Global Arena Holding, Inc. - Quarter Report: 2008 September (Form 10-Q)

csof10q093008.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008 OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO _______

COMMISSION FILE NUMBER: 0-49819

_______________

_CHINA STATIONERY AND OFFICE SUPPLY INC.

(Exact Name of Small Business Issuer As Specified In Its Charter)

DELAWARE	33-0931599
(STATE OR OTHER JURISDICTION OF	(I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

c/o Ningbo Binbin Stationery

Qiaotouhu Industrial Park

Ninghai, Zhejiang Province 315611 P.R. China

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)

ISSUER 'S TELEPHONE NUMBER, INCLUDING AREA CODE: 011-86-65160858

American Union Securities, Inc.

Attention: China Stationery & Office Supply

100 Wall Street, 15th Floor, New York, NY 10005

Agent Contact Information

Agents Telephone number: 212-232-0120

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer__ Accelerated filer__ Non-accelerated filer__ Small reporting company X

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

The number of shares of Common Stock of the Registrant, par value $0.001 per share, outstanding at November 19, 2008 was 11,987,427.

TABLE OF CONTENTS		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	1

Consolidated Balance Sheets as of September 30, 2008 (Unaudited) and December 31, 2007		1

Consolidated Statements of Income for the three and nine months ended September 30, 2008 and 2007 (Unaudited)		2

Consolidated Statement of Stockholders' Equity		3

Consolidated Statements of Cash Flows		4

Notes to Consolidated Financial Statements		5-7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operation	9

Item 3.	Quantitative and Qualitative Disclosures About Martket Risk	10

Item 4.	Controls and Procedures	10

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	11

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	11

Item 3.	Defaults Upon Senior Securities	11

Item 4.	Submission of Matters to a Vote of Security Holders	11

Item 5A.	Other Information	11

Item 6.	Exhibits	11

Signatures		12

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CHINA STATIONERY & OFFICE SUPPLY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	September 30		December 31
	2008		2007
	(Unaudited)
ASSETS

Current Assets:
Cash and Cash Equivalent	$	1,262,649	$	5,526,373
Accounts Receivable-net		4,904,050		2,691,125
Inventory		5,378,807		5,010,751
Advance to Suppliers		2,115,920		2,174,885
Other Receivable		787,105		2,438,502
Employee Travel Advances		84,254		27,257
Prepaid expense		883,875		998,349
Total Current Assets		15,416,659		18,867,242

Long-term Investment		-		68,400
Property, Plant & Equipment, net		8,394,069		7,799,530
Intangible Asset, net		1,365,497		1,295,986
Other Assets		2,566		20,073

Total Assets	$	25,178,791	$	28,051,231

Current Liabilities:
Accounts Payable	$	3,452,180		$	5,079,288
Notes payable		722,700			4,391,312
Short-term Bank Loans		16,644,000			12,038,488
Advanced from Customers		637,806			2,143,862
Total Current Liabilities		21,456,686			23,652,950

Long-Term Liabilities:		-			-
Total Liabilities		21,456,686			23,652,950

Stockholders' Equity:
Preferred Stock- $.001 par value, 2,000,000 shares authorized and
no shares are issued and outstanding		-			-
Common Stock, stated value $.0001, 50,000,000 authorized
11,987,427 shares issued and outstanding		11,987			11,987
Additional Paid in Capital		1,654,324			1,654,324
Retained Earnings		(168,295	)		875,886
Statutory Reserve		592,231			592,231
Accumulated Other Comprehensive Income		1,631,858			1,263,853
Total Stockholders' Equity		3,722,105			4,398,281

Total Liabilities and Stockholders' Equity	$	25,178,791		$	28,051,231

The accompanying notes are an integral part of these consolidated financial statements.

