10-Q 1 g5579.txt QTRLY REPORT FOR THE QTR ENDED 9-30-11 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, 2011 [ ] 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: 333-150385 PACIFIC BEPURE INDUSTRY INC. (Exact name of registrant as specified in its charter) Delaware 333-150385 26-1272059 (State or other jurisdiction (Commission (IRS Employer of incorporation) File No.) Identification No.) No. 78 Kanglong East Road, Yangdaili, Chendai Township Jinjiang City, Fujian Province, P. R. China (Address of principal executive offices) (86 595) 8677 0999 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 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 (ss.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 [ ] No [X] 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 definition 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 [ ] 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 [ ] No [X] As of November 15, 2011, 15,000,000 shares of the Company's common stock, $0.0001 par value, were issued and outstanding. Pacific Bepure Industry Inc. Table of Contents PART I FINANCIAL INFORMATION Item 1. Financial Statements 3 Condensed Consolidated Balance Sheets as of September 30, 2011 (unaudited) and December 31, 2010 4 Condensed Consolidated Statements of Income and Comprehensive Income for the nine months ended September 30, 2011 and 2010 (unaudited) 5 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 (unaudited) 6 Condensed Consolidated Statement of Stockholders' Equity 8 Notes to Condensed Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 24 Item 3. Quantitative and Qualitative Disclosures About Market Risk 33 Item 4. Controls and Procedures 33 Part II OTHER INFORMATION Item 1. Legal Proceedings 33 Item 1A. Risk Factors 33 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 34 Item 3. Defaults upon Senior Securities 34 Item 4. [Removed or reserved] 34 Item 5. Other Information 34 Item 6. Exhibits 34 Signatures 35 2 Pacific Bepure Industry Inc. Condensed Consolidated Financial Statements For the three and nine months ended September 30, 2011 and 2010 Index to Condensed Consolidated Financial Statements Pages ----- Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statements of Income and Comprehensive Income 5 Condensed Consolidated Statements of Cash Flows 6 Condensed Consolidated Statements of Stockholders' Equity 8 Notes to Condensed Consolidated Financial Statements 9 3 Pacific Bepure Industry Inc. Condensed Consolidated Balance Sheets As of September 30, 2011 and December 31, 2010 (Stated in US Dollars)

The accompanying notes are an integral part of these condensed consolidated financial statements 4 Pacific Bepure Industry Inc. Condensed Consolidated Statements of Income and Comprehensive Income For the three and nine months ended September 30, 2011 and 2010 (Stated in US Dollars)

The accompanying notes are an integral part of these condensed consolidated financial statements 5 Pacific Bepure Industry Inc. Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2011 and 2010 (Stated in US Dollars)

The accompanying notes are an integral part of these condensed consolidated financial statements 6 Pacific Bepure Industry Inc. Condensed Consolidated Statements of Cash Flows (cont'd) For the nine months ended September 30, 2011 and 2010 (Stated in US Dollars)

---------- Note: On January 26, 2009, the Company declared interim dividend amounting to $7,299,590 of which $5,280,338 was settled via a current account with a director in 2009. In 2010, the remaining balance of dividend payable amounting to $2,019,252 was transferred to current account with a director. The accompanying notes are an integral part of these condensed consolidated financial statements 7 Pacific Bepure Industry Inc. Condensed Consolidated Statement of Stockholders' Equity (Stated in US Dollars)

The accompanying notes are an integral part of these condensed consolidated financial statements 8 Pacific Bepure Industry Inc. Notes to Condensed Consolidated Financial Statements (Stated in US Dollars) 1. CORPORATE INFORMATION AND DESCRIPTION OF BUSINESS Pacific Bepure Industry Inc. (the "Company") was incorporated on October 9, 2007 under the laws of the State of Delaware with authorized share capital of $7,500, divided into 75,000,000 common shares of $0.0001 par value each. The Company's shares are quoted for trading on the Over-the-counter Bulletin Board in the United States of America. The Company's primary operations consist of the business and operations of Peakway Worldwide Limited ("Peakway"), which acts as an investment holding company and currently has three subsidiaries namely, Alberta Holdings Limited ("Alberta"), Fuijang Jinjiang Pacific Shoes Company Limited ("Pacific Shoes") and Fujian Baopiao Light Industry Company Limited ("Baopiao"). Peakway was incorporated in the British Virgin Islands (the "BVI") on November 3, 2006 as a limited liability company with authorized share capital of $50,000, divided into 50,000 common shares of $1 par value each. The issued share capital of Peakway is $1,000, divided into 1,000 common shares of $1 par value each. Alberta was incorporated in Hong Kong on November 4, 2006 as a limited liability company with authorized share capital of 10,000 Hong Kong dollars ("HK$"), divided into 10,000 common shares of HK$1 par value each. The issued share capital of Alberta is HK$1, being 1 common share of HK$1 par value. Alberta is also a holding company and had no other operation since its incorporation. Pacific Shoes was established as a sino-foreign equity joint venture entity in the People's Republic of China (the "PRC") on April 9, 1993 with registered capital of 5,000,000 Renminbi ("RMB") (which are not divided into shares) and its registered capital was fully paid up. Baopiao was established as a wholly foreign-owned enterprise ("WFOE") in the PRC on February 15, 2006 with registered capital of HK$50,000,000 (which are not divided into shares). As of March 31, 2011, its paid up capital was HK$16,370,478 of which HK$15,401,180 was certified. Baopiao acted as a subcontracting factory for Pacific Shoes and started operation on April 1, 2011. The Company, through its subsidiaries, is engaged in the design, manufacturing and trading of footwear under the brand names of "BEPURE" through a network across the PRC. The major target market of the Company's products is the PRC. 9 Pacific Bepure Industry Inc. Notes to Condensed Consolidated Financial Statements (Stated in US Dollars) 2. BASIS OF PRESENTATION These unaudited condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (the "US GAAP") have been condensed or omitted from these statements pursuant to such rules and regulation and, accordingly, they do not include all the information and notes necessary for comprehensive consolidated financial statements and should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2010. In the opinion of the management of the Company, all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the three-month and nine-month periods have been made. Results for the interim period presented are not necessarily indicative of the results that might be expected for the entire fiscal year. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. Concentrations of credit risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, trade receivables and advances to customers and distributors. As of September 30, 2011 and December 31, 2010, substantially all of the Company's cash and cash equivalents were held by major financial institutions located in the PRC, which management believes are of high credit quality. With respect to trade receivables and advances to customers and distributors, the Company extends credit based on evaluations of the customers' and distributors' financial positions. The Company generally does not require collateral for customers and distributors. 