UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
one)
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
or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the
transition period from _________ to _________.
Commission
File Number:
333-69270
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
(Formerly known as Online Processing,
Inc.)
(Exact
Name of Registrant as Specified in Its Charter)
|
Nevada
|
|
22-3774845
|
|
(State
or Other Jurisdiction of Incorporation or
Organization)
|
|
(IRS
Employer Identification
Number)
|
23rd
Floor, Building A, Galaxy Century,
No.
3069, Caitian Road, Futian District,
Shenzhen,
the PRC
Post
Code: 518026
(Address
of Principal Executive Offices)
00-86-755-2655-3152
(Registrant’s
Telephone Number, Including Area Code)
Online
Processing, Inc.
750
East Interstate 30
Suite
100
Rockwall,
TX 75087
(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes
x
No
¨
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 (§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
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer
¨
|
|
Accelerated
filer
¨
|
|
Non-accelerated
filer
¨
(Do
not check if a smaller reporting company)
|
|
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
September 30, 2009, the Company had 22,072,000 shares of common stock issued and
outstanding.
Diguang
International Development Co., Ltd.
Form
10-Q
For the
Quarter Ended September 30, 2009
Table of
Contents
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Page
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Part
I - Financial Information
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3
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Item
1. Financial Statements
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3
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Consolidated Statement
of Financial Position
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4
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Consolidated
Statements of Operations and Comprehensive Income
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5
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Consolidated
Statements of Cash Flows
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6
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Notes
to Consolidated Financial Statements
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7
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Item
2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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17
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Item
3. Quantitative and Qualitative Disclosures About Market
Risk
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28
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Item
4T. Controls and Procedures
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28
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Part
II - Other Information
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29
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Item
1. Legal Proceedings
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29
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Item
1A. Risk Factors.
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29
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Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
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29
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Item
3. Defaults Upon Senior Securities
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29
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Item
4. Submission of Matters to a Vote of Security Holders
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29
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Item
5. Other Information
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29
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Item
6. Exhibits
|
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29
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Signatures
|
