UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-K





x
ANNUAL REPORT UNDER PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



FOR THE FISCAL YEAR ENDED DECEMBER 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: 000-52623





CHINA SPORTS HOLDING COMPANY LIMITED(Exact name of small business issuer as specified in its charter)





Delaware

37-1532843(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)





Yangdai Village, Chendai County


Jinjiang City, Fujian Province


People’s Republic of China


(Address of principal executive offices)





+86 (139) 1074-2777


(Registrant’s telephone number, including area code)





SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:NONE





SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:


Common Stock, Par Value $0.001 Per Share


(Title of Class)





Indicate by check marked if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES oNO x





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o     No x





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference Part III of this Form 10-K or any amendment to this Form 10-K.   x





Indicate by check mark whether the registrant is a large accelerated filer, an 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
oNon-accelerated filer

(Do not check if a smaller reporting company)
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 oNO x





As of the last business day of the registrant’s most recently completed second fiscal quarter, there was no public trading market for our common stock.





As of April 15, 2011, there are 7,750,000shares of common stock issued and outstanding.





Documents Incorporated by Reference: None.











TABLE OF CONTENTS





Item Number and Caption

PagePART IItem 1.
Business.

1Item 1A.
Risk Factors.

12Item 2.
Properties.

20Item 3.
Legal Proceedings.

20Item 4.
(Removed and Reserved).

20PART IIItem 5.
Market for Registrant’s Common Equity, and Related Stockholder Matters and Issuer Purchases of Equity Securities.

20Item 6.
Selected Financial Data.

21Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.

21Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.

28Item 8.
Financial Statements and Supplementary Data.

28Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

29Item 9A.
Controls and Procedures.

30PART IIIItem 10.
Directors, Executive Officers and Corporate Governance.

31Item 11.
Executive Compensation.

33Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

34Item 13.
Certain Relationships and Related Transactions, and Director Independence.

34Item 14.
Principal Accountant Fees and Services.

35PART IVItem 15.
Exhibits, Financial Statement Schedules.

36SIGNATURES


37











PART I





ITEM 1. BUSINESS.





China Sports Holding Company Limited, formerly known as Mondo Acquisition III, Inc. (“we” or the “Company”), through Fujian Jinjiang Hengfeng Shoes & Garments Co., Ltd. (“Hengfeng”), is in the business of designing, manufacturing and selling sports shoes, sportswear and related accessories in the People’s Republic of China (“China” or the “PRC”). Our mission is to become the leading supplier of professional sporting goods in China by building on our fully integrated value chain and delivering premium quality products. We generate revenues solely from the sales of sports shoes, sportswear and related accessories in the PRC.





Our Corporate History and Structure





We were incorporated under the laws of the State of Delaware on October 30, 2006. We acquired Kobe Sport (International) Company Limited, a British Virgin Islands company with limited liability (“Kobe Sport”) that is in the business of production and sales of sport shoes, sportswear and accessories, in accordance with a Share Exchange Agreement dated February 12, 2010 (the “Exchange Agreement”) by and among the Company, Kobe Sport, and the shareholders of Kobe Sport (the “Kobe Sport Shareholders”). The closing of the transaction (the “Closing”) took place on February 12, 2010 (the “Closing Date”). On the Closing Date, pursuant to the terms of the Exchange Agreement, we acquired all of the outstanding shares (the “Interests”) of Kobe Sport from the Kobe Sport Shareholders; and the Kobe Sport Shareholders transferred and contributed all of their Interests to us. In exchange, we issued a total of 9,000,000 shares of common stock to the Kobe Sport Shareholders, their designees or assigns, which totals 90% of the issued and outstanding shares of common stock of the Company on a fully-diluted basis as of and immediately after the Closing of the Share Exchange. Following the Share Exchange, Kobe Sport became a wholly owned subsidiary of the Company.





Kobe Sport is a holding company and owns 100% of the issued and outstanding capital stock of Nam Kwong Trading Company Limited (“Nam Kwong”). Hengfeng is a sino-foreign joint stock limited liability company established in the PRC in 1992. On December 4, 2009, Hengfeng underwent reorganization. Before the reorganization, Hengfeng had been owned as to 94% by Nam Kwong Trading Co., an unincorporated company registered in Hong Kong (“Nam Kwong Unincorporated”), and 6% by Fujian Jinjiang Chenli Yangli Hengfeng Shoe-making Factory, which is a company registered in the PRC (“Fujian Jinjiang”), according to their respective capital contribution. Pursuant to the reorganization, Nam Kwong Unincorporated transferred the 94% interest in Hengfeng held by it to Nam Kwong. As a result, through Nam Kwong, Kobe owns 94% interest in Hengfeng.





As a further condition of the Share Exchange, Thomas A. Rose and Marc J. Ross resigned as the officers of the Company and Qionglin Lin, Mendoza Anding Lin and Tommy Lo were appointed as the new officers of the Company, effective immediately at the Closing. In addition, Thomas A. Rose, Marc J. Ross and Darrin M. Ocasio have resigned as the directors of the Company and Mendoza Anding Lin, Qionglin Lin and Aling Lin have been appointed as the new directors of the Company upon effectiveness of an information statement required by Rule 14f-1 promulgated under the Exchange Act of 1934 (the “Exchange Act”).





Our organizational structure was developed to permit the infusion of foreign capital under the laws of the PRC and to maintain an efficient tax structure, as well as to foster internal organizational efficiencies. It is reflected in the following chart:










1




Market Summary





The Chinese Sporting Goods Market





China’s sporting goods market experienced robust growth in recent years, at a compound annual growth rate of 20%. The 2008 Olympic Games in Beijing, the 2009 East Asian Games in Hong Kong and the 2010 Asian Games in Guangzhou have all increased the popularity of sports in China. With the income levels of Chinese consumers rising, expectations of quality and branding will also increase.





The high-end sportswear market in China is currently dominated by international brands, such as Nike, Adidas and Puma. The middle/high-end market is dominated by local brands such as Lining, Kangwei, Great, Doublestar and Anta. The entire middle class market is dominated by brands from Jingjiang, such as Xtep, Hongxing Erke and Deerway. The international brands have years of experience in the market, advanced R&D and strong financial support for marketing. On the other hand, the domestic brands that dominate the low-end and middle-class markets are following the rapid development of the leading international brands.





Market Trends and Brand Implications





Increased disposable income inspires the pursuit of fashion





The rise of income levels amongst Chinese consumers has increased the purchasing power which drives consumption.  Increased income has also led to an increase in leisure time, which, in turn, has increased the popularity of casual wear. Casual wear has become especially popular among those under 45 years old in China, which is the target consumer group for the Kobe brand. The Kobe brand can meet our target consumers’ demand by providing fashionable casual wear.





Rapid increase in demands in the second- and third-tier cities





We focus on the second- and third-tier cities, because:





·
Compared to first-tier cities, which have already been exploited by major international brands, the second- and third-tier cities provide a lot more marketing opportunities for domestic sporting goods brands.·
At the same time, the income levels in these cities are catching up to that in first-tier cities, which increases demand for sporting goods in these cities.·
Hengfeng’s franchising business model allows it to cover these target markets quickly.





Products





Hengfeng designs, develops, and manufactures “Kobe” branded shoes, sportswear and accessories in Jinjiang City, Fujian Province. The shoes are produced by Hengfeng internally and by subcontractors, while the manufacturing of clothes and accessories is outsourced to subcontractors.





The Company incorporates innovative value-adding technology into its products, such as a perspiration absorption system, a 3D ventilation system and a polyurethane anti-crease system to satisfy the demands and taste of target consumers.





In 2010, the Company distributed its products through 1,033 retail stores located throughout China, which were operated by the Company’s distributors. The Company expects that the number of stores will increase by at least 20% each year within the coming five years, and both the turnover and net profit would be increased accordingly.





Sourcing: All of our sportswear and accessories are produced by our subcontractors. Approximately 53% and 44% of our sports shoes were produced by our subcontractors for the years ended December 31, 2010 and December 31, 2009, respectively. The approximate amount of subcontracted and self-production of each segment are as follows:





Segments

Subcontracted ($)


Self-production ($)


Total Cost of

Sales ($)For the Year Ended
Sportswear


21,257,169



-



21,257,169December 31, 2009
Accessories


3,799,772



-



3,799,772Sports shoes


14,504,671



18,520,735



33,025,406Sub-Total


39,561,612



18,520,735



58,082,347For the Year Ended
Sportswear


27,673,568



-



27,673,568December 31, 2010
Accessories


3,800,528



-



3,800,528Sports shoes


24,424,753



21,653,481



46,078,234Sub-Total


55,898,849



21,653,481



77,552,330




2




We believe that the use of independent contract manufacturers affords us additional liquidity and flexibility. While we do not have any long-term contracts with any of our manufacturers, we do have long-standing relationships with many of our manufacturers and believe our relationships to be good.





In 2010, we subcontracted our sports shoes production to eight (8) factories in Fujian province in the PRC.  They are: Xinli Shoes Co., Ltd. (Jinjiang City), which accounted for 16.86% of the total shoes subcontracted in 2010; Dongzheng Shoes Co., Ltd. (Jinjiang City), 16.44%; Yiming (Jinjiang) Shoes Co., Ltd., 16.39%; Liweng Shoes Co., Ltd. (Jinjiang City), 13.92%; Jielongbao Shoes Co., Ltd. (Jinjiang City), 12.31%; Xinqile (Fujian) Shoes Co., Ltd., 8.81%; Dingfeng Shoes Co., Ltd. (Jinjiang City), 8.56%and Meilida Shoes Co., Ltd. (Jinjiang City), 6.72%.





Additionally, the following five (5) subcontractors produced approximately 95% of all our sportswear and accessories. Their names and percentages are: Qigao Clothing Co., Ltd. (Heshan City), 35.14%; Guhe Clothing Co., Ltd. (Xiamen City), 21.87%; Quanhuang Clothing & Accessories Co., Ltd. (Shishi City), 16.86%; Zifeng Clothing Factory (Banfu Town, Zhongshan City), 14.02%; and Ouwen Sport Products Co., Ltd. (Guangzhou City), 7.25%.





Shoe Production





We focus on designing and producing basketball shoes, casual shoes, jogging shoes and skateboard shoes, which accounted for 16%, 20%, 16% and 48%, respectively, of 2010 shoe production.



The sole of the basketball shoe was developed and manufactured by the Company, combining the latest technology and designs. The sole helps stabilize and protect the joints. The price of the sole is reasonable and very competitive in the industry. It has the following features:



Cushioning Feature:The cushioning features are divided into structural and material. Examples of the structural feature include the hive structure and arch structure. Examples of the material feature include the air cushion and shock absorption rubber. The index to evaluate the cushioning feature is based on the peak value of the impact force during the vertical counterforce test or the peak value of the negative acceleration. The lower the peak value of the impact force or the negative acceleration, the better the cushioning function the shoe acquires, which will greatly reduce the chance of injury.





Stabilization Feature: The middle and upper parts of the basketball shoe are also the focus of our research and development. Those parts have the functions of stabilizing joints, preventing ankle sprains, protecting the instep as well as the Achilles tendon.





Non-Slip Feature: The non-slip feature of the soles is also the friction function. The key relies on the width and depth of the sole veins. The change of the vein shapes will increase the friction force of the shoes and accordingly will effectively improve the non-slip feature. So far, the “人-shape” vain is still the symbol of the most powerful ground-grasping capacity.





Our jogging shoes also apply a variety of technologies which greatly reduce their weight and increase their endurance. A series of new technologies are applied in the uppers of the shoes which support the shoe body with the lightest skeleton. The sole and the TPU-tray support the foot arches which together with breathing cannelures prevent the fatigue of the feet after long jogging. The key R&D concept is making the shoe sole as the continuance of the foot. The wearer will barely feel the existence of the shoes when jogging.




3




Sportswear Production





We focus on tracksuits, basketball wear, t-shirts and casual wear, which accounted for 21%, 22% , 20% and 37%, respectively, of our 2010 sportswear production.



Our Kobe branded sportswear has many unique features. We select and purchase raw materials ourselves; fabrics are produced by weaving companies in accordance with our specifications on color, function and vain developed by our internal designing departments; and, environmentally friendly products are produced with Nano Technologies.



Warm-Keeping Feature: Our outdoor sport suits are designed in a way that both keep the wearer warm and are light and portable. We add special ceramic powders such as chromium oxide, magnesium oxide, zirconium oxide into compound fiber liquids such as polyester fiber. The minor ceramic powder on the Nano-level can absorb visible lights such as sunlight and transfer the lights into heat, and can also reflect the infrared rays produced by human body, which enable the material to acquire superior warm-keeping capacities.  In addition, following the bionics principles, we design the internal structure of the polyester fiber referring to that of the poly bears, which enable the fiber to acquire both lightness and warm-keeping features. We also manufacture the suits or fibers into two or three-layers which increases the number of non-circulating layers which is one of the traditional measures to keep warm.





Antibiotic and Antiodour Features:We add antibiotic chemicals into the fiber and make sure they will not be easily worn out. We also make sure the antibiotic chemicals contain as little poison as possible. In addition, by combining certain chemicals together, we are able to effectively shield ultraviolet rays.





Sports Accessories





We mainly produce the following sports accessories: basketballs, shields, sports and casual bags, and sports and casual socks.





Basketballs: Our basketballs are manufactured in compliance with International Basketball Association standards and bear our brand name. The advantages of our basketballs are that they are made with a high-quality inner tube material and they have a special outer skin material which makes them non-slip and enduring and allows them to be sweat absorbing.





Shields: Our designed shields have good flexibility and supporting capacity and equal pressure on specially made Coolprene materials.





Sport & Casual Bags: Our bags are portable, fashionable, humanity designs and structures and have streamlined production techniques. We intend our bags to be used for studying, traveling and outdoor exploring.





Sport & Casual Socks: Our socks have a sweat absorption design and a comprehensive cushion protection.





Production Capacity





We currently have four production lines with a total capacity of about 2.8 million pairs of sports shoes per year. They contribute about 45% - 55% of total sports shoes sold each year. The remaining 45% - 55% of total sports shoes are subcontracted out each year.





Raw Materials and Suppliers





Leather, plastic, rubber, thread and other basic components are our main raw materials for the production of shoes. The Company's principal required raw material is quality leather, which it purchases from a selected group of Chinese suppliers. The global availability of common upper materials and specialty leathers eliminates any reliance by the Company upon a sole supplier. The Company purchases all of its other raw materials and component parts from a variety of sources, none of which the Company believes to be a dominant supplier. Alternative sources of supplies are believed to be available to the Company. Our top five (5) raw material suppliers in 2010 were as below:




4


Suppliers

Supplied Raw Materials

Percentage of Total Supplied Amount in 2010Jinjiang Daxin Shoes Co., Ltd.

Leather, plastic, rubber, thread and other basic components

10.21%Jinjiang Lianfa Shoes Materials Co., Ltd.

Leather, plastic, rubber, thread and other basic components

9.10%Jinjiang Libao Industrial Chemicals Co., Ltd.

Chemicals

7.54%Quanzhou Baoshu Packing Co., Ltd

Shoes boxes

7.51%Jinjiang Runda Composite Material Co., Ltd.

Cloth

6.89%Total



41.25%





Product Design and Development





Our principal goal in product design is to generate new and exciting sports shoes, sportswear and accessories with contemporary and progressive styles and comfort-enhancing performance features. Targeted to the active, youthful and style-savvy consumers, we design most new styles to be fashionable and marketable to the 15 to 24 year-old consumer, while substantially all of our lines appeal to the broader range of 15 to 45 year-old consumers.





We believe that our products’ success is related to our ability to recognize trends in the footwear markets and to design products that anticipate and accommodate consumers’ ever-evolving preferences. We are able to quickly translate the latest fashion trends into stylish, quality footwear at a reasonable price by analyzing and interpreting current and emerging lifestyle trends. Lifestyle trend information is compiled and analyzed by our designers from various sources, including the review and analysis of modern music, television, cinema, clothing, alternative sports and other trend-setting media; traveling to domestic and international fashion markets to identify and confirm current trends; consulting with our retail and e-commerce customers for information on current retail selling trends; participating in major footwear trade shows to stay abreast of popular brands, fashions and styles; and subscribing to various fashion and color information services. In addition, a key component of our design philosophy is to continually re-interpret and develop our successful styles in our brands’ image.





Our products are designed and developed primarily by our in-house design staff. To promote innovation and brand relevance, we utilize dedicated design teams, who report to our senior design executives and focus on each of the men’s and women’s categories. In addition, we utilize outside design firms on an item-specific basis to supplement our internal design efforts. The design process is extremely collaborative, as members of the design staff frequently meet with the heads of retail, merchandising, sales, production and sourcing to further refine our products to meet the particular needs of the target market.





After a design team arrives at a consensus regarding the fashion themes for the coming season, the designers then translate these themes into our products. These interpretations include variations in product color, material structure and embellishments, which are arrived at after close consultation with our production department. Prototype blueprints and specifications are created and forwarded to our manufacturers for a design prototype. The design prototypes are then sent back to our design teams. Our major retail customers may also review these new design concepts. Customer input not only allows us to measure consumer reaction to the latest designs, but also affords us an opportunity to foster deeper and more collaborative relationships with our customers. We also occasionally order limited production runs that may initially be tested in our concept stores. By working closely with store personnel, we obtain customer feedback that often influences product design and development. Our design teams can easily and quickly modify and refine a design based on customer input.




We spent RMB 2,698,283, or approximately $395,006 in 2009 and RMB 3,757,411 or approximately $555,050 in 2010 on research and development for our products.




Quality Control





We believe that quality control is an important and effective means of maintaining the quality and reputation of our products. Our quality control program is designed to ensure that not only finished goods meet our established design specifications, but also that all goods bearing our trademarks meet our standards for quality. Our quality control personnel perform an array of inspection procedures at various stages of the production process, including examination and testing of prototypes of key raw materials prior to manufacture, samples and materials at various stages of production and final products prior to shipment. Our employees are on-site at each of our major manufacturers to oversee production. For some of our lower volume manufacturers, our staff is on-site during significant production runs or we will perform unannounced visits to their manufacturing sites to further monitor compliance with our manufacturing specifications.