10 Pacific Bepure Industry Inc. Notes to Condensed Consolidated Financial Statements (Stated in US Dollars) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) Concentrations of credit risk (cont'd) During the reporting period, customers representing 10% or more of the Company's sales are as follows: Nine months ended Three months ended September 30, September 30, ------------------------ ------------------------- 2011 2010 2011 2010 ---------- ---------- ---------- ---------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Taiwan Quanyi Xingye Co., Ltd. $5,171,555 $4,620,681 $1,245,788 $1,366,604 ========== ========== ========== ========== Details of customers for 10% or more of the Company's trade receivables are: As of As of September 30, December 31, 2011 2010 ---------- ---------- (Unaudited) (Audited) Taiwan Quanyi Xingye Co., Ltd. $3,053,019 $1,839,049 ========== ========== Collateralized and uncollateralized short-term bank loans ASC 820 "Fair Value Measurements and Disclosures" requires the disclosure of the estimated fair value of financial instruments including those financial instruments for which the ASC 323 fair value option was not elected. Except for collateralized borrowings disclosed below, the carrying amounts of other financial assets and liabilities approximate their fair values due to short maturities: As of September 30, 2011 As of December 31, 2010 ------------------------ ----------------------- (Unaudited) (Audited) Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Collateralized short-term bank loans $6,480,394 $6,445,764 $4,717,870 $4,713,661 ========== ========== ========== ========== The fair values of borrowings are based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. It is management's opinion that the Company is not exposed to significant price or credit risks arising from these financial instruments. 11 Pacific Bepure Industry Inc. Notes to Condensed Consolidated Financial Statements (Stated in US Dollars) 4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS 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". The objective of ASU 2010-20 is to provide financial statement users with greater transparency about an entity's allowance for credit losses and the credit quality of its financing receivables. Under ASU 2010-20, an entity is required to provide disclosures so that financial statement users can evaluate the nature of the credit risk inherent in the entity's portfolio of financing receivables, how that risk is analyzed and assessed to arrive at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. ASU 2010-20 is applicable to all entities, both public and non-public and is effective for interim and annual reporting periods ending on or after December 15, 2010. Comparative disclosure for earlier reporting periods that ended before initial adoption is encouraged but not required. However, comparative disclosures are required to be disclosed for those reporting periods ending after initial adoption. The adoption of this ASU update has no material impact on the Company's financial statements. The FASB issued ASU 2011-02, "Receivables (Topic 310): A Creditor's Determination of Whether a Restructuring is a Troubled Debt Restructuring". The amendments to Topic 310 clarify the guidance on a creditor's evaluation of whether a debtor is experiencing financial difficulties. A creditor should evaluate whether it is probable that the debtor would be in payment default on any of its debts in foreseeable future without the modification. In addition, the amendments to Topic 310 clarify that a creditor is precluded from using the effective interest rate test in the debtor's guidance on restructuring of payables (paragraph 470-60-55-10) when evaluating whether a restructuring constitutes a troubled debt restructuring. An entity should disclose the total amount of receivables and the allowance for credit losses as of the end of the period of adoption related to those receivables that are newly considered impaired under Section 310-10-35 for which impairment was previously measured under Subtopic 450-20, Contingencies - Loss Contingencies. The adoption of this ASU update has no material impact on the Company's financial statements. In April 2011, the FASB issued ASU 2011-03, "Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements". The amendments in this ASU update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The guidance in this ASU update is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of this ASU update is not expected to have a material impact on the Company's financial statements. 12 4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONT'D) In May 2011, the FASB issued ASU 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs". The FASB and the International Accounting Standard Board (IASB) works together to ensure that fair value has the same meaning in U.S. GAAP and IFRSs and that their respective fair value measurement and disclosure requirements are the same (except for minor differences in wording and style). The Boards concluded that the amendments in this ASU update will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments in this ASU update explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments in this ASU update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The adoption of this ASU update is not expected to have a material impact on the Company's financial statements. In June 2011, the FASB issued ASU 2011-05, "Comprehensive Income (Topic 220): Presentation of Comprehensive Income". In this ASU updated, the entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This Update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this ASU update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this ASU update are to be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early application by public entities is permitted. The adoption of this ASU update has no material impact on the Company's financial statements. In September 2011, the FASB issued ASU 2011-08, "Intangibles - Goodwill and Other (Topic 350)". The amendments in this update will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The adoption of this ASU update is not expected to have a material impact on the Company's financial statements. 13 Pacific Bepure Industry Inc. Notes to Condensed Consolidated Financial Statements (Stated in US Dollars) 5. PREPAYMENTS AND OTHER RECEIVABLES As of As of September 30, December 31, 2011 2010 -------- -------- (Unaudited) (Audited) Prepayments to suppliers $ 57,572 $131,846 Advances to staff 101,282 117,272 -------- -------- $158,854 $249,118 ======== ======== 6. ADVANCES TO CUSTOMERS AND DISTRIBUTORS As of As of September 30, December 31, 2011 2010 ---------- ---------- (Unaudited) (Audited) Interest-free loans advanced to customers and distributors $1,582,165 $1,293,733 ========== ========== In order to improve the market shares and increase the number of retailing points in the PRC, the management advanced cash to the potential retailers for them to increase the number of retail shops and distribution points in the related provinces in which they are located. The amounts are interest-free, unsecured and payable upon demand. 