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
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: 000-53075
DATONE,
INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
16-1591157
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification Number)
|
|
Qingdao
Hongguan Shoes Co., Ltd.
269
First Huashan Road
Jimo
City, Qingdao, Shandong, PRC
|
|
|
(Address
of principal executive office and zip code)
|
|
86-532-86595999
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
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 o
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 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, 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.
|
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 May 10,
2010
|
|
|
Common
Stock, $0.0001 par value per share
|
8,100,000
shares
|
TABLE
OF CONTENTS
|
PART
I.
|
FINANCIAL
INFORMATION
|
3
|
|
|
ITEM
1.
|
FINANCIAL
STATEMENTS
|
3
|
|
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
11
|
|
|
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
18
|
|
|
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
18
|
|
|
PART
II.
|
OTHER
INFORMATION
|
19
|
|
|
ITEM
1.
|
LEGAL
PROCEEDINGS
|
19
|
|
|
ITEM 1A
|
RISK FACTORS
|
19
|
|
|
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
19
|
|
|
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
19
|
|
|
ITEM
4.
|
RESERVED
|
19
|
|
|
ITEM
5.
|
OTHER
INFORMATION
|
19
|
|
|
ITEM
6.
|
EXHIBITS
|
19
|
|
|
SIGNATURES
|
20
|
||
2
FINANCIAL
INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
|
DATONE,
INC.
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
AS
OF MARCH 31, 2010 AND DECEMBER 31, 2009
UNAUDITED
|
|
March
31,
2010
|
December
31,
2009
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets
|
||||||||
|
Cash
|
$ | 378,219 | $ | 61,131 | ||||
|
Accounts
receivable
|
1,802,899 | 98,962 | ||||||
|
Notes
receivable
|
440,100 | - | ||||||
|
Inventories
|
385,266 | 344,512 | ||||||
|
Prepaid
expenses
|
231,165 | 57,311 | ||||||
|
Total
current assets
|
3,237,649 | 561,916 | ||||||
|
Property,
plant and equipment, net
|
913,651 | 930,451 | ||||||
|
Intangible
assets
|
206,957 | 208,167 | ||||||
|
Total
Assets
|
$ | 4,358,257 | $ | 1,700,534 | ||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities
|
||||||||
|
Accounts
payable and accrued liabilities
|
$ | 135,812 | $ | 15,727 | ||||
|
Short
term loans
|
1,158,930 | 718,830 | ||||||
|
Corporate
Income taxes payable
|
1,327,308 | 2,627 | ||||||
|
Duet
to related parties
|
- | 221,871 | ||||||
|
Total
current liabilities
|
2,622,050 | 959,055 | ||||||
|
Long-term
debt
|
249,390 | 249,390 | ||||||
|
Total
Liabilities
|
$ | 2,871,440 | $ | 1,208,445 | ||||
|
Shareholders’
Equity
|
||||||||
|
Series
A stock, .0001 par value, 10,000,000 shares authorized, 10,000 and zero
shares issued and outstanding, respectively, See Footnote
8
|
1 | 1 | ||||||
|
Common
stock, .0001 par value, 100,000,000 shares authorized, 8,100,000 shares
issued and outstanding
|
810 | - | ||||||
|
Additional
paid-in capital
|
319,669 | 320,479 | ||||||
|
Accumulated
other comprehensive income
|
441,116 | 440,775 | ||||||
|
Retained
earnings (deficits)
|
725,221 | (269,166 | ) | |||||
|
Total
Shareholders’ Equity
|
$ | 1,486,817 | $ | 492,089 | ||||
|
Total
Liabilities and Shareholders' Equity
|
$ |
4,358,257
|
$ |
1,700,534
|
||||
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
3
|
DATONE,
INC.
|
||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
|
||||||
|
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
|
||||||
|
UNAUDITED
|
|
Three
Months Ended
|
||||||||
|
March
31,
2010
|
March
31,
2009
|
|||||||
|
Net
sales
|
$ | 4,765,812 | $ | 4,455,898 | ||||
|
Cost
of sales
|
2,656,755 | 2,522,338 | ||||||
|
Gross
profit
|
2,109,057 | 1,933,560 | ||||||
|
Operating
expenses:
|
||||||||
|
Selling,
general and administrative expenses
|
260,110 | 218,547 | ||||||
|
Depreciation
and Amortization Expense
|
18,005 | 13,133 | ||||||
|
Income
from operations
|
1,830,942 | 1,701,880 | ||||||
|
Other
income (expense)
|
||||||||
|
Rental
income
|
21,998 | 21,977 | ||||||
|
Interest
income
|
89 | 533 | ||||||
|
Interest
expense
|
(22,906 | ) | (13,499 | ) | ||||
|
Income
before income taxes
|
1,830,123 | 1,710,891 | ||||||
|
Income
taxes
|
457,531 | 427,723 | ||||||
|
Net
income
|
$ | 1,372,592 | $ | 1,283,168 | ||||
|
Net
income per share – basic and diluted assuming the completion of the 1 to
27 reverse stock split and the conversion of the Series A Preferred Stock
See Footnote 8
|
$ | 0.14 | $ | 0.13 | ||||
|
Weighted
average shares outstanding-basic and diluted assuming the completion of
the 1 to 27 reverse stock split and the conversion of the Series A
Preferred Stock, See Footnote 8
|
10,000,000 | 9,700,000 | ||||||
|
Net
income
|
$ | 1,372,592 | $ | 1,283,168 | ||||
|
Other
comprehensive income (loss)
|
||||||||
|
Foreign
currency translation
|
341 | (6,705 | ) | |||||
|
Comprehensive
income
|
$ | 1,372,933 | $ | 1,276,463 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
4
|
DATONE,
INC.
