       2,049,150  
                 
INCOME TAXES
    (1,194,044 )     (522,625 )
                 
NET  INCOME
  $ 4,588,677     $ 1,526,525  
                 
Basic & Diluted Weighted Average Shares
    62,477,949       62,477,949  
Basic & Diluted Earnings per Share
  $ 0.07     $ 0.02  
                 
OTHER COMPREHENSIVE INCOME
               
    Net Income
  $ 4,588,677     $ 1,526,525  
Foreign currency translation adjustment
    2,529       (55,629 )
                 
COMPREHENSIVE INCOME
  $ 4,591,206     $ 1,470,896  
 
The accompanying notes are an integral part of these financial statement
 
 
3

 
 
HOME SYSTEM GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND YEAR ENDED DECEMBER 31, 2009

   
Number of
Shares of
               
Notes
Receivable
         
 
Other
             
   
Common
Stock
   
Common
Stock
   
Paid-in
Capital
   
For Stock Issuance
   
Statutory Reserve
   
Comprehensive Income
   
Retained Earnings
   
Total
 
BALANCE AT
DECEMBER 31, 2008
    62,477,949     $ 62,478     $ 6,581,717     $ (900,000 )   $ 29,616     $ 1,852,462     $ 4, 217, 826     $ 11,844,099  
                                                 
Cumulative translation adjustment
    -       -       -       -       -       87,306       -       87,306  
                                                                 
Net income for 2009
    -       -       -       -       -       -       9,326,032       9,326,032  
                                                                 
Satisfaction of subscription
    -       -       -       900,000       -       -       -       900,000  
                                                                 
Appropriation to statutory reserve fund
    -       -       -       -       652,298       -       (652,298 )     -  
                                                                 
BALANCE AT
DECEMBER 31, 2009
    62,477,949     $ 62,478     $ 6,581,717     $ -     $ 681,914     $ 1,939,768     $ 12,891,560     $ 22,157,437  
Cumulative translation adjustment
    -       -       -       -       -       2,529       -       2,529  
                                                                 
Net income for three months ended March 31, 2010
    -       -       -       -       -       -       4,588,677       4,588,677  
                                                                 
                                                                 
BALANCE AT
MARCH 31, 2010
    62,477,949     $ 62,478     $ 6,581,717     $ -     $ 681,914     $ 1,942,297     $ 17,480,237     $ 26,748,643  
 
The accompanying notes are an integral part of these financial statements

 
4

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

   
Three Months Ended March 31,
 
   
2010
   
2009
 
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
           
Net income
  $ 4,588,677     $ 1,526,525  
Adjustments to reconcile net income
               
to net cash used in operating activities:
               
Depreciation
    257,388       336,312  
Amortization of  intangible assets
    84,845       92,272  
Deferred finance costs amortized
    127,615       373,029  
       Change in assets and liabilities
               
          (Increase) decrease in assets:
               
Accounts receivables
    (13,937,622 )     (2,805,507 )
Deposits and advances
    (206,802 )     (1,575,692 )
Inventories
    6,722,298       (3,550,195 )
Trade deposits
    (1,992,332 )     (373,733 )
Other tax refundable
    821,432       1,075,178  
           Increase (decrease) in liabilities:
               
Bills payable
    (3,476,390 )     404,833  
           Accounts payable
    591,093       1,832,213  
           Other payables and accrued expenses
    (306,605 )     6,052,392  
Income taxes payable
    307,670       (1,439,945 )
Other taxes payable
    42,342       -  
Net cash provided by (used in) Operating Activities
    (6,376,391 )     1,947,682  
                 
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
          Refund of acquisition deposit
    -       732,500  
          Capital expenditures
    (126,034 )     (18,422 )
Net cash provided by (used in) Investing Activities
    (126,034 )     714,078  
                 
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
               
Proceeds of bank loans
    14,358,946       8,996,821  
Repayments of bank loans
    (3,240,672     (5,437,110
Increase in notes receivables
    (4,892,528 )     -  
Proceeds from notes payable
    -       5,984,853  
Restricted cash
    -       (341,568 )
Repayments of loans due to related party
    -       (1,172,000 )
Advances from stockholder
    317,728       104,000  
Net cash provided by Financing Activities
    6,543,474       8,134,996  
                 
Exchange rate effect on cash
    1,879       (18,513 )
Net increase in cash
    42,928       10,778,243  
Cash - begin of period
    3,985,782       1,609,540  
Cash - end of period
  $ 4,028,710     $ 12,387,783  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
               
Cash paid during the period for:
               
Interest
  $ 248,945     $ 369,641  
Income taxes
  $ 885,879     $ 792,454  
 
The accompanying notes are an integral part of these financial statements 
 
 
5

 
 
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS

Home System Group (“HSG” or the “Company”) (formerly named Supreme Realty Investments, Inc. (“Supreme”)) is incorporated in the State of Nevada.   The Company has three operating subsidiaries as of March 31, 2010.

On August 4, 2006, Supreme was a public shell company and acquired Home System Group, Inc. (“HSGI”).  HSGI was incorporated as a limited liability company in the British Virgin Islands on February 28, 2003.  HSGI was inactive until June 30, 2006 when HSGI acquired all the outstanding stock of Oceanic International (HK) Limited (“Oceanic”).  Oceanic is an operating company, organized under the laws of Hong Kong on June 23, 2004 for the purpose of distributing gas grills, home electronic appliances and bin racks. Since the ownership of HSGI and Oceanic was the same, the merger was accounted for as a transaction between entities under common control, whereby HSGI recognized Oceanic’s assets and liabilities as being transferred at their carrying amounts. Under the terms of the merger agreement with Supreme, the stockholders of HSGI received 8,000,000 shares of Supreme’s common stock for 100% of HSGI’s outstanding common stock.  Following the merger, Supreme changed its name to Home System Group.  Under accounting principles generally accepted in the United States, the share exchange is considered to be a capital transaction in substance, rather than a business combination.  That is, the share exchange is equivalent to the issuance of stock by HSGI for the net monetary assets of Supreme, accompanied by a recapitalization, and is accounted for as a change in capital structure.  Accordingly, the accounting for the share exchange is identical to that resulting from a reverse acquisition, except no goodwill was recorded.  Under reverse takeover accounting, the post reverse acquisition comparative historical financial statements of the legal acquirer, Supreme, are those of the legal acquiree which is considered to be the accounting acquirer, HSGI.  Shares and per share amounts stated have been adjusted to reflect the merger.
 