7. INVENTORIES As of As of September 30, December 31, 2011 2010 ---------- ---------- (Unaudited) (Audited) Raw materials $1,028,147 $ 227,572 Work-in-progress 1,721,254 445,249 Finished goods 706,981 559,736 ---------- ---------- $3,456,382 $1,232,557 ========== ========== 14 Pacific Bepure Industry Inc. Notes to Condensed Consolidated Financial Statements (Stated in US Dollars) 8. PROPERTIES, PLANT AND EQUIPMENT As of As of September 30, December 31, 2011 2010 ------------ ------------ (Unaudited) (Audited) Costs: Plant and machinery $ 1,462,141 $ 985,609 Office equipment 219,053 115,060 Buildings 8,742,604 1,337,557 ------------ ------------ 10,423,798 2,438,226 Accumulated depreciation (1,436,439) (1,261,688) Construction-in-progress 3,799 6,416,328 ------------ ------------ $ 8,991,158 $ 7,592,866 ============ ============ During the reporting period, depreciation is included in: Nine months ended September 30, --------------------------------- 2011 2010 -------- -------- (Unaudited) (Unaudited) Cost of sales and overheads $133,654 $ 68,799 Administrative expenses 102,936 49,886 -------- -------- $236,590 $118,685 ======== ======== ---------- Notes: As of September 30, 2011 and December 31, 2010, buildings with carrying value of $7,280,065 and $852,833 respectively, were pledged for the collateralized bank loans (Note 12b). Construction-in-progress consist mainly the new manufacturing plant under construction. 9. LAND USE RIGHTS As of As of September 30, December 31, 2011 2010 ------------ ------------ (Unaudited) (Audited) Cost $ 6,618,675 $ 6,414,392 Accumulated amortization (506,705) (392,903) ------------ ------------ $ 6,111,970 $ 6,021,489 ============ ============ The Company obtained the rights from the relevant PRC land bureau for a period of 50 years to use the land on which the office premises, production facilities and warehouse of the Company are situated. As of September 30, 2011 and December 31, 2010, the land use rights with carrying value of $6,111,970 and $6,021,489 respectively, was pledged for collateralized bank loans (Note 12b). 15 Pacific Bepure Industry Inc. Notes to Condensed Consolidated Financial Statements (Stated in US Dollars) 9. LAND USE RIGHTS (CONT'D) During the nine months ended September 30, 2011 and 2010, amortization for the land use rights amounted to $99,730 and $94,932 of which $32,975 and $94,166 have been capitalized in construction-in-progress, respectively. The estimated aggregate amortization expenses for the land use rights for the five succeeding years are as follows :- Year ---- 2012 $133,426 2013 133,426 2014 133,426 2015 133,426 2016 133,426 -------- $667,130 ======== 10. INTANGIBLE ASSET As of As of September 30, December 31, 2011 2010 ---------- ---------- (Unaudited) (Audited) Software Cost $ 342,803 $ 332,223 Accumulated amortization (192,510) (141,718) ---------- ---------- $ 150,293 $ 190,505 ========== ========== This software represents integrated software in designing footwear and purchased by Pacific Shoes. Pursuant to the management experience, this software estimated useful life was 5 years. Since its acquisition, an annual impairment review was performed by management and no impairment was identified. During the nine months ended September 30, 2011 and 2010, amortization for intangible asset amounted to $45,566 and $39,610, respectively. The estimated aggregate amortization expenses for software for the three succeeding years are as follows: Year ---- 2012 $ 59,800 2013 59,800 2014 30,693 -------- $150,293 ======== 16 Pacific Bepure Industry Inc. Notes to Condensed Consolidated Financial Statements (Stated in US Dollars) 11. OTHER PAYABLES AND ACCRUED EXPENSES As of As of September 30, December 31, 2011 2010 ---------- ---------- (Unaudited) (Audited) Value added tax and other tax payable $1,063,300 $1,712,724 Staff welfare payables (Note (a)) 1,209,244 1,046,724 Accrued expenses and other payables 558,532 536,147 Salaries payable 558,279 229,279 ---------- ---------- $3,389,355 $3,524,874 ========== ========== ---------- Notes: a) Staff welfare payable represents accrued staff medical, industry injury claims, labor and unemployment insurances. All of which are covered by third parties insurance and the insurance premiums are based on certain percentage of salaries. The obligations of the Company are limited to those premiums contributed by the Company. 12. LOANS PAYABLE As of As of September 30, December 31, 2011 2010 ---------- ---------- (Unaudited) (Audited) Collateralized short-term bank loans (Note (b)) $4,915,082 $3,079,510 Uncollateralized short-term bank loans 1,565,312 1,638,360 ---------- ---------- $6,480,394 $4,717,870 ========== ========== ---------- Notes: a) The bank loans are denominated in RMB and carried average interest rate as of September 30, 2011 and December 31, 2010 at 6.16% and 5.82% respectively. During the reporting period, there was no covenant requirement under the banking facilities granted to the Company. (b) These bank loans were collateralized by the buildings and land use right with carrying values of $7,280,065 (Note 8), and $6,111,970 (Note 9), respectively, and guaranteed by Mr. Li Haiting, the sole director of the Company and his brother and a third party. 17 Pacific Bepure Industry Inc. Notes to Condensed Consolidated Financial Statements (Stated in US Dollars) 13. AMOUNT DUE TO A DIRECTOR The amount is interest-free, unsecured and repayable on demand. The directors consider the carrying amount approximates its fair value. 14. SHARE-BASED COMPENSATION The Company granted share options to employees and a director to reward for services. On December 6, 2010, the Company has granted 3 tranches of share option. The option granted was designated as Incentive Stock Option. The Board of Directors adopted the Pacific Bepure Industry Inc. Stock Option Plan (the "2010 Plan") and the plan was approved in the Annual General Meeting on January 14, 2011. The 2010 Plan authorized the issuance of 560,000 options of the Company's common stock. The exercise price of the options granted, pursuant to the 2010 Plan, must be at least equal to the market value of the Company's common stock at the date of grant. Pursuant to the Plan, the Company issued 560,000 options with an exercise price of $1.75 per share on December, 6, 2010. The 3 tranches of options will vest and become exercisable from the date of January 5, 2011 to January 5, 2013. A summary of share option plan activity for the period ended September 30, 2011 is presented below: Number of Exercise Price Shares Per Share ------ --------- Outstanding as of January 1, 2011 560,000 $ 1.75 Granted -- -- Exercised -- -- Forfeited -- -- Cancelled -- -- -------- -------- Outstanding as of September 30, 2011 560,000 $ 1.75 ======== ======== Exercisable as of September 30, 2011 168,000 $ 1.75 ======== ======== The grant-date fair values for tranches 1, 2 and 3 of options granted in 2010 were $0.62, $0.67 and $0.72 per option respectively. Compensation expense of $187,784 arising from above mentioned share options granted was recognized for the nine months ended September 30, 2011. The fair values of the above option awards were estimated on the date of grant using the Black-Scholes Option Valuation Model with the following assumptions. Tranche 1 Tranche 2 Tranche 3 --------- --------- --------- Expected life 2.583 years 3.083 years 3.583 years Expected dividends Nil Nil Nil Expected volatility 54.743% 54.743% 54.743% Risk-free interest rate 1.572% 1.572% 1.572% 18 Pacific Bepure Industry Inc. Notes to Condensed Consolidated Financial Statements (Stated in US Dollars) 15. COMMITMENTS AND CONTINGENCIES a. Capital commitment As of September 30, 2011, there was no capital commitment for the Company (December 31, 2010 : the Company had capital commitment in respect of the construction of properties, amounting to $47,116, which was contracted but not provided for in the financial statements). b. Operating lease commitment As of September 30, 2011, there was no operating lease arrangement for the Company. The rental expense was $18,456 for the nine months ended September 30, 2011. c. Contingencies In accordance with the PRC tax regulations, the Company's sales are subject to value added tax ("VAT") at 17% upon the issuance of VAT invoices to its customers. When preparing these financial statements, the Company recognized revenue when goods were delivered, and made full tax provision in accordance with relevant national and local laws and regulations of the PRC. The Company follows the practice of reporting its revenue for PRC tax purposes when invoices are issued. In the local statutory financial statements prepared under PRC GAAP, the Company recognized revenue on an "invoice basis" instead of when goods are delivered. Accordingly, despite the fact that the Company has made full tax provision in the financial statements, the Company may be subject to a penalty for the deferred reporting of tax obligations. The exact amount of penalty cannot be estimated with any reasonable degree of certainty. The director considers it is very unlikely that the tax penalty will be imposed. 16. OTHER INCOME Nine months ended Three months ended September 30, September 30, --------------------- --------------------- 2011 2010 2011 2010 -------- -------- -------- -------- (Unaudited) (Unaudited) Government grant income $ 70,549 $ -- $ 15,915 $ -- Sales of scrap materials 81,946 -- 30,189 -- Others 3,059 -- 30 10,619 -------- -------- -------- -------- $155,554 $ -- $ 46,134 $ 10,619 ======== ======== ======== ======== 19 Pacific Bepure Industry Inc. Notes to Condensed Consolidated Financial Statements (Stated in US Dollars) 17. FINANCE COSTS Nine months ended Three months ended September 30, September 30, -------------------- -------------------- 2011 2010 2011 2010 -------- -------- -------- -------- (Unaudited) (Unaudited) Bank loan interest expenses $302,475 $190,957 $113,775 $ 67,520 Interest income (3,484) (3,066) (1,254) (661) Bank charges 75,761 6,787 3,775 5,243 -------- -------- -------- -------- $374,752 $194,678 $116,296 $ 72,102 ======== ======== ======== ======== 18. INCOME TAXES United States Pacific Bepure Industry Inc. is subject to the United States of America Tax law at tax rate of 34%. No provision for the US federal income taxes has been made as the Company had no taxable income in this jurisdiction for the reporting period. BVI Peakway was incorporated in the BVI and, under the current laws of the BVI, is not subject to income taxes. Hong Kong Alberta was incorporated in Hong Kong and is subject to profits tax rate of 16.5% (2010 : 16.5%). It is currently not subject to income taxes because it derived no taxable income during the reporting period. PRC On March 16, 2007, the National People's Congress approved the Corporate Income Tax Law of the People's Republic of China (the "New CIT Law"). The New CIT Law reduces the standard corporate income tax rate from 33% to 25% with effect from January 1, 2008. Pursuant to the New CIT Law, Pacific Shoes and Baopiao have been subjected to EIT at a unified rate of 25% from January 1, 2008 onwards. According to the PRC tax laws and regulations, Pacific Shoes and Bapiao being a sino-foreign equity joint venture entity and a WFOE respectively, were entitled to, starting from the first profitable year, a two-year exemption from enterprise income tax followed by a three-year 50% reduction in its enterprise income tax ("Tax Holiday"). The Tax Holiday of Pacific Shoes commenced in year 1993 and ended in year 1997. Baopiao has not started commercial operations and had no reportable profit under China Accounting Regulations since its incorporation on February 15, 2006. Baopiao had not applied for such Tax Holiday to the relevant PRC authority before the New CIT Law became effective on January 1, 2008. However, pursuant to the transitional provisions in the New CIT Law, companies qualified for Tax Holiday must make application prior to January 1, 2008 and the Tax Holiday would be deemed commence on January 1, 2008 regardless of results of operation. Baopiao is therefore not entitled to Tax Holiday. 20 Pacific Bepure Industry Inc. Notes to Condensed Consolidated Financial Statements (Stated in US Dollars) 18. INCOME TAXES (CONT'D) In July 2006, the FASB issued ASC 740-10-25 (previously Interpretation No. 48, "Accounting for Uncertainty in Income Taxes"). This interpretation requires recognition and measurement of uncertain income tax positions using a "more-likely-than-not" approach. The Company adopted this ASC 740-10-25 on January 1, 2007. Under the New CIT Law which became effective on January 1, 2008, the Company might be deemed to be a resident enterprise by the PRC tax authorities. If the Company was deemed to be resident enterprise, the Company might be subject to the CIT at 25% on the worldwide taxable income and dividends paid from the RPC subsidiaries to their overseas holding companies might be exempted from 10% PRC withholding tax. Given that all of the Company's income is generated from the PRC and the PRC subsidiaries do not intend to pay dividends for the foreseeable future operation, the management considers that the impact arising from resident enterprise on the Company's financial position is not significant. The management evaluated the Company's tax positions and considered that no provision for uncertainty in income taxes is necessary as of September 30, 2011. The components of the provision for income taxes from continuing operation are: Nine months ended Three months ended September 30, September 30, ------------------------- ------------------------ 2011 2010 2011 2010 ---------- ---------- ---------- ---------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Current taxes - PRC $ 714,349 $1,439,944 $ 223,532 $ 858,676 Deferred taxes - PRC -- -- -- -- ---------- ---------- ---------- ---------- $ 714,349 $1,439,944 $ 223,532 $ 858,676 ========== ========== ========== ========== The effective income tax expenses differ from the PRC statutory income tax rate from continuing operations in the PRC as follows: Nine months ended Three months ended September 30, September 30, ------------------------- ------------------------ 2011 2010 2011 2010 ---------- ---------- ---------- ---------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Provision for income taxes at PRC statutory income tax rate - 25% $ 414,902 $1,397,967 $ 115,920 $ 846,929 Non-deductible items 299,447 41,977 107,612 11,747 ---------- ---------- ---------- ---------- $ 714,349 $1,439,944 $ 223,532 $ 858,676 ========== ========== ========== ========== 21 Pacific Bepure Industry Inc. Notes to Condensed Consolidated Financial Statements (Stated in US Dollars) 19. EARNINGS PER SHARE The basic and diluted earnings per share is calculated using the net income and the weighted average number of shares outstanding during the reporting periods. The share options in issue are considered anti-dilative. Accordingly, the basic and diluted earnings per share are the same. 20. RELATED PARTIES TRANSACTIONS Apart from the transactions as disclosed in Notes 12(b) and 13 to the financial statements, the Company had no material transactions carried out with related parties during the period. 21. TRADEMARKS Pacific Shoes, currently owns two trademarks, namely "??" ("Bepure"), and "???" ("Dilks") which were registered in the PRC. These trademarks were transferred to the subsidiary from a major stockholder of the Company for nil consideration during 2008. 