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
UNAUDITED
|
|
Three
Months Ended
|
||||||||
|
March
31,
2010
|
March
31,
2009
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net
income
|
$ | 1,372,592 | $ | 1,283,168 | ||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
|
Depreciation
and amortization
|
18,005 | 13,133 | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(1,703,936 | ) | (101,932 | ) | ||||
|
Inventories
|
(40,754 | ) | (323,926 | ) | ||||
|
Prepaid
expenses
|
(173,854 | ) | (43,140 | ) | ||||
|
Accounts
payable and accrued liabilities
|
120,086 | 7,805 | ||||||
|
Tax
payable
|
1,324,682 | 1,241,699 | ||||||
|
Net
cash provided by operating activities
|
916,821 | 2,076,807 | ||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
|
Loan
made to other
|
(440,100 | ) | - | |||||
|
Advance
to related party
|
(221,871 | ) | (1,879,489 | ) | ||||
|
Cash
paid for construction in progress
|
- | (75,124 | ) | |||||
|
Net
cash used in investing activities
|
(661,971 | ) | (1,954,613 | ) | ||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
|
Distribution
to shareholders
|
(378,205 | ) | - | |||||
|
Proceeds
from loans
|
440,100 | - | ||||||
|
Net
cash provided by financing activities
|
61,895 | - | ||||||
|
Effect
of exchange rate changes on cash
|
343 | (249 | ) | |||||
|
Net
increase in cash
|
$ | 317,088 | $ | 121,945 | ||||
|
Cash,
beginning of year
|
61,131 | 118,534 | ||||||
|
Cash,
end of year
|
$ | 378,219 | $ | 240,479 | ||||
|
SUPPLEMENTARY
DISCLOSURE:
|
||||||||
|
Interest
paid
|
$ | 22,906 | $ | 13,498 | ||||
|
Income
tax paid
|
$ | - | $ | - | ||||
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
5
DATONE,
INC.
NOTES
TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE
1 - ORGANIZATION AND BUSINESS OPERATIONS
Datone,
Inc. was originally incorporated on August 9, 2000 under the laws of the State
of Delaware. The Company operated as a wholly-owned subsidiary of USIP.COM, Inc.
On August 24, 2006, USIP decided to spin-off its subsidiary companies, one of
which was Datone, Inc. On February 1, 2008, Datone, Inc. filed a Form 10-SB
registration statement. On November 13, 2008, Datone, Inc. went
effective.
On
February 12, 2010, the Company completed a reverse acquisition transaction
through a share exchange with Glory Reach International Limited, a Hong Kong
limited company (“Glory Reach”), the shareholders of Glory Reach (the
“Shareholders”), Greenwich Holdings LLC and Qingdao Shoes, whereby the Company
acquired 100% of the issued and outstanding capital stock of Glory Reach in
exchange for 10,000 shares of our Series A Convertible Preferred Stock which
constituted 97% of our issued and outstanding capital stock on an as-converted
to common stock basis as of and immediately after the consummation of the
reverse acquisition. As a result of the reverse acquisition, Glory Reach became
our wholly-owned subsidiary and the former shareholders of Glory Reach became
our controlling stockholders. The share exchange transaction with Glory
Reach was treated as a reverse acquisition, with Glory Reach as the acquirer and
Datone, Inc. as the acquired party for accounting and financial reporting
purposes.
Datone
spun off all its assets and liabilities to its prior owners before the reverse
merger. For Glory Reach, reverse merger is accounted for as a reverse
merger with a shell company and as a recapitalization.
Glory
Reach International Limited (the “Company”) was established in Hong Kong on
November 18, 2009 to serve as an intermediate holding company. Mr.
Tao Wang, the controlling interest holder of Qingdao Shoes also controls the
Company. On February 8, 2010, also pursuant to the restructuring
plan, the Company acquired 100% of the equity interests in Qingdao
Shoes.
Qingdao
Shoes was incorporated on March 11, 2003 in Jimo County, Qingdao City, Shandong
Province, People’s Republic of China (the “PRC”) with registered capital of
$320,480. Prior to December 18, 2009, Mr. Tao Wang owned 80% of
Qingdao Shoes and the remaining 20% was owned by Mr. Renwei Ma. Starting from
December 18, 2009, Mr. Tao Wang owned 80% of Qingdao Shoes, Mr. Renwei Ma owned
15% and Mr. Wenyi Chen owned the remaining 5%. Qingdao Shoes is the
owner of the brand name “Hongguan” and principally engaged in the wholesale and
retail sales of fashion footwear primarily in the northeast region of
China.
Since
there is common control between the Glory Reach and Qingdao Shoes, for
accounting purposes, the acquisitions of Qingdao Shoes has been treated as a
recapitalization with no adjustment to the historical basis of their assets and
liabilities. The restructuring has been accounted for using the “as if” pooling
method of accounting and the operations were consolidated as if the
restructuring had occurred as of the beginning of the earliest period presented
in our consolidated financial statements and the current corporate structure had
been in existence throughout the periods covered by our consolidated financial
statements.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
These
accompanying unaudited interim consolidated financial statements of the Company
have been prepared in accordance with accounting principles generally accepted
in the United States of America and the rules of the Securities and Exchange
Commission, and should be read in conjunction with the December 31, 2009 audited
financial statements of the Company and the notes thereto as included in the
Company’s Form PRER14C filed on April 19, 2010. In the opinion of management,
all adjustments, consisting of normal recurring adjustments, necessary for fair
presentation of financial position and results of operations for the interim
periods presented have been reflected herein. The results of operations for
interim periods are not necessarily indicative of the results to be expected for
the full year. Notes to the consolidated financial statements, which would
substantially duplicate the disclosure required in the Company’s December 31,
2009 annual financial statements have been omitted.
All
significant inter-company balances and transactions have been eliminated in
consolidation. Certain prior period numbers are reclassified to conform to
current period presentation.
6
Use of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“US 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 dates of the financial statements and the amount of revenues and expenses
during the reporting periods. Management makes these estimates using
the best information available at the time the estimates are
made. However, actual results could differ materially from those
estimates.