Holy (HK) Limited (“Holy”) was incorporated in Hong Kong on September 26, 2006 for the purpose of being a holding company.  Oceanic Well Profit, Inc. (“Well Profit”), a wholly-owned subsidiary of Holy, was incorporated in the People’s Republic of China (“PRC”) on April 5, 2006 for the purpose of manufacturing gas grills, home electrical appliances and bin racks.

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

On January 31, 2007, HSG acquired Holy and its wholly-owned subsidiary, Well Profit.  Under the terms of the merger agreement, the stockholders of Holy received $3,000,000 and 42,500,000 shares of voting common stock of HSG in exchange for 100% of Holy’s outstanding common stock. For accounting purposes, the acquisition has been treated as an acquisition of Holy by HSG and as a recapitalization of Holy. The historical financial statements prior to January 31, 2007 are those of Holy. Share and per share amounts have been retroactively adjusted to reflect the acquisition.
 
On October 1, 2008, the Company purchased from the shareholders of Asia Forever Investment Limited (“Asia Forever”) all of Asia Forever’s outstanding stock for approximately $39.5 million.  Asia Forever had been incorporated as a limited liability company on April 1, 2008 in the Hong Kong Special Administrative Region, and it has 100% ownership interest of Zhongshan City Weihe Appliances Co., Ltd (“Weihe”). Weihe had been incorporated as a limited liability company on August 3, 1998 in the PRC, and it manufactures ceiling fans and residential lighting to be sold to the international consumer market through various distributors. See Note 13 for further information regarding the purchase of Asia Forever. The operations of Asia Forever are included in the consolidated financial statements since October 1, 2008.
 
NOTE 2 – BASIS OF PREPARATION AND CONSOLIDATION

The accompanying financial statements of the Company have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America. The consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant inter-company accounts and transactions have been eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements reflect the adjustments considered necessary for a fair presentation of the Company’s results as of March 31, 2010 and March 31, 2009, and for the periods then ended.

 
6

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basic and diluted earnings per share

The Company reports earnings per share in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 260 “Earnings per share”. The Company’s basic earning per share is computed using the weighted average number of shares outstanding for the periods presented.  
 
Diluted earnings per share is based on the assumption that all dilutive options or warrants were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, the Company’s outstanding stock options are assumed to be exercised, and as if funds obtained thereby were used to purchase common stock at the average market price during the period. The options outstanding as of March 31, 2010 and March 31, 2009 were anti-dilutive and thus were not included in the computation of the Company’s earnings per share.

Cash and cash equivalents

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

Accounts receivable - trade

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

Inventory

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

Deferred finance costs

Deferred finance costs are being amortized over the term of the non-interest bearing promissory notes payable issued regarding a related business acquisition, using the effective interest method.
 
The amounts amortized for the period ended March 31, 2010 and 2009 were $127,615 and $373,029, respectively. 

Property, plant and equipment

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

Foreign currency translation

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

 
7

 
 
All foreign exchange transactions involving RMB must take place either through the People’s Bank of China (the “PBOC”) or other institutions authorized to buy and sell foreign exchange. The exchange rates adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC. Translation of amounts from RMB into US dollars has been made at the following exchange rates:

For the period ended March 31, 2010:
       
Balance sheet
     
RMB 6.83 to US$ 1.00
Statement of Operations
     
RMB 6.83 to US$ 1.00
 
For the period ended March 31, 2009:
       
Balance sheet
     
RMB 6.84 to US$ 1.00
Statement of Operations
     
RMB 6.83 to US$ 1.00
         
For the period ended December 31, 2009:
       
Balance sheet
     
RMB 6.83 to US$ 1.00

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

Use of estimates

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

Reclassifications

Certain items have been reclassified in the accompanying consolidated Financial Statements and Notes for prior periods to be comparable with the classification for the period ended March 31, 2010. The reclassification had no effect on previously reported Net income.

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

Concentration of risk

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

Recently issued accounting pronouncements

In December 2007, the FASB issued ASC Topic 810, “Consolidation”, to establish 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. It also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This standard  is effective for the Company beginning January 1, 2009. The Company adopted the new standard on January 1, 2009, and the implementation of the new standard did not have a significant impact on the Company’s financial position or results of operations.

 
8

 
 
In April 2008, the FASB issued  ASC Topic 350, “Intangibles-Goodwill and Other”, 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. 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 standard did not have a significant impact on the Company’s financial statements.

In May 2008, the FASB issued ASC Topic 470, “Debt”, which is effective for financial statements issued for fiscal years beginning after December 15, 2008. This standard 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. This standard is not currently applicable to the Company since the Company does not have convertible debt.

In June 2008, the FASB issued ASC Topic 260, “Earnings per Share”, regarding determining whether instruments granted in share-based payment transactions are participating securities. This 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 is not expected to have an effect on the Company’s financial reporting.