22. COMMON STOCK The Company was incorporated on October 9, 2007 with authorized share capital of $7,500 divided into 75,000,000 common shares of $0.0001 par value each. 23. STATUTORY RESERVE The Company's statutory reserve comprise of the following: As of As of September 30, December 31, 2011 2010 -------- -------- (Unaudited) (Audited) Statutory reserve $309,688 $309,688 ======== ======== Under PRC regulations, Pacific Shoes and Baopiao may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC GAAP. In addition, these companies are required to set aside at least 10% of their after-tax net profits each year, if any, to fund the statutory reserves until the individual balance of the reserve reaches 50% of their corresponding individual registered capital. The statutory reserves are not distributable in the form of cash dividends to the Company and can be used to make up cumulative prior year losses. For the nine months ended September 30, 2011 and 2010 respectively, no appropriation to this statutory reserve was made as the reserve reached 50% of the Pacific Shoes' registered capital and Baopiao did not make any profit during the period. 22 Pacific Bepure Industry Inc. Notes to Condensed Consolidated Financial Statements (Stated in US Dollars) 24. DEFINED CONTRIBUTION PLAN Pacific Shoes and Baopiao have defined contribution plans for all qualified employees in the PRC. Pacific Shoes and Baopiao and their employees are each required to make contributions to the plans at the rates specified in the plans. The only obligation of Pacific Shoes and Baopiao with respect to retirement schemes are to make the required contributions under the plans. No forfeited contribution is available to reduce the contribution payable in the future years. The defined contribution plan contributions were charged to the consolidated statements of income and comprehensive income. The Company contributed $124,039 and $86,124 for the nine months ended September 30, 2011 and 2010 respectively. 25. SEGMENT INFORMATION The Company uses the "management approach" in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company's chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company's reportable segments. Management, including the chief operating decision maker, reviews operating results solely by monthly revenue and operating results of the Company and, as such, the Company has determined that the Company has one operating segments - footwear, as defined by ASC 280, Segments Reporting" (previously SFAS No. 131). All of the Company's long-lived assets are located in the PRC. Geographic information about the revenues, which are classified based on the customers, is set out as follows: Nine months ended Three months ended September 30, September 30, ------------------------------ ------------------------------- 2011 2010 2011 2010 ------------ ------------ ------------ ------------ (Unaudited) (Unaudited) (Unaudited) (Unaudited) PRC $ 9,051,049 $ 15,493,515 $ 3,782,867 $ 9,504,439 Taiwan 5,171,555 4,664,286 1,245,788 1,366,185 ------------ ------------ ------------ ------------ $ 14,222,604 $ 20,157,801 $ 5,028,655 $ 10,870,624 ============ ============ ============ ============ 26. SUBSEQUENT EVENTS The company evaluated all events or transactions that occurred after September 30, 2011 and through the date the financial statements were issued, and has determined that there are no material subsequent events nor transactions which would require recognition or disclosure in these consolidated financial statements. 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains both historical and "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements, written, oral or otherwise made, represent the Company's expectation or belief concerning future events. All statements, other than statements of historical fact, are or may be forward-looking statements. For example, statements concerning projections, predictions, expectations, estimates or forecasts, and statements that describe our objectives, future performance, plans or goals are, or may be, forward-looking statements. These forward-looking statements reflect management's current expectations concerning future results and events and can generally be identified by the use of words such as "may," "will," "should," "could," "would," "likely," "predict," "potential," "continue," "future," "estimate," "believe," "expect," "anticipate," "intend," "plan," "foresee" and other similar words or phrases, as well as statements in the future tense. Forward-looking statements involve known and unknown risks, uncertainties, assumptions, and other important factors that may cause our actual results, performance or achievements to be different from any future results, performance and achievements expressed or implied by these statements. The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-Q. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the factors described in the Section entitled "Risk Factors" on Form 10-K and other documents we file from time to time with the Securities and Exchange Commission ("SEC"). OUR HISTORY AND CORPORATE STRUCTURE We are a Delaware corporation that was incorporated on October 9, 2007. We are headquartered in Fujian Province, China. On November 11, 2009, we completed a reverse acquisition transaction ("Reverse Merger") with Peakway Worldwide Limited ("Peakway"), a company incorporated under the laws of the British Virgin Islands pursuant to the terms of a Share Exchange Agreement dated as of November 5, 2009 ("Share Exchange Agreement"). Alberta Holdings Limited is a Hong Kong company incorporated on November 4, 2006 and was acquired by Peakway on November 1, 2007. Alberta presently has two wholly-owned subsidiaries: Fujian Jinjiang Pacific Shoes Co., Limited and Fujian Baopiao Light Industry Co., Limited. Fujian Jinjiang Pacific Shoes Co., Limited ("Pacific Shoes") was established as a sino-foreign equity joint venture entity in the PRC on April 9, 1993. On January 12, 2009, Alberta acquired 100% equity interest in Pacific Shoes. Currently, all of our revenues have been generated from Pacific Shoes. Fujian Baopiao Light Industry Co., Limited ("Baopiao ") was established as a wholly foreign-owned enterprise ("WFOE") in the PRC on February 15, 2006. On February 26, 2009, Alberta acquired 100% equity interest in Baopiao Shoes. As of the date of this report, Baopiao is still in its development stage and has not yet generated any revenue. We are now a fully reporting issuer with our common stock publicly quoted on the OTC bulletin board under the symbol "PBEP". To the best of the Company's knowledge and information, as of November 15, 2011, we had 15,000,000 shares of common stock issued and outstanding. BUSINESS REVIEW No matter how was the global economic condition, China economy was still increasing at a steady growth. Yet it took longer to achieve the same growth as compared with the same period in 2010. Influenced by macro control economic policies imposed on real estate, investments conducted less contributions to the increase of GDP. In general, the global economy was retrieving growth in slow paces, and China met continuous decreases of growth rate in export. Simultaneously CPI in China made a breakthrough in historical records, and the actual consumption was growing at a lower rate as compared with the same period in last year. The Company is mainly engaged in professional design, manufacture and distribution of sports and casual footwear through its Chinese Subsidiaries. We target at both female and male customers, particularly the 20-35 years old female consumers, among whom our Baopaio (or "Bepure") label has witnessed an increasing recognition. For nine months ended September 30, 2011, the Company's sales revenues decreased by $5,935,197 or 29.44% to $14,222,604 compared with $20,157,801 in the same period of 2010. 