Concentration of Credit
Risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and trade receivables. As
of March 31, 2010 and December 31, 2009, substantially all of the Company’s cash
were held by major financial institutions located in the PRC, which management
believes are of high credit quality. With respect to trade
receivables, the Company rarely extends credit to its customers. The
Company generally does not require collateral for trade receivables and has not
experienced any credit losses in collecting the trade receivables.
The
Company operates principally in the PRC and grants credit to its customers in
this geographic region. Although the PRC is economically stable, it is
always possible that unanticipated events in foreign countries could disrupt the
Company’s operations.
Comprehensive
Income
The
Company has adopted the provisions of ASC 220 “Reporting Comprehensive Income”
which establishes standards for the reporting and display of comprehensive
income, its components and accumulated balances in a full set of general purpose
financial statements.
ASC 220
defines comprehensive income is comprised of net income and all changes to the
statements of stockholders’ equity, except those due to investments by
stockholders, changes in paid-in capital and distributions to stockholders,
including adjustments to minimum pension liabilities, accumulated foreign
currency translation, and unrealized gains or losses on marketable
securities. The Company’s other comprehensive income arose from the
effect of foreign currency translation adjustments.
Value Added
Taxes
The
Company is subject to value added tax (“VAT”) for selling
merchandise. The applicable VAT rate is 17% for products sold in the
PRC. The amount of VAT liability is determined by applying the
applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT
paid on purchases made with the relevant supporting invoices (input
VAT). Under the commercial practice of the PRC, the Company pays VAT
based on tax invoices issued. The tax invoices may be issued
subsequent to the date on which revenue is recognized, and there may be a
considerable delay between the date on which the revenue is recognized and the
date on which the tax invoice is issued. In the event that the PRC
tax authorities dispute the date on which revenue is recognized for tax
purposes, the PRC tax office has the right to assess a penalty based on the
amount of the taxes which are determined to be late or deficient, and will be
expensed in the period if and when a determination is made by the tax
authorities that a penalty is due.
Revenue
Recognition
Retail
sales are recognized at the point of sale to customers, are recorded net of
estimated returns, and exclude value added tax(“VAT”). Whole-sales to
its contracted customers are recognized as revenue at the time the product is
shipped and title passes to the customer on an FOB shipping point
basis.
Earnings per
Share
Basic
earnings per share is computed by dividing net income by weighted average number
of shares of common stock outstanding during each period. Diluted
earnings per share is computed by dividing net income by the weighted average
number of shares of common stock, common stock equivalents and potentially
dilutive securities outstanding during each period. At March 31, 2010
and December 31, 2009, respectively, the Company had no common stock equivalents
that could potentially dilute future earnings per share.
7
The
Company advanced $440,100 to a third party in January 2010. The note receivable
carries annual interest at 10% and matures in July 2010.
NOTE
4 - SHORT TERM LOANS
Short-term
loans are due to two financial institutions which are normally due within one
year. As of March 31, 2010 and December 31, 2009, the Company’s short
term loans consisted of the following:
|
March
31, 2010
|
December
31, 2009
|
|||||||
|
JMRB,
two 12-month bank loans both due in November 2010, bears annual interest
at 7.965% average, secured by third parties
|
293,400 | 293,400 | ||||||
|
BOQ,
12-month bank loan due in September 2010, bears annual interest at 6.372%
average, pledged by Company’s building and land use right
|
425,430 | 425,430 | ||||||
|
JMRB,
12-month bank loan due in December 2010, bears annual interest at
7.965% average, secured by third parties
|
440,100 | - | ||||||
|
Total
short-term debt
|
$ | 1,158,930 | $ | 718,830 | ||||
The above indebtedness to JMRB at
March 31, 2010 and December 31, 2009 has been guaranteed by two unrelated
companies.
NOTE
5 – LONG TERM LOANS
On
December 16, 2009, the Company entered into a 2-year loan agreement with
JMRB. The Company borrowed $249,390 with an annual interest rate
equal to 7.02% and is due in December 2011. The loan is guaranteed by
the relatives of Mr. Tao Wang, the CEO and major shareholder of the Company and
is collateralized by the property of his relatives.
NOTE
6 - RELATED PARTY BALANCES AND TRANSCATIONS
Due to related
party
At
December 31, 2009, the amount due to Mr. Tao Wang, the CEO and major shareholder
of the Company amounted to $104,511. These borrowings bear no interest and were
paid off in first quarter 2010.
At
December 31, 2009, the dividend payable to Mr. Renwei Ma, the shareholder of the
Company was $117,360, which was paid off in the first quarter of
2010.
Related party
transactions
The
Company leases one of its stores from Mr. Tao Wang under a four-year operating
lease expiring August 2011. For the three months ended March 31, 2010
and 2009, related party rent expense of $4,400 and $4,395, respectively, was
included in total rent expense of the year.
The
Company leases one of its warehouse buildings to Weidong, Liang, brother-in-law
of Mr. Tao Wang, for three years starting May 2008. Per the agreement, the
lessee shall pay equal amount of advertising expense on behalf of the lessor as
the lease payment. For the three months ended March 31, 2010 and 2009, the
Company recorded other income of $21,998 and $21,977 respectively, from leasing
the aforementioned building and advertising expense of the same amount
respectively.
8
NOTE
7 - INCOME TAX
The
Company is governed by the Income Tax Law of the PRC concerning the private-run
enterprises, which are generally subject to tax at a statutory rate of 25% on
income reported in the statutory financial statements.
|
Three
Months Ended March 31, 2010
|
Three
Months Ended March 31, 2009
|
|||||||
|
Income
before income taxes
|
$ | 1,830,123 | $ | 1,710,891 | ||||
|
Income
taxes
|
$ | 457,531 | $ | 427,723 | ||||
| Effective tax rate | 25 | % | 25 | % | ||||
There is
no significant temporary difference between book and tax income.