In April 2009, the FASB issued ASC Topic 820, “Fair Value Measurements and Disclosures”, which provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased and re-emphasizes that regardless of market conditions the fair value measurement is an exit price concept as defined in the standard. The scope of this standard does not include assets and liabilities measured under Level 1 inputs (quoted prices in active markets for identical assets). The standard is applied prospectively to all fair value measurements where appropriate and is effective for the Company’s interim and annual periods beginning in the second quarter of fiscal year 2009. The Company’s adoption of this above standard did not have a material impact on the Consolidated Financial Statements.

In May 2009, the FASB issued ASC Topic 855, “Subsequent Events”, that established general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued and shall be applied to subsequent events not addressed in other applicable generally accepted accounting principles.  This standard, among other things, sets forth the period after the balance sheet date during which management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures an entity should make about events or transactions that occurred after the balance sheet date. The Company adopted this standard effective with the fiscal quarter ending June 30, 2009.

In July 2009, the FASB issued standards that established the ASC Accounting Standards Codification as the single source of authoritative US GAAP for nongovernmental entities. The ASC supersedes all non-SEC accounting and reporting standards that existed at the ASC’s effective date, including FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and related literature. The FASB uses Accounting Standards Updates (“ASU”) to amend the ASC. The Codification was effective for interim and annual periods ending after September 15, 2009 (i.e., the year ended December 31, 2009 for the Company).

NOTE 4 - NOTES RECEIVABLE

The Company has an arrangement with Oceanic International (Zhongshan) (“Zhongshan”), a Chinese company that is a supplier of raw material to Home System, whereby both companies have agreed to jointly obtain financing from certain financial institutions. Under this arrangement, the Company enters into a loan agreement with the financial institution, in which Home System, Zhongshan and the financial institutions agree that certain assets of both companies will be used as collateral to secure the loan.  These assets consist of Home System’s receivables and certain property and buildings of Zhongshan. Once the Company receives the funding, it then enters into an agreement with the Zhongshan under which a portion of the funds the Company receives from the financial institution is provided by the Company to Zhongshan, and is evidenced by a note from Zhongshan payable to Home System.  These notes are classified as Notes receivable and include interest and maturity dates that coincide with the underlying financing agreements. As of March 31, 2010 and December 31, 2009, these Notes receivable amounted to $8,838,038 and $3,940,471, respectively, with interest rates that ranged from 2.49% to 7.74%, and include maturities of less than one year, and more than one year. The related bank loans are from China Construction Bank Zhongshan Branch and Commercial Bank of China amounted to $20,640,745 and $9,522,471 as of March 31, 2010 and December 31, 2009, respectively, and are discussed in NOTE 8 and NOTE 9.
 
 
9

 
 
As the Company bank loans are directly related to its agreement with Zhongshan, the Notes receivables from Zhongshan resulting from these loans are treated as a component of the Company's financing activities in the Statement of Cash Flow.
 
NOTE 5– INVENTORIES

Inventories consisted of the following:

   
March 31,
2010
   
December 31,
2009
 
Raw materials
  $ 7,161,545     $ 14,167,853  
Work in process
    3,729,851       3,548,298  
Finished goods
    690,000       587,864  
Total
  $ 11,581,396     $ 18,304,015  

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment consist of the following:

 
 
Useful Lives
 
March 31,
2010
   
December 31, 2009
 
Plant and machinery
5 to 10 years
  $ 10,462,969     $ 10,336,935  
Buildings
       20 years
    312,028       312,028  
Furniture, fixtures and equipment
5 to 10 years
    200,622       200,622  
Motor vehicles
8 to 10 years
    12,405       12,405  
Total
      10,988,024       10,861,990  
Less: accumulated depreciation
      (2,091,550 )     (1,834,162 )
Net book value
    $ 8,896,474     $ 9,027,828  

During the three months period ended March 31, 2010 and 2009 depreciation was recorded as follows,

   
Three months ended March 31,
 
   
2010
   
2009
 
Cost of sales
  $ 193,041     $ 251,745  
General, selling & administrative expenses
    64,347       84,468  
    $ 257,388     $ 336,213  


NOTE 7 – INTANGIBLE ASSETS, NET

Intangible assets consist of the following:

   
March 31,
2010
   
December 31,
2009
 
Customer relationships
  $ 2,030,000     $ 2,030,000  
Brand name
    145,792       145,792  
Total
    2,175,792       2,175,792  
Less: accumulated amortization
    (509,070 )     (424,225 )
Total Intangible assets, net
  $ 1,666,722     $ 1,751,567  

 
10

 
 
During the three month periods ended March 31, 2010, amortization expenses of intangible assets was $84,845. During the three month periods ended March 31, 2009, amortization expenses of intangible assets was $92,272, which included $7,427 of amortization from land use right.

The intangible assets are carried at cost and are amortized over the expected useful lives. Customer relationships are being amortized over its expected useful life of 6.25 years. Brand name is being amortized over its expected useful lives of 10 years.

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

Year      
 
2010 full year
  $ 339,380  
 
2011
  $ 339,380  
 
2012
  $ 339,380  
 
2013
  $ 339,380  
 
2014 and thereafter
  $ 309,202  
 
 
 
11

 
 
NOTE 8– SHORT TERM BANK LOANS

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

   
March 31, 2010
   
December 31, 2009
 
Loans from Standard Chartered Bank, interest rate at 7.74% (LIBOR+2%), due within 120 days, secured by accounts receivable held by a major customer
 
$
96,942
   
$
96,942
 
                 
Loans from China Construction Bank Zhongshan Branch, interest rate at 7.74% ( LIBOR+2%), due within 120 days, secured by accounts receivable held by a major customer
   
5,538,534
     
1,966,759
 
                 
Loans from China Construction Bank Zhongshan Branch, interest rate at 2.49%, due through July 2, 2010, secured by accounts receivable held by a major customer
   