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30
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Certifications
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PART
1 - FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS.
The
accompanying unaudited consolidated balance sheets, statements of income and
comprehensive income, and statements of cash flows and the related notes
thereto, have been prepared in accordance with generally accepted accounting
principles in the United States of America (“GAAP”) for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission (“SEC”). Accordingly, they do not include all of the
disclosures required by GAAP for complete financial statements. The financial
statements reflect all adjustments, consisting only of normal, recurring
adjustments, which are, in the opinion of management, necessary for a fair
presentation for the interim periods.
The
accompanying financial statements should be read in conjunction with the notes
to the aforementioned financial statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations and the financial
statements and notes thereto included in the Annual Report on Form 10-K for the
year ended December 31, 2008, as amended.
The
results of operations for the three-month and nine-month periods ended September
30, 2009 are not necessarily indicative of the results to be expected for the
entire fiscal year or any other period.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION
(In
US Dollars)
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
(Adjusted)
|
|
|
(Unaudited)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
15,024,363
|
|
|
$
|
9,447,864
|
|
|
Restricted
cash
|
|
|
-
|
|
|
|
4,340,769
|
|
|
Accounts
receivable, net of allowance for doubtful accounts $655,893 and
$655,671
|
|
|
9,944,208
|
|
|
|
13,238,497
|
|
|
Inventories,
net of provision $2,081,334 and $2,649,290
|
|
|
7,285,860
|
|
|
|
9,668,601
|
|
|
Other
receivables, net of provision $101,020 and $100,002
|
|
|
535,493
|
|
|
|
424,701
|
|
|
VAT
recoverable
|
|
|
112,842
|
|
|
|
369,811
|
|
|
Advance
to suppliers
|
|
|
602,017
|
|
|
|
973,688
|
|
|
Deferred
tax asset
|
|
|
28,485
|
|
|
|
-
|
|
|
Total
current assets
|
|
|
33,533,268
|
|
|
|
38,463,931
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment,
net of impairment $779,302 and $779,302
|
|
|
720,698
|
|
|
|
720,698
|
|
|
Property,
plants and equipment, net
|
|
|
19,369,200
|
|
|
|
17,983,687
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
53,623,166
|
|
|
$
|
57,168,316
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Bank
loans
|
|
$
|
4,397,215
|
|
|
$
|
13,143,314
|
|
|
Accounts
payable
|
|
|
15,643,476
|
|
|
|
15,687,458
|
|
|
Advance
from customers
|
|
|
561,282
|
|
|
|
549,832
|
|
|
Accruals
and other payables
|
|
|
2,337,800
|
|
|
|
2,238,520
|
|
|
Accrued
payroll and related expense
|
|
|
626,277
|
|
|
|
660,845
|
|
|
Income
tax payable
|
|
|
401,260
|
|
|
|
383,759
|
|
|
Amount
due to related parties
|
|
|
674,548
|
|
|
|
-
|
|
|
Amount
due to stockholders
|
|
|
1,005,480
|
|
|
|
935,853
|
|
|
Total
current liabilities
|
|
|
25,647,338
|
|
|
|
33,599,581
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
funding advanced
|
|
|
644,925
|
|
|
|
644,575
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
26,292,263
|
|
|
|
34,244,156
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
|
Common
stock, par value $0.001 per share, 50 million shares authorized,
22,593,000 and 22,593,000 shares issued, 22,072,000 and 22,072,000 shares
outstanding
|
|
|
22,593
|
|
|
|
22,593
|
|
|
Additional
paid-in capital
|
|
|
20,600,460
|
|
|
|
20,901,940
|
|
|
Treasury
stock at cost
|
|
|
(674,455
|
)
|
|
|
(674,455
|
)
|
|
Appropriated
earnings
|
|
|
802,408
|
|
|
|
795,740
|
|
|
Accumulated
deficit
|
|
|
(443,829
|
)
|
|
|
(4,702,304
|
)
|
|
Translation
adjustment
|
|
|
4,503,022
|
|
|
|
4,309,975
|
|
|
Total
shareholders’ equity
|
|
|
24,810,199
|
|
|
|
20,653,489
|
|
|
Non-controlling
interest
|
|
|
2,520,704
|
|
|
|
2,270,671
|
|
|
Total
equity
|
|
|
27,330,903
|
|
|
|
22,924,160
