10-Q 1 chang-on10q.htm FORM 10-Q chang-on10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 2009

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______________________To ______________________
 
Commission file number 000-52749
 
 
CHANG-ON INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
 
Utah
 
87-0302579
(State or other jurisdiction of incorporation or
 
(I.R.S. Employer Identification No.)
organization)
   
     
514 No. 18 Building
High New Technology Development
Harbin, Heilongjiang Province, China
 
N/A
(Address of principal executive offices)
 
(Zip Code)

+86 451 82695010
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was require 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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o      Accelerated filer o     Non-accelerated filer o    Smaller reporting company þ
 
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   
 
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
 
Check whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. o Yes o No
 
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
 
 
As of November 16, 2009, the registrant’s outstanding common stock consisted of 67,307,366 shares.
 

 
 

 
 
Table of Contents
 

 
 
1

 

 
 
 

 
 
 
 
The unaudited financial statements of Chang-On International, Inc., and subsidiaries (the “Company”, “Chang-On”, “we”, “our”, “us”) follow.  All currency references in this report are in US dollars unless otherwise noted.
 
 
The consolidated financial statements of the Company, included herein were prepared, without audit, pursuant to rules and regulations of the Securities and Exchange Commission.  Because certain information and notes normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America were condensed or omitted pursuant to such rules and regulations, these financial statements should be read in conjunction with the financial statements and notes thereto included in the audited financial statements of the Company as included in the Company's Form 10-K for the year ended December 31, 2008.
 



CHANG-ON INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
 
INDEX


 
PAGE
   
CONSOLIDATED BALANCE SHEETS (UNAUDITED
F-1
   
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
F-2
   
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
F-3
   
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY(DEFICIT) (UNAUDITED)
F-4
   
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
F-5
   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
F-6

 
 
2

 
 
CHANG-ON INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
       
ASSETS
           
Current Assets
           
     Cash
  $ 14,917     $ 3,798  
     Prepaid and other receivables
    293       293  
     Inventories (Note 4)
    107,203       108,493  
          Total Current Assets
    122,413       112,584  
                 
Property, plant and equipment, net (Note 5)
    369,894       396,056  
                 
          Total Assets
  $ 492,307     $ 508,640  
                 
LIABILITIES
               
Current Liabilities
               
     Trade accounts payable
  $ 696     $ 696  
     Accrued expenses
    25,208       25,211  
     Government subsidy (Note 6)
    78,097       56,155  
     Due to shareholders (Note 7)
    237,797       215,943  
          Total Current Liabilities
    341,798       298,005  
                 
          Total Liabilities
    341,798       298,005  
                 
EQUITY
               
Chang-On International, Inc Stockholders' Equity:
               
    Common stock, par value $0.001, authorized
               
        100,000,000 shares, issue and outstanding
               
        67,307,366 shares (Note 8)
    67,307       67,307  
     Additional paid in capital
    3,067,959       3,067,959  
     Deficit
    (2,943,728 )     (2,689,591 )
     Deferred Compensation (Note 9)
    (100,000 )     (317,500 )
Accumulated comprehensive income
    (15,568 )     (15,457 )
          Total Chang-On International, Inc Stockholders' equity
    75,970       112,718  
                 
Noncontrolling interest
    74,539       97,917  
                 
Total Equity
    150,509       210,635  
                 
          Total Liabilities and Equity
  $ 492,307     $ 508,640  
 
See Notes to Financial Statements
 
 
F-1

 
 
CHANG-ON INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
 
 
   
For the Three Months Ended
September 30,
   
For the Nine Months Ended
September 30,
     
For the Period
November 26, 2004 (inception)
to September 30,
 
   
2009
   
2008
   
2009
   
2008
   
2009
 
                               
Net sales
  $ 1,989     $ 352     $ 1,989     $ 33,094     $ 93,775  
Cost of sales
    (1,228 )     (176 )     (1,228 )     (16,609 )     (60,324 )
 Gross profit
    761       176       761       16,485       33,451  
                                         
Expenses
                                       
     Salaries
    3,513       6,559       10,538       19,672       118,824  
     Transportation
    -       4,307       -       7,509       13,354  
     Office equipment
    -       1,712       28       2,102       6,879  
     Water, electricity and gas
    3,573       10,826       23,889       17,787       115,523  
     Other expenses
    122       540       331       3,903       35,178  
     Advertisement
    -       -       -       -       556  
     Rent expense
    -       -       -       -       3,811  
     Depreciation
    8,641       8,571       25,917       19,730       157,249  
     R & D expense
    -       -       -       -       22,578  
     Repairs and maintenance
    -       -       -       -       1,025  
     Gain on disposal of fixed assets
    -       -       -       -       (7,730 )
     Stock compensation
    50,000       221,666       217,500       758,333       2,300,000  
     Professional fees
    -       -       -       -       25,000  
     Fixed assets impairment
    -       -       -       -       345,962  
     Intangibles writedown
    -       -       -       -       241,639  
  Total Expenses
    65,849       254,181       278,203       829,036       3,379,848  
                                         