Sales and Marketing





Our sports shoe sales were 60% and 57% of the total sales in the years ended December 31, 2010 and December 31, 2009, respectively. Our sportswear sales were 35% and 36% of the total sales in the years ended December 31, 2010 and December 31, 2009, respectively. The charts below show the breakdown of sales and margin by segment.





5




Sales Breakdown by Segment

Margin by Segment




Sales and Marketing Strategies





Product Orientation: Middle-ranged priced professional and functional sporting goods with high technical content. The products represent comfort, quality and high sports performance.





Target Consumers: 15-45 year olds: secondary school and university students that have a taste for fashion; middle-aged individuals that have a high purchase power and preference for quality.





Target Market: we mainly focus on second and third-tier cities with trendy consumers and professional athletes.





Expansion of Sales Network: Although international brands such as Nike and Adidas have a high market share, domestic brands are more capable of penetrating into smaller cities and provinces. We plan to expand our sales channel to second and third-tier cities of primary markets, and first and second-tier cities. Therefore, our strategy is to focus on brand promotion in first-tier cities, establish many retail outlets in second-tier cities and open flagship stores in third-tier cities. Below are our different levels of targeted markets:





Area

Primary Market

Secondary Market

Tertiary MarketNorthern China

Beijing

Tianjin

Hebei

Inner Mongolia

ShanxiNortheast China

Liaoning

Heilongjiang

JilinEastern China

Shanghai

Zhejiang

Jiangsu

Fujian

Anhui, Shandong

JiangxiSouthern China

Guangdong

Hunan

Henan

Hubei

Guangxi Zhuang A.R.

HainanSouthwest China

Chongqing

Sichuan

Guizhou

Yunnan

TibetNorthwest China

Shaanxi

Qinghai

Gansu

Ningxia Hui A.R.

Xinjiang Uygur A.R.





The map below shows our sales network and the locations of our retail stores:




6








In addition, we also sponsor sporting events to gain a higher brand exposure or sponsor gyms, which are a main exercising venue for the target consumer group. The Kobe brand is able to infiltrate the target consumers’ daily lives and hence cultivate brand loyalty. Further, we plan to design a website with a large online media company that represents the unique characteristics of the Kobe brand.





Business Model





Retail stores





We distribute our products through retail stores, which sell our products exclusively. We derive all of our revenue from sales to our distributors that operate, either directly or indirectly through third parties, the retail stores that sell our products. These distributors may also engage authorized third-party retailers to operate the retail stores. We only have contractual relationship only with our distributors, not any authorized third-party retailers. We believe that the sale of our products through distributors has enabled us to grow by leveraging on their regional retail expertise and economies of scale. We provide our distributors retail policies and guidelines, training, advertising and marketing support to assist them to manage and expand the retail sales network. The number of the retail stores grew from 869 as of December 31, 2009 to 1,033 as of December 31, 2010.





Self-owned stores





Self-owned stores have the advantages of: increased profit margins per item sold, the fact that sales staff of the Company would be close to customers and therefore be able to react quickly to any changes in consumers’ taste.  However, self-owned stores need to absorb their own costs and require additional time of management to run the stores.





We already set up three self-owned stores that began operations in the beginning of 2011 to test the market. We plan to set up 80 additional self-owned stores before the end of 2011.





Our development plan for stores is as below:





2009


2010


2011 (e)


2012 (e)No. of retail stores operated by distributors


869



1,033



1,240



1,488No. of self-owned stores


0



0



83



183Total


869



1,033



1,323



1,671





7




Competition





Competition in the sports shoe and sportswear industry is intense. Although we believe that we do not compete directly with any single company with respect to its entire range of products, our products compete with other branded products within their product category as well as with private label products sold by retailers, including some of our customers. Our sports shoes compete with sports shoes offered by international companies such as Nike, Inc., Adidas AG, Puma AG, and New Balance Athletic Shoe, Inc. and PRC companies such as Anta Sports Products Limited, Li Ning Company Limited and Qiaodan (China) Co., Ltd. In varying degrees, depending on the product category involved, we compete on the basis of style, price, quality, comfort and brand name prestige and recognition, among other considerations. These and other competitors pose challenges to our market share in our major domestic markets and may make it more difficult to establish our products in the PRC. We also compete with numerous manufacturers, importers and distributors of footwear for the limited shelf space available for the display of such products to the consumer. Moreover, the general availability of contract manufacturing capacity allows ease of access by new market entrants. Many of our competitors are larger, have been in existence for a longer period of time, have achieved greater recognition for their brand names, have captured greater market share and/or have substantially greater financial, distribution, marketing and other resources than we do.





Growth Strategy





We intend to improve our sales network and production capacity, increase our research expenditure and brand promotion of the Kobe brand by using the following means:





Expand Sales Network: To provide training, advertising and marketing assistance, and renovation subsidies to retail stores and increase the number of retail stores operated by distributors from 1,033 in 2010 to 1,488 by 2012, representing an increase of approximately 44% within 2 years.





Expand Production Facility:We paid a deposit of RMB50 million in 2010 for land use rights in order to expand our production facility in the near future.





Diversify Products: To diversify products from basketball shoes to other types of shoes and clothes for outdoor activities, and to keep the product mix of 40%:60% of sportswear and accessories to sports shoes.





IT System Upgrades: Introduce Management Information System (MIS) to efficiently monitor sales and inventory status of various stores to conduct sales analysis and forecasts





Research and Development: To improve on existing technology, such as the perspiration absorption system, and to increase the competitiveness of Kobe products.





Human Capital: To hire an experienced design team to introduce innovative and trendy products targeted for consumers’ taste and preference in order to further boost sales.





Intellectual Properties





We own and utilize a variety of trademarks, including the Kobe trademark. We continuously look to increase the number of our trademarks and potential design patents where necessary to protect valuable intellectual property. We regard our trademarks and other intellectual property as valuable assets and believe that they have significant value in the marketing of our products. We vigorously protect our trademarks against infringement, including through the use of cease and desist letters, administrative proceedings and lawsuits.





We rely on trademark, patent, copyright and trade secret protection, non-disclosure agreements and licensing arrangements to establish, protect and enforce intellectual property rights in our logos, trade names and in the design of our products. In particular, we believe that our future success will largely depend on our ability to maintain and protect the Kobe trademark and other key trademarks. Despite our efforts to safeguard and maintain our intellectual property rights, we cannot be certain that we will be successful in this regard. Furthermore, we cannot be certain that our trademarks, products and promotional materials or other intellectual property rights do not or will not violate the intellectual property rights of others, that our intellectual property would be upheld if challenged, or that we would, in such an event, not be prevented from using our trademarks or other intellectual property rights. Such claims, if proven, could materially and adversely affect our business, financial condition and results of operations. In addition, although any such claims may ultimately prove to be without merit, the necessary management attention to and legal costs associated with litigation or other resolution of future claims concerning trademarks and other intellectual property rights could materially and adversely affect our business, financial condition and results of operations.





8




The laws of certain foreign countries do not protect intellectual property rights to the same extent or in the same manner as do the laws of the PRC. Although we continue to implement protective measures and intend to defend our intellectual property rights vigorously, these efforts may not be successful or the costs associated with protecting our rights in certain jurisdictions may be prohibitive. From time to time we discover products in the marketplace that are counterfeit reproductions of our products or that otherwise infringe upon intellectual property rights held by us. Actions taken by us to establish and protect our trademarks and other intellectual property rights may not be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as violating trademarks and intellectual property rights. If we are unsuccessful in challenging a third party’s products on the basis of infringement of our intellectual property rights, continued sales of such products by that or any other third party could adversely impact the Kobe brand, result in the shift of consumer preferences away from our products and generally have a material adverse effect on our business, financial condition and results of operations.





All p r oducts and logos below are protected by trademarks issued by the Trademark Office State Administration for Industry and Commerce of People’s Republic of China.




Series Number
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Expiration Date1.
562663

08/19/20112.
1158223

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1172709

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1174678

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1345896

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1408187

03/13/20207.
1801861

07/06/20128.
1529493

02/27/2011 with extension9.
1669434

11/20/201110.
1801858

07/06/2012
  9
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3740959

06/27/201612.
1939990

07/13/201313.
3077706

05/13/201314.
3136715

02/13/201415.
3550726

09/13/201516.
3650808

05/27/201617.
3740970

06/27/201618.
3740957

02/27/202019.
3740956

10/13/201620.
3750412

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4485312

07/20/201922.
5010672

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6807321

6807333

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3750413

01/06/201625.
3829504

01/06/201726.
3629504

4485313

03/06/2021

07/20/201927.
3850732

03/13/201728.
3942591

03/06/202129.
3955039

10/06/201730.
3958964

06/27/2017




Environmental Protection
 
 Compliance with national, provincial or local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment have not had any material effect on the capital expenditures, earnings or competitive position of the Company. The Company uses and generates certain substances and wastes that are or can be regulated or may be deemed hazardous under certain national, provincial or local regulations with respect to the environment. The Company from time to time works with government agencies to resolve cleanup issues at waste sites and other regulatory issues.
 
 11
  Employees
 
 As of the date hereof, we have 926 full-time employees. The breakdown of our employees by department is:
 
 General and Administration Department


56Production Department


825Sales Department


22Research and Development


23
 
 We have employment agreements with our employees for one-year terms which are subject to renew every year. We believe we have good relations with our employees.
 
 ITEM 1A. RISK FACTORS.
 
 Risks Relating to Our Business
 
 Our results of operations are cyclical and could be adversely affected by fluctuations in the raw materials such as artificial leather, shoe soles and fabric.
 
 We are largely dependent on the cost and supply of raw materials such as artificial leather, shoe soles and fabric, which are determined by constantly changing and volatile market forces of supply and demand as well as other factors over which we have little or no control. These other factors include:
 
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competing demand for the raw materials,
 
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environmental and conservation regulations, and
 
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economic conditions.
 
 We cannot provide assurance that all or part of any increased costs experienced by us, from time to time, can be passed along to consumers of our products, either in a timely manner or at all.
 
 Substantially all of our business, assets and operations are located in the PRC.
 
 Substantially all of our business, assets and operations are located in PRC. The economy of PRC differs from the economies of most developed countries in many respects. The economy of PRC has been transitioning from a planned economy to a market-oriented economy. Although in recent years the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in PRC are still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industries by imposing industrial policies. It also exercises significant control over PRC’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Some of these measures benefit the overall economy of PRC, but may have a negative effect on us.
 
 Our management has no experience in managing and operating a public company. Any failure to comply or adequately comply with federal securities laws, rules or regulations could subject us to fines or regulatory actions, which may materially adversely affect our business, results of operations and financial condition.
 
 Our current management has no experience managing and operating a public company and relies in many instances on the professional experience and advice of third parties including its attorneys and accountants. Failure to comply or adequately comply with any laws, rules, or regulations applicable to our business may result in fines or regulatory actions, which may materially adversely affect our business, results of operation, or financial condition and could result in delays in achieving the development of an active and liquid trading market for our stock.
 
 Our business and the success of our products could be harmed if we are unable to maintain our brand image.
 
 Our success to date has been due in large part to the strength of the Kobe brand, and to a lesser degree, the reputation of our fashion brands. If we are unable to appropriately respond to changing consumer demand in a timely manner, our brand name and brand image may be impaired. Even if we react appropriately to changes in consumer preferences, consumers may consider our brand image to be outdated or associate our brand with styles of footwear that are no longer popular. In the past, several footwear companies including ours have experienced periods of rapid growth in revenues and earnings followed by periods of declining sales and losses. Our business may be similarly affected in the future.
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  Our plans to expand our production, to increase research and development and to improve and upgrade our internal control and management system will require capital expenditures in 2011.
 
 Our plans to expand our production, to increase our research and development and to improve and upgrade our internal control and management system will require capital expenditures in 2011. We may also need further funding for working capital, investments, potential acquisitions and research and development and other corporate requirements. We cannot provide assurance you that cash generated from our operations will be sufficient to fund these development plans, or that our actual capital expenditures and investments will not significantly exceed our current planned amounts. If either of these conditions arises, we may have to seek external financing to satisfy our capital needs. Our ability to obtain external financing at reasonable costs is subject to a variety of uncertainties. Failure to obtain sufficient external funds for our development plans could adversely affect our business, financial condition and operating performance.
 
 We derive all of our revenues from sales in the PRC and any downturn in the Chinese economy could have a material adverse effect on our business and financial condition.
 
 All of our revenues are generated from sales in the PRC. We anticipate that revenues from sales of our products in the PRC will continue to represent the substantial portion of our total revenues in the near future. Our sales and earnings can also be affected by changes in the general economy since purchases of sports products are generally discretionary for consumers. Our success is influenced by a number of economic factors which affect disposable consumer income, such as employment levels, business conditions, interest rates, oil and gas prices and taxation rates. Adverse changes in these economic factors, among others, may restrict consumer spending, thereby negatively affecting our sales and profitability.
 
 Our planned expansion could be delayed or adversely affected by, among other things, difficulties in obtaining sufficient financing, technical difficulties, or human or other resource constraints.
 
 Our planned expansion could be delayed or adversely affected by, among other things, difficulties in obtaining sufficient financing, technical difficulties, or human or other resource constraints. Moreover, the costs involved in these projects may exceed those originally contemplated. Cost savings and other economic benefits expected from these projects may not materialize as a result of any such project delays, cost overruns or changes in market circumstances. Failure to obtain intended economic benefits from these projects could adversely affect our business, financial condition and operating performances.
 
 We encounter substantial competition in our business and any failure to compete effectively could adversely affect our results of operations.
 
 Competition in the sports shoe and sportswear industry is intense. Although we believe that we do not compete directly with any single company with respect to its entire range of products, our products compete with other branded products within their product category as well as with private label products sold by retailers, including some of our customers. Our sports shoes compete with sports shoes offered by international companies such as Nike, Inc., Adidas AG, Puma AG, and New Balance Athletic Shoe, Inc. and PRC companies such as Anta Sports Products Limited, Li Ning Company Limited and Qiaodan (China) Co., Ltd. We anticipate that our competitors will continue to expand and seek to obtain additional market share with competitive price and performance characteristics. Aggressive expansion by our competitors or the entrance of new competitors into our markets could have a material adverse effect on our business, results of operations and financial condition.
 
 Our limited operating history may not serve as an adequate basis to judge our future prospects and results of operations.
 
 Our limited operating history in the sports goods industry may not provide a meaningful basis for evaluating our business. Hengfeng entered into its current line of business, “Kobe” branded shoes, sportswear and accessories in 2003, although it was established in 1992. Although its revenues have grown rapidly since its inception, we cannot guaranty that we will maintain profitability or that we will not incur net losses in the future. We will continue to encounter risks and difficulties that companies at a similar stage of development frequently experience, including the potential failure to:
 
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obtain sufficient working capital to support our expansion;
 
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expand our product offerings and maintain the high quality of our products;
 
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manage our expanding operations and continue to fill customers’ orders on time;
 
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maintain adequate control of our expenses allowing us to realize anticipated income growth;
 
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implement our product development, sales, and acquisition strategies and adapt and modify them as needed;
 
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successfully integrate any future acquisitions; and
  13
 
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anticipate and adapt to changing conditions in the sportswear industry resulting from changes in government regulations, mergers and acquisitions involving our competitors, technological developments and other significant competitive and market dynamics.
 
 If we are not successful in addressing any or all of the foregoing risks, our business may be materially and adversely affected.
 
 We need to manage growth in operations to maximize our potential growth and achieve our expected revenues and our failure to manage growth will cause a disruption of our operations resulting in the failure to generate revenue at levels we expect.
 
 In order to maximize potential growth in our current and potential markets, we believe that we must expand our production operations. This expansion will place a significant strain on our management and our operational, accounting, and information systems. We expect that we will need to continue to improve our financial controls, operating procedures, and management information systems. We will also need to effectively train, motivate, and manage our employees. Our failure to manage our growth could disrupt our operations and ultimately prevent us from generating the revenues we expect.
 
 We cannot provide assurance that our growth strategy will be successful which may result in a negative impact on our growth, financial condition, results of operations and cash flow.
 
 One of our strategies is to develop self-owned stores. However, many obstacles to entering such new markets exist including, but not limited to, established companies in such existing markets in the PRC. We cannot, therefore, assure you that we will be able to successfully overcome such obstacles and establish our products in any additional markets. Our inability to implement this organic growth strategy successfully may have a negative impact on our growth, future financial condition, results of operations or cash flows.
 
 If we need additional capital to fund our growing operations, we may not be able to obtain sufficient capital and may be forced to limit the scope of our operations.
 
 If adequate additional financing is not available to us on reasonable terms, we may not be able to expand our production lines and to develop self-owned stores, and we would have to modify our business plans accordingly. There is no assurance that additional financing will be available to us.
 
 In connection with our growth strategies, we may experience increased capital needs and accordingly, we may not have sufficient capital to fund our future operations without additional capital investments. Our capital needs will depend on numerous factors, including (i) our profitability; (ii) the release of competitive products by our competitors; (iii) the level of our investment in research and development; and (iv) the amount of our capital expenditures, including acquisitions. We cannot provide assurance that we will be able to obtain additional capital in the future to meet our needs.
 
 If we cannot obtain additional funding, we may be required to: (i) limit our expansion; (ii) limit our marketing efforts; and (iii) decrease or eliminate capital expenditures. Such reductions could materially adversely affect our business and our ability to compete.
 
 Even if we do find sources of additional capital, we may not be able to negotiate terms and conditions that are favorable to us. Any future capital investments could dilute or otherwise materially and adversely affect the holdings or rights of our existing shareholders. In addition, new equity or convertible debt securities issued by us to obtain financing could have rights, preferences and privileges senior to our common stock. We cannot give any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us.
 
 Need for additional employees.
 
 The Company’s future success also depends upon its continuing ability to attract and retain highly qualified personnel. Expansion of the Company’s business and the management and operation of the Company will require additional managers and employees with industry experience, and the success of the Company will be highly dependent on the Company’s ability to attract and retain skilled management personnel and other employees. There can be no assurance that the Company will be able to attract or retain highly qualified personnel. Competition for skilled personnel in our industry is significant. This competition may make it more difficult and expensive to attract, hire and retain qualified managers and employees.
 