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and equity
|
|
$
|
53,623,166
|
|
|
$
|
57,168,316
|
|
See
accompanying notes to financial statements.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
CONSOLIDATED
STATEMENTS OF OPERATIONS
AND
COMPREHENSIVE INCOME
(In
US Dollars)
|
|
|
Nine Months Ended
September 30,
|
|
|
Three Months Ended
September 30,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
net
|
|
$
|
46,696,057
|
|
|
$
|
29,659,356
|
|
|
$
|
13,599,288
|
|
|
$
|
13,456,366
|
|
|
Cost
of sales
|
|
|
40,994,317
|
|
|
|
27,699,850
|
|
|
|
12,718,211
|
|
|
|
12,518,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
5,701,740
|
|
|
|
1,959,506
|
|
|
|
881,077
|
|
|
|
938,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expense
|
|
|
1,264,818
|
|
|
|
1,653,102
|
|
|
|
481,837
|
|
|
|
714,206
|
|
|
Research
and development costs
|
|
|
978,377
|
|
|
|
1,486,377
|
|
|
|
326,774
|
|
|
|
460,946
|
|
|
General
and administrative expenses
|
|
|
3,766,713
|
|
|
|
3,185,343
|
|
|
|
1,305,495
|
|
|
|
997,932
|
|
|
Loss
on disposing assets
|
|
|
-
|
|
|
|
30,487
|
|
|
|
-
|
|
|
|
10,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(308,168
|
)
|
|
|
(4,395,803
|
)
|
|
|
(1,233,029
|
)
|
|
|
(1,245,232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
(170,604
|
)
|
|
|
(285,759
|
)
|
|
|
(48,150
|
)
|
|
|
(126,251
|
)
|
|
Investment
income (loss)
|
|
|
66,052
|
|
|
|
800
|
|
|
|
36,873
|
|
|
|
-
|
|
|
Other
income (expense)
|
|
|
(189,730
|
)
|
|
|
197,937
|
|
|
|
23,619
|
|
|
|
87,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income tax
|
|
|
(602,450
|
)
|
|
|
(4,482,825
|
)
|
|
|
(1,220,687
|
)
|
|
|
(1,283,739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
125,653
|
|
|
|
30,927
|
|
|
|
885
|
|
|
|
(646
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(728,103
|
)
|
|
|
(4,513,752
|
)
|
|
|
(1,221,572
|
)
|
|
|
(1,283,093
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to non-controlling interest
|
|
|
269,932
|
|
|
|
(248,609
|
)
|
|
|
79,981
|
|
|
|
(65,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common shares
|
|
$
|
(998,035
|
)
|
|
$
|
(4,265,143
|
)
|
|
$
|
(1,301,553
|
)
|
|
$
|
(1,217,550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding – basic
|
|
|
22,245,762
|
|
|
|
22,072,000
|
|
|
|
22,137,326
|
|
|
|
22,072,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses
per share – basic
|
|
|
(0.04
|
)
|
|
|
(0.19
|
)
|
|
|
(0.06
|
)
|
|
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding – diluted
|
|
|
22,245,762
|
|
|
|
22,072,000
|
|
|
|
22,137,326
|
|
|
|
22,072,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses
per shares – diluted
|
|
|
(0.04
|
)
|
|
|
(0.19
|
)
|
|
|
(0.06
|
)
|
|
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
2,232,841
|
|
|
|
(194,471
|
)
|
|
|
270,344
|
|
|
|
8,346
|
|
|
Comprehensive
income (loss)
|
|
|
1,504,738
|
|
|
|
(4,708,223
|
)
|
|
|
(951,228
|
)
|
|
|
(1,274,747
|
)
|
|
Comprehensive
income (loss) attributable to non-controlling interest
|
|
|
397,073
|
|
|
|
(250,033
|
)
|
|
|
103,996
|
|
|
|
(64,179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income attributable to common shares
|
|
$
|
1,107,665
|
|
|
$
|
(4,458,190
|
)
|
|
$
|
(1,055,224
|
)
|
|
$
|
(1,210,568
|
)
|
See
accompanying notes to financial statements.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Increase
(Decrease) in Cash and Cash Equivalents
(In
US Dollars)
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(728,103
|
)
|
|
$
|
(4,513,752
|
)
|
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,417,240
|
|
|
|
1,219,618
|
|
|
Inventory
provision
|
|
|
55,884
|
|
|
|
568,265
|
|
|
Loss
on disposing assets
|
|
|
-
|
|
|
|
30,487
|
|
|
Share-based
compensation
|
|
|
427,378
|
|
|
|
301,480
|
|
|
Deferred
tax asset
|
|
|
-
|
|
|
|
28,485
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(4,963,204
|
)
|
|
|
(3,294,841
|
)
|
|
Inventory
|
|
|
(2,045,807
|
)
|
|
|
(2,953,544
|
)
|
|
Other
receivables
|
|
|
69,051
|
|
|
|
110,788
|
|
|
VAT
recoverable
|
|
|
403,225
|
|
|
|
(256,989
|
)
|
|
Prepayments
and other assets
|
|