Total expenses and loss from operations
    (65,088 )     (254,005 )     (277,442 )     (812,551 )     (3,346,397 )
                                         
Other income
    -       76       -       7,159       7,195  
                                         
Loss before provision for income tax
    (65,088 )     (253,929 )     (277,442 )     (805,392 )     (3,339,202 )
                                         
Income tax provision
    -       -       -       -       -  
                                         
Net loss
    (65,088 )     (253,929 )     (277,442 )     (805,392 )     (3,339,202 )
                                         
Less: Net loss attributable to the noncontrolling interest
    5,851       -       23,305       -       289,108  
                                         
Net loss attributable to Chang-On International, Inc
                                 
common stockholders
  $ (59,237 )   $ (253,929 )   $ (254,137 )     (805,392 )   $ (3,050,094 )
                                         
Basic and Fully Diluted Earnings per Share
  $ (0.00 )   $ (0.00 )   $ (0.00 )   $ (0.01 )        
                                         
Weighted average shares outstanding
    67,307,366       67,307,366       67,307,366       67,307,366          
 
See Notes to Financial Statements
 
 
F-2

 
 
CHANG-ON INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
 
 
 
   
For the Three Months Ended
September 30,
   
For the Nine Months Ended
September 30,
    For the Period November 26, 2004 (inception) to September 30,  
   
2009
   
2008
   
2009
   
2008
   
2009
 
                               
Net loss
  $ (65,088 )   $ (253,929 )   $ (277,442 )   $ (805,392 )   $ (3,339,202 )
                                         
Other comprehensive income(loss), net of tax:
                                       
Foreign currency translation gain(loss)
    114       (3,797 )     (184 )     (21,098 )     (15,641 )
                                         
Comprehensive loss
    (64,974 )     (257,726 )     (277,626 )     (826,490 )     (3,354,843 )
Comprehensive loss attributable to the noncontrolling interest
    5,808       -       23,378       -       289,181  
                                         
Comprehensive loss attributable to Chang-On International, Inc.
  $ (59,166 )   $ (257,726 )   $ (254,248 )   $ (826,490 )   $ (3,065,662 )
 
See Notes to Financial Statements
 
 
 
F-3

 
 
 
CHANG-ON INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY(DEFICIT)
(UNAUDITED)
               
Chang-On International, Inc. Stockholders
                   
               
Common Stock
   
Additional
               
Accumulated
 
         
Comprehensive
   
$0.001 Par Value
   
Paid-in
   
Accumulated
   
Deferred
   
Comprehensive
 
   
Total
   
Income
   
Shares
   
Amount
   
Capital
   
Deficit
   
Compensation
   
Income (loss)
   
Interest
 
                                                       
Balance December 31, 2008
  $ 210,635     $ -       67,307,366     $ 67,307     $ 3,067,959     $ (2,689,591 )   $ (317,500 )   $ (15,457 )   $ 97,917  
                                                                         
Amortization of deferred compensation
    217,500                                               217,500                  
                                                                         
Comprehensive loss:
                                                                       
Net loss
    (277,442 )     (277,442 )                             (254,137 )                     (23,305 )
Other comprehensive loss, net of tax:
                                                                       
Foreign currency translation loss
    (184 )     (184 )                                             (111 )     (73 )
                                                                         
Comprehensive loss
    (277,626 )   $ (277,626 )                                                        
                                                                         
Balance September 30, 2009
  $ 150,509               67,307,366     $ 67,307     $ 3,067,959     $ (2,943,728 )   $ (100,000 )   $ (15,568 )   $ 74,539  
 
See Notes to Financial Statements
 
 
 
F-4

 
 
 
CHANG-ON INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   
Nine Months Ended
September 30,
    For the Period November 26, 2004 (inception) to September 30,  
   
2009
   
2008
   
2009
 
Operating Activities:
                 
Net loss
  $ (277,442 )   $ (805,392 )   $ (3,339,202 )
Adjustments to reconcile net loss to net cash used by operations
                 
                         
Depreciation (cost and expense)
    25,917       25,300       166,711  
Impairment loss on intangible assets
    -       -       241,639  
Impairment loss on fixed assets
    -       -       345,962  
Gain on disposal of fixed assets
    -       -       (7,730 )
Stock compensation
    217,500       758,333       2,298,000  
Changes in operating assets and liabilities:
                       
(Increase)/decrease in account receivable
    -       -       -  
(Increase)/decrease in prepaid and other receivables
    -       665       (293 )
(Increase)/decrease in inventory
    -       (58,932 )     (108,493 )
Increase/(decrease) in accounts payable
    -       (14,359 )     695  
Increase/(decrease) in accrued expenses
    -       182       25,211  
Decrease in government subsidy
    -       -       (50,038 )
Net cash used by operating activities
    (34,025 )     (94,203 )     (427,538 )
                         