CHINA STATIONERY & OFFICE SUPPLY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Three Months Ended						Nine Months Ended
	September. 30						September. 30
	2008			2007			2008			2007
Net Sales	$	4,983,388		$	8,405,726		$	13,943,144		$	27,747,378

Cost of Goods Sold		4,649,209			7,800,734			13,077,786			25,122,798

Gross Profit		334,179			604,992			865,358			2,624,580

Operating Expenses:
Selling,General and Administrative Expenses		424,270			502,771			1,331,244			2,033,218

Total Operating Expenses		424,270			502,771			1,331,244			2,033,218

Income (loss) from Operations		(90,091	)		102,221			(465,886	)		591,362

Other Income /(Expenses):
Interest Expense		(216,069	)		(175,859	)		(818,012	)		(559,036	)
Government Subsidy Income		24,157						38,858
Non-operation Income (Expense)		16,431			(3,036	)		200,859			8,047
Total Other Income (Expenses)		(175,481	)		(178,895	)		(578,295	)		(550,989	)

Income (Loss) from Continuing Operations		(265,572	)		(76,674	)		(1,044,181	)		40,373
Provision For State Income Taxes		-			-			-			-

Net Income		(265,572	)		(76,674	)		(1,044,181	)		40,373
Other Comprehensive Item:
Gain on Foreign Currency Translation		197,127			79,426			368,005			224,762

Net Comprehensive Income	$	(68,444	)	$	2,752		$	(676,176	)	$	265,135

Earnings per Common Share-basic and Diluted		(0.01	)		0.00			(0.06	)		0.02
Weighted Average Common shares-Basic and Diluted		11,987,427			11,987,427			11,987,427			11,987,427

The accompanying notes are an integral part of these consolidated financial statements.

CHINA STATIONERY & OFFICE SUPPLY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

	Contributed									Common Stock Stated Value $.0001				Additional							Accumulated Other		Total
				Prefered Stock										Paid in		Statutory		Retained			Comprehensive		Stockholders'
	Capital			Shares			Amount			Shares		Amount		Capital		Reserve		Earnings			Income		Equity
Balance December 3 1, 2005	$	1,210,000					$	-			-	$	-	$	-	$	551,849	$	3,127,144		$	60,525	$	4,949,518

Exchange for Common Stock		(1,210,000	)												1,653,824									443,824
Insurance for Preferred Stocks					500,000			500											-					500
Insurance of Common Stocks											11,987,427		11,987											11,987
Effect of Merger and Recapitalization																			(765,545	)		-		(765,545	)
Net Income																			403,820					403,820
Allocation of Statutory Reserve																	40,382		(40,382	)				-
Other Comprehensive Income																						488,357		488,357

Balance December 31, 2006		-			500,000			500			11,987,427		11,987		1,653,824		592,231		2,725,037			548,882		5,532,461

Conversion of Preferred Stock to
Common Stocks					(500,000	)		(500	)						500									-
Net Income																			(1,849,151	)				(1,849,151	)
Allocation of Statutory Reserve																								-
Other Comprehensive Income																						714,971		714,971

Balance- December 31, 2007					-			-			11,987,427		11,987		1,654,324		592,231		875,886			1,263,853		4,398,281

Net Income																			(1,044,181	)				(1,044,181	)
Allocation of Statutory Reserve																								-
Other Comprehensive Income																						368,005		368,005

Balance- September 30, 2008					-			-			11,987,427	$	11,987	$	1,654,324	$	592,231	$	(168,295	)	$	1,631,858	$	3,722,105

The accompanying notes are an integral part of these consolidated financial statements.

CHINA STATIONERY & OFFICE SUPPLY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 and 2007

Cash Flows From Operating Activities:	2008			2007

Net income (Loss)	$	(1,044,181	)	$	40,373
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest
Depreciation and amortization		434,466			391,751
Bad debt expense		-			-
Loss on disposal of fixed assets		-			-
Changes in assets and liabilities:
Accounts receivable, net		(2,212,925	)		3,136,904
Inventories		(368,055	)		601,793
Advances to vendors		58,965			3,660,914
Employee travel advances		(56,996	)		138,376
Other receivables, net		1,651,397			641,320
Prepaid expenses		114,474			(340,236	)
Accounts payable		(1,412,467	)		(4,555,343	)
Advances from customers		(1,506,056	)		(1,011,863	)
Accrued expenses, taxes and sundry current liabilities		(765,726	)		305,662
Total Adjustments		(4,062,924	)		2,969,278
Net Cash (Used in) Provided by Operating Activities		(5,107,105	)		3,009,651