|
(443,110
|
)
|
|
|
(371,720
|
)
|
|
Accounts
payable
|
|
|
209,445
|
|
|
|
238,456
|
|
|
Accruals
and other payable
|
|
|
(1,411,569
|
)
|
|
|
(64,672
|
)
|
|
Advance
from customers
|
|
|
244,442
|
|
|
|
(11,404
|
)
|
|
Accrued
interest payable to related parties
|
|
|
-
|
|
|
|
57,103
|
|
|
Taxes
payable
|
|
|
3,355
|
|
|
|
(17,492
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(6,761,773
|
)
|
|
|
(8,929,732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(3,336,543
|
)
|
|
|
(87,631
|
)
|
|
Purchase
of marketable securities
|
|
|
(41,126
|
)
|
|
|
-
|
|
|
Due
to related parties
|
|
|
(101,478
|
)
|
|
|
-
|
|
|
Proceeds
from disposal of fixed assets
|
|
|
-
|
|
|
|
29,152
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(3,479,147
|
)
|
|
|
(58,479
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Stock
repurchase
|
|
|
(242,870
|
)
|
|
|
-
|
|
|
Due
to related parties
|
|
|
(1,108,264
|
)
|
|
|
(800,912
|
)
|
|
Capital
infused by minority interest in North Diamond
|
|
|
737,500
|
|
|
|
|
|
|
Proceeds
from short-term bank facilities
|
|
|
4,292,521
|
|
|
|
8,741,354
|
|
|
Restricted
cash pledged for import facilities
|
|
|
-
|
|
|
|
(4,340,769
|
)
|
|
Research
funding advanced
|
|
|
72,995
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash received from financing activities
|
|
|
3,751,882
|
|
|
|
3,599,673
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of changes in foreign exchange rates
|
|
|
1,608,514
|
|
|
|
(187,961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(4,880,524
|
)
|
|
|
(5,576,499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of the period
|
|
|
16,250,727
|
|
|
|
15,024,363
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of the period
|
|
$
|
11,370,203
|
|
|
$
|
9,447,864
|
|
See
accompanying notes to financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 ─BUSINESS AND BASIS OF PRESENTATION
The
Company specializes in the design, production and distribution of small to
medium-sized Light Emitting Diode, “LED”, and Cold Cathode Fluorescent Lamp,
“CCFL”, backlights for various Thin Film Transistor Liquid Crystal Displays,
“TFT-LCD”, and Super-Twisted Nematic Liquid Crystal Display, “STN-LCD”, Twisted
Nematic Liquid Crystal Display, “TN-LCD”, and Mono LCDs, taken together, these
applications are referred to as “LCD” applications. Those applications
include color displays for cell phones, car televisions and navigation systems,
digital cameras, televisions, computer displays, camcorders, PDAs and DVDs, CD
and MP3/MP4 players, appliance displays and the like.
The
Company’s headquarter is in Shenzhen, China. The Company owns its subsidiaries
through Diguang Holdings. Diguang Holdings was established under the
law of the British Virgin Islands on July 27, 2004 and holds equity interests in
the following entities:
|
|
·
|
Well
Planner Limited, a Hong Kong based
entity;
|
|
|
·
|
Diguang
Science and Technology (HK) Limited, a British Virgin Islands based
entity;
|
|
|
·
|
Shenzhen
Diguang Electronics Co., Ltd., a China based
entity;
|
|
|
·
|
Wuhan
Diguang Electronics Co., Ltd.; and,
|
|
|
·
|
Dongguan
Diguang Electronics Science and Technology Co.
Ltd.
|
Well
Planner Limited, “Well Planner”, was established under the laws of Hong Kong
Special Administrative Region on April 20, 2001 and has been doing major
business in custom forwarding related to export and import activities conducted
by Diguang Electronics for a service fee based on a service agreement, pursuant
to which service fees should not be less than 2% of the goods Well Planner has
sold. Well Planner mainly sells to Diguang Science and Technology
(HK) Limited and has minimal sales to third-party customers.
Diguang
Science and Technology (HK) Limited, “Diguang Technology”, was established under
the laws of the British Virgin Islands on August 28, 2003 and has handled all
sales to international customers and procurements of electronic components and
materials for Diguang Electronics.
Both Well
Planner and Diguang Technology do not have any office space leased in Hong Kong
and British Virgin Islands.
