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

 

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

 

The number of shares outstanding of each of the issuer’s classes of common equity, as of May 14, 2008 was 31,546,134 shares of common stock.

 

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CHINA DONGSHENG INTERNATIONAL, INC.

FORM 10-Q

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Condensed Consolidated Balance Sheets as of March 31, 2008 (Unaudited) and June 30, 2007 (Audited)	3
Condensed Consolidated Statements of Income for the Nine and Three Months Ended March 31, 2008 and 2007 (Unaudited)	4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2008 and 2007 (Unaudited)	5
Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 4T. Controls and Procedures	16
PART II - OTHER INFORMATION	17
Item 1. Legal Proceedings	17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	17
Item 3. Defaults Upon Senior Securities	17
Item 4. Submission of Matters to a Vote of Security Holders	17
Item 5. Other Information	17
Item 6. Exhibits	17
SIGNATURES	18

 

Except as otherwise required by the context, all references in this report to "we", "us”, "our", “CDSG”, “China Dongsheng” or "Company" refer to the consolidated operations of China Dongsheng International, Inc., a Delaware corporation, and its wholly owned subsidiaries.

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

CHINA DONGSHENG INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

ASSETS
		March 31,			June 30,
		2008			2007
		(Unaudited)
Current assets:
Cash and cash equivalents		$	958,572			$	585,126
Accounts receivable - net of allowance for doubtful accounts of $40,000			107,100				69,884
Inventory			6,898,313				74,388
Prepaid expenses			143				57,500
Advances to suppliers			2,424,070				616,914
Other receivable			13,163				4,660
Total Current Assets			10,401,361				1,408,472
Property and equipment, net of accumulated depreciation of $972,495 and $308,382			44,859,930				34,390,372
Other assets:
Deposit on land			2,994,866				2,758,802
Land use right, net			5,684,558				2,706,374
Other assets			-				8,506
Total Other Assets			8,679,424				5,473,682
Total Assets		$	63,940,715			$	41,272,526
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	878,901			$	682,223
Unearned revenue			731,800				493,666
Taxes payable			8,040,844				18,925,542
Accrued expenses and other payables			591,341				295,361
Total Current Liabilities			10,242,886				20,396,792
Notes payable - related party			395,616				88,145
Total Liabilities			10,638,502				20,484,937
Stockholders' Equity
Common stock, $0.001 par value, 100,000,000 shares authorized; 31,546,134
shares issued and outstanding at March 31, 2008 and June 30, 2007			31,546				31,546
Additional paid in capital			1,084,546				1,034,546
Accumulated other comprehensive income			4,177,863				863,783
Retained earnings - Appropriated			1,218,086				1,218,086
Retained earnings -Unappropriated			46,790,172				17,639,628
Total Stockholders' Equity			53,302,213				20,787,589
Total Liabilities and Stockholders' Equity		$	63,940,715			$	41,272,526

The accompanying notes are an integral part of the condensed consolidated statements.

 

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CHINA DONGSHENG INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME (UNAUDITED)

For the nine and three months ended March 31, 2008 and 2007

		Nine-Month Ended								Three-Month Ended
		March 31				March 31				March 31				March 31
		2008				2007				2008				2007
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Sales		$	22,932,944			$	23,280,402			$	4,543,223			$	4,544,019
Cost of Sales			5,200,332				9,402,668				751,571				1,774,086
Gross Profit			17,732,612				13,877,734				3,791,652				2,769,933
Operating Expenses
Selling, general and administrative			3,656,533				1,330,034				837,993				560,801
Operating income			14,076,079				12,547,700				2,953,659				2,209,132
Other Income and Expenses
Interest income			7,297				3,441				1,501				4,349
Other income (expense)			-				700,522				(13	)			34,549
Total Other Income			7,297				703,963				1,488				38,898
Income Before Income Taxes			14,083,376				13,251,663				2,955,147				2,248,030
(Benefit) provision for Income Taxes
Income tax benefit			(19,392,018	)			-				-				-
Provision for income taxes			4,324,850				4,248,314				774,665				730,540
Total (benefit) provision for income taxes			(15,067,168	)			4,248,314				774,665				730,540
Net Income			29,150,544				9,003,349				2,180,482				1,517,490
Other Comprehensive Income:
Foreign currency translation adjustment			3,314,080				475,358				1,687,433				149,329
Comprehensive Income		$	32,464,624			$	9,478,707			$	3,867,915			$	1,666,819
Basic and Diluted Income Per Common Share
Basic		$	0.92			$	2.04			$	0.07			$	0.12
Diluted		$	0.92			$	2.04			$	0.07			$	0.12
Weighted Average Number Common Shares Outstanding
Basic			31,546,134				4,416,240				31,546,134				12,703,159
Diluted			31,546,134				4,416,240				31,546,134				12,703,159

 

The accompanying notes are an integral part of the condensed consolidated statements.

 

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CHINA DONGSHENG INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