Investing Activities
                       
Purchase of fixed assets
    -       (1,852 )     (710,118 )
Loan to shareholders
    -       -       (24,659 )
Repay of loan from shareholders
    -       -       24,659  
Net cash (used) by investing activities
    -       (1,852 )     (710,118 )
                         
Financing Activities
                       
Distribution to shareholders
    -       -       (24,994 )
Capital contribution
    -       -       274,103  
Proceeds from government subsidy
    21,942       -       121,072  
Proceeds from shareholder loans
    80,499       137,282       821,201  
Repay of loan to shareholders
    (58,545 )     -       (70,844 )
Net cash provided by financing activities
    43,896       137,282       1,120,538  
                         
Effect of exchange rate changes on cash
    1,248       (46,328 )     32,035  
                         
Increase(decrease)  in cash
    11,119       (5,101 )     14,917  
Cash at beginning of period
    3,798       7,380       -  
Cash at end of period
  $ 14,917     $ 2,279     $ 14,917  
                         
Supplemental Cash Flow Information:
                       
Interest received (paid) during the year
  $ -     $ 9     $ 260  
Non-cash financing activities:
                       
Contribution of patent for equity
  $ -     $ -     $ 241,639  
Contribution of fixed assets for equity
  $ -     $ -     $ 125,497  
Stock issued in exchange for consulting services
  $ -     $ -     $ 2,400,000  
Conversion of shareholder's loan to paid in capital
  $ -     $ -     $ 589,100  
 
See Notes to Financial Statements
 
 
F-5

 
 
CHANG-ON INTERNATIONAL, INC AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
Note 1- ORGANIZATION AND BUSINESS BACKGROUND

Chang-On International, Inc., (the “Company”) was incorporated under the law of the State of Utah as Gold Standard, Inc. (“Gold Standard”) on November 28, 1972 and changed its name to Chang-On International, Inc. on April 18, 2007. The Company is principally engaged in the business of waste recycling and reutilization in the People’s Republic of China (“PRC”) through its majority-owned subsidiary, Chang-On International Limited (“Chang-On”).

Chang-On International Limited (“Chang-On”) was incorporated as a Hong Kong limited liability company on September 8, 2006. Chang-On was formed to facilitate a merger between a US company and a PRC business entity. On December 29, 2006, under the terms of the Agreement for the Share Exchange, the Company has agreed to acquire all the outstanding capital stock of Chang-On in return for the issuance of 60,000,000 shares of common stock.

Chang-On is a holding company that owns 61% of the registered capital of Harbin Hongbo Environment Protection Material, Inc. (“Hongbo”) a corporation formed under the laws of the PRC on November 26, 2004. Hongbo is engaged in the business of manufacturing construction materials from waste products. All Hongbo’s business is currently in the PRC.

The Company is considered to be a development stage company, as it has not generated substantial revenues from operations.


Note 2- GOING CONCERN

As of September 30, 2009, the Company had incurred accumulated losses of $2,943,728 from operations since inception and has limited operations. The Company is actively pursuing additional funding and a potential merger or acquisition candidate and strategic partners, which would enhance owners’ investment.

 
F-6

 
 
CHANG-ON INTERNATIONAL, INC AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Note 3- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

l Basis of presentation
These accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America and are presented in U.S. dollars.

The consolidated financial statements have been prepared in accordance with US GAAP for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation SX. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been included. These consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2008 and notes thereto contained in the Report on Form 10-K of the Company as filed with the United States Securities and Exchange Commission (the “SEC”) on March 3, 2009. Interim results are not necessarily indicative of the results for the full year. 

 
The Company has evaluated subsequent events through the date that the financial statements were issued, which was November 16, 2009, the date of the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2009.
 
l Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all its majority-owned subsidiaries which require consolidation.  Inter-company transactions have been eliminated in consolidation. The functional currency of the Company’s operation is Reminbi (“RMB”)

l Use of estimates
In preparing these financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the year reported. Actual results may differ from these estimates.

l Revenue recognition
Revenues are recognized when finished products are shipped to unaffiliated customers, both title and the risks and rewards of ownership are transferred or services have been rendered and accepted, and collectibility is reasonably assured.

l Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the average cost method. Costs include direct material, direct labor and applicable manufacturing overhead.

l Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method. Additions and improvement that substantially extend the useful life of the properties, plan and equipment are capitalized. Property, plant and equipment are depreciated to their estimated residual values over their estimated useful lives, and reviewed for impairment in accordance with Statement of Financial Accounting Standard No.144 “Accounting for the Impairment or Disposal of Long-Lived Assets.”

l Intangible Assets
The Company periodically analyzes its intangible assets for potential impairment, assessing the appropriateness of lives and recoverability of unamortized balances through measurement of undiscounted operating cash flows on a basis consistent with US GAAP.
 
 
F-7

 
 
CHANG-ON INTERNATIONAL, INC AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
l Related Parties
The caption "Due from shareholders" represents loans receivable that are unsecured, non-interest bearing and have no fixed terms of repayment, and therefore are not considered current assets.
The caption "Due to shareholders" represents loans payable that are unsecured, non-interest bearing and have no fixed terms of repayment, therefore, deemed payable on demand. Refer to Note 7.

l Income Tax
Income tax expense is based on reported income before income taxes. Deferred income taxes reflect the effect of temporary differences between assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. In accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," these deferred taxes are measured by applying currently enacted tax laws.