2,896,517
     
2,896,517
 
                 
Loans from Industrial and Commercial Bank of China, interest rate at 7.74% (LIBOR+2%), due within 120 days, secured by the Company’s accounts receivables
   
4,881,082
     
3,194,680
 
                 
Loans from Industrial and Commercial Bank of China, interest rate at 4.86%, due through June 24, 2010 ,secured by the Company’s  accounts receivables
   
1,171,938
     
-
 
                 
Loans from Industrial and Commercial Bank of China, interest rate at 4.86%, due through June 28, 2010 ,secured by the Company’s  accounts receivables
   
1,464,922
     
-
 
                 
Loans from Industrial and Commercial Bank of China, interest rate at 4.86%, due through July 1, 2010 secured by the Company’s  accounts receivables
   
1,757,907
     
-
 
                 
Loan from CITIC Bank, interest rate at 5.84%, payments due through September 10, 2010, guaranteed by Li Weiqiu, a related party
   
2,929,030
     
2,929,030
 
                 
Loan from CITIC Bank, interest rate at 5.84%, payments due through June 9, 2010 guaranteed by Li Weiqiu, a related party
   
1,464,513
     
1,464,513
 
                 
Total Short term bank loans
 
$
22,201,385
   
$
12,548,441
 
 

NOTE 9– LONG TERM BANK LOANS

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

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

 
12

 

NOTE 10 – NOTES PAYABLE

On May 23, 2007, the Company entered into a Fixed Price Standby Equity Distribution Agreement (the “Agreement”) with four investors (the “Investors”) who were related parties.  Pursuant to the Agreement, the Company could, at its discretion, periodically sell to the Investors up to 10 million shares of the Company’s common stock for a total purchase price of up to $40 million (a per share purchase price of $4.00 per share). The Investors’ obligation to purchase shares of common stock under the Agreement was subject to certain conditions, including the Company obtaining an effective registration statement for the resale of the common stock sold under the Agreement.  The Investors paid 16.5% of the purchase price ($6,575,000) to the Company. Also, the Investors were to deliver to the Company an executed promissory note for the payment of the remaining 83.5% of the remaining commitment under this Agreement.
 
On February 7, 2008, the Company cancelled the Agreement with the Investors, and the amount of $6,575,000 that had been received by the Company has been reflected as a non-interest bearing Notes payable recorded under current liabilities and non-current liabilities at the end of December 31, 2009 and December 31, 2008, respectively. See NOTE 18 – SUBSEQUENT EVENTS

On October 1, 2008, the Company issued promissory notes (“Notes”) in the amount equivalent to the purchase price of approximately $39.4 million to the former shareholders of Asia Forever for the Company’s acquisition of Asia Forever. The net present value of these Notes payable at October 1, 2008, after a payment of $8 million, was $29,900,000 and the deferred finance cost of $1,505,147 was recorded based on the Company’s 5.3% borrowing rate, to be amortized using the effective interest rate method. The Notes bear no interest, and principal was to be repaid as follows: 25% of the purchase price ($9.9 million) was payable on or before December 31, 2008, with the remaining principal amount to be repaid in three equal semi-annual installments beginning on June 30, 2009.

On June 30, 2009, the Company entered into a Supplement Agreement to the Notes (“Supplement Agreement”) with the former shareholders of Asia Forever which amended the payment terms as set forth in the original promissory notes. Pursuant to the Supplement Agreement, the cash payments of  $1.8 million, which was past due from December 31, 2008, and $9.9 million which was due on June 30, 2009 were to be satisfied in total by: (i) $4.4 million in cash which was paid by the Company as of June 30, 2009; (ii) $1,464,000 in cash to be paid by the Company in two equal installments of $732,000 by July 31, 2009 and December 31, 2009; (iii) the transfer of buildings held by the Company including offices and production facilities totaling 41,067 square meters and the related land use rights, together valued at $6.1 million (the “Fixed Assets”). Such revised payment terms when fully completed would satisfy all payments due under the Notes for the December 31, 2008 and June 30, 2009 installments. The cash payments were made and on September 18, 2009, the Company completed the transfer of the Fixed Assets to former shareholders of Asia Forever.

On December 18, 2009, the Company executed an amendment to the Notes (the “Amended Note”) to defer the final installment of the payment of the Purchase Price due on June 30, 2010 under the Notes that the Shareholders received in the Company’s acquisition of Asia Forever.  Pursuant to the Amended Note, the Shareholders agreed that the Company could defer the payment $9.9 million that was originally due on June 30, 2010 to June 30, 2011.  On April 1, 2010, the former shareholders of Asia Forever agreed to convert $7,089,312 of final installment into the Company’s common stock at the conversion rate $3.50 per share in accordance to the Note Conversion Agreements as discussed in NOTE 18 - SUBSEQUENT EVENTS. After this conversion, the Company owes $2,779,109 to the former shareholders of Asia Forever which is due on June 30, 2011.
 
 
13

 
 
Notes payable consist of the following:
 
   
March 31,
2010
   
December 31, 2009
 
Notes payable related to the fixed price standby equity distribution agreement
 
$
6,575,000
   
$
6,575,000
 
Notes payable related to acquisition of subsidiary
   
9,868,421
     
9,868,421
 
Total  Notes Payable
   
 16,443,421
     
 16,443,421
 
                 
Less: Current portion
   
(13,664,312)
     
(6,575,000)
 
                 
Notes payable recorded under non-current liabilities
   
2,779,109
   
$
9,868,421
 
 
Deferred interest expenses consist of the following:

   
March 31,
2010
   
December 31, 2009
 
Deferred interest expenses, classified as Other Assets
 
$
127,616
   
$
255,230
 
 

NOTE 11 – DUE TO STOCKHOLDER

This Company owed $4,420,896 to a stockholder as of March 31, 2010.  This is unsecured and bears no interest. On April 1st, the Company entered into Note Conversion Agreement with the stockholder. The Note Conversion Agreement provides that $3,953,462 of the total amount be converted into Company’s common stock at the conversion rate of $3.50 as discussed in NOTE 18-SUBSEQUENT EVENTS.