 The loss of the services of our key employees, particularly the services rendered by Qionglin Lin, our General Manager and Director, Mendoza Anding Lin, our President, CEO, Interim CFO and Chairman, and Aling Lin, our Director, could harm our business.
 
 Our success depends to a significant degree on the services rendered to us by our key employees.  If we fail to attract, train and retain sufficient numbers of these qualified people, our prospects, business, financial condition and results of operations will be materially and adversely affected. In particular, we are heavily dependent on the continued services of Qionglin Lin, our General Manager and Director, Mendoza Anding Lin, our President, CEO, Interim CFO and Chairman, and Aling Lin, our Director. The loss of any key employees, including members of our senior management team, and our inability to attract highly skilled personnel with sufficient experience in our industry could harm our business.
 
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  Our ability to compete could be jeopardized if we are unable to protect our intellectual property rights or if we are sued for intellectual property infringement.
 
 We believe that our trademarks and other proprietary rights are important to our success and our competitive position. We use trademarks on nearly all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying us and in distinguishing our goods from the goods of others. We consider our trademarks to be among our most valuable assets, and we have registered these trademarks in many countries. In addition, we own many other trademarks that we utilize in marketing our products. We believe that our trademarks are generally sufficient to permit us to carry on our business as presently conducted. While we vigorously protect our trademarks against infringement, we cannot provide assurance that we will be able to secure patents or trademark protection for our intellectual property in the future or that protection will be adequate for future products. Further, we may be sued for patent and trademark infringement and cannot be sure that our activities do not and will not infringe on the intellectual property rights of others. If we are compelled to prosecute infringing parties, defend our intellectual property or defend ourselves from intellectual property claims made by others, we may face significant expenses and liability as well as the diversion of management’s attention from our business, each of which could negatively impact our business or financial condition.
 
 Our principal stockholder is able to control substantially all matters requiring a vote of our stockholders and his interests may differ from the interests of our other stockholders.
 
 As of the date hereof, Anding Lin, our President, beneficially owned 81% of our outstanding common stock. Mr. Lin may have different interests than our other stockholders, and because he is able to control substantially all matters requiring approval by our stockholders, he may direct the operations of our business in a manner contrary to the interests of our other stockholders. Matters that require the approval of our stockholders include the election of directors and the approval of mergers or other business combination transactions. Mr. Lin also has control over our management and affairs. As a result of such control, certain transactions are not possible without the approval of Mr. Lin, including proxy contests, tender offers, open market purchase programs or other transactions that can give our stockholders the opportunity to realize a premium over the then-prevailing market prices for their shares of our common stock.
 
 Our failure to comply with increasingly stringent environmental regulations and related litigation could result in significant penalties, damages and adverse publicity for our business.
 
 In recent years, the government of China has become increasingly concerned with the degradation of China’s environment that has accompanied the country’s rapid economic growth.  We expect that our operations and properties will continue to be subject to extensive and increasingly stringent laws and regulations pertaining to, among other things, the discharge of materials into the environment and the handling and disposition of wastes (including solid and hazardous wastes) or otherwise relating to protection of the environment. Failure to comply with any laws and regulations and future changes to them may result in significant consequences to us, including civil and criminal penalties, liability for damages and negative publicity.  We cannot provide assurance that additional environmental issues will not require currently unanticipated investigations, assessments or expenditures, or that requirements applicable to us will not be altered in ways that will require us to incur significant additional costs.
 
 We will incur significant costs to ensure compliance with United States corporate governance and accounting requirements.
 
 We will incur significant costs associated with our public company reporting requirements, costs associated with newly applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the Securities and Exchange Commission. We expect all of these applicable rules and regulations to significantly increase our legal and financial compliance costs and to make some activities more time consuming and costly. We also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these newly applicable rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
 
 We may not be able to meet the internal control reporting requirements imposed by the SEC resulting in a possible decline in the price of our common stock and our inability to obtain future financing.
 
 As directed by Section 404 of the Sarbanes-Oxley Act, the SEC adopted rules requiring each public company to include a report of management on the company’s internal controls over financial reporting in its annual reports. Although the Dodd-Frank Wall Street Reform and Consumer Protection Act exempts companies with a public float of less than $75 million from the requirement that our independent registered public accounting firm attest to our financial controls, this exemption does not affect the requirement that we include a report of management on our internal control over financial reporting and does not affect the requirement to include the independent registered public accounting firm’s attestation if our public float exceeds $75 million.
 
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  While we expect to expend significant resources in developing the necessary documentation and testing procedures required by Section 404 of the Sarbanes-Oxley Act, there is a risk that we may not be able to comply timely with all of the requirements imposed by this rule. Regardless of whether we are required to receive a positive attestation from our independent registered public accounting firm with respect to our internal controls, if we are unable to do so, investors and others may lose confidence in the reliability of our financial statements and our stock price and ability to obtain equity or debt financing as needed could suffer.
 
 In addition, in the event that our independent registered public accounting firm is unable to rely on our internal controls in connection with its audit of our financial statements, and in the further event that it is unable to devise alternative procedures in order to satisfy itself as to the material accuracy of our financial statements and related disclosures, it is possible that we would be unable to file our annual reports with the SEC, which could also adversely affect the market for and the market price of our common stock and our ability to secure additional financing as needed.
 
 Risks Relating to Doing Business in the People's Republic of China
 
 Certain political and economic considerations relating to the PRC could adversely affect our company.
 
 The PRC is transitioning from a planned economy to a market economy. While the PRC government has pursued economic reforms since its adoption of the open-door policy in 1978, a large portion of the PRC economy is still operating under five-year plans and annual state plans. Through these plans and other economic measures, such as control on foreign exchange, taxation and restrictions on foreign participation in the domestic market of various industries, the PRC government exerts considerable direct and indirect influence on the economy. Many of the economic reforms carried out by the PRC government are unprecedented or experimental, and are expected to be refined and improved. Other political, economic and social factors can also lead to further readjustment of such reforms. This refining and readjustment process may not necessarily have a positive effect on our operations or future business development. Our operating results may be adversely affected by changes in the PRC’s economic and social conditions as well as by changes in the policies of the PRC government, such as changes in laws and regulations (or the official interpretation thereof), measures which may be introduced to control inflation, changes in the interest rate or method of taxation, and the imposition of restrictions on currency conversion in addition to those described below.
 
 Chinese corporate income tax law could adversely affect our business and our net income.
 
 In 2007, the PRC government promulgated the New EIT Law, and the relevant implementation rules, which became effective on January 1, 2008. Under the New EIT Law and its implementation rules, all domestic and foreign investment companies will be subject to a uniform enterprise income tax at the rate of 25%. As a result, our PRC subsidiaries and VIE Entities are subject to enterprise income tax at the rates of 25% in 2008, 2009 and 2010.
 
 Under the New EIT Law, dividends from PRC subsidiaries to their non-PRC shareholders will be subject to a withholding tax at a rate of 20%, which is further reduced to 10% by the implementation rules, if the non-PRC shareholder is considered to be a non-PRC tax resident enterprise without any establishment or place within China or if the dividends payable has no connection with the non-PRC shareholder’s establishment or place within China, unless any such non-PRC shareholder’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.
 
 In addition, pursuant to the New EIT Law, enterprises established under the laws of non-PRC jurisdictions, but whose “de facto management body” is located in the PRC, should be treated as resident enterprises for PRC tax purposes. However, it is currently uncertain whether we may be deemed a resident enterprise, or how to interpret whether any income or gain is derived from sources within China. Under the New EIT Law, we may be classified as a ‘resident enterprise’ of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC stockholders.”
 
 We face uncertainty from China’s Circular on Strengthening the Administration of Enterprise Income Tax on Non-Resident Enterprises' Share Transfer that was released in December 2009 with retroactive effect from January 1, 2008.
 
 The Chinese State Administration of Taxation (SAT) released a circular (Guoshuihan No. 698 – Circular 698) on December 15, 2009 that addresses the transfer of shares by nonresident companies. Circular 698, which was effective retroactively to January 1, 2008, may have a significant impact on many companies that use offshore holding companies to invest in China. Circular 698, which provides parties with a short period of time to comply with its requirements, indirectly taxes foreign companies on gains derived from the indirect sale of a Chinese company. Where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise by selling the shares in an offshore holding company, and the latter is located in a country or jurisdiction where the effective tax burden is less than 12.5% or where the offshore income of his, her, or its residents is not taxable, the foreign investor is required to provide the tax authority in charge of that Chinese resident enterprise with the relevant information within 30 days of the transfers.
 
 16
 
 Moreover, where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise through an abuse of form of organization and there are no reasonable commercial purposes such that the corporate income tax liability is avoided, the PRC tax authority will have the power to re-assess the nature of the equity transfer in accordance with PRC’s “substance-over-form” principle and deny the existence of the offshore holding company that is used for tax planning purposes. There is uncertainty as to the application of Circular 698. For example, while the term "indirectly transfer" is not defined, it is understood that the relevant PRC tax authorities have jurisdiction regarding requests for information over a wide range of foreign entities having no direct contact with China. Moreover, the relevant authority has not yet promulgated any formal provisions or formally declared or stated how to calculate the effective tax in the country or jurisdiction and to what extent and the process of the disclosure to the tax authority in charge of that Chinese resident enterprise. In addition, there are not any formal declarations with regard to how to decide “abuse of form of organization” and “reasonable commercial purpose,” which can be utilized by us to balance if our Company complies with the Circular 698. As a result, we may become at risk of being taxed under Circular 698 and we may be required to expend valuable resources to comply with Circular 698 or to establish that we should not be taxed under Circular 698, which could have a material adverse effect on our financial condition and results of operations.
 
 The recent nature and uncertain application of many PRC laws applicable to us create an uncertain environment for business operations and they could have a negative effect on us.
 
 The PRC legal system is a civil law system. Unlike the common law system, the civil law system is based on written statutes in which decided legal cases have little value as precedents. In 1979, the PRC began to promulgate a comprehensive system of laws and has since introduced many laws and regulations to provide general guidance on economic and business practices in the PRC and to regulate foreign investment. Progress has been made in the promulgation of laws and regulations dealing with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. The promulgation of new laws, changes of existing laws and the abrogation of local regulations by national laws could have a negative impact on our business and business prospects.
 
 Currency conversion could adversely affect our financial condition.
 
 The PRC government imposes control over the conversion of Renminbi into foreign currencies. Under the current unified floating exchange rate system, the People’s Bank of China publishes an exchange rate, which we refer to as the PBOC exchange rate, based on the previous day’s dealings in the inter-bank foreign exchange market. Financial institutions authorized to deal in foreign currency may enter into foreign exchange transactions at exchange rates within an authorized range above or below the PBOC exchange rate according to market conditions.
 
 Pursuant to the Foreign Exchange Control Regulations of the PRC issued by the State Council which came into effect on April 1, 1996, and the Regulations on the Administration of Foreign Exchange Settlement, Sale and Payment of the PRC which came into effect on July 1, 1996, regarding foreign exchange control, conversion of Renminbi into foreign exchange by Foreign Investment Enterprises, or FIEs, for use on current account items, including the distribution of dividends and profits to foreign investors, is permissible. FIEs are permitted to convert their after-tax dividends and profits to foreign exchange and remit such foreign exchange to their foreign exchange bank accounts in the PRC. Conversion of Renminbi into foreign currencies for capital account items, including direct investment, loans, and security investment, is still under certain restrictions. On January 14, 1997, the State Council amended the Foreign Exchange Control Regulations and added, among other things, an important provision, which provides that the PRC government shall not impose restrictions on recurring international payments and transfers under current account items.
 
 Enterprises in the PRC (including FIEs) which require foreign exchange for transactions relating to current account items, may, without approval of the State Administration of Foreign Exchange, or SAFE, effect payment from their foreign exchange account or convert and pay at the designated foreign exchange banks by providing valid receipts and proofs.
 
 Convertibility of foreign exchange in respect of capital account items, such as direct investment and capital contribution, is still subject to certain restrictions, and prior approval from the SAFE or its relevant branches must be sought.
 
 Furthermore, the Renminbi is not freely convertible into foreign currencies nor can it be freely remitted abroad. Under the PRC’s Foreign Exchange Control Regulations and the Administration of Settlement, Sales and Payment of Foreign Exchange Regulations, Foreign Invested Enterprises are permitted either to repatriate or distribute its profits or dividends in foreign currencies out of its foreign exchange accounts, or exchange Renminbi for foreign currencies through banks authorized to conduct foreign exchange business. The conversion of Renminbi into foreign exchange by Foreign Invested Enterprises for recurring items, including the distribution of dividends to foreign investors, is permissible. The conversion of Renminbi into foreign currencies for capital items, such as direct investment, loans and security investment, is subject, however, to more stringent controls.
 
 Our operating company is a FIE to which the Foreign Exchange Control Regulations are applicable. Accordingly, we will have to maintain sufficient foreign exchange to pay dividends and/or satisfy other foreign exchange requirements.
  17
  Exchange rate volatility could adversely affect our financial condition.
 
 The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions as well as economic policies of the PRC. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB has been permitted to fluctuate within a narrow and managed band against a basket of foreign currencies. This change in policy has resulted in an approximately 16.4% appreciation of the RMB against the U.S. dollar between July 21, 2005 and July 15, 2010, and as of November 23, 2010, the exchange rate was RMB 6.63 to $1.00. There remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the RMB against the U.S. dollar. In June 2010, the PRC government indicated that it would make the foreign exchange rate of the RMB more flexible, which increases the possibility of sharp fluctuations in RMB value in the near future and thus unpredictability associated with RMB exchange rates.
 
 Substantially all of our sales and costs are denominated in the RMB, and a significant portion of our financial assets is also denominated in the RMB. Further, we rely principally on dividends and other distributions paid by our operating subsidiaries in China. Any significant revaluation of the RMB could materially and adversely affect our cash flows, sales, earnings and financial position, and the value of, and any dividends payable with respect to, our shares in U.S. dollars. Any fluctuations of the exchange rate between the RMB and the U.S. dollar could also result in foreign currency translation losses for financial reporting purposes.
 
 Since our assets are located in the PRC, any dividends of proceeds from liquidation are subject to the approval of the relevant Chinese government agencies.
 
 Our operating assets are located inside the PRC. Under the laws governing Foreign Invested Enterprises in the PRC, dividend distribution and liquidation are allowed but subject to special procedures under the relevant laws and rules. Any dividend payment will be subject to the decision of the board of directors and subject to foreign exchange rules governing such repatriation. Any liquidation is subject to the relevant government agency’s approval and supervision as well as the foreign exchange control. This may generate additional risk for our investors in case of dividend payment and liquidation.
 
 It may be difficult to affect service of process and enforcement of legal judgments upon our company and our officers and directors because they reside outside the United States.
 
 As our operations are presently based in the PRC and our director and officer resides in the PRC, service of process on our company and such director and officer may be difficult to effect within the United States. Also, our main assets are located in the PRC and any judgment obtained in the United States against us may not be enforceable outside the United States.
 
 Due to various restrictions under PRC laws on the distribution of dividends by our PRC Operating Companies, we may not be able to pay dividends to our stockholders.
 
 The Wholly-Foreign Owned Enterprise Law (1986), as amended and The Wholly-Foreign Owned Enterprise Law Implementing Rules (1990), as amended and the Company Law of the PRC (2006) contain the principal regulations governing dividend distributions by wholly foreign owned enterprises. Under these regulations, wholly foreign owned enterprises may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, such companies are required to set aside a certain amount of their accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash dividends except in the event of liquidation and cannot be used for working capital purposes. The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. We may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from the Company’s profits.
 
 Furthermore, if our subsidiaries in China incur debt on their own in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments. If we or our subsidiaries are unable to receive all of the revenues from our operations through these contractual or dividend arrangements, we may be unable to pay dividends on our common stock.
 
 The Chinese government exerts substantial influence over the manner in which we must conduct our business activities.
 
 We are dependent on our relationship with the local government in the province in which we operate our business. Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, environmental regulations, land use rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties.
  18
  Future inflation in China may inhibit our ability to conduct business in China. In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our products rise at a rate that is insufficient to compensate for the rise in the costs of supplies, it may have an adverse effect on profitability. These factors have led to the adoption by Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products.
 
 If our land use rights are revoked, we would have no operational capabilities.
 
 Under Chinese law land is owned by the state or rural collective economic organizations. The state issues to tenants the rights to use property. Use rights can be revoked and the tenants forced to vacate at any time when redevelopment of the land is in the public interest. The public interest rationale is interpreted quite broadly and the process of land appropriation may be less than transparent. Each of our operating subsidiaries rely on these land use rights as the cornerstone of their operations, and the loss of such rights would have a material adverse effect on our company.
 
 The implementation of the new PRC employment contract law and increases in the labor costs in China may hurt our business and profitability.
 
 A new employment contract law became effective on January 1, 2008 in China. It imposes more stringent requirements on employers in relation to entry into fixed-term employment contracts, recruitment of temporary employees and dismissal of employees. In addition, under the newly promulgated Regulations on Paid Annual Leave for Employees, which also became effective on January 1, 2008, employees who have worked continuously for more than one year are entitled to paid vacation ranging from 5 to 15 days, depending on the length of the employee’s service. Employees who waive such vacation entitlements at the request of the employer will be compensated for three times their normal daily salaries for each vacation day so waived. As a result of the new law and regulations, our labor costs may increase. There is no assurance that disputes, work stoppages or strikes will not arise in the future. Increases in the labor costs or future disputes with our employees could damage our business, financial condition or operating results.
 
 Risks Relating to Our Securities
 
 In order to raise sufficient funds to expand our operations, we may have to issue additional securities at prices which may result in substantial dilution to our shareholders.
 
 If we raise additional funds through the sale of equity or convertible debt, our current stockholders’ percentage ownership will be reduced. In addition, these transactions may dilute the value of our securities outstanding. We may have to issue securities that may have rights, preferences and privileges senior to our common stock. We cannot provide assurance that we will be able to raise additional funds on terms acceptable to us, if at all. If future financing is not available or is not available on acceptable terms, we may not be able to fund our future needs, which would have a material adverse effect on our business plans, prospects, results of operations and financial condition.
 
