GME INNOTAINMENT, INC. - Quarter Report: 2010 September (Form 10-Q)

See accompanying notes to condensed consolidated financial statements.

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GREAT EAST BOTTLES & DRINKS (CHINA) HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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NOTE 2 – REORGANIZATION

On December 30, 2009, the Company reorganized by transferring effectively 60% of its equity interests in its three operating subsidiaries (as owned through GEPI) to Great East Packaging Holdings Limited (“GEPH”), in return for effectively a 33.6% equity ownership interest in three other operating entities previously owned by GEPH. The Company and GEPH are affiliated through majority common ownership by Mr. Guy A-Tsan Chung.

This reorganization was accounted for as a transfer of entities under common control in a manner similar to a pooling of interests. Accordingly, the condensed financial statements of the commonly controlled entities have been combined retrospectively, as if the transaction had occurred as of the beginning of the periods presented.

NOTE 3 – PRINCIPLES OF CONSOLIDATION

The unaudited interim financial statements of the Company and the Company’s subsidiaries (see Note 1) for the nine months ended September 30, 2010 and 2009 have been prepared pursuant to the rules & regulations of the SEC. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the following disclosures are adequate to make the information presented not misleading.  All significant intercompany balances and transactions have been eliminated. The functional currency for the majority of the Company’s operations is the Renminbi (“RMB”), while the reporting currency is the US Dollar.

In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the Company’s financial position as of September 30, 2010, the results of its operations and cash flows for the nine months ended September 30, 2010 and 2009.

The results of operations for the nine months ended September 30, 2010 are not necessarily indicative of the results for a full year period.

On December 30, 2009, the Company reorganized by transferring effectively 60% of its equity interests in its three operating subsidiaries (as owned through GEPI) to GEPH, in return for effectively a 33.6% equity ownership interest in three other operating entities previously owned by GEPH. The Company and GEPH are affiliated through majority common ownership by Mr. Guy A-Tsan Chung.

Despite a lesser percentage of ownership, in view of the management, GEPI and entities owned by GEPI are consolidated as subsidiaries in accordance with FAS 167 and ASC 810 due to the following facts:

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The Company possesses controlling power through voting rights to direct the activities of these entities that most significantly impact the entity’s economic performance;

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The Company has obligations to absorb losses of these entities, if any; and

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The majority ownership of these entities is held by GEPH, an affiliated company.

All assets transferred between entities under common control are accounted for at historical cost similar to a pooling of interest.

NOTE 4 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original maturities of nine months or less to be cash equivalents.  The Company maintains bank accounts in Hong Kong and China.

(b)

Restricted cash

As of the balance sheet dates, restricted cash consisted of cash pledged as deposits for bankers’ notes facilities.

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(c)

Inventories

Inventories consisting of raw materials, work-in-progress, goods in transit and finished goods are stated at the lower of cost or net realizable value. Finished goods are comprised of direct materials, direct labor and a portion of overhead. Inventory costs are calculated using a weighted average, first in first out (FIFO) method of accounting.  There was no provision for slow moving inventories for the nine months ended September 30, 2010 and 2009, respectively.

(d)

Fair Value of Financial Instruments

The Company’s financial instruments primarily consist of cash and cash equivalents, accounts receivable, prepaid expenses and other receivables, tax recoverable, accounts payable, accrued expenses and other payables, note payables, taxes payable and amount due to a related party.

The estimated fair value amounts have been determined by the Company, using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.

  

As of the balance sheet dates, the estimated fair values of the financial instruments were not materially different from their carrying values as presented, due to the short maturities of these instruments and the fact that the interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profiles at respective year ends.

(e)

Revenue Recognition

The Company recognized trading revenue when products are delivered and customers take ownership and assume risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and selling price is fixed or determinable.

(f)

Earnings Per Share

Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is 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.  As of the balance sheet dates, there were no dilutive securities outstanding.

(g)

Foreign Currency Translation

The accompanying consolidated financial statements are presented in United States Dollars (US$). The functional currency of the Company is the Renminbi (RMB). Capital accounts of the consolidated financial statements are translated into United States dollars from RMB at their historical exchange rates when the capital transactions occurred. Assets and liabilities are translated at the exchange rates as of balance sheet date. Income and expenditures are translated at the average exchange rate of the year.  The translation rates are as follows:

		September 30, 2010		December 31, 2009		September 30, 2009
Period/year end RMB : US$ exchange rate		0.1494		0.1468		0.1467
Average yearly RMB : US$ exchange rate		0.1469		0.1464		0.1461

On July 21, 2005, the PRC changed its foreign currency exchange policy from a fixed RMB/US$ exchange rate into a flexible rate under the control of the PRC’s government.

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The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions.  No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.