The Company did not provide any current or deferred income tax provision or benefit for any period presented to date because there is no income from operations, with only minor timing differences with regard to the depreciation of fixed assets. Management has determined that any deferred tax asset or liability is inconsequential, and not material to the financial statements.

l Fair Value of Financial Instruments
The Company adopted the standard “Fair Value Measurements” , codified with ASC 820 and effective January 1, 2008.  The provisions of ASC 820 are to be applied prospectively.

ASC 820 clarifies that fair value is an estimate of the exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (i.e., the exit price at the measurement date).  Under ASC 820, fair value measurements are not adjusted for transaction cost.  ASC 820  provides for use of a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three levels:

Level 1:
Unadjusted quoted prices in active markets for identical assets or liabilities

Level 2:
Input other than quoted market prices that are observable, either directly or indirectly, and reasonably available.  Observable inputs reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the Company.

Level 3:
Unobservable inputs.  Unobservable inputs reflect the assumptions that the Company develops based on available information about what market participants would use in valuing the asset or liability.

An asset or liability’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.  Availability of observable inputs can vary and is affected by a variety of factors.  The Company uses judgment in determining fair value of assets and liabilities and Level 3 assets and liabilities involve greater judgment than Level 1 and Level 2 assets or liabilities.

l Foreign currencies translation
The functional currency of the Company is the Reminbi (“RMB”). The accompanying financial statements have been expressed in United States dollars, the reporting currency of the Company.  The balance sheet is translated into United States dollars based on the rates of exchange ruling at the balance sheet date.  The statement of operations is translated using a weighted average rate for the period.  Translation adjustments are reflected as accumulated comprehensive income in shareholders’ equity.
 
 
F-8

 
 
CHANG-ON INTERNATIONAL, INC AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
l New Accounting Pronouncements
 
In June 2009, the Financial Accounting Standards Board (FASB) issued a standard that established the FASB Accounting Standards Codification TM  (ASC) and amended the hierarchy of generally accepted accounting principles (GAAP) such that the ASC became the single source of authoritative nongovernmental U.S. GAAP. The ASC did not change current U.S. GAAP, but was intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All previously existing accounting standard documents were superseded and all other accounting literature not included in the ASC is considered non-authoritative. New accounting standards issued subsequent to June 30, 2009 are communicated by the FASB through Accounting Standards Updates (ASUs). For the Company, the ASC was effective July 1, 2009. This standard did not have an impact on the Company’s consolidated results of operations or financial condition. However, throughout the notes to the consolidated financial statements references that were previously made to various former authoritative U.S. GAAP pronouncements have been changed to coincide with the appropriate section of the ASC.
 
In December 2008, the FASB issued an accounting standard regarding a company’s disclosures about postretirement benefit plan assets.  This standard requires additional disclosures about plan assets for sponsors of defined benefit pension and postretirement plans including expanded information regarding investment strategies, major categories of plan assets, and concentrations of risk within plan assets. Additionally, this standard requires disclosures similar to those required for fair value measurements and disclosures under ASC 820 with respect to the fair value of plan assets such as the inputs and valuation techniques used to measure fair value and information with respect to classification of plan assets in terms of the hierarchy of the source of information used to determine their value. The disclosures under this standard are required for annual periods ending after December 15, 2009. The Company is currently evaluating the requirements of these additional disclosures.
 
In April 2009, the FASB issued an accounting standard which modifies the requirements for recognizing other-than-temporarily impaired debt securities and changes the existing impairment model for such securities. The standard also requires additional disclosures for both annual and interim periods with respect to both debt and equity securities. Under the standard, impairment of debt securities will be considered other-than-temporary if an entity (1) intends to sell the security, (2) more likely than not will be required to sell the security before recovering its cost, or (3) does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). The standard further indicates that, depending on which of the above factor(s) causes the impairment to be considered other-than-temporary, (1) the entire shortfall of the security’s fair value versus its amortized cost basis or (2) only the credit loss portion would be recognized in earnings while the remaining shortfall (if any) would be recorded in other comprehensive income. The standard requires entities to initially apply its provisions to previously other-than-temporarily impaired debt securities existing as of the date of initial adoption by making a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The cumulative-effect adjustment potentially reclassifies the noncredit portion of a previously other-than-temporarily impaired debt security held as of the date of initial adoption from retained earnings to accumulated other comprehensive income. For the Company, this standard was effective beginning April 1, 2009. The adoption of this standard did not have a material impact on the Company’s consolidated results of operations or financial condition.
 