 Our securities have not been registered under the Securities Act, and cannot be sold without registration under the Securities Act or any exemption from registration.
 
 Our securities should be considered a long-term, illiquid investment. Our securities have not been registered under the Securities Act, and cannot be sold without registration under the Securities Act or any exemption from registration. In addition, our securities are not registered under any state securities laws that would permit their transfer. Because of these restrictions and the absence of an active trading market for the securities, a shareholder will likely be unable to liquidate an investment even though other personal financial circumstances would dictate such liquidation.
 
 We are not likely to pay cash dividends in the foreseeable future.
 
 We currently intend to retain any future earnings for use in the operation and expansion of our business. Accordingly, we do not expect to pay any cash dividends in the foreseeable future, but will review this policy as circumstances dictate. Should we determine to pay dividends in the future, our ability to do so will depend upon the receipt of dividends or other payments from our PRC operating subsidiary which may, from time to time, be subject to restrictions on its ability to make distributions to us, including restrictions on the conversion of RMB into U.S. dollars or other hard currency and other regulatory restrictions.
  19
  We may be subject to the penny stock rules which will make our securities more difficult to sell.
 
 If we are able to obtain a listing of our securities on a national securities exchange, we may be subject in the future to the SEC’s “penny stock” rules if our securities sell below $5.00 per share. Penny stocks generally are equity securities with a price of less than $5.00. The penny stock rules require broker-dealers to deliver a standardized risk disclosure document prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson, and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information must be given to the customer orally or in writing prior to completing the transaction and must be given to the customer in writing before or with the customer’s confirmation.
 
 In addition, the penny stock rules require that prior to a transaction, the broker dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. The penny stock rules are burdensome and may reduce purchases of any offerings and reduce the trading activity for our securities. As long as our securities are subject to the penny stock rules, the holders of such securities may find it more difficult to sell their securities.
 
 Our securities have not been listed for trading on any stock exchange and there can be no assurance that there will be a market developed for our securities in the future.
 
 Our securities have not been quoted or listed for trading on any stock exchange. Although our management intends to apply to a senior exchange for listing of our securities, there can be no assurance that a public market for our shares will be developed. Consequently, investors may not be able to liquidate their investment or liquidate it at a price that reflects the value of the business. Even if a public market should develop, the price may be highly volatile. Because there may be a low price for our securities, many brokerage firms may not be willing to effect transactions in the securities. Even if an investor finds a broker willing to effect a transaction in our securities, the combination of brokerage commissions, transfer fees, taxes, if any, and any other selling costs may exceed the selling price. Further, many lending institutions will not permit the use of such securities as collateral for any loans.
 
 ITEM 2. PROPERTIES.
 
 Our corporate headquarters and factory are located at Yangdai Village, Chendai County, Jinjiang City, Fujian Province in the PRC, which consists of an aggregate of approximately 50,000 square meters.  The facility, which is situated on approximately 7,500 square meters of developed land, is leased from the Chinese government for a period of 50 years and is scheduled to expire in 2057.
 
 We have obtained insurance for our properties, including our office building, factory and equipment, etc. for a total of $10,963,994.02 insured amount, from January 1, 2011 until December 31, 2011, which we renew annually.
 
 ITEM 3. LEGAL PROCEEDINGS.
 
 To the best of our knowledge, there are no known or pending litigation proceedings against us.
 
 ITEM 4. (REMOVED AND RESERVED).




PART II





ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.





Market Information





Our common stock has not been quoted or listed for trading on any stock exchange and therefore there is no public trading market for our common stock.





Holders





As of the date hereof, there are 7,750,000 shares of common stock issued and outstanding. There are 11 shareholders of our common stock.





Dividend Policy





Since inception we have not paid any dividends on our common stock. We currently do not anticipate paying any cash dividends in the foreseeable future on our common stock. Although we intend to retain our earnings, if any, to finance the exploration and growth of our business, our Board of Directors will have the discretion to declare and pay dividends in the future. Payment of dividends in the future will depend upon our earnings, capital requirements, and other factors, which our Board of Directors may deem relevant.




20




Penny Stock





We may be subject in the future to the SEC’s “penny stock” rules if our securities sell below $5.00 per share. Penny stocks generally are equity securities with a price of less than $5.00. The penny stock rules require broker-dealers to deliver a standardized risk disclosure document prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson, and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information must be given to the customer orally or in writing prior to completing the transaction and must be given to the customer in writing before or with the customer’s confirmation.





In addition, the penny stock rules require that prior to a transaction, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. The penny stock rules are burdensome and may reduce purchases of any offerings and reduce the trading activity for our securities. As long as our securities are subject to the penny stock rules, the holders of such securities may find it more difficult to sell their securities.





Securities Authorized for Issuance Under Equity Compensation Plans





We presently do not have any equity based or other long-term incentive programs. In the future, we may adopt and establish an equity-based or other long-term incentive plan if it is in the best interest of the Company and our stockholders to do so.





ITEM 6. SELECTED FINANCIAL DATA.





Not applicable because we are a smaller reporting company.





ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.





The following discussion and analysis of the results of operations and financial condition for the fiscal years ended December 31, 2010 and 2009, should be read in conjunction with our financial statements, and the notes to those financial statements that are included elsewhere in this Form 10-K. References in this section to “we,” “us,” “our,” or the “Company” are to the consolidated business of Kobe Sport, Nam Kwong and Hengfeng.





Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Cautionary Notice Regarding Forward-Looking Statements and Business sections in this From 10-K. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.





COMPANY OVERVIEW





The Company, operating through its PRC subsidiary, Hengfeng, designs, develops, and manufactures “Kobe” brand shoes, sportswear and accessories in Jinjiang City, Fujian Province. Around 50% of the shoes are produced by Hengfeng internally, while the sportswear and accessories are outsourced to subcontractors. The Company incorporates innovate value-adding technology into its products, such as a perspiration absorption system, a 3D ventilation system and a polyurethane anti-crease system to satisfy the demands and tastes of our target consumers.


We distribute our products through retail stores, which sell our products exclusively. We derive all of our revenue from sales to our distributors that operate, either directly or indirectly through third parties, the retail stores that sell our products. These distributors may also engage authorized third-party retailers to operate the retail stores. We only have contractual relationship with our distributors, not with any authorized third-party retailers. We believe that the sale of our products through distributors has enabled us to grow by leveraging on their regional retail expertise and economies of scale. We provide our distributors retail policies and guidelines, training, advertising and marketing support to assist them to manage and expand the retail sales network. The number of the retail stores grew from 869 as of December 31, 2009 to 1,033 as of December 31, 2010.
 
 The Company expects to increase the number of stores by at least 20% each year within the coming five years, and both the turnover and net profit would be increased accordingly.


The main focus of the Company is on second and third-tier cities with trendy consumers and professional athletes. The targeted customers are those within the 15 to 45-year old range, who are secondary school and university students that have a taste for fashion and middle-aged individuals that have a high purchase power and preference for quality. The products are mid-ranged priced for professionals and functional sporting goods with high technical content.




The principal factor affecting our financial performance is the size of our sales network. The market demand is so material that the increase of the number of sales points within our sales network can proportionally raise our turnover and net profit. We plan to open more retail stores. They will be mainly operated by our distributors and some will be self-owned. Our turnover and net profit can be increased in line of the number of retail stores within our sales network.





21




RESULTS OF OPERATIONS





Results of Operations for the year ended December 31, 2010 compared to the year ended December 31, 2009




The following table sets forth key components of our results of operations during the fiscal years ended December 31, 2010 and 2009 in US dollars. The discussion following the table is based on these results.




INCOME STATEMENT


For the Year Ended

December 312010



2009Revenue

$
109,722,921


$
81,187,591Cost of goods sold


(77,552,330
)


(58,082,347
)Gross profit


32,170,591



23,105,244Selling expenses


(3,048,995
)


(2,315,635
)General and administrative expenses


(3,017,779
)


(1,990,451
)Income from operations


26,103,817



18,799,158Other income (expense):Interest income


140,524



258,717Interest expense


(70,014
)


(81,999
)Total other income (expense)


70,510



176,718Income before income tax


26,174,327



18,975,876Provision for income tax


(6,633,704
)


(4,751,151
)Net income


19,540,623



14,224,725Income attributable to non-controlling interests


(1,192,777
)


(853,484
)Net income attributable to China Sports stockholders

$
18,347,846


$
13,371,241Other comprehensive income attributable to China Sports stockholders:Foreign currency translation adjustment


1,484,934



25,268Comprehensive income attributable to China Sports stockholders

$
19,832,780


$
13,396,509Comprehensive income attributable to non-controlling interests


1,287,560



855,096Total comprehensive income

$
21,120,340


$
14,251,605





Net Revenue:





Net revenue increased by $28,535,330 or 35%, from $81,187,591 for the year ended December 31, 2009 to $109,722,921 for the year ended December 31, 2010.  Our overall net revenue increased primarily for three reasons. First, the sales increase of skate board shoes for the year ended December 31, 2010.  The sales quantity of skate board shoes increased from 1,948,159 pairs in the year ended December 31, 2009 to 2,917,572 pairs in the year ended December 31, 2010 and the unit price for skate board shoes increased from RMB65.39 in 2009 to RMB67.73 in 2010. Second, the sales increase of jogging shoes for the year ended December 31, 2010. The sales quantity of jogging shoes increased from 295,992 pairs in the year ended December 31, 2009 to 966,579 pairs in the same period of 2010 and the unit price for jogging shoes increased from RMB78.09 in 2009 to RMB81.67 in 2010. Third, the sales increase of sportswear for the year ended December 31, 2010. The sales increase of approximately $9 million in sportswear in 2010 was due to a unit price increase from RMB45.67 in 2009 to RMB59.69 in 2010.





Cost of sales:





Cost of sales increased by $19,469,983, or 34%, from $58,082,347 for the year ended December 31, 2009 to $77,552,330 for the year ended December 31, 2010.  The percentage increase in cost of sales is basically in line with the increase in revenue as mentioned above.





22




Gross profit:





Gross profit increased by $9,065,347 or 39%, from $23,105,244 for the year ended December 31, 2009 to $32,170,591 for the year ended December 31, 2010.  The gross profit margin for the year ended December 31, 2010 was aproximately 29%, which was slightly higher than 28% for the year ended December 31, 2009.





Selling expenses:





Selling expenses were $2,315,635 for the year ended December 31, 2009, compared to $3,048,995 for the year ended December 31, 2010.  The percentage increase in selling expenses for the year ended December 31, 2010 was 32% as compared to the year ended December 31, 2009.Selling expenses include salaries, shipping expenses, travelling expenses and advertising cost for products. In order to increase the market share, we carried out more advertising activities in 2010, which caused our advertisement expenditures to increase by $630,240 for the year ended December 31, 2010.





Administrative expenses





Administrative expenses for the year ended December 31, 2010 and 2009 were $3,017,779 and $1,990,451 respectively. The increase in administrative expenses was caused, in part, by the increase in depreciation expenses of $213,211.  From February 2010 to April 2010, production was temporarily stopped for maintenance, causing the related depreciation expense for plant and equipment to be recorded as administrative expenses during this period instead of cost of production as in the prior year.





The increase in administrative expenses was also caused by $173,228 of plant and equipment maintenance expenditures, $339,000  for audit and attorney’s fees in relation to the Company’s share exchange transaction in 2010, and increased salaries of $199,727.





Income from operations:





Income from operations was $18,799,158 for the year ended December 31, 2009, compared to $26,103,817 for the year ended December 31, 2010.  The increase of $7,304,659 or 39%, was primarily the result of the increase in gross profit.





Provision for income tax





Income tax increased by $1,882,553 to $6,633,704 for the year ended December 31, 2010 from $4,751,151 for the same period in 2009. We paid more tax in 2010 because of the increase in sales and taxable income.





Net income





Net income increased by $5,315,898, or 37% to $19,540,623 for the year ended December 31, 2010 from $14,224,725 for the same period of 2009, as a result of the factors described above.





Income attributable to non-controlling interests





“Income attributable to non-controlling interests”was $853,484 for the year ended December 31, 2009, compared to $1,192,777 for the year ended December 31, 2010. The increase of $339,293 or 40% was primarily the result of the increase in income before “Income attributable to non-controlling interests”. It is calculated as the 6% share of the net income of Hengfeng for the year ended December 31, 2010.





Net income attributable to China Sports stockholders





“Net income attributable to China Sports stockholders” was $13,371,241 for the year ended December 31, 2009, compared to $18,347,846 for the year ended December 31, 2010, an increase of $4,976,605 or 37%, as a result of the factors described above.




23




Results of Operations for year ended December 31, 2009 compared to year ended December 31, 2008





The following table sets forth key components of our results of operations during the fiscal years ended December 31, 2010 and 2009 in US dollars. The discussion following the table is based on these results.




INCOME STATEMENT

For the Year Ended

December 312009


2008Revenue

$
81,187,591


$
63,406,121Cost of goods sold


(58,082,347
)


(45,463,469
)Gross profit


23,105,244



17,942,652Selling expenses


(2,315,635
)


(2,932,230
)General and administrative expenses


(1,990,451
)


(1,742,675
)Income from operations


18,799,158



13,267,747Other income (expense):Interest income


258,717



77,603Interest expense


(81,999
)


(129,624
)Total other income (expense)


176,718



(52,021
)Income before income tax


18,975,876



13,215,726Provision for income tax


(4,751,151
)


(3,316,035
)Net income


14,224,725



9,899,691Income attributable to non-controlling interests


(853,484
)


(593,981
)Net income attributable to China Sports stockholders

$
13,371,241


$
9,305,710Other comprehensive income attributable to China Sports stockholders:Foreign currency translation adjustment


25,268



1,000,295Comprehensive income attributable to China Sports stockholders

$
13,396,509


$
10,306,005Comprehensive income attributable to non-controlling interests


855,096



657,831Total comprehensive income

$
14,251,605


$
10,963,836





Net Revenue:





Net revenue increased by $17,781,470 or 28%, from $63,406,121 for the year ended December 31, 2008 to $81,187,591 for the year ended December 31, 2009.  Our overall net revenue increased primarily for two reasons. First, the sales increase of sportswear for the year ended December 31, 2009.  The sales quantity of sportswear increased from 3,274,878 in the year ended December 31, 2008 to 4,460,893 in the year ended December 31, 2009 and the unit price has increased from RMB39.87 in 2008 to RMB45.67 in 2009. Second, the sales increase of accessories for the year ended December 31, 2009. The sales quantity of accessories increased from 3,651,870 in the year ended December 31, 2008 to 5,425,883 in the same period of 2009 and the unit price has increased from RMB5.96 in 2008 to RMB6.73 in 2009.





Cost of sales:





Cost of sales increased by $12,618,878 or 28%, from $45,463,469 for the year ended December 31, 2008 to $58,082,347 for the year ended December 31, 2009.  The percentage increase in cost of sales is basically in line with the increase in revenue as mentioned above.





Gross profit:





Gross profit increased by $5,162,592 or 29%, from $17,942,652 for the year ended December 31, 2008 to $23,105,244 for the year ended December 31, 2009.  The gross profit margin for the year ended December 31, 2009 was about 28.5%, which was slightly higher than 28.3% for the year ended December 31, 2008.





Selling expenses:





Selling expenses were $2,932,230 for the year ended December 31, 2008, compared to $2,315,635 for the year ended December 31, 2009.  Selling expenses in 2008 were higher than in 2009 due to subsidies to retail stores. In 2008, subsidies to retail stores were included in the selling expense. Subsidies to retail stores was calculated as 1.5% of the sales revenue, which was deducted directly from the sales revenue starting from 2009.




24





Administrative expenses




Administrative expenses for the year ended December 31, 2009 and 2008 were $1,990,451 and $1,742,675 respectively. The increase in administrative expenses was mainly due to increases in other taxes and fees, which is part of administrative expense and increased salaries in 2009.





Income from operations:





Income from operations was $13,267,747 for the year ended December 31, 2008, compared to $18,799,158 for the year ended December 31, 2009.  The increase of $5,531,411 or 42%, was primarily the result of the increase in gross profit.





Provision for income tax





Income tax increased by $1,435,116 to $4,751,151 for the year ended December 31, 2009 from $3,316,035 for the same period in 2008.  We paid more tax in 2009 because of the increase in sales and taxable income.





Net income





Net income increased by $4,325,034, or 44% to $14,224,725 for the year ended December 31, 2009 from $9,899,691 for the same period of 2008, as a result of the factors described above.





Income attributable to noncontrolling interests





“Income attributable to noncontrolling interests”was $593,981 for the year ended December 31, 2008, compared to $853,484 for the year ended December 31, 2009. The increase of $259,503 or 44% was primarily the result of the increase in income before “Income attributable to noncontrolling interests” (or, “Net income”). It is calculated as the 6% share of the net income of Hengfeng for the year ended December 31, 2009.





Net income attributable to China Sports stockholders





“Net income attributable to China Sports stockholders” was $9,305,710 for the year ended December 31, 2008, compared to $13,371,241 for the year ended December 31, 2009, an increase of $4,065,531 or 44%, as a result of the factors described above.








LIQUIDITY AND CAPITAL RESOURCES





As of December 31, 2010, our balance of cash and cash equivalents was $ 28,657,972.   As of December 31, 2009, our balance of cash and cash equivalents was $17,387,929.





The following table summarizes our cash flows for 2009 and 2010:





For the YearEnded

December 31,2010


2009(US$)Net cash provided by operating activities

$
14,490,325


$
13,573,493Net cash used in investing activities


(4,373,781
)


(3,132,324
)Net cash provided by (used in) financing activities


213,437



(465,525
)Foreign currency translation adjustment


940,062



12,228Cash and cash equivalents at beginning of period


17,387,929



7,400,057Cash and cash equivalents at end of period

$
28,657,972


$
17,387,929





Operating activities





For the year ended December 31, 2010, cash provided by operating activities totaled $14,490,325 compared to $13,573,493 in the same period of 2009. This was primarily attributable to: i) net earnings of $19,540,623; ii) a $15,895,501 accounts receivable increase driven by revenue growth; and iii) a $9,770,908 accounts payable increase.