Cash Flows From Investing Activities

Acquisition of property and equipment		(529,924	)		(513,972	)
Short-term investment					(7,838	)
Long-term investment		68,400			(65,320	)
(Loans to) borrow from other company		-			29,534
Net Cash Used In Investing Activities		(461,524	)		(557,596	)

Cash Flows From Financng Activties

Proceeds from and (repayments) to bank loans, net		4,605,512			(3,527,280	)
(Repayment) proceed of notes payable		(3,668,612	)		3,220,276
Contributed capital		-			33,966
Net Cash Provided by (Used) in Financing Activities		936,900			(273,038	)

Effect of foreign currency translation gain		368,005			115,314

Net Increase (Decrease) in Cash And Cash Equivalents		(4,263,724	)		2,294,331

Cash and cash equivalents at the Beginning of the Years		5,526,373			1,674,641

Cash and cash equivalents at the End of the Years	$	1,262,649		$	3,968,972

Supplemental Disclosures of Cash Flow Information:

Cash Paid During The Years for:
Interest Paid		818,012			559,036
Income Taxes Paid		-			-

The accompanying notes are an integral part of these consolidated financial statements.

CHINA STATIONERY AND OFFICE SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 AND 2007

(UNAUDITED)

NOTE 1-INTERIM FINANCIAL STATEMENTS

These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2007, as not all disclosures required by generally accepted accounting principles for annual financial statements are presented. The interim financial statements follow the same accounting policies and methods of computations as the audited financial statements for the year ended December 31, 2007.

NOTE 2-ACCOUNTING POLICIES

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles applicable to interim financial information and in accordance with the requirements of Form 10-Q and Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included.

The consolidated financial statements include the accounts of the Company, its wholly and majority owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.

NOTE 3- ACCOUNTS RECEIVABLE

The Company extends to certain customers credit terms up to 12 months. Management performs periodic reviews of the ages of accounts receivables and customer payment patterns. Reserves are made when accounts are deemed uncollectible and recorded primarily on a specific identification basis. As of September 30, 2008, the Company provides an allowance for doubtful accounts for the amount of $1,235,484 which was equal to the estimated uncollectible amounts.

NOTE 4-INVENTORIES

A summary of the components of inventories at September 30, 2008 and December 31, 2007 is as follows:

	30-Sept-08		31-Dec-07
Raw materials	$	1,356,857	$	918,453
Work in process		2,839,454		1,045,306
Finished goods		1,010,589		3,046,992
Packaging supplies		171,907		-

Total	$	5,378,807	$	5,010,751

NOTE 5-ADVANCES TO SUPPLIERS

As a normal practice of doing business in China, the Company is frequently required to make advance payments to suppliers for raw materials. Such advance payments are interest free. The balances of advance to suppliers were $2,115,920 and $2,174,885 as of September 30, 2008 and December 31, 2007 respectively.

NOTE 6- PROPERTY AND EQUIPMENT

A summary of property and equipment at September 30, 2008 and December 31, 2007 is as follows:

	30-Sept-08			31-Dec-07
Building	$	6,803,141		$	6,755,213
Manufacturing equipment		3,129,053			2,403,013
Office equipment and furniture		986,055			541,418
Vehicles		607,709			640,153
Total Property and Equipment		11,525,958			10,339,797

Accumulated depreciation		(3,131,888	)		(2,540,267	)

Net of Property and Equipment	$	8,394,069		$	7,799,530

Depreciation expenses for nine months period ended September 30, 2008 was $396,660.

CHINA STATIONERY AND OFFICE SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2008 AND 2007

(UNAUDITED)

NOTE 7- INTANGIBLE ASSETS

The net intangible asset at September 30, 2008 is as follows:

Right to use land	$	1,679,991
Accumulated Amortization		(314,494	)
Net of Amortization	$	1,365,497

The company’s office and manufacturing site is located in Qiaotouhu Street Scene, Ninghai Zhejiang China. The Company leases the land from the local government of the PRC with a term of fifty years from November 2001 to November 2051. The fair value at the time of the acquisition of the right to use land was recorded as an intangible asset and is being amortized over 50 years. Amortization expenses for the nine months period ended September 30, 2008 was $37,804.