In May 2009, the FASB issued a new accounting standard regarding subsequent events. This standard incorporates into authoritative accounting literature certain guidance that already existed within generally accepted auditing standards, with the requirements concerning recognition and disclosure of subsequent events remaining essentially unchanged. This guidance addresses events which occur after the balance sheet date but before the issuance of financial statements. Under the new standard, as under previous practice, an entity must record the effects of subsequent events that provide evidence about conditions that existed at the balance sheet date and must disclose but not record the effects of subsequent events which provide evidence about conditions that did not exist at the balance sheet date. This standard added an additional required disclosure relative to the date through which subsequent events have been evaluated and whether that is the date on which the financial statements were issued. For the Company, this standard was effective beginning April 1, 2009. The additional disclosures required by this standard are included in Note 1.
 
 
F-9

 
 
CHANG-ON INTERNATIONAL, INC AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
In June 2009, the FASB issued a new standard regarding the accounting for transfers of financial assets amending the existing guidance on transfers of financial assets to, among other things, eliminate the qualifying special-purpose entity concept, include a new unit of account definition that must be met for transfers of portions of financial assets to be eligible for sale accounting, clarify and change the derecognition criteria for a transfer to be accounted for as a sale, and require significant additional disclosure. For the Company, this standard is effective for new transfers of financial assets beginning January 1, 2010. Because the Company historically does not have significant transfers of financial assets, the adoption of this standard is not expected to have a material impact on the Company’s consolidated results of operations or financial condition.  
 
 
In August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair Value , which provides additional guidance on how companies should measure liabilities at fair value under ASC 820. The ASU clarifies that the quoted price for an identical liability should be used. However, if such information is not available, a entity may use, the quoted price of an identical liability when traded as an asset, quoted prices for similar liabilities or similar liabilities traded as assets, or another valuation technique (such as the market or income approach). The ASU also indicates that the fair value of a liability is not adjusted to reflect the impact of contractual restrictions that prevent its transfer and indicates circumstances in which quoted prices for an identical liability or quoted price for an identical liability traded as an asset may be considered level 1 fair value measurements. For the Company, this ASU is effective October 1, 2009. The Company is currently evaluating the impact of this standard, but would not expect it to have a material impact on the Company’s consolidated results of operations or financial condition.
 

Note 4- INVENTORIES

Inventories consist of the following:


   
September 30,
   
December 31,
 
   
2009
   
2008
 
             
Raw Material
  $ 38,308     $ 38,330  
Finished Goods
    68,895       70,163  
    $ 107,203     $ 108,493  

 

 
F-10

 
 
CHANG-ON INTERNATIONAL, INC AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


 
Note 5 - PROPERTY, PLANT AND EQUIPMENT
 
Property, Plant and Equipment consist of the following:

   
September 30,
   
December 31,
 
   
2009
   
2008
 
             
Machinery and Equipment
  $ 335,675     $ 335,863  
Office Equipment
    7,672       7,676  
Vehicle
    6,885       6,889  
Construction in Progress
    136,807       136,884  
      487,039       487,312  
Less: Accumulated Depreciation
    (117,145 )     (91,256 )
    $ 369,894     $ 396,056  

Depreciation is calculated on a straight-line basis over the estimated useful life of the assets. The annual percentages applied are:

Machinery and Equipment    10%
Office Equipment                       20%
Vehicle                                     10%

The depreciation was $25,917 and $25,300, including cost and operating expense, for the nine months ended September 30, 2009 and 2008, respectively.

Note 6- GOVERNMENT SUBSIDY

During 2005, the Company received approximately $100,000 in a government subsidy from the Finance Department of Heilongjiang Province to be used for research and development activities. This subsidy reduces the cost of the Company’s research and development activities. Any unused portion of the subsidy has to be returned to the province. At September 30, 2009, the Company had not used $78,097 of the subsidy.
 
 
F-11

 
 
CHANG-ON INTERNATIONAL, INC AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Note 7- DUE TO SHAREHOLDERS
 
Due to Shareholders consists of the following:

   
September 30,
   
December 31,
 
   
2009
   
2008
 
Li, Yukun
  $ 22,311     $ 22,323  
Li, Guomin
    213,563       191,697  
Zhou, Qingwei
    1,923       1,923  
    $ 237,797     $ 215,943  

Li Guomin had been a shareholder of Hongbo since November 2006. Zhou, Qingwei has been a shareholder of Chang-On since September 2006.  Under the Agreement for the Share Exchange on December 29, 2006, Li, Guomin and Zhou, Qingwei acquired 17,400,000 and 36,600,000 shares of Gold Standard, Inc. respectively.
 
Note 8- COMMON STOCK

Under the Agreement for the Share Exchange, Gold Standard, Inc. issued to the shareholders of Chang-On 60,000,000 shares of common stock. With 1,307, 366 shares issued and outstanding before the shares exchange. On March 23, 2007, the Company filed S-8 to register 6,000,000 common shares for stock based compensation (Note 9). There is a total of 67,307,366 shares issued and outstanding for the Company as of September 30, 2009.
 
Note 9-STOCK BASED COMPENSATION

On January 19, 2007, the Company entered into an agreement with Li, Yaru for legal services in PRC for a term of two years, pursuant to which the Company issued 900,000 shares of common stock in April 2007. The fair market value amounted to $360,000, which is being amortized over the term of the agreement.