The
Company has no United States income tax liabilities as of March 31,
2010 and December 31, 2009.
NOTE
8 – SHAREHOLDERS’ EQUITY
During
January 2010, the Company distributed $378,205 to its
shareholders.
Series A Convertible
Preferred Stock
The
Company issued 10,000 shares of our Series A Preferred Stock in February 2010
related to the reverse merger.
Shares of
Series A Preferred Stock will automatically convert into shares of common stock
on the basis of one share of Series A Preferred Stock for 970 shares of common
stock immediately subsequent to the effectiveness of a planned 1-for-27 reverse
split of the Company’s outstanding common stock, which will become effective on
the effective date of the “reverse stock split. Upon the reverse
split the 10,000 outstanding shares of Series A Preferred Stock will
automatically convert into 9,700,000 shares of common stock, which will
constitute 97% of the outstanding common stock of the Company subsequent to the
reverse stock split.
Holders
of Series A Preferred Stock vote with the holders of common stock on all matters
on an as-converted to common stock basis, based on an assumed post 1-for-27
reverse split (to retroactively take into account the reverse stock
split).
Following
the effectiveness of the Reverse Stock Split and conversion of Series A
Preferred Stock into common stock, there will be approximately 10,000,000 shares
of our common stock issued and outstanding and no shares of preferred stock
issued and outstanding.
The 1-for-27 Reverse Stock
Split
The
Company’s board of directors unanimously approved, subject to stockholder
approval, the 1-for-27 Reverse Split of our issued and outstanding common stock.
The reverse split will reduce the number of issued and outstanding shares of the
Company’s common stock outstanding prior to the split. The reverse split
increases the total number of issued and outstanding shares of the Company’s
common stock subsequent to the split by triggering the automatic conversion of
the Company’s Series A Preferred Stock into 9,700,000 shares of common stock.
The reverse split will become effective on the effective date which occurs when
the Company file with the Secretary of State of the State of Delaware following
the expiration of the 20 day period mandated by Rule 14c of the Exchange Act. On
the effective date, 27 shares of Common Stock will automatically be combined and
changed into one share of common stock. The table below sets forth, as of the
record date and as of the effective date, the following information both before
and after the proposed reverse split and assumes the conversion of all shares of
Series A Preferred Stock into shares of common stock at the applicable
conversion ratios:
9
|
Capital
Structure prior to conversion of issued and outstanding Series A Preferred
Stock on Pre-Reverse Split Basis
|
Capital
Structure after the Reverse Split and automatic conversion of Series A
Preferred Stock
|
|||||||
|
(As
of Record Date)
|
(On
Effective Date)
|
|||||||
|
Issued
and outstanding Common Stock
|
8,100,000 | 10,000,000 | ||||||
|
Issued
and outstanding Series A Preferred Stock
|
10,000 | -0- | ||||||
|
Common
Stock reserved for issuance upon conversion of Series A Preferred
Stock
|
9,700,000 | -0- | ||||||
|
Authorized
but unissued and unreserved Common Stock
|
82,200,000 | 90,000,000 | ||||||
As of the
filing date of the 10Q, the above reverse split is not effective yet. It is
expected to be effective within the next 30 days, based on management
assessment.
The
following is a pro forma earning per share calculation assuming successful
completion of the 1 to 27 stock reverse split and the conversion of the Series A
convertible preferred stock to 9,700,000 shares of common stock on a post
reverse split basis.
|
Three
Months Ended
|
||||||||
|
March
31,
|
March
31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Net
income
|
$ | 1,372,592 | $ | 1,283,168 | ||||
|
Pro
forma net income per share – basic
|
$ | 0.14 | $ | 0.13 | ||||
|
Pro
forma weighted average shares outstanding-basic
|
10,000,000 | 9,700,000 | ||||||
NOTE
9 – COMMITMENTS AND
CONTINGECIES
Guarantees
At March
31, 2010 and December 31, 2009, we had two outstanding guarantees provided to
two unrelated companies for their bank loan amount of $293,400 and $146,700,
respectively. The two unrelated companies also provided guarantees to us
for a bank loan amounted $293,400 (Note 5).
Tax
liabilities
The tax
authority of the PRC Government
conducts periodic and ad hoc tax filing reviews on business enterprises
operating in the PRC after those enterprises had completed their relevant tax
filings, hence the Company’s tax filings may not be finalized. It is therefore uncertain as to whether
the PRC tax authority may take different views about the Company’s tax filings which may lead to
additional tax liabilities.
10
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This
Quarterly Report on Form 10-Q for the three months ended March 31, 2010 contains
“forward-looking statements” within the meaning of Section 21E of the Securities
and Exchange Act of 1934, as amended, including statements that include the
words “believes,” “expects,” “anticipates,” or similar
expressions. These forward-looking statements include, among others,
statements concerning our expectations regarding our working capital
requirements, financing requirements, business, growth prospects, competition
and results of operations, and other statements of expectations, beliefs, future
plans and strategies, anticipated events or trends, and similar expressions
concerning matters that are not historical facts. The forward-looking
statements in this Quarterly Report on Form 10-Q for the three months ended
March 31, 2010 involve known and unknown risks, uncertainties and other factors
that could cause our actual results, performance or achievements to differ
materially from those expressed in or implied by the forward-looking statements
contained herein.
Overview
We are a
designer and retailer of branded footwear in Northern China. We were
organized to service what we believe is an unmet and increasing demand for high
quality formal and casual footwear throughout the PRC. As urbanization and
individual purchasing power has increased in China, the demand for leather
footwear has also grown.
Our
principal business includes (1) the design or selection of design for men’s and
women’s leather shoe lines; (2) sourcing and purchase of the contract
manufactured footwear; and (3) retail and sales of said footwear
under our proprietary brand, “Hongguan.” We operate a number of flagship stores
throughout greater Qingdao. Our products are also brought to market through
our extensive distribution network of authorized independent distributors as
well as through third party retailers selected to operate exclusive Hongguan
brand stores on our behalf. Our company headquarters and main sales office
is located in Shandong province in northern China, in the city of Jimo, less
than 25 miles from the major urban center of Qingdao.