NOTE 8- ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses were comprised of the following items as of September 30, 2008 and December 31, 2007

	30-Sept-08			31-Dec-07
Accounts payable	$	2,783,853		$	4,196,320
Accrued payroll and related liabilities		437,895			354,149
Accrued VAT payable		(35,770	)		16,734
Miscellaneous accrued expense		266,203			512,084
	$	3,452,180		$	5,079,287

NOTE 9- SHORT-TERM BANK LOANS

The Company has borrowed funds from several financial institutions for its working capital. These borrowings are short term in nature and are secured by the Company’s real estate. The borrowings bear interest at rates ranging from 7.470% to 8.217% in 2008.

NOTE 10- ADVANCES FROM CUSTOMERS

Advances from customers are non-interest bearing and unsecured. As of September 30, 2008 and December 31, 2007 the balances were $637,806 and $2,143,862 respectively.

NOTE 11- SEGMENT REPORTING

Under SFAS 131, the Company has two reportable segments: Ningbo Binbin Stationery Co., Ltd (“Stationery”) and Ningbo Binbin Style Commodity Co., Ltd (“Style”). Following is a summary of segment information for the nine months period ended September 30, 2008 and 2007:

Period ended September 30, 2008

	Stationery			Style			Total
Revenue	$	13,755,219		$	187,926		$	13,943,144
Operating income (loss)		(270,195	)		(195,691	)		(465,886	)
Net Income (Loss)		(882,279	)		(161,902	)		(1,044,181	)
Total Assets		21,594,453			3,584,338			25,178,791
Capital Expenditure		529,924			0			529,924
Depreciation and amortization		317,998			119,246			437,244
Interest expense		853,386			(35,374	)		818,012

Period ended September 30, 2007

	Stationery		Style			Other			Total
Revenue	$	25,896,002	$	1,851,376		$	0		$	27,747,378
Operating income (loss)		711,228		(158,374	)		(16,500	)		536,354
Net Income (Loss)		160,399		(158,534	)		(16,500	)		(14,635	)
Total Assets		15,619,905		6,307,270			1,971			21,929,146
Capital Expenditure		510,970		3,002			-			513,972
Depreciation and amortization		328,335		118,424			-			446,759
Interest expense		559,036		-			-			559,036

NOTE 12-STATUTORY COMMON WELFARE FUND

As stipulated by the Company Law of China, net income after taxation can only be distributed as dividends after provision has been made for the following:

(1)	Making up cumulative prior years’ losses, if any;

(2)	Allocations to the “statutory surplus reserve” of at least 10% of income after tax, as determined under China’s accounting rules and regulations, until the fund amounts to 50% of the Company’s registered capital;

(3)	Allocation of 5-10% of income after tax, as determined under China’s accounting rules and regulations, to the Company’s “statutory common welfare fund,” which is established for the purpose of providing employee facilities and other collective benefits to the Company’s employees; and

(4)	Allocations to the discretionary surplus reserve, if approved in the shareholders’ general meeting.

The Company incurred a loss in the period ended September 30, 2008. Therefore, Company was not required to allocate the “statutory surplus reserve” in this nine months period. As of September 30, 2008, this fund has accumulated amount to $592,231.

CHINA STATIONERY AND OFFICE SUPPLY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2008 AND 2007

(UNAUDITED)

NOTE 13- EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share are computed by dividing income or loss available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share are computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. There are no common stock equivalents available in the computation of earnings (loss) per share at September 30, 2008.

NOTE NOTE 14- CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS

The Company's operations are carried out in China. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the People Republic of China (PRC), and by the general state of the PRC economy.

The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

Concentration of credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents. As of September 30, 2008, substantially all of the Company’s cash and cash equivalents were held by major banks located in the PRC, which the Company’s management believes are of high credit quality. With respect to accounts receivable, the Company extends credit based on an evaluation of the customer’s financial condition and customer payment practices to minimize collection risk on the account receivable.

There was no single vendor who accounted for more than 3% of the Company’s total raw material purchases during the six months period ended September 30, 2008.

The Company had no major customer who accounted for 7 % or more of the total sales for the nine months period ended September 30, 2008.

The Company’s sales are heavily dependent on exports sales to USA and Asia for the nine months period ended September 30, 2008.