On January 31, 2007, the Company entered into an agreement with Canyon Red Group Limited, an incorporation of British Virgin Island for advisory services on the marketing strategy and implementation of corporate identity for a term of twelve months, pursuant to which the Company issued 700,000 shares of common stock in April 2007. The fair market value amounted to $280,000, which is being amortized over the term of the agreement.

On March 30, 2007, the Company entered into an agreement with Mu, Shiwei for internal audit services for a term of three years, pursuant to which the Company issued 1,500,000 shares of common stock in April 2007. The fair market value amounted to $600,000, which is being amortized over the term of the agreement.

On March 30, 2007, the Company entered into an agreement with I &V Limited, an incorporation of British Virgin Island for advisory services on the sales and distribution channels of certain environmental friendly construction materials in Northern China for a term of eighteen months, pursuant to which the Company issued 1,000,000 shares of common stock in April 2007. The fair market value amounted to $400,000, which is being amortized over the term of the agreement.
 
 
F-12

 
 
CHANG-ON INTERNATIONAL, INC AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
On March 30, 2007, the Company entered into an agreement with Billion Profit International Holdings Limited, an incorporation of British Virgin Island for advisory services on the sales and distribution channels of certain environmental friendly construction materials in Hainan Province of China for a term of twelve months, pursuant to which the Company issued 700,000 shares of common stock in April 2007. The fair market value amounted to $280,000, which is being amortized over the term of the agreement.

On March 30, 2007, the Company entered into an agreement with Prospect Bright Holdings Limited, an incorporation of British Virgin Island for advisory services on the sales and distribution channels of certain environmental friendly construction materials in Northeast China for a term of twenty-four months, pursuant to which the Company issued 1,200,000 shares of common stock in April 2007. The fair market value amounted to $480,000, which is being amortized over the term of the agreement.

For the nine months ended September 30, 2009, $217,500 of the above stock compensation was charged to operating expenses and $100,000 was recorded as deferred compensation.
 
Note 10- GEOGRAPHIC INFORMATION
 
All of the Company's sales and all of the Company's long-lived assets are located in the PRC.
 
Note 11- OPERATING RISK
 
Concentrations of credit risk
Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains its cash and cash equivalents with high-quality institutions to mitigate the fact there is no deposit insurance.

Country risk
The Company has significant investments in the PRC. The operating results of the Company may be adversely affected by changes in the political and social conditions in the PRC and by changes in Chinese government policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. There can be no assurance; however, those changes in political and other conditions will not result in any adverse impact.

NOTE 12- EMPLOYEE BENEFIT PLAN
Full time employees of the Company participate in a government mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require the Company to accrue for these benefits based on certain percentages of the employees' salaries. The total provisions for such employee benefits were $0 for the nine months ended September 30, 2009 and 2008. 
 
NOTE 13- RESTRICTED RETAINED EARNINGS

Pursuant to the laws applicable to the PRC, PRC entities must make appropriations from after-tax profit to the non-distributable “statutory surplus reserve fund”. Subject to certain cumulative limits, the “statutory surplus reserve fund” requires annual appropriations of 10% of after-tax profit until the aggregated appropriations reach 50% of the registered capital (as determined under accounting principles generally accepted in the PRC ("PRC GAAP") at each year-end). For foreign invested enterprises and joint ventures in the PRC, annual appropriations should be made to the “reserve fund”. For foreign invested enterprises, the annual appropriation for the “reserve fund” cannot be less than 10% of after-tax profits until the aggregated appropriations reach 50% of the registered capital (as determined under PRC GAAP at each year-end). The Company did not make any appropriations to the reserve funds mentioned above due to lack of profit after tax since commencement of operations.

 
F-13

 
 
 
 
Forward Looking Statements
 
This report on Form 10-Q contains certain forward-looking statements.  All statements other than statements of historical fact are “forward-looking statements” for purposes of these provisions, including any projections of earnings, revenues, or other financial items; any statements of the plans, strategies, and objectives of management for future operation; any statements concerning proposed new products, services, or developments; any statements regarding future economic conditions or performance; statements of belief; and any statement of assumptions underlying any of the foregoing. Such forward-looking statements are subject to inherent risks and uncertainties, and actual results could differ materially from those anticipated by the forward-looking statements.
 
These forward-looking statements involve significant risks and uncertainties, including, but not limited to, the following: competition, promotional costs, and risk of declining revenues. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of a number of factors. These forward-looking statements are made as of the date of this filing, and we assume no obligation to update such forward-looking statements. The following discusses our financial condition and results of operations based upon our consolidated financial statements which have been prepared in conformity with accounting principles generally accepted in the United States. It should be read in conjunction with our financial statements and the notes thereto included elsewhere herein.
 
Business Overview
 
We are principally engaged in the business of waste recycling and reutilization in the People’s Republic of China (“China”) through our majority owned subsidiary, Harbin Hongbo Environment Protection Material, Inc. (“Hongbo”), a corporation organized under the laws of China.