25




Investing activities





For the year ended December 31, 2010, cash used by investing activities totaled $4,373,781 compared to $3,131,123 in the same period of 2009. This was attributable to a $7,549,791 deposit for land use rights offset by $3,176,010 in loan repayment by a related party.





Financing activities





For the year ended December 31, 2010, we had net cash inflow of $213,437 from financing activities mainly due to advance from a related party of $339,000 offset by net repayments of short-term bank loans of $125,563..





The following table summarizes our cash flows for 2008 and 2009:





For the year ended

December 31,2009


2008(US$)Net cash provided by operating activities

$
13,573,493


$
6,835,504Net cash used in investing activities


(3,132,324
)


(7,538,804
)Net cash used in financing activities


(465,525
)


(1,650,781
)Effect of exchange rate on cash and cash equivalents


12,228



591,967Cash and cash equivalents at beginning of period


7,400,057



9,162,171Cash and cash equivalents at end of period

$
17,387,929


$
7,400,057





Operating activities





For the year ended December 31, 2009, cash provided by operating activities totaled $13,573,493 compared to $6,835,504 in the same period of 2008. This was primarily attributable to: i) net earnings of $14,224,725; ii) a $8,667,760 accounts receivable increase driven by revenue growth; and iii) a $3,960,111 accounts payable increase.





Investing activities





For the year ended December 31, 2009, cash used by investing activities totaled $3,131,324 compared to $7,538,804 in the same period of 2008. This was attributable to $2,929,030 in loan to a related party and $203,294 in purchase of new equipment.





Financing activities





For the year ended December 31, 2009, we had net cash outflow of $465,525 from financing activities for repayments of short-term bank loans and repayment to related parties.





We believe that our cash on hand and cash flow from operations will meet our expected capital expenditure and working capital requirements for the next 12 months.  However, we may in the future require additional cash resources due to changed business conditions, implementation of our strategy to expand our production capacity or other investments or acquisitions that 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.





CRITICAL ACCOUNTING POLICIES AND ESTIMATES





The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. We consider our critical accounting policies to be those that require the more significant judgments and estimates in the preparation of financial statements, including the following:





Use of estimates


The preparation of these consolidated financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of these consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.  Accordingly, actual results may differ from these estimates under different assumptions or conditions. Significant estimates for the years ended December 31, 2010, 2009 and 2008 include the useful lives of property and equipment and intangible assets and assumptions used in assessing impairment for long-term assets.




26




Revenue recognition


Revenue is recognized when the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectibility is reasonably assured.





Sales revenue is recognized net of value added and sales related taxes, sales discounts and returns at the time when the merchandise is sold to the customer. Based on historical experience, management estimates that sales returns are immaterial and has not made allowance for estimated sales returns.





Accounts receivable


Accounts receivable is stated at cost, net of allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses resulting from the failure of customers to make required payments. The Company reviews the accounts receivable on a periodic basis and makes allowances where there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, the customer’s payment history, its current credit-worthiness and current economic trends.





Inventories


Inventories are stated at the lower of cost, determined on a weighted average basis, or market. Costs of inventories include purchase and related costs incurred in bringing the products to their present location and condition. Market value is determined by reference to selling prices after the balance sheet date or to management’s estimates based on prevailing market conditions. The management will write down the inventories to market value if it is below cost. The management also regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine if valuation allowance is required.





RECENTLY ISSUED ACCOUNTING STANDARDS





In January 2010, the FASB issued ASU No. 2010-02—Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary. This Update amends Subtopic 810-10 and related guidance to clarify that the scope of the decrease in ownership provisions of the Subtopic and related guidance applies to (i) a subsidiary or group of assets that is a business or nonprofit activity; (ii) a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture; and (iii) an exchange of a group of assets that constitutes a business or nonprofit activity for a non-controlling interest in an entity, but does not apply to: (i) sales of in substance real estate; and (ii) conveyances of oil and gas mineral rights. The amendments in this update are effective beginning in the period that an entity adopts FAS 160 (now included in Subtopic 810-10). The adoption of the provisions in ASU 2010-02 did not have an impact on our consolidated financial statements.





Effective January 1, 2010, the Company adopted the provisions in ASU 2010-06, “Fair Value Measurements and Disclosures (ASC Topic 820): Improving Disclosures about Fair Value Measurements, which requires new disclosures related to transfers in and out of levels 1 and 2 and activity in level 3 fair value measurements, as well as amends existing disclosure requirements on level of disaggregation and inputs and valuation techniques. The adoption of the provisions in ASU 2010-06 did not have an impact on our consolidated financial statements.





In February 2010, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that amends the disclosure requirements related to subsequent events(Topic 855). This guidance includes the definition of a Securities and Exchange Commission filer, removes the definition of a public entity, redefines the reissuance disclosure requirements and allows public companies to omit the disclosure of the date through which subsequent events have been evaluated. This guidance is effective for financial statements issued for interim and annual periods ending after February 2010. This guidance did not materially impact our results of operations or financial position, but did require changes to our disclosures in its financial statements.





In April 2010, the FASB issued ASU No. 2010-13—Compensation—Stock Compensation (Topic 718), which addresses the classification of an employee share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. This update provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. We expect that the adoption of the amendments in this update will not have any significant impact on its financial position and results of operations.





In July 2010, the FASB issued ASU 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”. This ASU amends Topic 310 to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Except for the expanded disclosure requirements, the adoption of this ASU is not expected to have a material impact on our consolidated financial statements.




27




Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our Consolidated Financial Statements upon adoption.





OFF-BALANCE SHEET ARRANGEMENTS





We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs).








ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





Not applicable because we are a smaller reporting company.





ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


The financial statements begin on page F-1.


28




ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.





Prior to our reverse acquisition transaction with Kobe Sport, our independent registered public accounting firm was RBSM LLP (“RBSM”), while Kobe Sport’s independent registered public accounting firm was AGCA CPA Limited. On March 1, 2010, in connection with the change in control transaction, our board of directors approved the dismissal of RBSM, as our independent auditor, effective immediately. Concurrent with the decision to dismiss RBSM as our independent auditor, our board of directors elected to appoint AGCA, Inc. (“AGCA”) as our new independent auditor.





RBSM’s reports on the financial statements of the Company for the year ended December 31, 2008 did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles, except, RBSM’s audit reports for the year ended December 31, 2008 stated that several factors raised substantial doubt about the Company’s ability to continue as a going concern and that the financial statements do not include any adjustments that might result from the outcome of this uncertainty.





In connection with the audit and review of the financial statements of the Company through March 1, 2010, there were no disagreements on any matter of accounting principles or practices, financial statement disclosures, or auditing scope or procedures, which disagreements if not resolved to their satisfaction would have caused them to make reference in connection with RBSM’s opinion to the subject matter of the disagreement.





In connection with the audited financial statements of the Company for the year ended December 31, 2008 and interim unaudited financial statement through March 1, 2010, there have been no reportable events with the Company as set forth in Item 304(a)(1)(v) of Regulation S-K.




The Company provided RBSM with a copy of this report and requested that RBSM furnish it with a letter addressed to the SEC stating whether or not they agree with the above statements. The Company has received the requested letter from RBSM, and a copy of such letter is filed as Exhibit 16.1 to the Form 8-K that was filed on March 2, 2010.




Prior to March 1, 2010, the Company did not consult with AGCA regarding (1) the application of accounting principles to a specified transactions, (2) the type of audit opinion that might be rendered on the Company’s financial statements, (3) written or oral advice that was provided that would be an important factor considered by the Company in reaching a decision as to an accounting, auditing or financial reporting issues, or (4) any matter that was the subject of a disagreement between the Company and its predecessor auditor as described in Item 304(a)(1)(iv) or a reportable event as described in Item 304(a)(1)(v) of Regulation S-K.





On July 26, 2010, we dismissed AGCA as our independent registered public accounting firm, and engaged Crowe Horwath (HK) CPA Limited for that role.





AGCA reported on the financial statements of the Company for the year ended December 31, 2009 and reviewed the financial statements of the Company for the period ended March 31, 2010. For these periods and up to July 26, 2010, there were no disagreements with AGCA on any matter of accounting principles or practices, financial statement disclosures, or auditing scope or procedures, which disagreements if not resolved to the satisfaction of AGCA would have caused them to make reference thereto in their report on the financial statements for such year.




29




AGCA’s audit report on the financial statements of the Company for the year ended December 31, 2009 did not contain any adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles.




In connection with the audited financial statements of the Company for the year ended December 31, 2009, there have been no reportable events within the meaning as set forth in Item 304(a)(1)(v) of Regulation S-K.





The Company provided AGCA with a copy of this report and requested that AGCA furnish it with a letter addressed to the SEC stating whether or not they agree with the above statements. The Company has received the requested letter from AGCA, and a copy of such letter is filed as Exhibit 16.1 to the Form 8-K that was filed on August 2, 2010.





On July 26, 2010, the Company engaged Crowe Horwath (HK) CPA Limited as the Company’s new independent registered public accounting firm. The decision to engage Crowe Horwath (HK) CPA Limited was approved by the Company’s Board of Directors on July 26, 2010. During the fiscal year ended December 31, 2009 and through July 26, 2010, neither the Company nor anyone on its behalf consulted Crowe Horwath (HK) CPA Limited with respect to (1) the application of accounting principles to a specified transaction, either completed or proposed, (2) the type of audit opinion that might be rendered on the Company’s financial statements, (3) written or oral advice that was provided that would be an important factor considered by the Company in reaching a decision as to an accounting, auditing or financial reporting issues, or (4) any matter that was the subject of a disagreement between the Company and its predecessor auditor as described in Item 304(a)(1)(iv) or a reportable event as described in Item 304(a)(1)(v) of Regulation S-K.





ITEM 9A. CONTROLS AND PROCEDURES.





Evaluation of Disclosure Controls and Procedures





Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) (the Company’s principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and interim CFO Mendoza Anding Lin concluded that the Company’s disclosure controls and procedures are ineffective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and interim CFO, as appropriate, to allow timely decisions regarding required disclosure.





Management’s Annual Report on Internal Control over Financial Reporting.





The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.  Our internal control system was designed to, in general, provide reasonable assurance to the Company’s management and board regarding the preparation and fair presentation of published financial statements, but because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.





Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010.  The framework used by management in making that assessment was the criteria set forth in the document entitled “ Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation, management identified deficiencies that were determined to be a material weakness.





A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.  Because of the material weakness described below, management concluded that our internal control over financial reporting was ineffective as of December 31, 2010.





The specific material weakness identified by the Company’s management as of December 31, 2010 is described as follows:





●
The Company did not have sufficient and skilled accounting personnel with an appropriate level of technical accounting knowledge and experience in the application of accounting principles generally accepted in the United States of America commensurate with the Company’s financial reporting requirements, which resulted in a number of internal control deficiencies that were identified as being significant. The Company’s management determined that the number and nature of these significant deficiencies, when aggregated, constituted a material weakness.


●
The Company is lacking qualified resources to perform the internal audit functions properly.  In addition, the scope and effectiveness of the Company’s internal audit function are yet to be developed.




30




●
We currently do not have an audit committee.




Remediation Initiative


Due to limited resources available in the region, we were unable to hire qualified personnel to establish sufficient internal audit functions and an audit committee before end of 2010. Our management team is working on improving our internal control procedures and will try to recruit more qualified professionals in the near future.




Conclusion





Despite the material weakness and deficiencies reported above, the Company’s management believes that its 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.





This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.





Changes in Internal Control over Financial Reporting





No change in our system of internal control over financial reporting occurred during the fourth quarter of the fiscal year ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





PART III





ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.





Directors and Executive Officers





The following table set forth our directors, executive officers, significant employees, as well as their ages and the positions they held, as of the date hereof.  The term of office of each director expires at our annual meeting of stockholders or until their successors are duly elected and qualified.





Name

Age

PositionMendoza Anding Lin

33

President, CEO, Interim CFO and ChairmanQionglin Lin

41

General Manager and DirectorAling Lin

23

DirectorWenwei Yuan

46

Vice General ManagerYongchun Lai

30

Finance ManagerLiping Cai

38

Sales & Operation ManagerMingzhong Lin

42

Product Department ManagerDong Shen

39

Administration Manager





The following table sets forth the names, ages, and positions of our current executive officer and director. Executive officers are elected annually by our Board of Directors.





Mendoza Anding Lin, President, CEO and Chairman





Mr. Lin has served as the President of Heng Feng Shoes & Clothing Co., Ltd. at Jinjiang City, Fujian Province since 2009.  From 2003 to 2009, Mr. Lin was the Vice General Manager of Heng Feng Shoes & Clothing Co., Ltd. at Jinjiang City, Fujian Province.  Previously he served as the General Manager of a foreign trade company in Hong Kong from 2001 to 2003. He was also the General Manager of Chaoba Shoe Material Co., Ltd. at Quanzhou City, Fujian Province from 1999 to 2001. Mr. Lin graduated from Huaqiao University (Quanzhou) with a bachelor’s degree in 2000.


31




Qionglin Lin, General Manager and Director





Mr. Lin has served as the General Manager of Heng Feng Shoes & Clothing Co., Ltd. at Jinjiang City, Fujian Province since 2003. Mr. Lin served as the General Manager of Hengchao Shoes Co., Ltd. at Quanzhou City, Fujian Province from 2001 to 2003. Before that, he was the factory manager of Hengfeng Shoes Manufacturing Factory from 1990 to 2000. Mr. Lin graduated from Huaqiao University (Quanzhou) with a bachelor’s degree in 1993.





Aling Lin, Board Director





Ms. Lin has served as a board director and cashier of Heng Feng Shoes & Clothing Co., Ltd. at Jinjiang City, Fujian Province since 2007. She previously served as an account in Heng Feng from 2006 to 2007. Ms. Lin graduated from National Institute of Technology, School of Beijing with a bachelor’s degree in 2007.





Wenwei Yuan, Vice General Manager





Mr. Yuan has served as the Vice General Manager of Heng Feng Shoes & Clothing Co., Ltd. at Jinjiang City, Fujian Province since 2003. Mr. Yuan served as General Manager of Zhengyi Sporting Products Co., Ltd., a subsidiary of Zhengda Group in Fujian Province from 2000 to 2003. He was also the General Manager of Aolin Champion Sports Ltd. from 1995 to 2000 and a Chinese delegation official of the 12th Federation International Basketball Association from 1993 to 1995. He graduated from Beijing Sport University with a bachelor’s degree in 1988.





Yongchun Lai, Finance Manager





Mr. Lai has served as the Finance Manager of Heng Feng Shoes & Clothing Co., Ltd. at Jinjiang City, Fujian Province since 2006. Before that, he served as the Financial Manager at Xing Quan Shoes & Plastics Co., Ltd. from 2004 to 2006. He was also an accountant at Heng Chao Shoes Co., Ltd. from 2001 to 2004. He graduated from PLA Military Economics Academy in Wuhan with a bachelor’s degree in 2003.





Liping Cai, Sales & Operation Manager





Ms. Cai has been the Sales & Operation Manager of Heng Feng Shoes & Clothing Co., Ltd. at Jinjiang City, Fujian Province since 2007. Ms. Cai was the General Manager in Marketing Development at Anta Sports Co., Ltd. at Jinjiang City, Fujian Province from 1997 to 2007. Before that, she served as the Sales Manager at Zhengda Shoes Co., Ltd. in Quanzhou City, Fujian Province from 1992 to 1997. She graduated from Zhejiang GongShang University with a marketing bachelor’s degree in 1995.





Mingzhong Lin, Product Department Manager





Mr. Lin has been the Product Department Manager of Heng Feng Shoes & Clothing Co., Ltd. at Jinjiang City, Fujian Province since 2003. Previously, Mr. Lin served as the Manufacture Manager of Heng Chao Shoes Co., Ltd., at Jinjiang City, Fujian Province from 2001 to 2003. He was also an Assistant Factory Manager at Heng Feng Shoes Manufacturing Factory at Jinjiang City, Fujian Province from 1990 to 2000. He graduated from Liming Vocational University (Quanzhou) with a bachelor’s degree in 1990.





Dong Shen, Administration Manager





Mr. Shen has been the Administration Manager of Heng Feng Shoes & Clothing Co., Ltd. at Jinjiang City, Fujian Province since 2004. Previously he served as an Administrative Assistant at Chaoba Shoes Material Co., Ltd. from 1999 to 2004. Mr. Shen graduated from Xihua University with a bachelor’s degree in 1996.





Employment Agreements





We currently do not have employment agreement with any of our directors and executive officers.





Family Relationships





Mendoza Anding Lin and Qionglin Lin are brothers. Except as stated above, there are no family relationships between any of our directors or executive officers and any other directors or executive officers.





Involvement in Certain Legal Proceedings





To the best of our knowledge, none of our directors or executive officers have been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, or has been a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction or settlement. Except as set forth in our discussion below in “Certain Relationships and Related Transactions,” none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.





32




Code of Ethics





Currently we do not have a code of ethics that applies to our officers, employees and directors.





ITEM 11. EXECUTIVE COMPENSATION





Executive Compensation Summary





The following table sets forth all cash compensation paid by the Company, for the year ended December 31, 2010 and 2009.  The table below sets forth the positions and compensations for each officer and director of the Company.





Name and Principal Position

Year

Salary

($)


Bonus

($)


Stock Awards

($)

Option Awards

($)


Non-Equity Incentive Plan Compensation ($)


Non-Qualified Deferred Compensation Earnings

($)


All Other Compensation

($)


Totals

($)Mendoza Anding Lin, President, CEO, Interim CFO & Chairman (1)

2010


59,059



























59,0592009


28,907



0



0



0



0



0



0



28,907Qionglin Lin, General Manager and Director

2010


72,827



























72,8272009


30,664



0



0



0



0



0



0



30,664Aling Lin, Director

2010


5,757



























5,7572009


5,397



0



0



0



0



0



0



5,397Wing Sang Tommy Lo (1)

2010


62,043



























62,0432009


0



0



0



0



0



0



0



0Thomas A. Rose, President and Director (2)

2010


0



0



0



0



0



0



0



02009


0



0



0



0



0



0



0



0Marc J. Ross, Secretary and Director (2)

2010


0



0



0



0



0



0



0



02009


0



0



0



0



0



0



0



0Darrin M. Ocasio,

Director (2)

2010


0



0



0



0



0



0



0



02009


0



0



0



0



0



0



0



0





(1)
On November 26, 2010, Tommy Lo resigned as the chief financial officer of the Company effective immediately.  On March 18, 2011, Mr. Mendoza Anding Lin was appointed as the interim chief financial officer.(2)
On February 12, 2010, Thomas A. Rose and Marc J. Ross resigned as the officers of the Company effective immediately. In addition, Thomas A. Rose, Marc J. Ross and Darrin M. Ocasio resigned as the directors of the Company effective February 26, 2010.