(h)

Recent Accounting Pronouncements

In July 2010, the Financial Accounting Standards Board (“FASB”) issued an accounting standard related to disclosures about the credit quality of financing receivables and the allowance for credit losses. The standard requires greater transparency about an entity’s financing receivables, which include loans, long-term receivables, lease receivables, and other long-term receivables. We are required to adopt this standard effective January 1, 2011 and do not expect this accounting standard to have a material impact on our condensed consolidated financial statements.

NOTE 5 – ACCOUNTS RECEIVABLE

The Company’s accounts receivable as of the balance sheet dates are summarized as follows:

The Company’s sales are primarily to PRC customers with excellent credit ratings and since Company has incurred minimal bad debts in the past, no allowance for doubtful accounts has been recorded as of the balance sheet dates.

NOTE 6 – RESTRICTED CASH

Amount represents restricted cash pledged as deposits for bankers’ notes facilities (Notes payable – see Footnote 13). As of the balance sheet dates, restricted cash is summarized as follows:

NOTE 7 – INVENTORIES

Inventories as of the balance sheet dates are summarized as follows:

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NOTE 8 – PREPAID EXPENSES AND OTHER RECEIVABLES

Prepaid expenses and other receivables as of balance sheet dates are summarized as follows:

NOTE 9 – PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment of the Company consist primarily of manufacturing facilities and equipment owned and operated by the Company’s subsidiaries in China. Property, plant and equipment as of balance sheet dates are summarized as follows:

As of September 30, 2010, certain property, plant and equipment with net book value of $4,894,648 were pledged to secure the Company’s bank borrowings.

Depreciation expense for the nine months ended September 30, 2010 and 2009 was $2,332,058 and $2,423,160, respectively. The allocation of depreciation expense for the nine months ended September 30, 2010 and 2009 is summarized as follows:

NOTE 10 – LAND USE RIGHTS, NET

Land use rights as of the balance sheet date is summarized as follows:

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Amortization expense for the nine months ended September 30, 2010 and 2009 was $12,085 and $11,701, respectively.

As of the balance sheet dates, the Company’s land use right was pledged to secure certain bank loans.

NOTE 11 – AMOUNT DUE FROM A DIRECTOR

Amount due from a director as of September 30, 2010 represents short-term advances to Mr. Stetson Chung. The amount is interest free, unsecured and has no fixed terms of repayment.

NOTE 12 – AMOUNT DUE FROM/(TO) A RELATED PARTY

Amount due from a related party as of September 30, 2010 represents short-term advances to GEPH. Amount due to a related party as of December 31, 2009 represents advances from GEPH for the Company’s working capital use.

The amounts are interest free and have no fixed terms of repayment. GEPH is considered as a related party as the Company’s majority shareholder, Mr. Guy A-Tsan Chung, owned 73.88% of the Company and was an affiliate of GEPH as of the balance sheet dates.

NOTE 13 –NOTES PAYABLE

Banks issue notes to the Company’s suppliers payable at any time prior to a maturity date as part of the credit facility granted to the Company.  Should the supplier want to call the note prior to maturity, the bank would satisfy the note at a discount, and then be paid the full face amount of the note by the Company, at maturity.  The Company is also required to make certain deposits into its bank accounts at the date of issue and until maturity.  As such, there is no interest payable by the Company to the banks under this credit facility, and Company payments are always due at the maturity date. 

As of the balance sheet dates, the Company’s notes payable were summarized as follows:

As of the balance sheet dates, all the notes of the Company are repayable within one year.

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NOTE 14 – ACCRUED EXPENSES AND OTHER PAYABLES

As of the balance sheet dates, the Company’s accrued expenses and other payables are summarized as follows:

Other payables are non interest bearing and are payable within a year.  

NOTE 15 – TAXES PAYABLE

As of the balance sheet dates, the Company’s taxes payable are summarized as follows:

NOTE 16 – BANK LOANS

Bank loans of the Company as of the balance dates were summarized as follows:

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The maturity dates for the above bank loan are summarized as follows:

The bank loans were secured and guaranteed by the following:

(i)

Mr. Stetson Chung is also the directors of the Company’s subsidiaries in the PRC.

(ii)

Ms. Christine Wong is the spouse of Mr. Stetson Chung.

(iii)

These companies are considered as related parties, as Mr. Guy A-Tsan Chung, who owned 73.88% of the Company, was an affiliate of these companies as of September 30, 2010.

Interest expenses for the bank loan for the nine months ended September 30, 2010 and 2009 were $ 686,014 and $578,080, respectively.

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NOTE 17 – COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL

The Company has 375,000,000 authorized shares, $0.01 par value, of common stock as of September 30, 2010.

NOTE 18 – PRC STATUTORY RESERVES

In accordance with the PRC Companies Law, the Company’s PRC subsidiaries were required to transfer 10% of their profit after tax, as determined in accordance with accounting standards and regulations of the PRC, to the statutory surplus reserve and a percentage of not less than 5%, as determined by management, of the profit after tax to the public welfare fund. With the amendment of the PRC Companies Law which was effective January 1, 2006, enterprises in the PRC are no longer required to transfer any profit to the public welfare fund. Any balance of public welfare fund brought forward from December 31, 2005 should be transferred to the statutory surplus reserve. The statutory surplus reserve is non-distributable.