We own our interest in Hongbo through Chang-On International Limited, a company incorporated under the laws of Hong Kong as a limited liability company on September 8, 2006 (“Chang-On HK”).  Chang-On HK is a holding company with one asset: 61% of the equity in Harbin Hongbo Environment Protection Material, Inc. (“Hongbo”), a corporation organized under the laws of China.  The remaining 39% of the registered capital of Hongbo is owned by Guomin Li (29%) and Su Yu (10%), who are members of our Board of Directors.  We manufacture construction material out of waste plastic and waste coal ash.  From inception on November 26, 2004 to September 30, 2009 we have generated revenues of $93,775 from the sale of our products.
 
Liquidity and Capital Resources
 
As of September 30, 2009, we had cash of $14,917 and a working capital deficiency of $219,385.  As at September 30, 2009 our accumulated deficit during the development stage was $3,103,876.  Our net loss for the period from our inception on November 26, 2004 until September 30, 2009 was $3,346,397.  Our loss has been primarily funded by proceeds from shareholder loans and stock-based compensation.  During the nine months ended September 30, 2009, we received $80,499 as proceeds from shareholder loans compared to proceeds of $137,282 which we received during the same period in 2008.  During the nine months ended September 30, 2009 our cash position increased by $11,119.
 
We used net cash of $34,025 in operating activities for the nine months ended September 30, 2009 compared to net cash of $94,203 in operating activities for the same period in 2008.  We have used $427,538 on operating activities from our inception on November 26, 2004 until September 30, 2009.  The difference in cash used in operating activities is attributed mostly to a decrease in operating activities due to a decrease in seasonal demand for our products. Our stock compensation also substantially decreased during the reporting period.
 
 
3

 
 
We did not use any cash in investing activities during the period ended September 30, 2009 compared to $1,852 for the purchase of fixed assets during the same period in 2008, and have used $710,118 in investing activities, for the purchase of fixed assets for our manufacturing plant, from our inception on November 26, 2004 until September 30, 2009.
 
We received $43,896 from financing activities for the nine months ended September 30, 2009 compared to net cash of $137,282 during the same period in 2008.  During the reporting period, we received proceeds form government subsidiary and from shareholder loans. The decrease in net cash provided by financing activities is generally attributed to a repayment of loan to shareholders. We did not raise any funds through the sale of our securities during the nine months ended September 30, 2009 or during the same period in 2008.
 
Exchange rates resulted in a gain of $1,248 during the nine months ended September 30, 2009 compared to a loss of $46,328 during the same period in 2008.  Since our inception on November 26, 2004 until September 30, 2009, we have gained $32,035 due to the effect of exchange rates on our cash position.
 
During the nine months ended September 30, 2009 our monthly cash requirement was approximately $3,781, compared to our cash requirements of approximately $10,673 for the same period in 2008. Given our cash usage during the nine months ended September 30, 2009, we do not have enough cash reserves to fund our operations for the next month.
 
We expect to require a total of approximately $930,000 set out as follows to fully carry out our business plan over the next twelve months beginning December 2009.  Our expenditures for the next twelve months include:
 
Description
Estimated Expenses ($)
Research and development costs for further products and manufacturing processes
250,000
Consulting fees (including legal and auditing fees)
100,000
Rent expenses
20,000
Marketing expenses
400,000
Investor relations costs
80,000
Other administrative expenses
80,000
Total
930,000
 
We anticipate that our future revenues will be nominal and we do not anticipate enough positive internal operating cash flow until we can generate substantial revenues, which may take the next few years to fully realize. There is no assurance we will achieve profitable operations.
 
 
4

 
 
We have historically financed our operations primarily by cash flows generated from the sale of our equity securities and through cash infusions from officers and affiliates in exchange for debt and/or common stock. No officer or affiliate has made any commitment or is obligated to continue to provide cash through loans or purchases of equity.
 
We intend to meet the balance of our cash requirements for the next 12 months through external sources: a combination of debt financing and equity financing through private placements. Currently we are active in contacting broker/dealers in North America and elsewhere regarding possible financing arrangements. However, we currently do not have any arrangements in place for the completion of any further private placement financings and there is no assurance that we will be successful in completing any further private placement financings. If we are unsuccessful in raising enough money through future capital raising efforts, we may review other financing possibilities such as bank loans. If we are unsuccessful in raising enough money, we may not fully carry out our business plan.
 
Results of Operations for the three months ended September 30, 2009 compared to the three months ended June 30, 2008 and from inception to September 30, 2009.
 
Revenues
 
We generated $1,989 in revenues for the three months ended September 30, 2009 compared to $352 in the same period in 2008.  Since inception on November 26, 2004 to September 30, 2009 we generated total revenues of $93,775.  As we are a development stage company, our revenue streams are not established and thus our product sales are unstable.
 