No retirement, pension, profit sharing, stock option or insurance programs or other similar programs have been adopted by the Company for the benefit of its employees.




33




Our directors will not receive a fee for attending each board of directors meeting or meeting of a committee of the board of directors. All directors will be reimbursed for their reasonable out-of-pocket expenses incurred in connection with attending board of director and committee meetings.





ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.





The following table sets forth certain information as of the date hereof with respect to the beneficial ownership of our common stock, the sole outstanding class of our voting securities, by (i) each stockholder known to be the beneficial owner of 5% or more of the outstanding common stock of the Company, (ii) each executive officer and director, and (iii) all executive officers and directors as a group.





Name and Address of Beneficial Owner (1)(2)

Amount and Nature of Beneficial Ownership

Percent of Class (3)Mendoza Anding Lin

6,300,000

81.3%Qionglin Lin

0

0Aling Lin

0

0All Executive Officers and Directors as a group (3 persons)

6,300,000

81.3%





(1)
Unless otherwise indicated, the persons or entities identified herein have sole voting and investment power with respect to the shares shown as beneficially held by them, subject to community property laws where applicable.(2)
Except as otherwise stated, the address is Yangdai Village, Chendai County, Jinjiang City, Fujian Province, People’s Republic of China.(3)
Applicable percentage of ownership is based on 7,750,000 shares of common stock issued and outstanding after the Share Exchange and the return of 2,250,000 shares of common stock to treasury by two shareholders on February 14, 2011.





ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.





Related Transactions





Loans due from a related party





As of December 31, 2009, the Company had advances from Mr. Qionglin Lin for a total of $3,148,707.  The loan was unsecured, bearing interest at 10% per annum and was originally repayable in one lump sum on or before September 22, 2010. On April 5, 2010, the Company and Mr. Qionglin Lin entered into a revised scheme of settlement, pursuant to which $2,929,845 (i.e. RMB20,000,000) of the loan was repaid to the Company on April 30, 2010 and whereas the remaining balance of approximately $292,984 was repaid before May 31, 2010.




The Company recognized interest income of $73,861 and $219,587 on the loan due from Mr. Qionglin Lin for the years ended December 31, 2010 and 2009, respectively.





As of December 31, 2010 and 2009, the Company had advances from Mr.  Mendoza Anding Lin for a total of $339,000 and nil, respectively, which are non-interest bearing, unsecured and without a fixed repayment date.


Guarantees for the Company’s loans





Fujian Jinjiang Chenli Yangli Hengfeng Shoe-making Factory (the 6% minority shareholder of Hengfeng) provided guarantees for the Company’s short-term bank loan of $181,195 and $109,838 as of December 31, 2010 and December 31, 2009.





Mr. Qionglin Lin, the general manager of the Company, provided guarantees for the Company’s short-term bank loans of $1,268,366 and $1,354,676 as of December 31, 2010 and December 31, 2009, respectively.





Reorganization Related Transactions





Kobe Sport was incorporated with limited liability on September 25, 2009 under the International Business Companies Act in the British Virgin Islands and owns a 100% issued and outstanding capital stock of Nam Kwong. Hengfeng is a sino-foreign joint stock limited liability company established in the PRC. On December 4, 2009, Hengfeng underwent reorganization. Before the reorganization, Hengfeng had been owned as to 94% by Nam Kwong Trading Co. (“Nam Kwong Unincorporated”, an unincorporated company registered in Hong Kong) and 6% by another unrelated minority shareholder, which is a company registered in the PRC, according to their respective capital contribution. Pursuant to the reorganization, Nam Kwong Unincorporated transferred the 94% interest in Hengfeng held by it to Nam Kwong. As a result, through Nam Kwong, Kobe Sport owns a 94% interest in Hengfeng.




34




Both before and after the reorganization, Nam Kwong Unincorporated, Nam Kwong and Kobe have all been beneficially owned and controlled by Mr. Anding Lin, who is also the President of Hengfeng.





Other than the above, none of the following persons has any direct or indirect material interest in any transaction to which we are a party since our incorporation or in any proposed transaction to which we are proposed to be a party:





(A)
Any of our directors or officers;(B)
Any proposed nominee for election as our director;(C)
Any person who beneficially owns, directly or indirectly, shares carrying more than 10% of the voting rights attached to our common stock; or(D)
Any relative or spouse of any of the foregoing persons, or any relative of such spouse, who has the same house as such person or who is a director or officer of any parent or subsidiary of our company.





Director Independence





Because our common stock is not currently listed on a national securities exchange, we have used the definition of “independence” of The NASDAQ Stock Market to make this determination.  NASDAQ Listing Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the company or any other individual having a relationship which, in the opinion of the company’s Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.  The NASDAQ listing rules provide that a director cannot be considered independent if:





·
the director is, or at any time during the past three years was, an employee of the company;


·
the director or a family member of the director accepted any compensation from the company in excess of $120,000 during any period of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions, including, among other things, compensation for board or board committee service);


·
a family member of the director is, or at any time during the past three years was, an executive officer of the company;


·
the director or a family member of the director is a partner in, controlling stockholder of, or an executive officer of an entity to which the company made, or from which the company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions);


·
the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of the company served on the compensation committee of such other entity; or


·
the director or a family member of the director is a current partner of the company’s outside auditor, or at any time during the past three years was a partner or employee of the company’s outside auditor, and who worked on the company’s audit.





We currently do not have any independent directors on our board. However, at such time in the future that we make an application to list on a higher exchange, we will appoint independent directors to our board.





ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES





Independent Auditors’ Fees




The following table represents fees billed and to be billed to the Company for professional audit services rendered by its principal accountants:





2010


2009Audit fees (1)

$
259,000


$
-Audit-related fees (2)


-



-Tax fees (3)


-



-All other fees (4)


-



-Total

$
259,000


$
-


______________


(1)
“Audit Fees” consisted of the aggregate fees billed or accrued for professional services rendered for the audit of our annual financial statements and the reviews of the financial statements included in our Forms 10-Q and for any other services that were normally provided in connection with our statutory and regulatory filings or engagements.




35




(2)
“Audit Related Fees” consisted of the aggregate fees billed for professional services rendered for assurance and related services that were reasonably related to the performance of the audit or review of our financial statements and were not otherwise included in Audit Fees.




(3)
“Tax Fees” consisted of the aggregate fees billed for professional services rendered for tax compliance, tax advice and tax planning. Included in such Tax Fees were fees for preparation of our tax returns and consultancy and advice on other tax planning matters.




(4)
“All Other Fees” consisted of the aggregate fees billed for products and services provided and not otherwise included in Audit Fees, Audit Related Fees or Tax Fees.





Pre-Approval Policies and Procedures





The Company’s Board of Directors acting as the audit committee pre-approved the audit services performed by Crowe Horwath (HK) CPA Limited for our consolidated financial statements as of and for the year ended December 31, 2010.





PART IV





ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.





(a) The following documents are filed as part of this report:





(1) Financial Statements and Report of Independent Registered Public Accounting Firm, which are set forth in the index to Consolidated Financial Statements on pages F-1 through F-22 of this report.





(2) Financial Statement Schedule: None.





(3) Exhibits






Exhibit No.

Description2.1

Share Exchange Agreement by and between the Company and Kobe Sport (International) Company Limited, dated February 12, 2010 (Incorporated by reference to exhibit 2.1 on Form 8-K filed on February 12, 2010).3.1

Articles of Incorporation (Incorporated by reference to exhibit 3.1 on Form 10-SB filed on May 2, 2007).3.2

Bylaws (Incorporated by reference to exhibit 3.2 on Form 10-SB filed May 2, 2007).16.1

Letter from RBSM LLP, dated February 26, 2010 (Incorporated by reference to exhibit 16.1 on Form 8-K filed on March 2, 2010).16.2

Letter from AGCA Inc., dated July 26, 2010 (Incorporated by reference to exhibit 16.1 on Form 8-K filed on August 2, 2010).21.1

List of subsidiaries of the Registrant *31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *32.1

Certification of Chief Executive Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *32.2

Certification of Chief Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *




*
Filed herein.




36




SIGNATURES
 
 In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 CHINA SPORTS HOLDING COMPANY LIMITEDDate: April 15, 2011
By:
/s/ Mendoza Anding LinMendoza Anding LinPresident, Chief Executive Officer, Interim Chief Financial Officer and Chairman
 
 In accordance with the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
 Name

Title

Date/s/ Mendoza Anding Lin

President, Chief Executive Officer,

April 15, 2011Mendoza Anding Lin

Interim Chief Financial Officer and Chairman/s/ Qionglin Lin

General Manager and Director

April 15, 2011Qionglin Lin/s/ Aling Lin

Director

April 15, 2011Aling Lin








37






CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
 
 CONSOLIDATED FINANCIAL STATEMENTS
 
 FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 
 
  F-1
  CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
 
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
   Page(s)Report of Independent Registered Public Accounting Firm – Crowe Horwath (HK) CPA Limited

F-3Report of Independent Registered Public Accounting Firm – AGCA CPA Ltd.

F-4Consolidated Balance Sheets

F-5Consolidated Statements of Income and Comprehensive Income

F-6Consolidated Statements of Stockholders’ Equity

F-7Consolidated Statements of Cash Flows

F-8Notes to Consolidated Financial Statements

F-9 - 22
  F-2
  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  
 
 
 To the Board of Directors and Stockholders of
 China Sports Holding Company Limited
 
 We have audited the accompanying consolidated balance sheet of China Sports Holding Company Limited (“Company”) and subsidiaries as of December 31, 2010 and the related consolidated statements of income and comprehensive income, stockholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
 
 We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 
 In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and subsidiaries as of December 31, 2010 and the consolidated results of their operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
 
 
 /s/ Crowe Horwath (HK) CPA Limited
 Hong Kong, China
 April 15, 2011
 F-3
   REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To the Board of Directors and Stockholders of
 KOBE SPORT (INTERNATIONAL) COMPANY LIMITED:
 
 We have audited the accompanying consolidated balance sheet of Kobe Sport (International) Company Limited (a wholly-owned subsidiary of China Sports Holding Company Limited–successor to Kobe Sport (International) Company Limited) and subsidiaries (the “Company”) as of December 31, 2009 and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the two years ended December 31, 2009 and 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
 
 We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 
 In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2009, the results of its operations and its cash flows for each of the two years ended December 31, 2009 and 2008 in conformity with accounting principles generally accepted in the United States of America.
 
 As explained in Note 1, the Company completed a reverse acquisition of China Sports Holding Company Limited (formerly known as Mondo Acquisition III, Inc.) on February 12, 2010. As a result, the equity section and earnings per share data of the Company have been retroactively restated to reflect the reverse acquisition.
 
 
 /s/ AGCA CPA Limited
 
 AGCA CPA Limited
 Hong Kong, April 9, 2010
 F-4
 
 CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
 (FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
 CONSOLIDATED BALANCE SHEETS
 (AMOUNTS EXPRESSED IN US DOLLAR)
 
 December31,


December 31,2010


2009ASSETSCURRENT ASSETSCash and cash equivalents

$
28,657,972


$
17,387,929Accounts receivable, net of $nil allowance


39,060,384



22,125,979Prepaid land use rights – current portion


18,015



17,473Inventories


2,212,384



1,687,090Loan due from a related party


-



3,148,707Total current assets


69,948,755



44,367,178OTHER ASSETSProperty, plant and equipment, net


9,234,482



9,837,833Deposit for land use right


7,549,791



−Prepaid land use rights – long-term portion


799,345



792,761Total non-current assets


17,583,618



10,630,594Total assets

$
87,532,373


$
54,997,772LIABILITIES AND EQUITYCURRENT LIABILITIESShort-term bank loans

$
1,268,365


$
1,354,676Accounts payable


24,761,843



14,329,705Other payables and accruals


1,250,800



1,243,656Due to a related party


339,000



-Income taxes payable


2,079,049



1,360,954Total current liabilities


29,699,057



18,288,991Total liabilities


29,699,057



18,288,991STOCKHOLDERS' EQUITY

Preferred stock, $0.001 par: 10,000,000 shares authorized, none shares issued and outstanding


-



-Common stock, $0.001 par: 40,000,000 shares authorized, 10,000,000 and 9,000,000 shares issued and outstanding as of December 31, 2010 and December 31, 2009, respectively


10,000



9,000Additional paid-in capital


2,402,198



2,399,003Statutory reserves


2,009,528



2,009,528Retained earnings


46,757,350



28,409,504Accumulated other comprehensive income


3,164,153



1,679,219Total China Sports stockholders' equity


54,343,229



34,506,254Non-controlling interests


3,490,087



2,202,527Total equity


57,833,316



36,708,781Total liabilities and stockholders' equity

$
87,532,373


$
54,997,772
 
 The accompanying notes are an integral part of these consolidated financial statements.
 
 F-5
 
 CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
 (FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
 CONSOLIDATED STATEMENTS OF INCOME
 AND COMPREHENSIVE INCOME
 (AMOUNTS EXPRESSED IN US DOLLAR)
 
 For the YearEnded December 31,2010


2009


2008Revenue

$
109,722,921


$
81,187,591


$
63,406,121Cost of goods sold


(77,552,330
)


(58,082,347
)


(45,463,469
)Gross profit


32,170,591



23,105,244



17,942,652Selling expenses


(3,048,995
)


(2,315,635
)


(2,932,230
)General and administrative expenses


(3,017,779
)


(1,990,451
)


(1,742,675
)Income from operations


26,103,817



18,799,158



13,267,747Other income (expense):Interest income


140,524



258,717



77,603Interest expense


(70,014
)


(81,999
)


(129,624
)Total other income (expense)


70,510



176,718



(52,021
)Income before income tax


26,174,327



18,975,876



13,215,726Provision for income tax


(6,633,704
)


(4,751,151
)


(3,316,035
)Net income


19,540,623



14,224,725



9,899,691Income attributable to non-controlling interests


(1,192,777
)


(853,484
)


(593,981
)Net income attributable to China Sports stockholders

$
18,347,846


$
13,371,241


$
9,305,710Other comprehensive income attributable to China Sports stockholders:Foreign currency translation adjustment


1,484,934



25,268



1,000,295Comprehensive income attributable to China Sports stockholders

$
19,832,780


$
13,396,509


$
10,306,005Comprehensive income attributable to non-controlling interests


1,287,560



855,096



657,831Total comprehensive income

$
21,120,340


$
14,251,605


$
10,963,836Earnings per share attributable to China Sports stockholdersBasic

$
1.86


$
1.49


$
1.03Diluted

$
1.86


$
1.49


$
1.03Weighted average number of shares outstandingBasic


9,882,192



9,000,000



9,000,000Diluted


9,882,192



9,000,000



9,000,000
 
 The accompanying notes are an integral part of these consolidated financial statements
 
 F-6
 
 CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
 (FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 (AMOUNTS EXPRESSED IN US DOLLAR)
 
 Attributable to China Sports stockholdersCommon Stock


Additional








Accumulated Other


Non-Number of





Paid-in


Statutory


Retained


Comprehensive


controllingShares


Amount


Capital


Reserves


Earnings


Income


Interests


TotalAt January 1, 2008


9,000,000


$
9,000


$
2,399,003


$
1,019,559


$
8,752,701


$
653,656


$
819,186


$
13,653,105Net income


-



-



-



-



9,305,710



-



593,981



9,899,691Foreign currency

translation adjustment


-



-



-



-







1,000,295



63,850



1,064,145Appropriation of

statutory reserves


-



-



-



989,969



(989,969
)


-



-



-Special dividend paid


-



-



-



-



(2,030,179
)


-



(129,586
)


(2,159,765
)At December 31, 2008


9,000,000


$
9,000


$
2,399,003


$
2,009,528


$
15,038,263


$
1,653,951


$
1,347,431


$
22,457,176Net income


-



-



-



-



13,371,241



-



853,484



14,224,725Foreign currency

translation adjustment


-



-



-



-



-



25,268



1,612



26,880At December 31, 2009


9,000,000


$
9,000


$
2,399,003


$
2,009,528


$
28,409,504


$
1,679,219


$
2,202,527


$
36,708,781Effect of reverse

acquisition (Note 1)


1,000,000



1,000



3,195



-



-



-



-



4,195Net income


-



-



-



-



18,347,846



-



1,192,777



19,540,623Foreign currency

translation

adjustment


-



-



-



-



-



1,484,934



94,783



1,579,717At December 31, 2010


10,000,000


$
10,000


$
2,402,198


$
2,009,528


$
46,757,350


$
3,164,153


$
3,490,087


$
57,833,316
  The accompanying notes are an integral part of these consolidated financial statements.
 