As discussion in NOTE 8, various Bank loans made to the Company have been secured or guaranteed by the related party, Li Weiqiu, the founder of Well Profit and a current shareholder of the Company.

On May 14, 2009, The Company received a loan from a related party, Kinwai Cheung, a director and shareholder of the Company, with the interest rate 7.844% due on May 14, 2014. The Company pays the principal amount and interest of approximately $29,280 (RMB 200,000) per month. As of March 31, 2010, the amount due to Kinwai Cheung was $1,246,161, including the current portion $263,155 due within twelve months.

   
March 31,
2010
   
December 31,
 2009
 
Due to stockholder unsecured and no interest
  $ 4,420,896     $ 3,979,971  
Due to stockholder with interest of 7.844%
    1,246,161       1,369,358  
      5,667,057       5,349,329  
                 
Less: Current portion
    (4,684,051 )     (4,040,896 )
                 
 Due to stockholder under non-current liabilities
  $ 983,006     $ 1,308,433  

 
14

 

The principal amounts due over the five succeeding years maturities are as follows:


Year
     
2010
  $ 4,420,896  
2011
    268,209  
2012
    290,021  
2013
    313,606  
2014
    374,325  
    $ 5,667,057  

 
NOTE 12 – SHIPPING AND HANDLING FEES AND COSTS

The Company does not charge its customers for shipping and handling.  The Company classifies shipping and handling costs as part of the Cost of sales, and these were $169,817 and $326,129 for the three month periods ended March 31, 2010 and 2009, respectively.

NOTE 13 – WARRANTY

The Company evaluates its exposure to warranty claims based on both current and historical product sales data and warranty costs incurred.  The Company assesses the adequacy of its recorded warranty liability annually and adjusts the amount as necessary.  As of March 31, 2010 the Company believed that it had no material warranty claims. The warranty liability would be included in accrued expenses in the accompanying balance sheet.  
  
NOTE 14– INCOME TAXES

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

The Company is subject to the Income Tax Laws of PRC. All of the tax provisions for the three month period ended March 31, 2010 and 2009 pertain to PRC taxes. Effective on January 1, 2008, the PRC Enterprise Income Tax (“EIT”) Law, and Implementing Rules impose a unified enterprise income tax rate of 25% on all domestic-invested enterprises and foreign investment enterprises in China, unless they qualify under certain limited exception. Most of the Company’s operations units are subject to this tax.

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

During three months ended March 31, 2010 and March 31, 2009, the benefit that the Company received from this Tax Holiday was $210,274 and $71,503, respectively.
The reconciliations of the PRC statutory tax rate to the Company’s effective tax rate for the three months periods ended March 31of 2010 and 2009 are as follows:

 
15

 
 
   
Three months ended March 31,
 
   
2010
   
2009
 
PRC Statutory Tax rate
    25 %     25 %
Tax Holiday
    (3.6 )%     (2.9 )%
Tax Benefit from lower tax rate region (Hong Kong)
    (2.6 )%     -  
Inability to record tax benefit on U.S. losses
    1.5 %     1.4 %
Other
    0.3 %     2.0 %
Effective Tax Rate
    20.6 %     25.5 %
 
 

Due to the uncertainty surrounding the realization of the U.S. net operating losses in future tax returns, we continue to record a full valuation allowance against our otherwise recognizable U.S. net deferred tax assets as of March 31, 2010 and December 31, 2009.  These Net Operating Losses expire from 2027 to 2030.

Deferred Tax Assets consist of the following:

   
As of March 31,
2010
   
As of December 31,
2009
 
Deferred Tax Asset – U.S. NOL’s
  $ 706,375     $ 583,931  
Valuation Allowance
    (706,375 )     (583,931 )
Total Deferred Taxes
  $ 0     $ 0  

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

   
As of March 31,
2010
   
As of December 31,
2009
 
Accumulated operating losses
  $ 2,018,217     $ 1,668,375  


NOTE 15 – SEGMENT REPORTING

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

During the first quarter of 2010, management conducted the annual review of the Company’s segment reporting and decided to revise the segments in order to be consistent with the Company’s updated business operation. The Company now has four new reportable segments:  (1) Barbeque Grills and Skateboards (2) Fans and Lightings, (3) Other Trading, (4) Corporate.
 
 
16

 
 
 
 
Barbeque Grills & Skateboards
   
Fans & Lightings
   
Other Trading
   
Corporate
   
Total
 
 
 
For the three months ended
3/31/10
   
For the three months ended
3/31/09
   
For the three months ended 3/31/10
   
For the three months ended 3/31/09
   
For the three months ended 3/31/10
   
For the three months ended 3/31/09
   
For the three months ended 3/31/10
   
For the three months ended 3/31/09
   
For the three months ended 3/31/10
   
For the three months ended 3/31/09
 
Net sales
  $ 3,066,166     $ 6,240,229     $ 23,143,744     $ 7,981,956     $ 3,850,727     $ 1,206,929     $ -     $ -     $ 30,060,637     $ 15,429,114  
Depreciation and amortization
  $ 41,609     $ 175,681     $ 300,568     $ 217,411     $ 56     $ 35,393     $ -     $ -     $ 342,233     $ 428,485  
Segment operational income (loss)   $ 484,277     $ 529,454     $ 4,670,090     $ 2,025,444     $ 607,387     $ 1,059     $ (434,787 )   $ (198,156 )   $ 5,326,967     $ 2,357,801  
Total assets
    11,925,336       40,657,000       70,091,528       67,588,202       8,241,306       -       11,380,190       11,295,845       101,638,360       119,541,047  
Capital expenditures
  $ 611     $ 24,389     $ 125,423     $ 18,442     $ -     $ -     $ -     $ -     $ 126,034     $ 18,442  