NOTE 15- CONTINGENCIES

As of September 30, 2008, Ninbo Binbin Stationery Co., Ltd (“Binbin”) is contingently liable as a guarantor with respect to approximately $4,905,600 of indebtedness of non-related entities. The term of the guarantees is through April 9, 2010. At any time through that day, should any one of the entities default on their debt payments, Binbin will be obligated to perform under that guarantee by making the required payments. The maximum potential amount of future payments that Binbin is required to make under the guarantee is $4,905,600.

NOTE 16- RECLASSIFICATIONS

Preferred stock was converted to common stock. $500 was reclassified to additional paid in capital to reflect the transaction.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Proviso Regarding Forward-Looking Statements

This “Management’s Discussion and Analysis” includes certain forward-looking statements. These forward-looking statements represent management’s present expectations regarding the future. There are many risks and uncertainties that, if realized, could cause management’s expectations to be an inaccurate prediction of the future. Some of those risks are described below under the heading “Risk Factors That May Affect Future Results.”

The forward–looking statements contained herein speak only as of the date hereof. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Overview

Prior to acquiring a listing on the OTC Bulletin Board in June of 2006, the Company’s Chinese subsidiary, Ningbo Binbin Stationery Co., Ltd. (“Binbin”) had established itself through a period of 15 years as one of the top stationery manufacturers in China. It was recognized by Forbes China in 2004 and 2005 as one of the “Top 100 Growth Potential Small and Medium sized private enterprises.”

The Company’s product line consists of four categories, which include traditional office stationery and supplies, electric office supplies, office peripheral devices and furniture, and teaching aids. Traditional office supplies include manual staplers, staple removers, pencil sharpeners, hole punchers, rubber stamps, correctional tape, pens, and paper stationery sets. Electric office supplies include electric staples, electric hole punchers, electric paper shredders, electric pencil sharpeners, and vacuum cleaners. Office peripherals include desktop organizers, drawer organizers, bookends, desktop computer accessories, and partition accessories. Teaching aids include protractors, triangles of assorted degrees including 45-degree, 60-degree, and 90-degree, compass sets and additional drafting supplies.

In the late 1990s, the Company began to focus its business model on export sales. It offered the maximum number of products at highly competitive prices. The effort was successful as it established market presence in over 30 countries in five continents. In 2001, the Company became the first private company in Ningbo and among the first in China to obtain approval from the Ministry of Foreign Trade and Economic Cooperation to establish its own import/export company. Its notable foreign customers include Tesco Stores Ltd. (UK), Elmer’s Products, Inc. (US), Daiso Japan, and Romeo Maestri Figli S.p.A. (Italy). Today export sales account for nearly 90% of total sales.

Results of Operations

In recent years, because of relaxed regulation as well as international reaction to the dynamic growth of the Chinese economy, the exchange rates related to the Chinese Renminbi have become much more volatile than was the case at the start of this decade. For a company such as Binbin, whose business primarily consists of exporting high volume, low margin items, the volatility of exchange rates presents a significant obstacle to sound business planning. In the first instance, because we incur our cost of goods sold in Renminbi, but price our exports in Dollars, an increase in the exchange rate between the Renminbi and the Dollar can have the effect of eliminating our already modest profit margin on a sale. But if we adjust the sales price of our products to offset our increased manufacturing cost, the effect is to reduce demand for our products.

This double impact of the falling value of the Dollar is the primary explanation for our poor results in the first nine months of 2008. The reduced competitive position of our products caused us to realize only $13,943,144 in net sales revenue, a 50% reduction from the first nine months of 2007. The third quarter, similarly, saw a 41% reduction in sales compared to the third quarter of 2007. And even on those reduced sales, we realized only $865,358 in gross profit for the nine month period ended September 30, 2008 and $334,179 for the quarter (compared to $2,624,580 for the first nine months and $604,992 for the third quarter of 2008). That level of gross profit was far less than we required in order to cover our operating expenses.