Datone,
Inc. was originally incorporated on August 9, 2000 under the laws of the State
of Delaware. The Company operated as a wholly-owned subsidiary of USIP.COM, Inc.
On August 24, 2006, USIP decided to spin-off its subsidiary companies, one of
which was Datone, Inc. On February 1, 2008, Datone, Inc. filed a Form 10-SB
registration statement. On November 13, 2008, Datone, Inc. went
effective.
Datone,
Inc. was a provider of both privately owned and company owned payphones
(COCOT’s) and stations in New York. The Company receives revenues from the
collection of the payphone coinage, a portion of usage of service from each
payphone and a percentage of long distance calls placed from each payphone from
the telecommunications service providers. In addition, the Company also receives
revenues from the service and repair of privately owned payphones and sales of
payphone units.
On
February 12, 2010, the Company completed a reverse acquisition transaction
through a share exchange with Glory Reach International Limited, a Hong Kong
limited company (“Glory Reach”), the shareholders of Glory Reach (the
“Shareholders”), Greenwich Holdings LLC and Qingdao Shoes, whereby the Company
acquired 100% of the issued and outstanding capital stock of Glory Reach in
exchange for 10,000 shares of our Series A Convertible Preferred Stock which
constituted 97% of our issued and outstanding capital stock on an as-converted
to common stock basis as of and immediately after the consummation of the
reverse acquisition. As a result of the reverse acquisition, Glory Reach became
our wholly-owned subsidiary and the former shareholders of Glory Reach became
our controlling stockholders. The share exchange transaction with Glory
Reach was treated as a reverse acquisition, with Glory Reach as the acquirer and
Datone, Inc. as the acquired party for accounting and financial reporting
purposes.
Immediately
following the closing of the reverse acquisition of Glory Reach, one of the
Shareholders transferred 337 of the 874 shares of Series A Convertible
Preferred Stock issued to him under the share exchange to certain persons
who provided services to Glory Reach’s subsidiaries, pursuant to share
allocation agreements that the Shareholder entered into with such service
providers.
Upon the
closing of the reverse acquisition, Craig H. Burton, our president and director,
Joseph J. Passalaqua, our secretary and director, and Joseph Meuse, our
director, submitted a resignation letter pursuant to which they resigned from
all offices that they held effective immediately and from their position as
our directors that became effective on the tenth day following the mailing by us
of an information statement to our stockholders that complies with the
requirements of Section 14f-1 of the Exchange Act, which have been mailed out on
March 8, 2010. In addition, our board of directors on February 12
appointed Tao Wang (Chairman), Renwei Ma and Lanhai Sun to fill the vacancies
created by such resignations, which appointments became effective upon the
effectiveness of the resignation of Craig H. Burton, Joseph J. Passalaqua and
Joseph Meuse on the tenth day following the mailing by us of the information
statement to our stockholders. In addition, our executive officers
were replaced by the Qingdao Shoes’ executive officers upon the closing of the
reverse acquisition as indicated in more detail below.
11
As a
result of our acquisition of Glory Reach, we now own all of the issued and
outstanding capital stock of Glory Reach, which in turn owns all of the
outstanding capital stock of Qingdao Shoes.
Since
there is common control between the Glory Reach and Qingdao Shoes, for
accounting purposes, the acquisitions of Qingdao Shoes has been treated as a
recapitalization with no adjustment to the historical basis of their assets and
liabilities. The restructuring has been accounted for using the “as if” pooling
method of accounting and the operations were consolidated as if the
restructuring had occurred as of the beginning of the earliest period presented
in our consolidated financial statements and the current corporate structure had
been in existence throughout the periods covered by our consolidated financial
statements.
Immediately
following the acquisition of Glory Reach, under an Agreement of Conveyance,
Transfer and Assignment of Assets and Assumption of Obligations (the “Conveyance
Agreement”), we transferred all of our pre-acquisition assets and liabilities to
our wholly-owned subsidiary, DT Communications, Inc. The Conveyance
Agreement is attached as Exhibit 10.5 to this Current Report on Form 8-K as
filed with the Securities and Exchange Commission on February 12, 2010 and is
incorporated herein by reference.
Our
Current Organizational Structure
All of
our business operations are conducted through our Hong Kong and Chinese
subsidiaries. The chart below presents our current organizational
structure.
Our
Growth Strategy
We
believe that the market for affordable, high quality footwear in China provides
us with attractive and sustainable growth opportunities.
12
We intend
to pursue the following strategies to achieve our goal:
|
1)
|
Continue
our aggressive marketing and advertising campaigns in order to gain brand
awareness.
|
|
2)
|
Expand
distributor and third party operator stores in prime locations to maximize
profits.
|
|
3)
|
Bring
more self owned stores online to increase higher margin
sales.
|
|
4)
|
Continue
to strive for excellence in quality, customer service and design in order
to attract new and retain repeat
customers.
|
|
5)
|
Leverage
our growing purchasing power with manufacturers to lower
costs.
|
Our
Products
Our
products consist of men and women’s footwear. Our designs are on the
whole targeted at consumers seeking business casual and formal leather shoes
appropriate for an office setting. Each year we design or commission
designs for more than 300 unique styles. We do not manufacture our
products, but instead outsource manufacturing to third parties. Our
designs are split roughly evenly between men’s and women’s
products. Designs are made based on collaboration between our sales
department and design department regarding market demand and assessment of
what will designs be fashionable in the upcoming season. As of March 31,
2010, Men’s footwear constituted 60% of revenue and women’s footwear the
remainder. 40% of sales were formal shoes, and the remaining 60% are
attributed to casual footwear.