 
17

 
 
NOTE 16– CONCENTRATIONS, RISK AND UNCERTAINTIES

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

   
Three months ended March 31,
 
   
2010
   
2009
 
Zhongshan City Heng Bao Trading Co., Ltd
    60 %     66 %
WaiYi (HK) Limited
    24 %     26 %

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


   
Three months ended March 31,
 
   
2010
   
2009
 
Zhongshan City Heng Bao Trading Co., Ltd
    65 %     67 %
WaiYi (HK) Limited
    14 %     29 %

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 March 31,
 
   
2010
   
2009
 
Zhongshan City Oceanic International Company Limited
    12 %     13 %
Hubei Xin Cheng Industry & Trade Company Limited
    11 %     12 %

 
18

 
 
NOTE 17 – COMMITMENTS AND CONTINGENCIES

Operating Leases

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

Year
     
2010
  $ 576,843  
2011
    769,124  
2012
    666,849  
2013
    360,027  
2014
    60,005  
    $ 2,432,848  

Rental expenses were $360,874 and $124,308 for the three months ended March 31, 2010 and 2009, respectively.


NOTE 18 – SUBSEQUENT EVENTS

For the quarter ended March 31, 2010, the Company has evaluated subsequent events for potential recognition and disclosure from April 1, 2010 through the date of filing the financial statements with the SEC.

On April 1, 2010, Home System Group entered into Note Conversion Agreements with five debt holders to convert the amounts owed to them by the Company totaling of $17,542,774 into 5,012,221 shares Company’s common stock at a conversion rate of $3.50 per share as set forth in detail below:

Note Holder
 
Principal Amount
   
Number of Shares Issued
 
Total Shine Group Limited (1)
  $ 1,600,000       457,142  
Victory High Investments Limited (1)
    2,000,000       571,428  
Think Big Trading Limited (1)
    2,900,000       828,571  
Simple (Hong Kong) Investment & Management (2)
    3,953,462       1,129,559  
Chen Xiaohong and Jiao Liming (3)
    7,089,312       2,025,517  
Total
  $ 17,542,774       5,012,221  

(1)
This pertains to a non-interest bearing note along with the Fixed Price Standby Equity Distribution Agreement as discussed in NOTE 10 – NOTES PAYABLE.
(2)
This is part of the amount of “DUE TO STOCKHOLDER” as discussed in NOTE 11.
(3)
This is part of the final installments of payment to Asia Forever former shareholders as discussed in NOTE 10 – NOTES PAYABLE.
 
 
The conversion rate $3.50 is lower than $3.86, which is the 30 trading days average price of the common stock at the time of the conversion, resulting in a loss of $1,822,762 that will be reflected in the Company’s the second quarter financials.

The number of total outstanding shares of Home System Group increased to 67,490,170 upon this issuance.
 
 
19

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

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

 
Results of Operations

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

   
Three months ended
   
Increase
(Decrease)
   
Percentage Increase
(Decrease)
 
March 31, 2010
   
March 31, 2009
Net sales
 
$
30,060,637
   
$
15,429,114
   
$
14,631,523
     
94.8%
 
Costs of sales
   
(23,114,501)
     
(11,656,538)
     
(11,457,963)
     
98.3%
 
Gross profit
   
6,946,136
     
3,772,576
     
  3,173,560
     
84.1%
 
General selling and administrative expenses
   
(1,619,169)
     
           (1,414,775)
     
   (204,394)
     
14.4%
 
Income from operations
   
5,326,967
     
             2,357,801
     
 2,969,166
     
125.9%
 
Other income
   
   832,513
     
   61,737
     
    770,776
     
N/A
 
Interest expense, net
   
 (376,759)
     
(370,388)
     
(6,371)
     
N/A
 
Income before  taxes
   
5,782,721
     
                2,049,150
     
 3,733,571
     
182.2%
 
Income taxes
   
(1,194,044)
     
            (522,625)
     
  (671,419)
     
128.5%
 
Net income (loss)
 
$
4,588,677
   
$
           1,526,525
   
$
 3,062,152
     
200.6%
 

Sales Revenue

Total consolidated sales for three months ended March 31, 2010 was $30,060,637, an increased of $14,631,523 as compared to $15,429,114 for three month period ended March 31, 2009, primarily driven by the higher sales of fans and lightings of $15,161,788 in the first quarter of 2010 over the comparable period of 2009 and higher revenue of $2,643,798 generated by international trading in 2010 over the comparable period last year. However, these increased sales were partially offset by a decrease of $3,174,063 in sales of barbeque grills and skateboards.

 
20

 
 
        
    Net revenue by Segment
   
Three months ended
March 31, 2010
 
Three months ended
March 31, 2009
Segment
     
Percent of total
     
Percent of total
Fans & Lightings
 
$
23,143,744
 
76.9%
 
7,981,956
 
51.7%
Other Trading
   
    3,850,727
 
12.9%
   
    1,206,929
 
 7.9%
Barbeque Grills & Skateboards
   
      3,066,166
 
10.2%
   
6,240,229
 
40.4%
Total
 
$
  30,060,637
 
100%
 
$
  15,429,114
 
 100%


 
Three months ended March 31,
2010 vs. 2009
Segment
Percent increase of net revenue
Fans & Lightings
    189.9%
Other Trading
    219%
Barbeque Grills & Skateboards
    (50.9)%

The reasons for revenue for each segment are as follows:

Fans & Lightings – Fans and lightings became our major products since the acquisition of Weihe in late 2008 and due to their higher gross profit margins, the Company has redistributed resources and facilities to the of fans and lightings segments. As a result of Weihe’s strong stable sales network, the revenue of fans and lightings increased by $15,161,788 to $23,143,744 for three months ended March 31, 2010.