While the negative turn in the Renminbi-to-Dollar exchange rate was the primary factor causing our negative operating results, an additional reason for the quarter-to-quarter decline was the fact that in 2006 UNICEF did not place its annual order until near to the end of the year. We were able to ship only $2.55 million of this $9 million order in 2006, and shipped the remaining $6.45 million in the first quarter of 2007. In comparison, we made no shipments to UNICEF in the first nine months of 2008. We believe that sales to UNICEF will continue to represent a large portion of our revenue in the next few years. But we cannot predict when UNICEF will place its orders, and so cannot determine the extent to which our revenues and earnings will develop a pattern of seasonality as a result of the UNICEF orders.

As noted, our gross margin on the sales fell from 9.5% in the first nine months of 2007 to 6.2% in the first nine months of 2008. In addition to the effect of the falling value of the Dollar, the decrease in gross margin reflected the fact that the prices of several of our key raw materials have been increasing. In particular, the world markets for non-ferrous metals, such as zinc, copper and nickel, have become substantially inflated. This has increased the manufacturing cost of many of our products.

We do not expect either of these two situations – the falling value of the Dollar or the increase in commodities prices - to be reversed in the near future. In addition, as of July 1, 2007 the Government of China reduced the rebate that it will pay on certain exported goods from 13% to 8%, with some rebates falling as low as 5%. This change put further downward pressure on our margins. Therefore we do not expect to reverse the decline in our profit margins until our long-term program of replacing low margin goods with higher margin products is fully implemented.

The dramatic decline in our sales revenue did have the effect of reducing our selling, general and administrative expenses for the nine month period by 36%, from $2,033,218 in the nine months ended September 30, 2007 to $1,331,244 in the nine months ended September 30, 2008. Similarly, selling, general and administrative expense in the three months ended September 30, 2008 was 16% lower than in the three months ended September 30, 2007. The primary reason for the reduction is the fact that the ratio of our sales expenses to our net sales remained relatively static reflecting our efforts to increase the efficiency of our marketing operations. As revenues fell, therefore, our selling, general and administrative expenses also fell. Offsetting the reduction in selling expenses, however, were two factors producing increases in general and administrative expense:

·	an increase in salaries to our staff necessitated by the overall rise in wages in China in recent years; and

·	an increase in depreciation, due to the expansion of our manufacturing facilities since last year.

The $4.6 million increase in our bank loans during the past nine months has increased our interest expense. Interest expense for the nine months ended September 30, 2008 totaled $818,012, compared to $559,036 in the first nine months of 2007. We expect that our borrowing and the related interest expense will remain high until our revenues return to prior levels and provide us positive cash flow from operations.

For all of these reasons, we incurred a net loss of $1,044,181 for the nine months ended September 30, 2008. In the first nine months of 2007 we realized net income of $40,373. For the same reasons, our net loss of $265,572 for the three months ended September 30, 2008 exceeded our net loss of $76,674 in the third quarter of 2007.

Our business operates in Chinese Renminbi, but we report our results in our SEC filings in U.S. Dollars. The conversion of our accounts from RMB to Dollars results in translation adjustments, which are reported as a middle step between net income and comprehensive income. The net income is added to the retained earnings on our balance sheet; while the translation adjustment is added to a line item on our balance sheet labeled “accumulated other comprehensive income,” since it is more reflective of changes in the relative values of U.S. and Chinese currencies than of the success of our business. During the first nine months of 2008 the unrealized gain on foreign currency translations added $368,005 to our accumulated other comprehensive income.

Liquidity and Capital Resources

On September 30, 2008 we had a working capital deficit of $6,040,027, having added $1,254,319 to our deficit since December 31, 2007. The primary reason for the magnitude of our deficit is the customary Chinese banking practice of funding business clients through short-term debt. Because of that policy, our entire bank debt ($16.6 million at September 30, 2008) is categorized as a short-term liability. Our expectation is that we will be permitted by the bank to roll over as much of the debt as we require. (Indeed the banks permitted us to increase our bank debt by $5.4 million during the first quarter of 2008, despite our poor financial results, an indication of the strong long-term relationship that we have with our banks.) So this arrangement provides us with considerable flexibility in molding our debt structure to our immediate need.

Our liquidity is affected by certain financing arrangements that we have made, involving certain suppliers of our raw materials and other companies with which we have mutual assistance relationships. These relationships manifest themselves in two ways, both of which are common practice in the Chinese business environment. First, we have on our balance sheet “advances to suppliers” totaling $2,115,920, representing funds that we deposit with our suppliers in order to assure ourselves of on-time supplies of raw materials.