24 SALES NETWORK We design, develop, manufacture and distribute sports and casual footwear in China and South America through our indirectly owned Chinese subsidiaries. All of our products are sold under the brand "" ("Baopiao" in English). We sell our products to consumers in the People's Republic of China (for purpose of this Form 10-Q, excludes Hong Kong Special Administration Region, Macau Special Administration Region and Taiwan), or so-called "domestic market" and South America. In the domestic market, we sell our products substantially on a wholesale basis to our distributors who are responsible for distribution to retail outlets. Through our distributors, our sales network covers 24 provinces and administrative regions in various modes, including retail outlets, counters in department stores and shopping malls, and wall racks in large supermarkets. Our products, including our branded products and ODM (Original Design Manufacture) products, are sold in the South America through our distributors. We have certain control over these distributor appointed retailers because when we enter into distribution agreements with distributors, we have the right to approve or reject the distributor's request to appoint certain retailers. As of September 30, 2011, retail locations are 98, and 1,523 counters in the shopping malls are now authorized to sell our products and they are under the direct management of our distributors. We continue to refresh our brand image with in-store advertising and decorations, so that consumers will enjoy a much happier purchase experience at the retail outlets. Through years of effort in expanding the market share, the Company now maintains a solid distribution base with a retail management system is under development as well. This enables us to monitor the overall retail situation and respond to the market changes in a more timely manner. As part of our online marketing and distribution strategy, we improved our online shopping portal and registered Bepure official online store with Taobao, a leading Internet destination for shopping, socializing and information sharing in China. PRODUCT R&D The Company consistently aims to develop attractive footwear products to satisfy the demand of its target market and to interpret fashion trends. To help accomplish this, the Company has been focused on the R&D and application of new craftsmanship, new materials and new technologies, to streamline the Company's innovative brand concept and international sports fashion. We increased the R&D cost, updated the equipment and introduced additional talents to develop fashionable and practical products. In addition, the Company keeps adding new elements into the product designs to earn more selling points and consumer recognition on the Baopiao brand, thus constantly striving for the fashion leader position of "Baopiao" in the female sports and casual footwear market. In order to build an appropriate, scalable and multiple product structure, the Company has increased the percentage of men's products to the total sales and divided its products into four categories, namely, the "Free Travel," the "Business Travel," the "Outdoor Travel" and the "Urban Travel". CHAIN SUPPLY MANAGEMENT We have adopted a cost control system in its business operation. Our procurement team works closely with engaged suppliers and outsourcing companies to shares the cost trend of main materials. Meanwhile, we are able to decrease both costs and pollutants by implementing strict production standards at our existing facilities while outsourcing certain low margin products. We also try to reduce the cost of raw materials through bulk purchases, in which our outsourcing partners are co-buyers. INFORMATION MANAGEMENT The Company has set up an information management system which consists of financial management, sales management, supply chain management, production management, decision-making support and database service functions, which contributes significantly to the operation development. This is an integrated IT system that is able to handle the ever-increasing requirements of business development. The Company will continue to extend the new system to its sales channels, especially retail outlets. The Enterprise Resource Planning (ERP) System of the Company was in full operation at the end of 2010. The system (i) comprehensively records the information of sales and goods allotment which is the basis for implementation of sales policies; (ii) provides exact and thorough analysis data for management of production; (iii) assists the management in planning and decision-making by providing access to close domination each department. 25 SUMMARY OF CRITICAL ACCOUNTING POLICIES Principles of consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. Use of estimates In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements, as well as the reported amounts of revenue and expenses during the reported period. These amounts and estimates include, but are not limited to, the valuation of trade and bills receivables, inventories and estimation on useful lives and residual values of properties, plant and equipment and intangible asset. Actual results could differ from these estimates. Inventories Inventories are stated at the lower of cost or market value. Cost is determined on a weighted average basis and includes all expenditures incurred in bringing the goods to the point of sale and putting them in a saleable condition. In addition, the Company estimates net realizable value based on intended use, current market value and inventory ageing analyses. The Company writes down the inventories for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventories and the estimated market value based upon assumptions about future demand and market conditions. There were no provision of obsolete inventories made during the reporting period. Historically, the actual net realizable value is close to the management estimation. Properties, plant and equipment Properties, plant and equipment are stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use. Depreciation is provided on a straight-line basis over the assets' estimated useful lives. The useful lives are as follows :- Estimated Useful Lives ------------ Plant and machinery 3 to 8 years Office equipment 3 to 5 years Buildings 30 to 40 years Maintenance or repairs are charged to expense as incurred. Upon sale or disposal, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from disposal is charged or credited to income. Construction-in-progress Construction-in-progress represents assets under construction and is stated at cost. This includes cost of construction of buildings and other direct costs. Construction-in-progress is not depreciated until such time the relevant assets are completed and put into use. Intangible asset The intangible asset of the Company is comprised of accounting software and shoes designing software. The software is determined to have useful life of 5 years pursuant to the management experience. The software is stated at cost of purchase less accumulated amortization and any identified impairment losses in the annual impairment review. 