Other Trading – The revenue consists of the Company’s purchasing small home appliances from local manufacturers in China, and then exporting those goods to international buyers. In the first quarter of 2010, the revenue was $3,850,727, increased by $2,643,798 over the revenue of $1,206,929 in the first quarter of 2009 due to some large transactions in 2010.

Barbeque Grills & Skateboards – The revenue from this segment is from barbeque grills, skateboards and some other small home appliances accessories. In the first quarter of 2010, the Company recorded revenue of $499,611 from the sales of barbeque grills, a large decrease from $5,416,067 in the first quarter of 2009. This dramatic decrease was resulted from the general weakness of gas grills market and the change in Company’s strategy plan of allocating more production resources to the Fans and Lightings segments. Due to the financial issues at one of our major gas grills’ clients, the orders level decreased below levels that we feel are necessary to provide adequate profit margin. As a result, management decided to not accepting orders with low profit margin, to restructure our product composition and provide the resources to fans and lightings. The revenue of skateboards was strong with revenue of $2,316,913 for the three months ended March 31, 2010, an increase of $1,492,751 from the revenue of $824,162 in comparable period in 2009.

Costs of Sales and Gross Profit
 
 
Three months ended March 31,
 
2010
 
2009
         
% of Sales Revenue
       
% of Sales Revenue
Cost of Sales
 
$
23,114,501
 
76.9%
 
$
11,656,538
 
75.6%
Gross Profit
 
$
6,946,136
 
23.1%
 
$
  3,772,576
 
24.4%

The Company reported cost of sales of $23,114,501 for the three months ended March 31, 2010, an increase of $11,457,963 from the corresponding 2009 level.  This increase was primarily the result of the higher volume of Fans and Lightings sales and International trading activity, which resulted in increased cost of sales of $10,986,410 and $2,781,174 over the comparable period of 2009, respectively. This was offset by lower cost of sales of Barbeque Grills & Skateboards segment due to its lower revenue as discussed above. Cost of sales as a percentage of revenue for the three months ended March 31, 2009 decreased slightly compared to the prior fiscal three month period.
 
 
21

 
 
General Selling and Administrative Expenses

The Company’s general selling and administrative expenses increased by $204,394 for the three months ended March 31, 2010, as compared to level in 2009. This amount was higher primarily due to the higher payroll expense and utilities resulted from increased sales volume of manufactures as discussed above.
 
 Income from Operations

Income from operations increased by $2,969,166 for the three months ended March 31, 2010, as compared to three months ended March 31, 2009, largely due to the increased revenue and operating profit resulted from favorable performance in the sales of fans and lightings.

   
Three months ended
March 31, 2010
 
Three months ended
March 31, 2009
Segment
     
Percent of Income
     
Percent of Income
Fans & Lightings
 
$
  4,670,090
 
87.6%
 
$
   2,025,444
 
85.9%
Other Trading
   
607,387
 
11.4%
   
      1,059
 
N/A
Barbeque Grills & Skateboards
   
484,277
 
     9%
   
 529,454
 
22.5%
Corporate
   
  (434,787)
 
     (8)%
   
(198,156)
 
(8.4)%
Total
 
$
  5,326,967
 
100%
 
$
2,357,801
 
100%

 
Income from Fans and Lightings increased $2,644,646 to $4,670,090, resulting from the higher revenue as discussed above.

Income from operation of Other Trading was $607,387 for three months ended March 31, 2010 increased by $606,328 over the corresponding 2009 level. This increase was due to the higher revenue as discussed above as well as 2010 had transactions which has higher profit margins.

Income from operation of Barbeque Grills and Skateboards was $484,277, decrease of $45,177 or 8.5% compared to the corresponding period 2009 level. The slightly decrease in percentage of income from operation primarily due to the lower revenue of $3,174,063 but higher profit margin of the orders that we received during the current three month period.

Other Income
 
Other income increased by $770,776 for the three months ended March 31, 2010 as compared the three months ended March 31, 2009, largely due to the gain on sales of excess raw materials consisting of stainless steel cold coil in the amount of $682,647.

Interest Expense, Net
 
Net interest expense was $376,759 in the first quarter of 2010, remaining consistent with the $370,388 recorded in the first quarter of 2009.

Net Income before Income Taxes

The Company reported net income before taxes of $5,782,721 for the three months ended March 31, 2010, representing an increase of $3,733,571 from the pre-tax income of $2,049,150 recorded during first quarter of 2009. This increase was primarily driven by the higher revenue resulting from manufacture of fans and lightings and other income, partially offset by the lower sales of barbeque grills as discussed above.

 
22

 
 
Taxes

The Company recorded a tax provision of $1,194,044, representing 20.6% of its pre-tax income.  This is an increase over the comparable period in 2009 tax provision of $522,625, or 25% of pre-tax income due to the $3,733,571 increase in the first quarter of 2010 pre-tax income, partially offset by the effect of the income of $607,082 from international business trading which was not subject to tax due to the tax policy in Hong Kong, where the sales were located, a transitional Tax Holiday benefit pertaining to the Company operations.

Net Income

As a result of the increased level of net income before taxes, the Company realized net income of $4,588,677 for the three months ended March 31, 2010, an increase of $3,062,152 from the prior year. This improvement reflects the increased revenue discussed above.

 
23

 
 
Liquidity and Capital Resources
 
As of December 31, 2009, cash and cash equivalents were $4,028,710 as compared to $3,985,782 as of December 31, 2008. The components of this increase of $42,928 are reflected below.