Shenzhen
Diguang Electronics Co. Ltd., “Diguang Electronics”, was established as an
equity joint venture in Shenzhen under the laws of the People’s Republic of
China, the “PRC”, on January 9, 1996 with an operating life of 20 years starting
on that date. As of December 31, 2006, its registered capital was RMB 85
million, equivalent to approximately $10,573,615. Diguang Electronics designs,
develops and manufactures LED and CCFL backlight units. These backlight units
are essential components used in illuminating display panels such as TFT-LCD and
color STN-LCD panels. These display panels are used in products such as mobile
phones, PDAs, digital cameras, liquid crystal computer or television displays
and other household and industrial electronic devices. Diguang Electronics’
customers are located in both China and overseas.
NOTE
1 ─BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
Diguang
Holdings acquired 65% interest of North Diamond since January 3,
2007. North Diamond is a holding company of
Dihao (Yangzhou) Co., Ltd.,
“
Dihao”
,
an operating entity, which is
registered in the Yangzhou
City De
velopment
Zone, Jiangsu Province, China.
Dihao conducts business
activities of developing, manufacturing and marketing backlight products for
large size electronic display devices and provides relevant technical services
in China.
Diguang
Electronics and Diguang Holdings jointly set up Wuhan Diguang Electronics Co.,
Ltd., “Wuhan Diguang”, in Wuhan, Hubei Province, China, with a registered
capital of $1 million, of which 70% was infused by Diguang Electronics and the
remaining 30% by Diguang Holdings. Wuhan Diguang was established on
March 13, 2007 and its business license issued by Wuhan Municipal Administrative
Bureau for Industry and Commerce is valid for 20 years expiring on March 12,
2027. Wuhan Diguang manufactures and sells LED and CCFL backlight
units in Central South region of China. Wuhan Diguang started
operation on July 1, 2007.
On
December 29, 2007, Diguang Holdings acquired 100% interest in Dongguan Diguang
Electronics Science and Technology Co. Ltd., “Dongguan Diguang
S&T”. On January 1, 2008, Diguang Holdings assigned 70% of
interest in Dongguan Diguang S&T to Diguang Electronics. Dongguan Diguang
S&T was established under the laws of the People’s Republic of China on
February 16, 2004 and has been used by Diguang Electronics as the production
base since its inception.
NOTE
2 ─ RECENT ACCOUNTING PRONOUNCEMENTS
Adoption
of FASB Accounting Standards Codification
The
issuance of FASB Accounting Standards Codification (“FASB ASC”) on July 1, 2009
(effective for interim or annual reporting periods ending after September 15,
2009) establishes the FASB Accounting Standards Codification as the sole source
of authoritative generally accepted accounting principles. Pursuant to the
provisions of FASB ASC, the Company has updated references to U.S. GAAP in its
financial statements issued for the period ended September 30, 2009. The
adoption of FASB ASC did not impact the Company’s financial position or results
of operations.
Adoption
of FASB ASC 805
Effective
January 1, 2009, the Company adopted FASB ASC 805, “
Business
Combinations.”
FASB ASC 805 changed accounting for
acquisitions that close beginning in 2009. FASB ASC 805 extends its
applicability to all transactions and other events in which one entity obtains
control over one or more other businesses. It broadens the fair value
measurement and recognition of assets acquired, liabilities assumed, and
interests transferred as a result of business combinations. FASB ASC
805 expands on required disclosures to improve the statement users’ abilities to
evaluate the nature and financial effects of business
combinations. The adoption of FASB ASC 805 did not have a material
impact on the Company’s financial statements.
NOTE
2 ─ RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
Adoption
of FASB ASC 805-20
Effective
January 1, 2009, the Company adopted FASB ASC 805-20, “
Noncontrolling Interests in
Consolidated Financial Statements.”
FASB ASC 805-20 requires
that a non-controlling interest in a subsidiary be reported as equity and the
amount of consolidated net income specifically attributable to the
noncontrolling interest be identified in the consolidated financial
statements. It also calls for consistency in the manner of reporting
changes in the parent’s ownership interest and requires fair value measurement
of any noncontrolling equity investment retained in a
deconsolidation. FASB ASC 805-20 requires retroactive adoption of the
presentation and disclosure requirements for existing minority
interests.