26 Land use rights Land use rights are stated at cost less accumulated amortization. Amortization is provided using the straight-line method over the terms of the lease of 50 years obtained from the relevant PRC land bureau. Impairment of long-lived assets Long-lived assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company recognizes impairment of long-lived assets in the event that the net book values of such assets exceed the future undiscounted cash flows attributable to such assets. During the reporting period, the Company has not identified any indicators that would require testing for impairment. Revenue recognition Revenue from sales of the Company's products is recognized when the significant risks and rewards of ownership have been transferred to the buyer at the time of delivery, the sales price is fixed or determinable and collection is reasonably assured. Returns and exchange require approval from management and discounts are based on trade terms. The Company reviews and estimates the rates of return and exchange monthly and made provision for return based on customers' and distributors' past records. From the past records, the return and exchange are insignificant. Cost of sales Cost of sales consists primarily of material costs, purchasing and receiving costs, inspection costs, wages, employees' compensation, depreciation and related costs, which are directly attributable to the production of products. Write down of inventory to lower of cost or market value is also recorded in cost of sales. Share-based compensation The Company adopted the provisions of ASC 718, which requires the use of the fair value method of accounting for share-based compensation. Under the fair value based method, compensation cost related to employee stock options or similar equity instruments which are equity-classified awards, is measured at the grant date based on the value of the award and is recognized over the requisite service period, which is usually the vesting period. ASC 718 also requires measurement of cost of a liability-classified award based on its current fair value. Fair value of share options granted is determined using the Black-Scholes Option Valuation Model. Under this model, certain assumptions, including the risk-free interest rate, the expected life of the options and the estimated fair value of the Company's common stock and the expected volatility, are required to determine the fair value of the options. If different assumptions had been used, the fair value of the options would have been different from the amount the Company computed and recorded, which would have resulted in either an increase or decrease in the compensation expense. Income taxes The Company uses the asset and liability method of accounting for income taxes pursuant to SFAS No.109 "Accounting for Income Taxes". Under the asset and liability method of SFAS No.109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and loss carried forward and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. 27 RESULTS OF OPERATIONS FOR THE NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2011 AND SEPTEMBER 30, 2010 The following table summarizes our operating results and key financial ratios for the nine months ended September 30, 2011 and September 30, 2010, respectively:

This table below illustrates our key operating results and financial indicators for the nine months ended September 30, 2011 and September 30, 2010, respectively: 28

---------- NOTE: 1. THE EASTERN SECTION REFERS TO THE CITY OF SHANGHAI AND THE PROVINCES OF ZHEJIANG, JIANGSU, ANHUI, HUBEI, HUNAN, JIANGXI AND SHANDONG IN THE PRC; 2. THE NORTHERN SECTION REFERS TO THE CITY OF BEIJING AND THE PROVINCES OF XINJIANG, GANSU, NINGXIA, HEBEI, HENAN, TIANJIN, SHANXI, INNER MONGOLIA, LIAONING, JILIN AND HEILONGJIANG IN THE PRC; 3. THE SOUTHERN SECTION REFERS TO THE CITY OF CHONGQING AND PROVINCES OF GUANGDONG, GUANGXI, FUJIAN, HAINAN, SICHUAN, GUIZHOU, YUNNAN AND TIBET IN THE PRC. For the three months ended September 30, 2011, $1,245,788 of our sales revenues were generated from the foreign markets, representing an decrease of 8.81% compared to $1,366,185 for the same period in 2010. For the three months ended September 30, 2011, the Eastern section generated sales revenues of $844,231, representing a decrease of 59.06%, compared to $2,062,288 for the same period in 2010. The Northern section achieved sales revenues of $1,662,045, representing a decrease of 58.65%, compared to $4,019,357 for the same period in 2010. The Southern section achieved sales revenues of $1,276,591, representing a decrease of 62.70%, compared to $3,422,794 for the same period in 2010. GROSS PROFIT AND GROSS PROFIT MARGIN FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010: Nine months ended September 30 Comparison --------------------------- ------------------------ 2011 2010 Amount % ------------ ------------ ------------ -------- Sales revenue $ 14,222,604 $ 20,157,801 $ (5,935,197) (29.44%) Cost of sales 10,549,817 13,340,291 (2,790,474) (20.92%) Gross profit $ 3,672,787 $ 6,817,510 $ (3,144,723) (46.13%) Gross profit margin 25.82% 33.82% (8.00%) 30 For the nine months ended September 30, 2011, our gross profit was $3,672,787, representing a decrease of $3,144,723 or 46.13%, compared to $6,817,510 for the same period of 2010. We mainly attribute this to the decreased sales. For the nine months ended September 30, 2011, our gross profit margin was 25.82%, representing a decrease of 8.00% compared with 33.82% in the same period of 2010. Such decrease is mainly due to the increased employee salaries and materials cost(collectively increased by around 10%). GROSS PROFIT AND GROSS PROFIT MARGIN FOR THE THIRD QUARTER OF 2011 & 2010: Three months ended September 30 Comparison --------------------------- ------------------------ 2011 2010 Amount % ------------ ------------ ------------ -------- Sales revenue $ 5,028,655 $ 10,870,624 $ (5,841,969) (53.74%) Cost of sales 3,888,996 7,128,247 (3,239,251) (45.44%) Gross profit $ 1,139,659 $ 3,742,377 $ (2,602,718) (69.55%) Gross profit margin 22.66% 34.43% (11.77%) For the three months ended September 30, 2011, our gross profit was $1,139,659, representing a decrease of $2,602,718 or 69.55%, compared to $3,742,377for the same period of 2010. For the three months ended September 30, 2011, our gross profit margin was 22.66%, representing a decrease of 11.77% as compared to the 34.43% in the same period of 2010. The decrease was mainly resulted from increased labor costs and raw material costs. In future, we intend to achieve the targeted gross profit margin through adoption of following measures: * Conducting the procurements on a wholesale basis so as to reduce the cost of the materials; and * Releasing more products into the market at a higher price which has been properly adjusted. OPERATING AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES For the nine months ended September 30, 2011, the selling expenses were $313,763, representing an increase of $123,339 or 64.77%, compared to $190,424 for the same period in 2010. The reasons were mainly as following: * The salaries of sales workers were adjusted to a higher level; * The advertisement expense increased as the Company renewed the advertising policies. For the nine months ended September 30, 2011, the administrative expenses were $1,408,218, representing an increase of 70.03% compared to $828,225 of the same period in 2010. It was mainly due to as following: * The increase of R&D expenses in improving new products; * The increased administrative expenses in management of new factory located in Hui'an County; * The additional administrative expenses in implementing stock option plan. FINANCING COST For the nine months ended September 30, 2011, the finance cost was $374,752, representing an increase of $180,074 or 92.50% comparing to $194,678 for the same period in 2010. The increase primarily relates to increase in debt servicing cost on the increase in bank loans which were applied to finance our marketing expansion and consolidated construction of retails. NET PROFIT For the nine months ended September 30, 2011, the net profit was $945,259, representing a decrease of $3,206,665 or 77.23% compared to $4,151,924 for the same period in 2010, primarily as a result of the decrease in revenues, higher cost and huge increase of administrative expenses from the new factory in Quanzhou. 