 F-7
 
 CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
 (FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (AMOUNTS EXPRESSED IN US DOLLAR)
 
 For the Year Ended December 31,2010


2009


2008CASH FLOWS FROM OPERATING ACTIVITIESNet income

$
19,540,623


$
14,224,725


$
9,899,691Adjustments to reconcile net income to cash provided by operating activitiesInterest income receivable on loan due from a related party


-



(219,587
)


-Depreciation and amortization


906,537



900,011



538,174(Increase) decrease in assets:Accounts receivable


(15,895,501
)


(8,667,760
)


(2,958,968
)Other receivables


-



1,347,797



460,462Inventories


(462,688
)


1,502,556



(530,979
)Increase (decrease) in liabilities:Accounts payable


9,770,908



3,960,111



(870,095
)Other payables and accruals


(30,763
)


86,087



(26,178
)Income taxes payable


661,209



439,553



323,397Net cash provided by operating activities


14,490,325



13,573,493



6,835,504CASH FLOWS FROM INVESTING ACTIVITIESRepayment by (loan to) a related party


3,176,010



(2,929,030
)


-Purchase of property, plant and equipment


-



(203,294
)


(7,538,804
)Payment of deposit for land use right


(7,549,791
)


-



-Net cash used in investing activities


(4,373,781
)


(3,132,324
)


(7,538,804
)CASH FLOWS FROM FINANCING ACTIVITIESRepayment to related parties


-



(399,649
)


(138,945
)Advances from a related party


339,000



-



-Proceeds from short-term borrowings


1,240,860



1,419,997



2,185,682Repayments of short-term bank loans


(1,366,423
)


(1,485,873
)


(1,537,753
)Special dividend paid to non-controlling interests


-



-



(129,586
)Special dividend paid to Kobe Sport stockholders


-



-



(2,030,179
)Net cash provided by (used in) financing activities


213,437



(465,525
)


(1,650,781
)Foreign currency translation adjustment


940,062



12,228



591,967Net increase (decrease) in cash and cash equivalents


11,270,043



9,987,872



(1,762,114
)Cash and cash equivalents, beginning of year


17,387,929



7,400,057



9,162,171Cash and cash equivalents, end of year

$
28,657,972


$
17,387,929


$
7,400,057NON-CASH INVESTING AND FINANCING ACTIVITIESInterest receivable on loan due from a related party

$
-


$
219,587


$
-SUPPLEMENTAL DISCLOSURE INFORMATIONCash paid for interest

$
70,014


$
81,999


$
129,624Cash paid for income taxes

$
5,972,495


$
4,311,598


$
2,992,639
 
 The accompanying notes are an integral part of these consolidated financial statements.
 
 F-8
 CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
 (FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 For the years ended December 31, 2010, 2009 and 2008
   NOTE 1 DESCRIPTION OF BUSINESS AND ORGANIZATION
 
 Nature of operations
  China Sports Holding Company Limited (formerly known as Mondo Acquisition III, Inc., the “Company” or “China Sports”) was incorporated in the State of Delaware on October 30, 2006.  On February 12, 2010, the Company completed a share exchange with Kobe Sport (International) Company Limited (“Kobe Sport”).  As a result of the share exchange, the Company is no longer a shell company and, through its subsidiaries, primarily engages in design, manufacturing and sales of sports shoes, sportswear and related accessories.
  On March 12, 2010, the Company received written consents in lieu of a meeting of stockholders from a shareholder holding 6,300,000 voting shares representing approximately 63% of the total voting stock of the Company to amend its Articles of Incorporation to change its name from “Mondo Acquisition III, Inc.” to “China Sports Holding Company Limited”. The change in name became effective on April 20, 2010.
 
 Corporate organization
  As of December 31, 2010, details of the subsidiaries of the Company are as follows:
 
 Subsidiaries’ names

Domicile and date of

incorporation

Ownership by the Company

Principal activitiesKobe Sport (International) Company Limited (“Kobe Sport”)

British Virgin Islands

September 25, 2009

100%

Intermediate holding companyNam Kwong Trading Company Limited (“Nam Kwong”)

Hong Kong

October 8, 2009

100% (through Kobe Sport)

Intermediate holding companyKobe Brand and Properties Management Company Limited (“Kobe Brand”)

Hong Kong

April 26, 2010

100% (through Kobe Sport)

Not yet commenced businessFujian Jinjiang Hengfeng Shoes & Garments Co., Ltd. (“Hengfeng”)

People’s Republic of China (“PRC”)

March 2, 1992

94% (through Nam Kwong)

Design, manufacturing and sales of sports shoes, sportswear and related accessories
 
 Share Exchange
  On February 12, 2010, the Company entered into a share exchange agreement ("Share Exchange Agreement”) under which the Company issued 9,000,000 shares of its common stock, par value $0.001, to the shareholders of Kobe Sport (the “Kobe Sport Shareholders”) in exchange for all the issued and outstanding shares of Kobe Sport (the “Share Exchange”).  As a result of the Share Exchange, Kobe Sport has become the Company’s wholly-owned subsidiary and Kobe Sport Shareholders acquired 90% of the Company’s issued and outstanding stock. Concurrent with the Share Exchange, Mr. Anding Lin (the managing director of Kobe Sport and all of its operating subsidiaries, “Mr. Lin”) was appointed the Chief Executive Officer of the Company.
 
 As a result, the Share Exchange has been accounted for as a reverse acquisition using the purchase method of accounting, whereby Kobe Sport is deemed to be the accounting acquirer (legal acquiree) and the Company to be the accounting acquiree (legal acquirer).  The financial statements before the date of Share Exchange are those of Kobe Sport with the results of the Company being consolidated from the date of Share Exchange. The equity section and earnings per share have been retroactively restated to reflect the reverse acquisition and no goodwill has been recorded.
 
 Kobe Sport was incorporated in the British Virgin Islands on September 25, 2009.  On December 4, 2009, pursuant to a restructuring plan set out below, Kobe Sport has become the holding company of a group of companies comprising Nam Kwong, a company incorporated in Hong Kong, which holds 100% equity interests in Hengfeng, a limited liability company organized under the existing laws of PRC.
 
 Kobe Brand was incorporated in Hong Kong by Kobe Sport on April 26, 2010.
  F-9
 CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES (FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 For the years ended December 31, 2010, 2009 and 2008
 NOTE 1 DESCRIPTION OF BUSINESS AND ORGANIZATION (CONTINUED)
 
 Reorganization of Hengfeng
  Hengfeng is a sino-foreign joint stock limited liability company established in the PRC. On December 4, 2009, Hengfeng underwent a reorganization (“Reorganization”).  Before the Reorganization, Hengfeng had been owned as to 94% by Nam Kwong Trading Co. (“Nam Kwong Unincorporated”, an unincorporated company registered in Hong Kong) and 6% by another unrelated minority shareholder, which is a company registered in the PRC, according to their respective capital contribution. Pursuant to the Reorgnization, Nam Kwong Unincorporated transferred the 94% interest in Hengfeng held by it to Nam Kwong. As a result, through Nam Kwong, Kobe Sport owns a 94% interest in Hengfeng.
 
 Both before and after the Reorganization, Nam Kwong Unincorporated, Nam Kwong and Kobe Sport have all been beneficially owned and controlled by Mr. Anding Lin, who is also the managing director of Hengfeng.
 
 
 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Principle of consolidation
 The accompanying consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant inter-company balances or transactions have been eliminated on consolidation.
 
 Basis of preparation
 These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
 
 The Reorganization has been accounted for as a common control transaction and a recapitalization of Hengfeng with retroactive effect in the accompanying financial statements. The financial statements have been prepared as if the existing corporate structure had been in existence throughout all periods and the Reorganization had occurred as of the beginning of the earliest period presented in the accompanying financial statements.
 
 As a result of the Share Exchange, which has been accounted for as a reverse acquisition using the purchase method of accounting, Kobe Sport (International) Company Limited is deemed to be the accounting acquirer (legal acquiree) and the Company to be the accounting acquire (legal acquirer). The audited consolidated financial statements of Kobe Sport (International) Company Limited as of December 31, 2009 and for the two years then ended have been adopted as comparative figures in these financial statements.
 
 Use of estimates
 The preparation of these consolidated financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of these consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.  Accordingly, actual results may differ from these estimates under different assumptions or conditions. Significant estimates for the years ended December 31, 2010, 2009 and 2008 include the useful lives of property and equipment and intangible assets and assumptions used in assessing impairment for long-term assets.
 
 Cash and cash equivalents
 Cash and cash equivalents consist of all cash balances and highly liquid investments with an original maturity of three months or less.  Because of the short maturity of these investments, the carrying amounts approximate their fair value.
 
 Accounts receivable
 Accounts receivable is stated at cost, net of allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses resulting from the failure of customers to make required payments. The Company reviews the accounts receivable on a periodic basis and makes allowances where there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, the customer’s payment history, its current credit-worthiness and current economic trends.
 
 
 F-10
 CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
 (FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 For the years ended December 31, 2010, 2009 and 2008
   NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 Inventories
 
 Inventories are stated at the lower of cost, determined on a weighted average basis, or market. Costs of inventories include purchase and related costs incurred in bringing the products to their present location and condition. Market value is determined by reference to selling prices after the balance sheet date or to management’s estimates based on prevailing market conditions. Management will write down the inventories to market value if it is below cost. Management also regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine if valuation allowance is required.
  Property, plant and equipment
 
 Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Gains or losses on disposals are reflected as gain or loss in the year of disposal. The cost of improvements that extend the life of property, plant and equipment are capitalized. These capitalized costs may include structural improvements, equipment and fixtures. All ordinary repair and maintenance costs are expensed as incurred.
 
 Depreciation for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the assets as follows:
  Useful Life(In years)Buildings
50Machinery
10Office equipment
5
 
 Prepaid land use rights
 
 Lease prepayments represent lump sum payment for land use rights in the PRC.  The amount is expensed on a straight-line basis over the period of land use rights of 50 years.
 
 Impairment of long-lived assets
 
 The Company reviews and evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the assets, including goodwill, if any. An impairment loss is measured and recorded based on discounted estimated future cash flows. In estimating future cash flows, assets are grouped at the lowest level for which there is identifiable cash flows that are largely independent of future cash flows from other asset groups.
 
 Revenue recognition
 
 Revenue is recognized when the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectibility is reasonably assured.
 
 Sales revenue is recognized net of value added and sales related taxes, sales discounts and returns at the time when the merchandise is sold to the customer. Based on historical experience, management estimates that sales returns are immaterial and has not made allowance for estimated sales returns.
 
 Research and development costs
  Research and development costs are expensed as incurred. During the years ended December 31, 2010, 2009 and 2008, research and development costs charged to administrative expense were $209,811, $158,896 and $137,386, respectively.
 
 Advertising costs
  The Company expenses all advertising costs as incurred. The total amount of advertising costs charged to selling expense were $2,754,205, $2,123,965 and $1,759,254 for the years ended December 31, 2010, 2009 and 2008, respectively.
 
 Shipping and handling costs
  Substantially all costs of shipping and handling of products to customers are included in selling expense.  Shipping and handling costs for the years ended December 31, 2010, 2009 and 2008 were $60,152, $14,583 and $8,079, respectively.
 
 F-11
 CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
 (FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 For the years ended December 31, 2010, 2009 and 2008
   NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 Income taxes
  The Company is subject to income taxes in the United States and other foreign jurisdictions where it operates. The Company accounts for income taxes in accordance with FASB ASC Topic 740, “Income Taxes”.  FASB ASC Topic 740 requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years.  Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.
  The Company’s income tax returns are subject to examination by the Internal Revenue Service (“IRS”) and other tax authorities in the locations where it operates. The Company assesses potentially unfavorable outcomes of such examinations based on the criteria of FASB ASC 740-10-25-5 through 740-10-25-7 and 740-10-25-13 (formerly FASB Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes”).  The interpretation prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. This Interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.
 
 Comprehensive income
  FASB ASC Topic 220, “Comprehensive Income”, establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. Accumulated other comprehensive income includes foreign currency translation adjustments.
  Foreign currency
  The Company uses the United States dollars (“U.S. Dollar” or “US$” or “$”) for financial reporting purposes.  The PRC subsidiaries within the Company maintain their books and records in their functional currency, Chinese Renminbi (“RMB”), being the lawful currency in the PRC.  Assets and liabilities of the PRC subsidiaries are translated from RMB into US Dollars using the applicable exchange rates prevailing at the balance sheet date.  Items on the statement of operations are translated at average exchange rates during the reporting period.  Equity accounts are translated at historical rates.  Adjustments resulting from the translation of the Company’s financial statements are recorded as accumulated other comprehensive income.
 
 The exchange rates used to translate amounts in RMB into U.S. Dollars for the purposes of preparing the consolidated financial statements are based on the rates as published on the website of People’s Bank of China and are as follows:-
 
 December 31, 2010

December 31, 2009Balance sheet items, except for equity accounts
US$1=RMB  6.6227

US$1=RMB6.8282For the Year  ended December 31,2010

2009
2008Items in the statements of income and cash flows
US$1=RMB 6.7695

US$1=RMB 6.8310
US$1=RMB6.9452
 
 No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at the above rates.
 
 The value of RMB against U.S. dollars and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. Any significant revaluation of RMB may materially affect the Company’s financial condition in terms of U.S. dollar reporting.
  Earnings per share
 The Company reports earnings per share in accordance with the provisions of FASB ASC Topic 260, "Earnings per Share". FASB ASC Topic 260 requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution (using the treasury stock method) that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.
 
 F-12
 CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
 (FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 For the years ended December 31, 2010, 2009 and 2008
   NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 Commitments and contingencies
 The Company follows FASB ASC Subtopic 450-20, “Loss Contingencies” in determining its accruals and disclosures with respect to loss contingencies. Accordingly, estimated losses from loss contingencies are accrued by a charge to income when information available prior to issuance of the financial statements indicates that it is probable that a liability could be been incurred and the amount of the loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the financial statements when it is at least reasonably possible that a material loss could be incurred.
 
 Recently issued accounting standards
  In January 2010, the FASB issued ASU No. 2010-02—Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary. This Update amends Subtopic 810-10 and related guidance to clarify that the scope of the decrease in ownership provisions of the Subtopic and related guidance applies to (i) a subsidiary or group of assets that is a business or nonprofit activity; (ii) a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture; and (iii) an exchange of a group of assets that constitutes a business or nonprofit activity for a non-controlling interest in an entity, but does not apply to: (i) sales of in substance real estate; and (ii) conveyances of oil and gas mineral rights. The amendments in this update are effective beginning in the period that an entity adopts FAS 160 (now included in Subtopic 810-10). The adoption of the provisions in ASU 2010-02 did not have an impact on the Company’s consolidated financial statements.
 
 Effective January 1, 2010, the Company adopted the provisions in ASU 2010-06, “Fair Value Measurements and Disclosures (ASC Topic 820): Improving Disclosures about Fair Value Measurements, which requires new disclosures related to transfers in and out of levels 1 and 2 and activity in level 3 fair value measurements, as well as amends existing disclosure requirements on level of disaggregation and inputs and valuation techniques. Except for the expanded disclosure requirements, the adoption of the provisions in ASU 2010-06 did not have an impact on the Company’s consolidated financial statements.
 
 In February 2010, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that amends the disclosure requirements related to subsequent events (Topic 855). This guidance includes the definition of a Securities and Exchange Commission filer, removes the definition of a public entity, redefines the reissuance disclosure requirements and allows public companies to omit the disclosure of the date through which subsequent events have been evaluated. This guidance is effective for financial statements issued for interim and annual periods ending after February 2010. This guidance did not materially impact the Company’s results of operations or financial position, but did require changes to the Company’s disclosures in its financial statements.
 
 In April 2010, the FASB issued ASU No. 2010-13—Compensation—Stock Compensation (Topic 718), which addresses the classification of an employee share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. This update provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company expects that the adoption of the amendments in this update will not have any significant impact on its financial position and results of operations.
 
 In July 2010, the FASB issued ASU 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”. This ASU amends Topic 310 to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Except for the expanded disclosure requirements, the adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.
 
 Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.
 
 F-13
 CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
 (FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 For the years ended December 31, 2010, 2009 and 2008
   NOTE 3 FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS
 
 ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
 
 Level 1-
Quoted prices in active markets for identical assets or liabilities.
 Level 2-
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 Level 3-
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
 Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter.
 
 There were no assets or liabilities measured at fair value on a recurring basis as of December 31, 2010 or December 31, 2009.
 
 The carrying values of cash and cash equivalents, accounts receivables, accounts and notes payables, other payables and accruals and due from related parties approximate their fair values due to their short maturities.
 
 NOTE 4 ACCOUNTS RECEIVABLE, NET
 
 Accounts receivable consisted of the following:
 December 31,


December 31,2010


2009Accounts receivable

$
39,060,384


$
22,125,979Less: Allowance for doubtful accounts


-



-Accounts receivable, net

$
39,060,384


$
22,125,979
 
 Based on the Company’s assessment of collectibility, there has been no allowance for doubtful accounts provided as of December 31, 2010 or December 31, 2009
 
 NOTE 5 INVENTORIES
 
 Inventories by major categories are summarized as follows:
 December 31,


December 31,2010


2009Raw materials

$
557,061


$
558,990Work in progress


1,086,706



317,072Finished goods


568,617



811,028$
2,212,384


$
1,687,090
 
 Included in work in progress were inventories of $446,389 and $126,649 as of December 31, 2010 and December 31, 2009, respectively, which were at subcontractors’ locations.
 
 F-14
 CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
 (FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 For the years ended December 31, 2010, 2009 and 2008
   NOTE 6 LAND USE RIGHTS
  The Company has recorded as prepaid land use rights the lump sum payments paid to acquire long-term interests to utilize the land underlying the Company’s buildings and production facility. This type of arrangement is common for the use of land in the PRC. The prepaid land use rights are expensed on the straight-line basis over the term of the land use rights of 50 years.
 
 The amounts expensed on prepaid land use rights for the years ended December 31, 2010 and 2009 and 2008 were $17,625,$16,938 and $20,045, respectively. As of December 31, 2010, the estimated expense of the prepaid land use rights over each of the next five years will be $18,015 per annum.
 
 As of December 31, 2010, the deposit for land use rights represented the payment made by Hengfeng to acquire a 50-year right to use a parcel of land pursuant to the land use rights transfer agreement between Hengfeng and the PRC local land authority dated January 16, 2010, for a price of $7,549,791. The land will be used for the extension of Hengfeng’s existing factory buildings. As of December 31, 2010, the relevant formalities were not completed, hence Hengfeng has not yet obtained the legal title to the land use rights. On September 8, 2010, a supplemental agreement was signed whereby if the relevant formalities are not completed by September 6, 2011, the local land authority agreed to repay $4,529,875 (RMB30 million) on March 6, 2012 and the remaining balance of $3,019,916 (RMB20 million) plus interest accruing at 10% per annum on June 6, 2012 .  An independent third party, Jinjiang Hengchao Co., Ltd. has guaranteed the repayment of the amount.
 