Adoption
of FASB ASC 815
Effective
January 1, 2009, the Company adopted FASB ASC 815, “
Disclosures about Derivative
Instruments and Hedging Activities.
” FASB ASC 815 requires
enhanced disclosures about (i) how and why the Company uses derivative
instruments, (ii) how the Company accounts for derivative instruments and
related hedged items, and (iii) how derivative instruments and related hedged
items affect the Company’s financial results. The adoption FASB ASC
815 did not have any impact on the Company’s financial statements.
Adoption
of FASB ASC 350-30
Effective
January 1, 2009, the Company adopted FASB ASC 350-30, “
Determination of the Useful Life of
Intangible Assets.
” FASB ASC 350-30 amended the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset. The
adoption of FASB ASC 350-30 did not have material impact on the Company’s
financial statements.
Adoption
of FASB ASC 470-20
Effective
January 1, 2009, the Company adopted FASB ASC 470-20, “
Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement).
” FASB ASC 470-20 requires entities to account
separately for the liability and equity components of a convertible debt
security by measuring the fair value of a similar nonconvertible debt security
when interest cost is recognized in subsequent periods. FASB ASC
470-20 requires entities to retroactively separate the liability and equity
components of such debt on the entities’ balance sheets on a fair value
basis. The adoption of FASB ASC 470-20 did not have any impact on the
Company’s financial statements.
NOTE
3 ─ ALLOWANCE FOR ACCOUNTS RECEIVABLE
During
the normal course of business, the Company extends unsecured credit to its
customers. Typically credit terms require payment to be made within
90 days of the invoice date. The Company does not require collateral from its
customers. The Company regularly evaluates and monitors the
creditworthiness of each customer on a case-by-case basis. The
Company includes any account balances that are determined to be uncollectible in
the allowance for doubtful accounts. After all attempts to collect a
receivable have failed, the receivable is written off against the
allowance. Based on the information available to management, the
Company believes that its allowance for doubtful accounts as of
December 31, 2008 and September 30, 2009 were adequate,
respectively. However, actual write-off might exceed the recorded
allowance.
The
following table presents allowance activities in accounts
receivable.
|
|
|
December
31,
|
|
|
September
30,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
680,784
|
|
|
$
|
655,893
|
|
|
Additions
charged to expense
|
|
|
286,931
|
|
|
|
-
|
|
|
Translation
changes
|
|
|
-
|
|
|
|
(222
|
)
|
|
Write-off
|
|
|
(311,822
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
655,893
|
|
|
$
|
655,671
|
|
NOTE
4 ─ INVENTORIES
Inventories
consisted of the following:
|
|
|
December
31,
|
|
|
September
30,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
4,629,926
|
|
|
$
|
5,749,176
|
|
|
Work
in progress
|
|
|
704,877
|
|
|
|
1,559,245
|
|
|
Finished
goods
|
|
|
3,111,681
|
|
|
|
2,960,611
|
|
|
Consignment
goods
|
|
|
920,710
|
|
|
|
2,048,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,367,194
|
|
|
|
12,317,891
|
|
|
Provision
|
|
|
(2,081,334
|
)
|
|
|
(2,649,290
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Inventories,
net
|
|
$
|
7,285,860
|
|
|
$
|
9,668,601
|
|
NOTE
5 ─ PROPERTY AND EQUIPMENT
A summary
of property and equipment at cost is as follows:
|
|
|
December
31,
|
|
|
September
30,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Land
usage rights
|
|
$
|
3,201,055
|
|
|
$
|
3,199,320
|
|
|
Plant
and office buildings
|
|
|
11,720,336
|
|
|
|
11,493,426
|
|
|
Machinery
|
|
|
5,205,448
|
|
|
|
5,145,049
|
|
|
Office
equipment
|
|
|
1,348,348
|
|
|
|
1,415,221
|
|
|
Vehicles
|
|
|
334,742
|
|
|
|
259,698
|
|
|
Software
|
|
|
140,945
|
|
|
|
153,302
|
|
|
Leasehold
improvement
|
|
|
2,147,683
|
|
|
|
2,126,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,098,557
|
|
|
|
23,792,997
|
|
|
Accumulated
depreciation
|
|
|
(4,729,357
|
)
|
|
|
(5,809,310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,369,200
|
|
|
$
|
17,983,687
|
|
The
depreciation and amortization for the nine-months ended September
30
, 2008 and 2009
were $1,417,240 and $1,219,618 respectively.