Net Loss
 
We incurred a net loss of $65,088 for the three months ended September 30, 2009, compared to a net loss of $253,929 for the same period in 2008. The decrease of $188,841 in net loss was a result of $171,666 less stock-based compensation issued during the three months ended September 30, 2009.  From inception on November 26, 2004 to September 30, 2009, we have incurred net loss of $3,339,202.
 
We did not register a net loss per share for the three months ended September 30, 2009 or for the same period in 2008.
 
Expenses
 
Our total operating expenses decreased from $254,181 for the three months ended September 30, 2008 to $65,849 for the three months ended September 30, 2009.  The reason for the decrease was a significant reduction in our stock based compensation. Since our inception on November 26, 2004 to September 30, 2009, we have incurred total operating expenses of $3,379,848.

Our expenses, net of stock-based compensation, decreased by $16,666 from $32,515 to $15,849 for the three months ended September 30, 2009 compared to the same period in 2008.  This decrease was mainly due to a decrease in payments for salaries and utilities compared to the same period in 2008. We also did not incur any transportation or office equipment expenses during the three months ended September 30, 2009.

Our stock compensation decreased by $171,666 to $50,000 for the three months ended September 30, 2009 from $221,666 for the same period in 2008.  From inception on November 26, 2004 to September 30, 2009, we have incurred stock based compensation expenses of $2,300,000.

We did not incur research and development expenses for the three months ended September 30, 2009 or for the same period in 2008.   Since our inception on November 26, 2004 until September 30, 2009 we have spent $22,578 on research and development.  Going forward, we anticipate that we will spend approximately $250,000 on research and development during the next 12 months.
 
 
5

 
 
Results of Operations for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008.
 
Revenues
 
We generated $1,989 in revenues for the nine months ended September 30, 2009 compared to $33,094in the same period in 2008.As we are a development stage company, our revenue streams are not established and thus our product sales are unstable.
 
Net Loss
 
We incurred a net loss of $277,442 for the nine months ended September 30, 2009, compared to a net loss of $805,392 for the same period in 2008. The decrease of $527,950 in net loss was a result of a reduction in stock-based compensation during the nine months ended September 30, 2009.
 
Our net loss per share was $0.00 for the nine months ended September 30, 2009 and $0.01 for the same period in 2008.
 
Expenses
 
Our total operating expenses decreased from $829,036 for the nine months ended September 30, 2008 to $278,203 for the nine months ended September 30, 2009.  The decrease was due to lower stock based compensation during the nine months reporting period.

Our expenses, net of stock-based compensation, decreased by $10,000 from $70,703 to $60,703 for the nine months ended September 30, 2009 compared to the same period in 2008.  This decrease was mainly due to an decreased in salaries and transportation expenses compared to the same period in 2008.

Our stock compensation decreased $540,833 to $217,500 for the nine months ended September 30, 2009 from $758,333 for the same period in 2008.  We did not incur research and development expenses for the nine months ended September 30, 2009 or for the same period in 2008.
 
Inflation
 
The amounts presented in the financial statements do not provide for the effect of inflation on our operations or financial position. The net operating losses shown would be greater than reported if the effects of inflation were reflected either by charging operations with amounts that represent replacement costs or by using other inflation adjustments.
 
 
6

 
 
Off-Balance Sheet Arrangements
 
As of September 30, 2009, we had no off-balance sheet transactions that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
 
Critical Accounting Policies
 
Use of estimates

In preparing these financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the year reported. Actual results may differ from these estimates.

Revenue recognition

Revenues are recognized when finished products are shipped to unaffiliated customers, both title and the risks and rewards of ownership are transferred or services have been rendered and accepted, and collectibility is reasonably assured.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method. Additions and improvement that substantially extend the useful life of the properties, plan and equipment are capitalized. Property, plant and equipment are depreciated to their estimated residual values over their estimated useful lives, and reviewed for impairment in accordance with Statement of Financial Accounting Standard No.144 “Accounting for the Impairment or Disposal of Long-Lived Assets.”
 
Disclosure Controls

We  carried out an evaluation, under the supervision and with the participation   of  our  management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) for the period covered in this report.  Based upon that evaluation and the unresolved material weaknesses in our internal control over financial reporting identified in our Annual Report on Form 10-K for the year ended December 31, 2008, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the "Exchange  Act") is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate  to allow timely decisions regarding required disclosure.
 
Changes in internal controls
 
During the period covered by this report, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
 
7

 
 
 
 
Management is not aware of any legal proceedings contemplated by any governmental authority or any other party against us.  None of our directors, officers or affiliates are (i) a party adverse to us in any legal proceedings, or (ii) have an adverse interest to us in any legal proceedings.  Management is not aware of any other legal proceedings that have been threatened against us.
 
 
Not applicable.
 
 
None.
 
 
None.
 
 
None.
 
 
None.
 
 
 

 
8

 
 
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned thereunto duly authorized.

 
Chang-On International, Inc.
   
 
By: /s/ Guomin Li
Date: November 16, 2009
Guomin Li
 
President, Chief Executive Officer Chief Financial Officer, Principal
Accounting Officer, Director


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