The
following diagram details our current distribution channels:
As of
March 31, 2010, we had 12 flagship stores, 11 exclusive third party managed
retail outlets, and 192 outlets managed by distributors.
13
Distributors
We
identify suitable distributors and enter into distributorship agreements,
usually for a term of two years. Distributors purchase wholesale priced shoes
and vend them at sales points throughout China. We require our
distributors to implement, monitor compliance with and enforce our retail store
guidelines. Our distributors are independent third parties that
do not pay us any fee other than the purchase price for the purchase of our
products, nor do we pay them any incentives or fees.
Our
distribution contracts usually contain the following terms:
|
Geographic
limitation — distributors must sell our Hongguan branded
footwear within a specific authorized
location(s).
|
|
Wholesale price
— distributors pay a discounted wholesale price for our
products.
|
|
Payment and credit terms
— payment and credit terms are on a case by case
basis. The credit period is usually one month, and 25%
percent of our distributors prepay for their
stock.
|
|
Performance
— Qingdao Shoes typically retains the right to end
the agreement if a distributor does to meet sales
targets.
|
|
Exclusivity — the
distributorship agreements allow our distributors to sell our products
under the Hongguan brand on an exclusive basis. If there are
other brands featured at the distributor’s outlet, Hongguan brand shoes
must constitute a certain percentage, generally a majority, of product on
display. Furthermore, the products must be displayed according
to our standards.
|
|
Training
— training and instructional materials are provided to all of
our distributers regarding product display, decoration, and sales
techniques.
Renewal and
termination — we can renew contracts at our discretion
and can terminate contracts if contractual conditions including sales
targets are not met.
|
We do not
have a return policy with our distributors. In the event a
distributor is unable to sell their stock, we will attempt to help them relocate
it to a nearby Qingdao Shoes outlet.
Regulation
and Government Policy in China
Because
our principal operating subsidiary, Qingdao Shoes, is located in the PRC, our
business is regulated by the national and local laws of the PRC. We believe our
conduct of business complies with existing PRC laws, rules and
regulations.
General
Regulation of Businesses
We
believe we are in material compliance with all applicable labor and safety laws
and regulations in the PRC, including the PRC Labor Contract Law, the PRC
Production Safety Law, the PRC Regulation for Insurance for Labor Injury, the
PRC Unemployment Insurance Law, the PRC Provisional Insurance Measures for
Maternity of Employees, PRC Interim Provisions on Registration of Social
Insurance, PRC Interim Regulation on the Collection and Payment of Social
Insurance Premiums and other related regulations, rules and provisions issued by
the relevant governmental authorities from time to time, for our operations in
the PRC.
According
to the PRC Labor Contract Law, we are required to enter into labor contracts
with our employees. We are required to pay no less than local minimum wages to
our employees. We are also required to provide employees with labor safety and
sanitation conditions meeting PRC government laws and regulations and carry out
regular health examinations of our employees engaged in hazardous
occupations.
Foreign
Currency Exchange
The
principal regulation governing foreign currency exchange in China is the Foreign
Currency Administration Rules (1996), as amended (2008). Under these Rules, RMB
is freely convertible for current account items, such as trade and
service-related foreign exchange transactions, but not for capital account
items, such as direct investment, loan or investment in securities outside China
unless the prior approval of, and/or registration with, the State Administration
of Foreign Exchange of the People’s Republic of China, or SAFE, or its local
counterparts (as the case may be) is obtained.
14
Regulation
of Income Taxes
On March
16, 2007, the National People’s Congress of China passed a new Enterprise Income
Tax Law, or the New EIT Law, and its implementing rules, both of which became
effective on January 1, 2008. Before the implementation of the New EIT Law, FIEs
established in the PRC, unless granted preferential tax treatments by the PRC
government, were generally subject to an earned income tax, or EIT, rate of
33.0%, which included a 30.0% state income tax and a 3.0% local income tax. The
New EIT Law and its implementing rules impose a unified EIT rate of 25.0% on all
domestic-invested enterprises and FIEs, unless they qualify under certain
limited exceptions.
In
addition to the changes to the current tax structure, under the New EIT Law, an
enterprise established outside of China with “de facto management bodies” within
China is considered a resident enterprise and will normally be subject to an EIT
of 25% on its global income. The implementing rules define the term “de facto
management bodies” as “an establishment that exercises, in substance, overall
management and control over the production, business, personnel, accounting,
etc., of a Chinese enterprise.” If the PRC tax authorities subsequently
determine that we should be classified as a resident enterprise, then our
organization’s global income will be subject to PRC income tax of
25%.
Our
future effective income tax rate depends on various factors, such as tax
legislation, the geographic composition of our pre-tax income and non-tax
deductible expenses incurred. Our management carefully monitors these legal
developments and will timely adjust our effective income tax rate when
necessary.
Dividend
Distribution
Under
applicable PRC regulations, FIEs in China may pay dividends only out of their
accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations. In addition, a FIE in China is required to set aside
at least 10.0% of its after-tax profit based on PRC accounting standards each
year to its general reserves until the accumulative amount of such reserves
reach 50.0% of its registered capital. These reserves are not distributable as
cash dividends. The board of directors of a FIE has the discretion to allocate a
portion of its after-tax profits to staff welfare and bonus funds, which may not
be distributed to equity owners except in the event of liquidation.
The New
EIT Law and its implementing rules generally provide that a 10% withholding tax
applies to China-sourced income derived by non-resident enterprises for PRC
enterprise income tax purposes unless the jurisdiction of incorporation of such
enterprises’ shareholder has a tax treaty with China that provides for a
different withholding arrangement. Qingdao Shoes is considered an FIE and is
directly held by our subsidiary Glory Reach in Hong Kong. According to a 2006
tax treaty between the Mainland and Hong Kong, dividends payable by an FIE in
China to the company in Hong Kong who directly holds at least 25% of the equity
interests in the FIE will be subject to a no more than 5% withholding tax. We
expect that such 5% withholding tax will apply to dividends paid to Glory Reach
by Qingdao Shoes, but this treatment will depend on our status as a non-resident
enterprise.