NOTE
6 ─ RELATED PARTY TRANSACTIONS
Related
Party Relationships
|
Name of Related Parties
|
|
|
Relationship with the
Company
|
|
|
|
|
|
|
Mr.
Yi Song
|
|
|
One
of the shareholders of the Company
|
|
Mr.
Hong Song
|
|
|
One
of the shareholders of the Company
|
|
Shenzhen
Diguang Engine & Equipment Co., Ltd., a China based
entity
|
|
|
80%
owned by Mr. Yi Song and 20% owned by Mr. Hong Song
|
|
Sino
Olympics Industrial Limited
|
|
|
The
representative of Song’s
brothers
|
The
break-down details of due to related parties were summarized as
follows:
|
Amount due to
|
|
Diguang Engine
|
|
|
Stockholders
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1 , 2009
|
|
$
|
674,548
|
|
|
$
|
1,005,480
|
|
|
$
|
1,680,028
|
|
|
Accrued
interest
|
|
|
17,060
|
|
|
|
40,043
|
|
|
|
57,103
|
|
|
Payments
made
|
|
|
(691,242
|
)
|
|
|
(109,670
|
)
|
|
|
(800,912
|
)
|
|
Translation
adjustment
|
|
|
(366
|
)
|
|
|
-
|
|
|
|
(366
|
)
|
|
Balance
at September 30, 2009
|
|
$
|
-
|
|
|
|
935,853
|
|
|
|
935,853
|
|
After
acquiring 100% interest in Dongguan Diguang S&T, the Company assumed the
loan of RMB 10 million borrowed by Dongguan Diguang S&T from Shenzhen
Diguang Engine and Equipment on October 20, 2006. The loan matured on
November 30, 2008 and was repaid in full on April 10, 2009.
The
purchase price of Dongguan Diguang S&T was $4.2 million, of which $2 million
was paid in 2007. The remaining $2.2 million presenting on the
balance sheet as amount due to stockholders would be repaid through four
installment payments on June 30, 2008, December 31, 2008, March 31, 2009 and
June 30, 2009, respectively. The balance of $935,853 was due on
September 30, 2009, among which, $40,043 was accrued interest and $895,810 was
outstanding purchase consideration. The Company has agreed with stockholders to
pay the balance at the end of this year, but no formal extension agreement was
signed.
NOTE
7 ─ BANK LOANS
Loans
from Shenzhen Ping’an Bank
On May 7
and June 5, 2009, Diguang Electronics renewed its bank loan of RMB 30 million,
equivalent to $4,394,832 as of September 30, 2009, with Shenzhen Ping’an Bank as
two stand alone loans of RMB 15 million each, which will mature on December 1
and December 5, 2009, respectively. Pursuant to the renewed loan
agreements, the plant in Dongguan Diguang S&T with net book value of
$4,475,264 was put as pledge and the prevailing annual standard rate was 5.31%
and 4.86% under the stipulation from the People's Bank of China.
Diguang
Electronics received bank loans of $2,194,175 and $2,159,475 for import
financing purposes from Shenzhen Ping’an Bank on May 15, 2009 and June 12, 2009,
respectively. The loans will mature in one year and have annual rates
of 1.74% and 1.9425%. The proceeds of the above $4,353,650 loans were
received in U.S. Dollars, which is foreign currency to Diguang Electronics; and
the loans were guaranteed by an equivalent cash deposit in local currency of RMB
29,630,958, with an annual deposit rate of 2.25%.
Loan
agreements with China Development Bank Co., Ltd.