 Land use rights with a net carrying value of $177,921 and $175,632 as of December 31, 2010 and December 31, 2009, respectively, have been pledged as collateral against the short-term bank loans (see Note 9).
 
 NOTE 7 PROPERTY, PLANT AND EQUIPMENT, NET
 
 December 31,


December 31,2010


2009Cost:Buildings

$
3,086,204


$
2,993,322Machinery


9,099,683



8,825,821Office equipment


380,165



368,724Total cost


12,566,052



12,187,867Less: Accumulated depreciation


(3,331,570
)


(2,350,034
)Net book value

$
9,234,482


$
9,837,833
 
 Depreciation expense for the years ended December 31, 2010, 2009 and 2008 was $888,912, $883,073 and $518,129, respectively.
 
 Buildings with a net book value of $1,012,396 and $998,675 as of December 31, 2010 and December 31, 2009, respectively, have been pledged as collateral against the short-term bank loans (see Note 9).
 
 NOTE 8 OTHER PAYABLES AND ACCRUALS
 
 December 31,


December 31,2010


2009Accrued staff costs and other operating expenses

$
421,105


$
280,126Value added tax payable


747,336



435,453Other taxes payable


82,359



528,077$
1,250,800


$
1,243,656
 
 F-15
 CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
 (FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 For the years ended December 31, 2010, 2009 and 2008
   NOTE 9 SHORT-TERM BANK LOANS
 
 Short-term bank loans consisted of the following loans granted by Industrial Bank Co., Ltd.:
  Annual interest rateDecember 31,

2010


December 31,

2009




December 31,

2010

December 31,

2009Maturity date

CollateralFebruary 23, 2011

extended to  February 23, 2012


5.31
%




Guaranteed by a minority shareholder of Hengfeng and the general manager of Hengfeng

$
181,195

$
-March 4, 2011 extended to  March 3, 2012


5.31
%




Guaranteed by third parties and the general manager of Hengfeng


181,195


-September 21, 2011


7.02
%




Guaranteed by third parties and the general manager of Hengfeng


226,493


-February 25, 2010






5.31
%

Guaranteed by a minority shareholder of Hengfeng and the general manager of Hengfeng


-


109,838March 31, 2011,

extended to March 31, 2012


7.27
%


5.31
%

The Company’s land use right and buildings and guaranteed by third parties and the general manager of Hengfeng


377,490


366,129September 26, 2009, extended to September 25, 2010






5.31
%

Guaranteed by a third party entity and the general manager of Hengfeng


-


109,839September 26, 2009, extended to September 25, 2010






5.31
%

Guaranteed by a third party entity,  the general manager of Hengfeng and a third party individual


-


109,839April 2, 2010






5.31
%

The Company’s land use right and guaranteed by  the general manager of Hengfeng


-


183,064April 6, 2010






5.31
%

The Company’s land use right and buildings and guaranteed by the general manager of Hengfeng


-


183,064April 22, 2010,extended toApril 19, 2011


5.31
%


5.31
%

The Company’s land use right and buildings and guaranteed by the general manager of Hengfeng


196,295


190,387August 26, 2010 extended to August 24, 2011


7.02
%


5.31
%

The Company’s land use right and buildings and guaranteed by the general manager of Hengfeng


105,697


102,516$
1,268,365

$
1,354,676
 
 
 F-16
 CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
 (FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 For the years ended December 31, 2010, 2009 and 2008
 
  NOTE 10 STATUTORY RESERVES
 
 In accordance with the PRC Companies Law, Hengfeng, the PRC subsidiary, is required to transfer 10% of its profits after tax, as determined in accordance with accounting standards and regulations of the PRC, to the statutory surplus reserve until such reserve reached 50% of registered capital of the Company’s PRC subsidiaries.  The statutory surplus reserve is non-distributable.  No transfer to statutory surplus reserves has been made during the years end December 31, 2010 and 2009 as such reserves reached 50% of the registered capital of Hengfeng.
 
 NOTE 11 EMPLOYEE BENEFITS
 
 The full-time employees of the Company’s PRC subsidiary are entitled to staff welfare benefits, including medical care, welfare subsidies, unemployment insurance and pension benefits. The Company’s PRC subsidiary is required to accrue for these benefits based on certain fixed percentages of the employees’ salaries in accordance with the relevant regulations and to make contributions to the state-sponsored pension and medical plans out of the amounts accrued for medical and pension benefits. The total amounts charged to the statements of income for such employee benefits amounted to $225,609, $195,252 and $169,579 for the years ended December 31, 2010, 2009 and 2008, respectively.
 
 NOTE 12 INCOME TAXES
 
 The Company is subject to income tax on an entity basis on income arising from the tax jurisdictions in which they operate.
 
 China Sports is subject to taxes in the U.S.
 
 Kobe Sport, being incorporated in the British Virgin Islands (“BVI”), is not subject to any income tax in the BVI.
 
 Nam Kwong and Kobe Brand are subject to Hong Kong income tax on their taxable income derived from trade or businesses carried out in Hong Kong at 16.5% for the years ended December 31, 2010, 2009 and 2008.
 
 Hengfeng is subject to PRC income taxes.  On March 16, 2007, the PRC government promulgated a new tax law, China’s Unified Enterprise Income Tax Law (“New EIT Law”), which took effect from January 1, 2008. Under the New EIT Law, foreign-owned enterprises as well as domestic companies are subject to a uniform tax rate of 25%.  Therefore, Hengfeng has been subject to an EIT rate of 25% on its taxable income for the years ended December 31, 2010, 2009 and 2008.
 
 The Company’s provision for income taxes consisted of:
 
 For the Year Ended December 31,2010


2009


2008Current – PRC

$
6,633,704


$
4,751,151


$
3,316,035Deferred


-



-



-$
6,633,704



4,751,151


$
3,316,035
 
 A reconciliation of the provision for income taxes to the Company’s effective income tax rate is as follows:
 
 For the Year Ended December 31,2010


2009


2008Pre-tax income

$
26,174,327


$
18,975,876


$
13,215,726United States federal corporate income tax rate


34
%


34
%


34
%Income tax computed at United States statutory corporate income tax rate


8,899,271



6,451,798



4,493,347Change in valuation allowance


115,260



-



-Rate differential for PRC earnings


(2,386,199
)


(1,707,829
)


(1,189,416
)Non-deductible expenses and non-taxable income


5,372



7,182



12,104Provision for income tax

$
6,633,704


$
4,751,151


$
3,316,035
 
 F-17
 CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
 (FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 For the years ended December 31, 2010, 2009 and 2008
 
  NOTE 12 INCOME TAXES (CONTINUED)
 
 The Company had deferred tax assets as follows:
  December 31,

2010


December 31,

2009Net operating losses carried forward

$
115,260


$
-Less: Valuation allowance


(115,260
)


-Net deferred tax assets

$
-


$
-
 
 As of December 31, 2010 and 2009, the Company had $339,000 and nilnet operating loss carryforwards available to reduce future taxable income,respectively, which will expire in various years through 2030. It is more-likely-than-not that the deferred tax assets cannot be utilized in the future because there will not be significant future earnings from the entity which generated the net operating loss. Therefore, the Company recorded a full valuation allowance on its deferred tax assets.
 
 As of December 31, 2010 and 2009, the Company has no material unrecognized tax benefits which would favorably affect the effective income tax rate in future periods and does not believe that there will be any significant increases or decreases of unrecognized tax benefits within the next twelve months. No interest or penalties relating to income tax matters have been imposed on the Company during the years ended December 31, 2010, 2009 and 2008, and no provision for interest and penalties is deemed necessary as of December 31, 2010 and 2009.
 
 The New EIT Law imposes a withholding tax of 10% unless reduced by a tax treaty, for dividends distributed by a PRC-resident enterprise to its immediate holding company outside the PRC for earnings accumulated beginning on January 1, 2008.  Undistributed earnings generated prior to January 1, 2008 are exempt from such withholding tax. The Company has not provided for income taxes on accumulated earnings of Hengfeng as of December 31, 2010 and 2009, since these earnings are intended to be reinvested indefinitely in the overseas jurisdictions. It is not practicable to estimate the amount of additional taxes that might be payable on such undistributed earnings.
 
 According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational or other errors made by the taxpayer or the withholding agent. The statute of limitations extends to five years under special circumstances. In the case of transfer pricing issues, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion. Accordingly, the income tax returns of Hengfeng for the years ended December 31, 2008 through 2010 are open to examination by the PRC state and local tax authorities.
 
 NOTE 13 EARNINGS PER SHARE
 
 The following table is a reconciliation of the net income and the weighted average shares used in the computation of basic and diluted earnings per share for the periods presented:
 
 For the Year Ended December 31,2010


2009


2008Income available to common shareholders (basic and diluted):- Net income

$
18,347,846


$
13,371,241


$
9,305,710Weighted average number of shares:- Basic and diluted


9,882,192



9,000,000



9,000,000Net income per share- Basic

$
1.86


$
1.49


$
1.03- Diluted

$
1.86


$
1.49


$
1.03
 
 The weighted average numbers of shares outstanding during 2009 and 2008 have been restated to reflect the recapitalization on February 12, 2010.
 
 F-18
 CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
 (FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 For the years ended December 31, 2010, 2009 and 2008
   NOTE 14 RELATED PARTY TRANSACTIONS
 
 December 31,


December 31,2010


2009Loan due from a related party:Mr. Qionglin Lin, the general manager of the Company
(a)

$
-


$
3,148,707Due to related party

Mr.Anding Lin, the Chief Executive Officer and Interim Chief Financial Officerof the Company
(b)

$
339,000


$
-
 
 (a)
The above loan due from Mr. Qionglin Lin as of December 31, 2009 was unsecured, bearing interest at 10% per annum and was originally repayable in one lump sum on or before September 22, 2010. On April 5, 2010, the Company and Mr. Qionglin Lin entered into a revised scheme of settlement, pursuant to which $2,929,845 (i.e. RMB20,000,000) of the loan was repaid to the Company on April 30, 2010 and whereas the remaining balance of approximately $292,984 was repaid before May 31, 2010.
  The Company recognized interest income of $73,861, $219,587 and nil on the loan due from Mr. Qionglin Lin for the years ended December 31, 2010, 2009 and 2008, respectively.
  (b)
The amount due to Mr  Anding Lin was non-interest bearing, unsecured and without fixed repayment date.
 
 Guarantees for the Company’s loans
  Fujian Jinjiang Chenli Yangli Hengfeng Shoe-Making Factory (the 6% minority shareholder of Hengfeng) provided guarantees for the Company’s short-term bank loan of $181,195 and $109,838 as of December 31, 2010 and December 31, 2009, respectively (See Note 9).
 
 Mr. Qionglin Lin, the general manager of the Company, provided guarantees for the Company’s short-term bank loans of $1,268,365 and $1,354,676 as of December 31, 2010 and December 31, 2009, respectively (See Note 9).
 
 NOTE 15 CERTAIN RISKS AND CONCENTRATIONS
 
 Credit risk
  As of December 31, 2010 and December 31, 2009, 100% of the Company’s cash included cash on hand and deposits in accounts maintained within the PRC where there is currently no rule or regulation in place for obligatory insurance to cover bank deposits in the event of bank failure. However, the Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.
 
 For the years ended December 31, 2010, 2009 and 2008, all of the Company’s revenue arose in the PRC.  In addition, all accounts receivable as of December 31, 2010 and 2009 were due from customers located in the PRC.
 
 As of December 31, 2010, there was no customer who accounted for 10% or more of the accounts receivable of the Company.  As of December 31, 2009, there was one customer who accounted for 11% of the accounts receivable of the Company.  Except for the afore-mentioned, there was no other single customer who accounted for more than 10% of the Company’s accounts receivable as of December 31, 2009.
 
 There were no customers who accounted for 10% or more of the Company’s revenue for the year ended December 31, 2010.  There was two customer who accounted for 12% and 10% of the Company’s revenue for the year ended December 31, 2009.  Except for the afore-mentioned, there was no other single customer who accounted for 10% or more of the Company’s revenue for the year ended December 31, 2009. There was no single customer who accounted for more than 10% of the Company’s revenue for the year ended December 31, 2008.
 
 Concentration of suppliers
 
 The five largest subcontractors or suppliers accounted for 41.9%, 44.4% and 35.1% of the total value of the Company’s purchases made during the years ended December 31, 2010, 2009 and 2008, respectively, out of which one single subcontractor accounted for 10.2%, 15.3% and 10.1%, respectively. Except for the afore-mentioned, there was no other single subcontractor or supplier who accounted for 10% or more of the Company’s purchases for the year ended December 31, 2010, 2009 or 2008.
 
 F-19
 CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
 (FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 For the years ended December 31, 2010, 2009 and 2008
   NOTE 16 COMMITMENTS AND CONTINGENCIES
 
 Lease commitments
  The Company has entered into tenancy agreements for the lease of factory premises and warehouse with independent parties. The Company’s commitments for minimum lease payments under these operating leases for the next five years and thereafter as of December 31, 2010 are as follows:
 
 Payable within:- fiscal year ending December 31, 2011

$
66,799- fiscal year ending December 31, 2012


31,192- fiscal year ending December 31, 2013 and thereafter


-Total

$
97,991
 
 NOTE 17 SEGMENT DATA
 
 The Company follows FASB ASC Topic 280, Segment Reporting, which requires that companies disclose segment data based on how management makes decision about allocating resources to segments and evaluating their performance.
 
 The Company operates and manages its business as a single segment that includes the design, manufacturing and sales of sports shoes, sportswear and related accessories.
 
 Throughout the years ended December 31, 2010, 2009 and 2008, all of the Company’s revenue was derived from China and all of its long-lived assets were located in China.
  The Company’s major product categories are (1) sports shoes, which include casual shoes, basketball shoes, jogging shoes, skate board and other shoes, (2) sportswear and (3) accessories: sports bags, wristlets, basketballs, travel bags, hats, sport socks, shields and scarfs, etc. The following table sets out the analysis of the Company’s revenue by product:


For the Years Ended December 31,2010


2009


2008Net revenue from external customers:Sports shoes

$
65,610,612


$
46,014,686


$
41,473,871Sportswear


38,764,420



29,826,083



18,799,094Accessories


5,347,889



5,346,822



3,133,156Total

$
109,722,921


$
81,187,591


$
63,406,121
 
 NOTE 18 SUBSEQUENT EVENTS
 
 On February 14, 2011, two shareholders returned a total of 2,250,000 shares of common stock to treasury.
 
 On March 18, 2011 the Board of Directors appointed Mendoza Anding Lin as the Interim Chief Financial Officer of the Companywith immediate effect. Mr. Mendoza Anding Lin currently serves as the Company’s President and Chief Executive Officer.
 
 NOTE 19 RESTRICTED NET ASSETS
 
 The Company’s operations are substantially conducted through Hengfeng and Hengfeng may only pay dividends out of its retained earnings determined in accordance with the accounting standards and regulations in the PRC and after it has met the PRC requirements for appropriation to statutory reserves (see Note 10).
 
 In addition, Hengfeng's business transactions and assets are primarily denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts. These currency exchange control measures imposed by the PRC government may restrict the ability of Hengfeng to transfer their net assets to the Company through loans, advances or cash dividends.  The net assets of Hengfeng in aggregate exceeded 25% of the Company’s consolidated net assets. Accordingly, condensed parent company financial statements have been prepared in accordance with Rule 5.04 and Rule 12-04 of SEC Regulation S-X.
 
 F-20
 CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
 (FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 For the years ended December 31, 2010, 2009 and 2008
   NOTE 19 RESTRICTED NET ASSETS (CONTINUED)
 
 The Company records its investment in subsidiaries under the equity method of accountingin the condensed parent company financial statements.  Such investment and long-term loans to subsidiaries are presented on the condensedbalance sheets as “Investments in subsidiaries” and the income of the subsidiaries is presented as “Equity in income of subsidiaries” on the condensedstatements of income.
 
 These supplemental condensed parent company financial statements should be read in conjunction with the notes to the Company’s consolidated financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.
 
 As of December 31, 2009 and 2010, there were no material contingencies, significant provisions for long-term obligations, or guarantees of the Company, except as separately disclosed in the consolidated financial statements, if any.
 
 Supplemental Parent Company Financial Information – China Sports Holding Company Limited
  Condensed Balance Sheets
 
 As of December 31,2010


2009ASSETSCurrent assets:Cash and cash equivalents

$
4,195


$
-Total current assets


4,195



-Investments in subsidiaries


54,678,034



34,506,254Total assets

$
54,682,229


$
34,506,254LIABILITIESCurrent liabilities:Due to arelated party

$
339,000


$
-Total current liabilities


339,000



-Stockholders’ equityPreferred stock, par value $0.001; 10,000,000 shares authorized, no issued and outstanding as of December 31, 2010 and 2009


-



-Common stock, $0.001 par: 40,000,000 shares authorized, 9,000,000 shares issued and outstanding as of December 31, 2010 and 2009,respectively


10,000



9,000Additional paid-in capital


2,402,198



2,399,003Retained earnings


48,766,878



30,419,032Accumulated other comprehensive income


3,164,153



1,679,219Total stockholders' equity


54,343,229



34,506,254Total liabilities and stockholders' equity

$
54,682,229


$
34,506,254
  Condensed Statements of Income
 
 For the Year Ended December 31,2010


2009


2008Equity in income of subsidiaries

$
18, 686,846


$
13,371,241


$
9,305,710Administrative expenses


(339,000
)


-



-Net income

$
18,347,846


$
13,371,241


$
9,305,710
  F-21
 CHINA SPORTS HOLDING COMPANY LIMITED AND SUBSIDIARIES
 (FORMERLY KNOWN AS MONDO ACQUISITION III, INC.)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 For the years ended December 31, 2010, 2009 and 2008
   NOTE 19 RESTRICTED NET ASSETS (CONTINUED)
 
  Condensed Statements of Cash Flows
 
 For the Year Ended December 31,2010

2009


2008Net cash used in operating activities

$
(339,000
)

$
-


$
-Net cash used in investing activities


-



-



-Net cash provided by financing activities


343,195



-



-Cash, beginning of year


-



-



-Cash, end of year

$
4,195


$
-


$
-