For the nine months ended March 31, 2008 and 2007

		2008				2007
		(Unaudited)				(Unaudited)
Cash Flows From Operating Activities:
Net income		$	29,150,544			$	9,003,349
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization			682,574				193,550
Income Tax Benefit			(19,392,018	)			-
Changes in operating assets and liabilities:
Accounts receivable			21,444				113,665
Inventory			(6,823,925	)			(49,800	)
Advances to suppliers			(1,807,156	)			3,710,814
Prepaid expenses			(143	)			(80,611	)
Other receivables			(1,157	)			-
Accounts payable			196,679				(211,739	)
Unearned revenue			238,134				83,151
Taxes payable			7,521,417				8,464,057
Accrued expenses and other payables			270,980				(192,502	)
Cash provided by operating activities			10,057,371				21,033,934
Cash Flows From Investing Activities:
Purchase of land use right			(2,713,749	)			(2,714,785	)
Deposit on ginseng farm			-				-
Purchase of property and equipment			(7,769,395	)			(23,674	)
Additions to construction in process			-				(17,994,813	)
Cash used in investing activities			(10,483,144	)			(20,733,272	)
Cash Flows From Financing Activities:
Payment of notes payable			332,470				(104,368	)
Proceeds received upon recapitalization			50,000				-
Cash provided by (used in) financing activities			382,470				(104,368	)
Effect of exchange rate changes on cash and cash equivalents			416,749				187,455
Increase in cash and cash equivalents			373,446				383,749
Cash and Cash Equivalents - Beginning of period			585,126				184,842
Cash and Cash Equivalents - Ending of period		$	958,572			$	568,591
Supplemental disclosures of cash flow information:
Interest paid		$	-			$	50,688
Income Taxes paid		$	207,643			$	-

 

The accompanying notes are an integral part of the condensed consolidated statements.

 

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CHINA DONGSHENG INTERNATIONAL, INC.

CONDENSED CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2008 AND 2007 (UNAUDITED)

 

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

 

China Dongsheng International, Inc. (“the Company” or “CDSG”) was incorporated under the laws of the State of Delaware in October, 1991 and formerly known as Paperclip Software, Inc.

 

On November 9, 2006, the Company acquired 100% of the issued and outstanding capital stock of American Sunrise international, Inc. (“ASI”), a Delaware corporation, thereby making ASI a wholly-owned subsidiary of the Company, in consideration for a cash payment of $280,000 and in exchange for the issuance of (i) 18,153,934 shares of the Company's common stock and (ii) 1,762,472 shares of the Company's newly-designated Series B Convertible Preferred Stock, of which series each share can be convert into 500 shares of the Company's common stock. After giving effect to the transactions contemplated by the Share Exchange Agreement (the "Transaction"), the ASI Shareholders and the former shareholders of the Company own 98.7% and 1.3%, respectively, of the Company's common stock on a fully-diluted basis, thereby resulting in a substantial dilution to the Company's shareholders of record as of November 6, 2006 (the "Historic PaperClip Shareholders") and constituting a change in control of the Company.

For accounting purposes, the transaction described above has been accounted for as a reverse acquisition under the purchase method of accounting. Accordingly, ASI is treated as the continuing entity for accounting purposes.

The Company operates its business primarily through its wholly-owned subsidiary, Jilin Dongsheng Weiye Science and Technology Co., Ltd. (“Dongsheng”), which is engaged in the manufacturing and distributing of nutritional supplements, beauty care products and other alternative health care products.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Item 310 of Regulation S-B.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements, In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the nine and three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the full year.

 

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CHINA DONGSHENG INTERNATIONAL, INC.

CONDENSED CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (Continued)

FOR THE NINE MONTHS ENDED MARCH 31, 2008 AND 2007 (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

MANAGEMENT ESTIMATES

 

The preparation of financial statements in conformity with generally accepted accounting principals requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

PRINCIPLES OF CONSOLIDATION

 

 

ADVANCES TO SUPPLIERS

The Company makes advances to certain vendors’ inventory purchases and purchase of construction equipments. The total advances to suppliers were $2,424,070 as of March 31, 2008.

 

UNEARNED REVENUE

Unearned revenue represents payments received from customers for goods and services that have not been delivered or performed.

 

CONCENTRATIONS OF CREDIT RISK

After merging with ASI, the principle operations of the Company are now located in the People’s Republic of China (“PRC”). Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political, economic, and legal environments in the PRC, in addition to the general state of the PRC economy. The Company's operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments legal environments and foreign currency exchange.

The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

 

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CHINA DONGSHENG INTERNATIONAL, INC.

CONDENSED CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (Continued)

FOR THE NINE MONTHS ENDED MARCH 31, 2008 AND 2007 (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

FOREIGN CURRENCY TRANSLATION

The functional currency for the Company’s operations in China is the Renminbi (“RMB”). Foreign currency transactions are translated at the applicable rates of exchange in effect at the transaction dates. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange in effect at that date. Revenues and expenses are translated at the average exchange rates in effect during the reporting period.

Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders' equity as "Accumulated Other Comprehensive Income".  Gains and losses resulting from foreign currency translations are included in Accumulated Other Comprehensive Income.

 

NEW ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements,” which provides a definition of fair value, establishes a framework for measuring fair value and requires expanded disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The provisions of SFAS No. 157 should be applied prospectively. The Company is currently analyzing whether this new standard will have impact on its financial position and results of operations.

In September 2006, the FASB issued SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”, which amends SFAS No. 87 “Employers’ Accounting for Pensions” (SFAS No. 87), SFAS No. 88 “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” (SFAS No. 88), SFAS No. 106 “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (SFAS No. 106), and SFAS No. 132R “Employers’ Disclosures about Pensions and Other Postretirement Benefits (revised 2003)” (SFAS No. 132R). This Statement requires companies to recognize an asset or liability for the overfunded or underfunded status of their benefit plans in their financial statements. SFAS No. 158 also requires the measurement date for plan assets and liabilities to coincide with the sponsor’s year-end. The standard provides two transition alternatives related to the change in measurement date provisions. The recognition of an asset and liability related to the funded status provision is effective for fiscal year ending after December 15, 2006 and the change in measurement date provisions is effective for fiscal years ending after December 15, 2008 The implementation of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

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CHINA DONGSHENG INTERNATIONAL, INC.

CONDENSED CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (Continued)

FOR THE NINE MONTHS ENDED MARCH 31, 2008 AND 2007 (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115,” which is effective for fiscal years beginning after November 15, 2007. This statement permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. We are currently evaluating the potential impact of this statement.