NOTE 19 – SEGMENT INFORMATION

The Company has determined that it operates in only one segment as the production of beverage bottles and OEM bottled water are similar operations, exposed to similar risks and have the same decision making channels.

NOTE 20 – INCOME TAX

The provisions for income taxes for each of the nine months ended September 30, 2010 and 2009 are summarized as follows:

There are no timing differences between reported book or financial income and income computed for income tax purposes.  Therefore, the Company has made no adjustment for deferred tax assets or liabilities.

A reconciliation of the expected tax with the actual tax expense for the nine months ended September 30, 2010 and 2009 are as follows:

(i)

The Company’s subsidiaries in PRC are subject to PRC income tax. The provision for PRC income tax is based on a statutory rate of 25% of the assessable income of the PRC subsidiaries as determined in accordance with the relevant income tax rules and regulations of the PRC.

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(ii)

The applicable tax rates of NJCP, HZCP and SYGE for the nine months ended September 30, 2010 are 12.5%, 12.5% and 11%, respectively. For comparative period last year, each of these PRC subsidiaries enjoys a tax holiday and the corresponding assessable profits for the nine months ended September 30, 2009, if any, are exempted from income tax.

(iii)

BVI companies are not subject to tax in accordance with the relevant tax laws and regulations of the BVI.

(iv)

The Hong Kong companies did not generate any assessable profits since their incorporation and therefore are not subject to Hong Kong tax.

NOTE 21 – OTHER INCOME

Other income for the nine months ended September 30, 2010 and 2009 are summarized as follows:

NOTE 22 – INTEREST INCOME

Interest income for the nine months ended September 30, 2010 and 2009 are summarized as follows:

GEPH is considered as a related party as the Company’s majority shareholder, Mr. Guy A-Tsan Chung, owned 73.88% of the Company and was an affiliate of GEPH as of the balance sheet dates.

NOTE 23 – OTHER EXPENSES

Other expenses for the nine months ended September 30, 2010 and 2009 are summarized as follows:

NOTE 24 – RELATED PARTY TRANSACTIONS

In addition to the transactions detailed elsewhere in these financial statements, the Company entered into the following material transactions with GEPH for the nine months ended September 30, 2010 and 2009:

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The above transactions were entered into by the Company in the normal course of business.

NOTE 25 – CONCENTRATION OF CREDIT RISK

For the nine month ended September 30, 2010 and 2009, the customers who account for 10% or more of sales of the Company are presented as follows:

Swire BCD Group is franchised to manufacture market and distribute products of Coca-Cola in China.

NOTE 26 – CONTINGENCIES AND COMMITMENTS

As of September 30, 2010, NJGE and XAGE, the subsidiaries of the Company, had arranged nine non-cancelable operating leases with nine third parties for their production plants. The expected annual lease payments under these operating leases are as follows:

Revenues

Sales revenue increased from $15,967,622 in the three months ended September 30 of 2009 to $16,051,025 in the same period in 2010, representing a 0.52% increase.

 

Cost of sales and gross margin

 

Cost of sales increased from $11,419,092 in the three months ended September of 2009 to $12,892,396 in the same period in 2010, representing a 12.90 % increase. The gross profits decreased from 28.49% in the three months ended September of 2009 to 19.68 % in the same period in 2010. It was mainly attributable to the increase in purchase price of raw material.

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Sales and marketing

Sales and marketing expenses increased by $165,807 or 86.17% from $192,414 in the three months ended September 30 of 2009 to $358,221 in the same period 2010. The increase was mainly due to transportation expenses.

General and administrative

General and administrative expenses decreased from $1,461,301 in the three months ended September 30 of 2009 to $869,605 for the same period in 2010, representing a decrease of $591,696 or 40.49%. The decrease was mainly due to legal and professional expenses.

 

Net income

Net income for the three months ended September 30 of 2010 was $323,723 as compared to net income was $383,731 in the same period 2009. The decrease was mainly attributable to the decrease in gross profit, which decreased from $4,548,530 in the three months ended September of 2009 to $3,158,629 in the same period in 2010.

Results of Operations – Nine Months Ended September 30, 2010 as Compared to Nine Months Ended September 30, 2009.

The following table summarizes the results of our operations during the nine-month period ended September 30, 2010 and 2009, and provides information regarding the dollar and percentage increase or (decrease) from the nine-month period ended September 30, 2010 to the nine-month period ended September 30, 2009.

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SIGNATURES

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

GREAT EAST BOTTLES & DRINKS (CHINA) HOLDINGS

(Registrant)

By:

 /S/ Stetson Chung         

      

Stetson Chung

      

Chief Executive Officer, President, and Director

 

Date: November 22, 2010

By:

/S/ Danny Poon

       

Danny Poon

       

Chief Financial Officer

Date: November 22, 2010

  

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