Results
of Operations
Three
Months Ended March 31, 2010 Compared to Three Months Ended March 31,
2009
The
following table sets forth key components of our results of operations during
the three months ended March 31, 2010 and 2009, both in dollars and as a
percentage of our net sales.
|
Three Months
Ended
|
Three
Months Ended
|
|||||||||||||||
|
March 31,
2010
|
March 31,
2009
|
|||||||||||||||
|
%
of Net
|
%
of Net
|
|||||||||||||||
|
Amount
|
Sales
|
Amount
|
Sales
|
|||||||||||||
|
Net
Sales
|
$ | 4,765,812 | 100 | % | $ | 4,455,898 | 100 | % | ||||||||
|
Cost
of sales
|
2,656,755 | 56 | % | 2,522,338 | 57 | % | ||||||||||
|
Gross
profit
|
2,109,057 | 44 | % | 1,933,560 | 43 | % | ||||||||||
|
Operating
Expenses
|
278,115 | 6 | % | 231,680 | 5 | % | ||||||||||
|
Operating
Income
|
1,830,942 | 38 | % | 1,701,880 | 38 | % | ||||||||||
|
Other income & interest expense
|
(819 | ) | 0 | % | 9,011 | 0 | % | |||||||||
|
Income
Before Income Taxes
|
1,830,123 | 38 | % | 1,710,891 | 38 | % | ||||||||||
|
Income
taxes
|
457,531 | 10 | % | 427,723 | 10 | % | ||||||||||
|
Net
income
|
$ | 1,372,592 | 29 | % | $ | 1,283,168 | 29 | % | ||||||||
15
Net Sales.
Our net sales increased to $4,765,812 in the three months ended March 31, 2010
from $4,455,898 in the same period in 2009, representing 7% revenue growth. This
increase was mainly due to an increase in the sales volume at existing
stores.
Cost of
Sales. Our cost of sales increased to $2,656,755 in the three months
ended March 31, 2010 from $2,522,338 in the same period in 2009, on account
increased sales volume. The cost of goods sold per sales ratio decreased to 56%
from 57%, mainly due to efficiencies in our cost control.
Gross Profit and
Gross Margin.
Our gross profit increased to $2,109,057 in the three months ended March
31, 2010 from $1,933,560 in the same period in 2009. Gross profit as a
percentage of net revenue was 44% for the three months ended March 31, 2010 and
43% in 2009. The slight increase in the gross profit and margin is due to the
factors discussed above.
Operating
Expenses. Our selling, general and administration grew slightly to
$260,110 in the three months ended March 31, 2010 from $218,547 in the same
period in 2009. This was mainly due to increased sales volume.
Other Income
& Interest Expense. Other Income & Interest Expense decreased to
($819) in the three months ended March 31, 2010 from $9011 in the same period in
2009. Other Income and Interest Expense is a negligible percentage of
our revenue.
Income Before
Income Taxes. Our income before income taxes increased to $1,830,123 in
the three months ended March 31, 2010 from $1,710,891 in the same period in
2009. This increase was due to expansion in our operational scope.
Income
Taxes. Income tax increased to $457,531 in the three months ended March
31, 2010 from $427,723 in the same period in 2009. The increase was due to an
increase in income, as our tax rate remained constant.
Net
Income. In the three months ended March 31, 2010, we generated a net
income of $1,372,592, an increase from $1,283,168 in the same period in 2009.
This increase was primarily due to the factors discussed above.
Liquidity
and Capital Resources
As of
March 31, 2010, we had cash and cash equivalents of $378,219, primarily
consisting of cash on hand and demand deposits. The following table provides
detailed information about our net cash flow for all financial statement periods
presented in this report. To date, we have financed our operations primarily
through cash flows from operations and equity contributions by our
shareholders.
The
following table sets forth a summary of our cash flows for the periods
indicated:
16
Cash
Flow
(all
amounts in U.S. dollars)
|
Three Months
Ended
|
||||||||
|
March
31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Net
cash provided by operating activities
|
$ | 916,821 | $ | 2,076,807 | ||||
|
Net
cash provided by (used in) investing activities
|
(661,971 | ) | (1,954,613 | ) | ||||
|
Net
cash provided by (used in) financing activities
|
61,895 | 0 | ||||||
|
Effects
of Exchange Rate Change in Cash
|
343 | (294 | ) | |||||
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
317,088 | 121,945 | ||||||
|
Cash
and Cash Equivalent at Beginning of the Year
|
61,131 | 118,534 | ||||||
|
Cash
and Cash Equivalent at End of the Year
|
378,219 | 240,479 | ||||||
Operating
activities
Net cash
provided by operating activities was $916,821 for the three months ended March
31, 2010, as compared to $2,076,807 for the same period in 2009. The decrease in
net cash provided by operating activities was due to an increase in accounts
receivable. We recently introduced more flexible payment schedules to some of
our distributers as a sales incentive.
Investing
activities
Net cash
used by investing activities for the three months ended March 31, 2010 was
$(661,971) as compared to $(1,954,613) net cash used in investing activities
during the same period of 2009. The decrease in net cash used by investing
activities was mainly due to decrease in advances to related
parties.
Financing
activities
Net cash
used in financing activities for the three months ended March 31, 2010 was
$61,895, as compared to $0 in the same period of 2009. The increase in net cash
provided by financing activities was due to proceeds from a bank
loan.
We
believe that our cash on hand and cash flow from operations will meet part of
our present cash needs and we will require additional cash resources, to meet
our expected capital expenditure and working capital for the next 12 months. We
may, however, in the future, require additional cash resources due to changed
business conditions, implementation of our strategy to ramp up our marketing
efforts and increase brand awareness, or acquisitions we may decide to pursue.