Cash Flow
 
   
Three months ended March 31,
 
   
2010
   
2009
 
Net cash provided (used) by operating activities
 
$
(6,376,391)
   
$
1,947,682
 
Net cash provided (used) by investing activities
   
(126,034)
     
714,078
 
Net cash provided by financing activities
   
6,543,474
     
8,134,996
 
Exchange rate effect on cash
   
1,879
     
(18,513)
 
Net cash inflow (outflow)
 
$
42,928
   
$
10,778,243
 
 
Net cash provided (used) by operating activities
 
Cash has historically been generated from operations and short-term borrowings. The negative cash flow from operating activities was principally attributed to the net income generated during the three months ended March 31, 2010, which was $4,588,677, and also the decrease of $6,722,298 in inventories. However, these benefits were more than offset by reduced levels of accounts payable and an increase of $13,937,622 of account receivables, the latter being the result of the higher revenue of $14,631,523 in the first quarter of 2010 over the comparable period in 2009. 
 
Net cash provided (used) in investing activities
 
There were no significant needs for plant and facility expansion during the first three months of 2010 and thus only $126,034 of cash was used in investing activities for the three months then ended.
 
Net cash provided by financing activities

The Company financed the operational negative cash flow by obtaining $11,118,274 funding from net bank loans, partially offset by the increase of $4,892,528 in notes receivables.
 
We had a working capital deficit for March 31, 2010 of $2,327,694 as compared to $1,242,215 at December 31, 2009, reflecting the higher receivables of $13,935,764, offset by lower inventories of $6,722,619, the increased level of bank loans of $9,652,944, higher notes payable - current portion and the $7,089,312 of long term debt which has been reclassified to current liabilities as of March 31, 2010 due to the Notes conversion agreements signed on April 1, 2010.

On April 1, 2010, we converted debt totaling $17,542,774 into common shares at the conversion rate of $3.50. Upon this conversion, our current liabilities have been substantially decreased, yielding a positive working capital.
 
We believe that our available funds and cash flows generated from operations and short term borrowings will be sufficient to meet our anticipated ongoing operating needs for the next twelve months. However it is possible that the Company might need to raise additional capital if it decides to make one or more substantial acquisitions. There can be no guarantee that we will be able to obtain such funding, whether through the issuance of debt or equity, on terms satisfactory to management and our Board of Directors.

Off-Balance Sheet Arrangements

We do not have any off-balance arrangements.
 
 
24

 
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not Applicable.

Item 4T. Evaluation of Disclosure Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

An evaluation was conducted under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”), its principal executive officer, and Chief Financial Officer (“CFO”), its principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of March 31, 2010. Based on that evaluation, the CEO and CFO concluded that there had been substantial improvements of the Company’s disclosure controls and procedures and the manner in which information that is required to be disclosed in Exchange Act report is reported within the time period specified in the SEC’s rule and forms. CEO has concluded that our disclosure controls and procedures were effective as of March 31, 2010.

Changes in Internal Control over Financial Reporting

In order to further enhance our disclosure and internal controls, the Company’s financial consultants 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.

 
25

 
 
PART II – OTHER INFORMATION
Item 1.   Legal Proceedings.

None.

Item 1A.   Risk Factors.

Not Applicable.

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

None.

Item 3.   Defaults Upon Senior Securities.

None.

Item 4.  Other Information.

None.

Item 5.  Exhibits.

(a) Exhibits

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

 
26

 
 
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: May 17, 2010
By:
/s/ Lei Yu
 
   
Lei Yu
 
   
Chief Executive Officer
 
    (Principal Executive Officer)  
       
       
Date: May 17, 2010
By:
/s/ Jianming Xu
 
   
Jianming Xu
 
   
Chief Financial Officer
(Principal Financial and Accounting Officer)
 
       


27

 

EX-31.1 HTML

ex31-1.htm

Exhibit 31.1
 
CERTIFICATION PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-14(a) and 15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002
 
I, Lei Yu, certify that:
 
1. I have reviewed this Quarterly Report on Form 10-Q of Home System Group;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
 
(a)         designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)         designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements, for external purposes in accordance with generally accepted accounting principles;
 
(c)         evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)         disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)         all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)         any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: May 17, 2010
 
By:
/s/ Lei Yu
 
 
Lei Yu
Chief Executive Officer
(Principal Executive Officer)
 

EX-31.2 HTML

ex31-2.htm

Exhibit 31.2
 
CERTIFICATION PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-14(a) and 15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002
 
I, Jianming Xu, certify that:
 
1. I have reviewed this Quarterly Report on Form 10-Q of Home System Group;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
 
(a)         designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)         designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements, for external purposes in accordance with generally accepted accounting principles;
 
(c)         evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)         disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)         all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)         any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: May 17, 2010
 
By:
/s/ Jianming Xu
 
 
Jianming Xu
Chief Financial Officer (Principal Accounting and Financial 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
 
In connection with the Quarterly Report of Home Systems Group on Form 10-Q for the fiscal quarter ended March 31, 2010 as filed with the Securities and Exchange Commission on the date here of, I, Yu Lei, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 
1. The Report complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
 
Date: May 17, 2010
 
/s/ Lei Yu 
 
Lei Yu
Chief Executive Officer (Principal Executive Officer)
 
 

EX-32.2 HTML

ex32-2.htm

Exhibit 32.2
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Home Systems Group on Form 10-Q for the fiscal quarter ended March 31, 2010 as filed with the Securities and Exchange Commission on the date here of, I, Jianming Xu, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 
1. The Report complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date: May 17, 2010
 
/s/ Jianming Xu
 
Jianming Xu
Chief Financial Officer (Principal Accounting and Financial Officer)