The second financing arrangement related to our business operations involves a series of guarantees, some mutual, some in exchange for business advantages. At September 30, 2008 Binbin was the guarantor of a total of 33.6 million RMB in debt (approximately $4,905,600). 11,600,000 RMB of the debt that we were guaranteeing was owed to banks by four of our suppliers. We made these guarantees for the same reason as supported our loans to suppliers. 22,000,000 RMB of the debt was guaranteed for the benefit of two Chinese businesses that are similarly guaranteeing Binbin’s bank debt. The debts we are guaranteeing are one-year loans without amortization, and our guarantees apply to principal payments only. China’s banks encourage this kind of cross-guarantee arrangement as a means of expanding the lending base of its customers. The situation does, however, increase the risk to our assets, as we face the possibility of being called upon to satisfy the debts we have guaranteed. We believe, however, that the debts we have guaranteed are likely to be paid, and that the arrangements provide us more benefit than risk.

We believe that our banking relationships provide us adequate liquidity to fund our ongoing operations and modest growth. Nevertheless we are currently exploring opportunities for increased funding in order to implement certain special projects that we hope will enhance our product offerings and the efficiency of our operations. We have not, however, entered into any new financing commitments.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.

Risk Factors That May Affect Future Results

You should carefully consider the risks described below before buying our common stock. If any of the risks described below actually occurs, that event could cause the trading price of our common stock to decline, and you could lose all or part of your investment.

I. Risks attendant to our business

Increased interest rates in China would have a negative effect on our operations.

Binbin is highly leveraged. Our current liabilities substantially exceed our current assets, and consist primarily of short-term debt to Chinese banks. Currently we pay interest on our bank debt at rates that are relatively low by Chinese standards (7.47% to 8.217%). The government of China, however, is considering implementing policies aimed at controlling the growth of the Chinese economy. These policies would result in significantly higher interest rates. If that were to occur, or if other factors caused an increase in interest rate, our expenses would increase significantly, which could eliminate our profitability.

If the Renminbi is allowed to float freely against the U.S. Dollar, our profits will be reduced.

Nearly 90% of our sales are made outside of China. Our export sales are priced in Dollars. If the value of the Dollar relative to the Renminbi is reduced, our revenue will be proportionately reduced, as overseas customers will find our products to be more expensive than those provided by their local office supply providers.

Our business and growth will suffer if we are unable to hire and retain key personnel that are in high demand.

Our future success depends on our ability to attract and retain highly skilled engineers, draftsmen, and technicians, as well as sales personnel experienced in international sales. Qualified individuals are in high demand in China, and there are insufficient experienced personnel to fill the demand. Therefore we may not be able to successfully attract or retain the personnel we need to succeed.

We may have difficulty establishing adequate management and financial controls in China.

The People’s Republic of China has only recently begun to adopt the management and financial reporting concepts and practices that investors in the United States are familiar with. We may have difficulty in hiring and retaining employees in China who have the experience necessary to implement the kind of management and financial controls that are expected of a United States public company. If we cannot establish such controls, we may experience difficulty in collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet U.S. standards.

Our operations are international, and we are subject to significant political, economic, legal and other uncertainties (including, but not limited to, trade barriers and taxes that may have an adverse effect on our business and operations.

We manufacture all of our products in China and substantially all of the net book value of our total fixed assets is located there. However, we sell our products primarily to customers outside of China. As a result, we may experience barriers to conducting business and trade in our targeted markets in the form of delayed customs clearances, customs duties and tariffs. In addition, we may be subject to repatriation taxes levied upon the exchange of income from local currency into foreign currency, as well as substantial taxes of profits, revenues, assets or payroll, as well as value-added tax. The markets in which we plan to operate may impose onerous and unpredictable duties, tariffs and taxes on our business and products. Any of these barriers and taxes could have an adverse effect on our finances and operations.

We rely principally on dividends and other distributions on equity paid by our operating subsidiary to fund our cash and financing requirements, but such dividends and other distributions are subject to restrictions under PRC law. Limitations on the ability of our operating subsidiary to pay dividends or other distributions to us could have a material adverse effect on our ability to grow, make investments or acquisitions, pay dividends to you, and otherwise fund and conduct our business.