If our own financial resources are insufficient to satisfy our capital
requirements, we may seek to sell additional equity or debt securities or obtain
additional credit facilities. The sale of additional equity securities could
result in dilution to our stockholders. The incurrence of indebtedness would
result in increased debt service obligations and could require us to agree to
operating and financial covenants that would restrict our operations. Financing
may not be available in amounts or on terms acceptable to us, if at all. Any
failure by us to raise additional funds on terms favorable to us, or at all,
could limit our ability to expand our business operations and could harm our
overall business prospects.
Inflation
Inflation
and changing prices have not had a material effect on our business and we do not
expect that inflation or changing prices will materially affect our business in
the foreseeable future. However, our management will closely monitor the price
change in travel industry and continually maintain effective cost control in
operations.
Off-Balance
Sheet Arrangements
We do not
have any off balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity or capital
expenditures or capital resources that is material to an investor in our
securities.
Seasonality
We may
experience seasonal fluctuations in our revenue in some regions in the PRC,
based on the seasonal changes in the weather and the tendency of customers to
make purchases relating to their apparel suitable for the time of
year. Any seasonality may cause significant pressure on us to monitor
the development of materials accurately and to anticipate and satisfy these
requirements. Our revenues are usually higher in the fourth and
first quarters due seasonal purchases.
Critical
Accounting Policies and Estimates
The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect the
amounts reported in our consolidated financial statements and accompanying
notes. We base our estimates and judgments on historical experience and on
various other assumptions that we believe are reasonable under the
circumstances. However, future events are subject to change, and the best
estimates and judgments routinely require adjustment. The amounts of assets and
liabilities reported in our consolidated balance sheet, and the amounts of
revenues and expenses reported for each of our fiscal periods, are affected by
estimates and assumptions which are used for, but not limited to, the accounting
for allowance for doubtful accounts, goodwill and intangible asset impairments,
restructurings, inventory and income taxes. Actual results could differ from
these estimates. The following critical accounting policies are significantly
affected by judgments, assumptions and estimates used in the preparation of our
consolidated financial statements.
17
Revenue
Recognition Policies
Retail
sales are recognized at the point of sale to customers, are recorded net of
estimated returns, and exclude value added tax(“VAT”). Whole-sales to
its contracted customers are recognized as revenue at the time the product is
shipped and title passes to the customer on an FOB shipping point
basis.
Recent
Accounting Pronouncements
Refer to
the December 31, 2009 audited financial statements of the Company and the notes
thereto as included in the Company’s Form PRER14C filed on April 19,
2010.
ITEM
2. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Rate
Risk
All of
our revenues and the majority of our expenses and liabilities incurred are in
RMB. Thus, our revenues and operating results may be impacted by
exchange rate fluctuations of RMB. Up to now, we have not reduced our
exposure to exchange rate fluctuations by using hedging transactions or any
other measures to avoid our exchange rate risks. Accordingly, we may
experience economic losses and negative impacts on earnings and equity as a
result of foreign exchange rate fluctuations.
ITEM
3. CONTROLS
AND PROCEDURES
Evaluation
of Disclosure Controls.
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 December 31, 2009. Based on that
evaluation, the CEO and CFO concluded that there had been 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 and CFO have concluded
that our disclosure controls and procedures were not effective as of December
31, 2009.
Conclusion
The
Company did not have sufficient and skilled accounting personnel with an
appropriate level of technical accounting knowledge and experience in the
application of generally accepted accounting principles accepted in the United
States of America commensurate with the Company’s disclosure controls and
procedures requirements, which resulted in a number of deficiencies in
disclosure controls and procedures that were identified as being
significant. The Company’s management believes that the number and
nature of these significant deficiencies, when aggregated, was determined to be
a material weakness.
Despite
of the material weaknesses and deficiencies reported above, the Company’s
management believes that its condensed consolidated financial statements
included in this report fairly present in all material respects the Company’s
financial condition, results of operations and cash flows for the periods
presented and that 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.
18
Changes in internal control over
financial reporting.
There
were no changes in the Company’s internal control over financial reporting
during the quarter ended March 31, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL
PROCEEDINGS
From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. We are currently not aware of any such
legal proceedings or claims that we expect will have a material adverse affect
on our business, financial condition or operating results. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business.
ITEM
1A. RISK FACTORS
During
the three months ended March 31, 2010, there were no material changes to the
risk factors previously disclosed in our Annual Report on Form 10-K for the year
ended December 31, 2009.
ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM
3. DEFAULTS
UPON SENIOR SECURITIES
None.
ITEM
4. RESERVED
ITEM
5. OTHER
INFORMATION
None.
ITEM
6. EXHIBITS
|
Exhibit
No.
|
Description
|
|
|
31.1*
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a)and Rule15d-14(a)
of the Securities Exchange Act of 1934, as amended
|
|
|
31.2*
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a)and Rule
15d-14(a) of the Securities Exchange Act of 1934, as
amended
|
|
|
32.1*
|
Certification
of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
32.2*
|
Certification
of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
* Filed herewith.
19
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
DATONE,
INC.
|
|||
|
By:
|
/s/ Tao Wang | ||
|
Tao
Wang
|
|||
|
Chief
Executive Officer
|
|||
|
Date:
May 10, 2010
|
|||
|
By:
|
/s/ Fang Sui | ||
|
Fang
Sui
|
|||
|
Chief
Financial Officer
|
|||
|
Date:
May 10, 2010
|
|||
20
EXHIBIT
INDEX
|
Exhibit
No.
|
Description
|
|
|
31.1*
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a)and Rule15d-14(a)
of the Securities Exchange Act of 1934, as amended
|
|
|
31.2*
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a)and Rule
15d-14(a) of the Securities Exchange Act of 1934, as
amended
|
|
|
32.1*
|
Certification
of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
32.2*
|
Certification
of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
* Filed herewith.
21