31 NET PROFIT MARGIN For the nine months ended September 30, 2011, the net profit margin is 6.65%, representing a decrease of 13.95% compared to 20.60% for the same period in 2010. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2011, our total assets were $33,780,329, which consist of cash and cash equivalents of $4,687,475, trade receivables of $13,642,032, inventories of $3,456,382, prepayments and other receivable of $1,741,019, properties, plant and equipment of $8,991,158, intangible asset of $150,293 and land use rights of $6,111,970. As of September 30, 2011, total liabilities were $15,948,710. Total liabilities are composed of trade payables of $2,975,826, short-term loans of $6,480,394, income tax payable of $1,041,404, and other payables and accrued expense of $5,451,086. As of September 30, 2011, stockholders' equity was $22,831,619. As of September 30, 2011, the gearing ratio is 41.13%. We offer reasonable credit limits to our customers at credit terms of 60-180 days to maintain control of trade receivable. As of September 30, 2011, the average trade receivables turnover was 254 days which was 116 days for the same period of 2010. As of September 30, 2011, the average inventory trade turnover was 60 days for our inventories which was 22 days for the same period of 2010. Our cash and bank deposits are mainly denominated in RMB, while the revenue, expense, assets and liabilities are denominated in RMB and US dollars. The PRC currency is exchanged to US dollars at a floating rate. It did not have any substantial impact on our financial condition because we own few assets denominated in US dollars. CASH FLOW As of September 30, 2011, our cash and cash equivalents were $4,687,475, representing a decrease of $1,127,782, compared to $5,266,419 for the same period of 2010. As of September 30, 2011, net cash used in operating activities was $1,504,955. Net cash used in investing activities was $1,375,262. Such cash was mainly used in the construction of the new production facility and acquisition of plant and machinery. As of September 30, 2011, net cash provided by financing activities was $1,587,448. 32 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item. ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (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 our management, including our Chief Executive Officer and Chief Financial Officer (the "Certifying officers"), as appropriate, to allow timely decisions regarding required disclosure. As of September 30, 2011, the end of the fiscal quarter covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Certifying officers, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, the Certifying Officers concluded that our disclosure controls and procedures were effective as of the end of the third fiscal quarter of 2011. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no changes in our internal control over financial reporting during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We know of no pending legal proceedings to which we are a party which are material or potentially material, either individually or in the aggregate. We are from time to time, during the normal course of our business operations, subject to various litigation claims and legal disputes. We do not believe that the ultimate disposition of any of these matters will have a material adverse effect on our financial position, results of operations or liquidity. ITEM 1A. RISK FACTORS Except as set forth below, there were no material changes from the risk factors as previously described in our Annual Report on Form 10-K filed with the SEC on March 31, 2011. WE MAY NOT BE ABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS OR PREVENT FRAUD DUE TO THE FACT THAT OUR BOOKS AND RECORDS ARE MAINTAINED AND PREPARED IN PRC GAAP AND OUR EMPLOYEES WHO HAVE PRIMARY RESPONSIBILITIES OF PREPARING AND SUPERVISING THE PREPARATION OF THE FINANCIAL STATEMENTS UNDER U.S. GAAP DO NOT HAVE KNOWLEDGE OF AND PROFESSIONAL EXPERIENCE WITH U.S. GAAP AND SEC RULES. AS A RESULT, CURRENT AND POTENTIAL SHAREHOLDERS COULD LOSE CONFIDENCE IN OUR FINANCIAL REPORTING, WHICH WOULD HARM THE VALUE OF OUR SECURITIES. Our CFO is tasked with the primary responsibility of preparing and supervising the preparation of the Company's financial statements and evaluating the effectiveness of the Company's internal control over financial reporting. He has not had prior or ongoing training in the application of the U.S. GAAP or SEC rules. This individual has spent approximately 5 years in the capacity of financial manager at a U.S. public company where he was involved in preparation of financial statements in accordance with the U.S. GAAP. In addition, our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding financial reporting and the preparation of financial statements for external purposes in accordance with United States Generally Accepted Accounting Principles. All of the business operations of the Company are located in Mainland China. For the purposes of maintaining controls and addressing financial reporting risks, we are using assignment of responsibility, authorization controls, reviews and approvals, budget controls, property protections, accounting controls, internal reporting, analysis of operations, performance assessment and other methods to address the risks of financial reporting. In addition, currently, our books and records are maintained and prepared in PRC GAAP and the employees who have primary responsibilities of preparing and supervising the preparation of the financial statements under U.S. GAAP do not have knowledge of and professional experience with U.S. GAAP and SEC rules and regulations. If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential shareholders could lose confidence in our financial reporting, which would harm the value of our shares. 33 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS During the three months ended September 30, 2011, the Company did not (i) sell any unregistered securities, or (ii) repurchase any of its equity securities. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. [REMOVED OR RESERVED] ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS The following exhibits are filed herewith: Exhibit No. Description ----------- ----------- 10.5 Purchase Contract, dated January 11, 2008, between Fujian Jinjiang Pacific Shoe Co.,Ltd and Huachang Footwear Materials Company. 10.6 Distribution Agreement, dated April 30, 2009, of Fujian Jinjiang Pacific Shoes Co., Ltd. 10.7* Zhong Zhao Employment Agreement. 21.1 List of Subsidiaries. 31.1 Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2. Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ---------- * Compensatory or management employment contract 34 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: November 14, 2011 By: /s/ Haiting Li ------------------------------------ Haiting Li Chief Executive Officer (Principal Executive Officer) Date: November 14, 2011 By: /s/ Zhong Zhao ------------------------------------ Zhong Zhao Chief Financial Officer (Principal Accounting and Financial Officer) 35

Pacific Bepure Industry Inc 10-Q