We are a holding company and conduct substantially all of our business through our operating subsidiary, Binbin, which is a limited liability company established in China. We rely on dividends paid by Binbin for our cash needs, including the funds necessary to pay dividends and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities organized in China is subject to regulations permitting Binbin to pay dividends to us only out of accumulated profits as determined in accordance with PRC accounting standards and regulations. Binbin is also required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until the cumulative amount of such reserves reaches 50% of its registered capital. These reserves are not distributable as cash dividends. In addition, Binbin is required to allocate a portion of its after-tax profit to its enterprise expansion fund and the staff welfare and bonus fund at the discretion of its board of directors. Moreover, if Binbin incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. Any limitations on the ability of Binbin Q to pay dividends or other distributions to us could have a material adverse effect on our ability to grow, make investments or acquisitions, pay dividends to you, and otherwise fund or conduct our business.

Capital outflow policies in China may hamper our ability to pay dividends to shareholders in the United States.

The People’s Republic of China has adopted currency and capital transfer regulations. These regulations require that we comply with complex regulations for the movement of capital. Although Chinese governmental policies were introduced in 1996 to allow the convertibility of RMB into foreign currency for current account items, conversion of RMB into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration of Foreign Exchange. We may be unable to obtain all of the required conversion approvals for our operations, and Chinese regulatory authorities may impose greater restrictions on the convertibility of the RMB in the future. Because most of our future revenues will be in RMB, any inability to obtain the requisite approvals or any future restrictions on currency exchanges will limit our ability to fund our business activities outside China or to pay dividends to our shareholders.

Our bank deposits are not insured.

There is no insurance program in the PRC that protects bank deposits, in the way that bank deposits in the U.S. are given limited protection by the FDIC. If the bank in which we maintain our cash assets were to fail, it is likely that we would lose most or all of our deposits.

We have limited business insurance coverage.

The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products, and do not, to our knowledge, offer business liability insurance. As a result, we do not have any business liability insurance coverage for our operations. Moreover, while business disruption insurance is available, we have determined that the risks of disruption and cost of the insurance are such that we do not require it at this time. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources.

II. Risks attendant to our management

Our business development would be hindered if we lost the services of our Chairman.

Wei Chenghui is the Chief Executive Officer of China Stationery and Office Supply, Inc. and of its operating subsidiary, Ningbo Binbin Stationery Co., Ltd. Mr. Wei is responsible for strategizing not only our business plan but also the means of financing it. If Mr. Wei were to leave Binbin or become unable to fulfill his responsibilities, our business would be imperiled. At the very least, there would be a delay in the development of Binbin until a suitable replacement for Mr. Wei could be retained.

We are not likely to hold annual shareholder meetings in the next few years.

Management does not expect to hold annual meetings of shareholders in the next few years, due to the expense involved. The current members of the Board of Directors were appointed to that position by the previous directors. If other directors are added to the Board in the future, it is likely that the current directors will appoint them. As a result, the shareholders of the Company will have no effective means of exercising control over the operations of the Company.

Your ability to bring an action against us or against our directors, or to enforce a judgment against us or them, will be limited because we conduct all of our operations in China and because all of our management resides outside of the United States.

We conduct all of our operations in China through our wholly-owned subsidiary. All of our directors and officers reside in China and all of the assets of those Chinese residents are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the United States and of China may render you unable to enforce a judgment against our assets or the assets of our directors.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES.

(a) Evaluation of disclosure controls and procedures. Our chief executive officer and chief financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Rules 13a-15e and 15d-15e) as of the end of the period covered by this report (the “Evaluation Date”), concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective.

(b) Changes in internal controls. During the fiscal quarter covered by this quarterly report, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

None.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults upon Senior Securities

None.

Item 4.

Submission of Matters to a Vote of Security Holders

None.

Item 5.

Other Information

None.

Item 6. Exhibits

31.1 – Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 – Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized.

CHINA STATIONERY AND OFFICE SUPPLY, INC.

Date: November 19, 2008.

By: /s/ Wei Chenghui

Wei Chenghui

Chief Executive Officer and Chief Financial Officer