On May
18, 2009, the Board of Directors of the Company approved the application of
Diguang Electronics for banking facilities of RMB100 million from China
Development Bank Co., Ltd. The banking facilities will be used in
connection with the construction of a new plant located on another piece of land
owned by Diguang Electronics. The application of RMB100 million bank
facilities is still under procedures of approval of China Development Bank Co.,
Ltd.
On June
25, 2009, Diguang Electronics entered into a loan agreement with China
Development Bank Co., Ltd. to borrow RMB30 million, which will be included in
the aforementioned RMB100 million facilities when the final approval procedures
are completed. Diguang Electronics received RMB30 million from China
Development Bank Co., Ltd. on July 3, 2009. The loan bears an annual
rate of 5.31%, the current benchmark interest rate pronounced by the People's
Bank of China, and will mature in one year. The obligations are
secured by the followings: two joint and several personal guarantees from Mr.
Song Yi and Mr. Song Hong, directors of the Company; a collateral placed on the
office space owned by Diguang Electronics with a carrying amount of $2,261,339;
a collateral placed on the land use rights on a piece of land located in the
Bao'an District of Shenzhen with a carrying amount of $2,413,517.
NOTE
8 ─ EQUITY TRANSACTIONS
In
accordance with the signed share exchange agreement, the shareholders of Diguang
International Holdings Limited will be granted certain incentive shares if the
Company (post reverse merger) meets certain financial performance
criteria. The incentive shares and financial performance criteria are
as follows:
|
|
|
2009
|
|
|
Sino
Olympics Industries Limited
|
|
|
2,000,000
|
|
|
After-tax Profit Target (in million)
(1)
|
|
$
|
43.1
|
|
|
(1)
|
After-tax
profit targets shall be the income from operations, less taxes paid or
payable with regard to such income, excluding the effect on income from
operations, if any, resulting from issuance of Incentive Shares in any
year.
|
The
Company accounts for the transactions of issuing these incentive shares based on
the fair value on the grant date. Under SFAS 123R, the Company
assesses whether it is probable at the grant date the awards would be earned and
if it is probably the expense would be recorded over the period, which in this
case is specified as whether the shareholders of the Company can earn any of the
above presented shares each year. The after-tax profit target for the
year ended December 31, 2006, 2007 and 2008, respectively, had not been met and
no share-based compensation was recorded for the Song Brothers during those
reporting periods. The Company estimated that the net income for nine months
ended September 30, 2009 would not meet the proportion of the after-tax profit
target for the entire year and did not book any share-based compensation during
this reporting period.
NOTE
9 ─ STOCK OPTIONS
The
Company recognized the share-based compensation cost based on estimated
grant-date fair value. There were no stock options issued before
January 1, 2006.
On July
15, 2007, the Company entered into a two years Consultancy Agreement with Mr.
Chen Min. On July 10, 2009, just before termination of the Consultancy
Agreement, the Board of Directors of the Company granted 50,000 shares of stock
option to Mr. Chen Min for the past consulting service rendered. The
50,000 shares of stock option vested at the grant date and the option may be
exercised for sixty months after termination of the above mentioned Consultancy
Agreement. The share option has a fair value of $24,500 and was
recognized as compensation cost immediately upon the granting.
Assumptions
The fair
value of each stock option granted was estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions, assuming no
expected dividends:
|
|
|
September 30,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Expected
volatility
|
|
|
95.76
|
%
|
|
|
271.4
|
%
|
|
Weighted
average volatility
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Expected
term
|
|
7
years
|
|
|
2.5
years
|
|
|
Risk
free interest rate
|
|
|
3.75
|
%
|
|
|
1.32
|
%
|
The
risk-free rates are consistent with the expected terms of stock option and based
on the U.S. Treasury yield curve in effect at the time of grant. The
Company estimated the forfeiture rate of its stock options was
6.13%.
Stock
Option Plan
The
Company’s 2006 Stock Incentive Plan, the “2006 Plan”, which is
shareholder-approved, permits the grant of stock options to its employees up to
1,500,000 shares of common stock. The Company believes that such
awards better align the interests of its employees with those of its
shareholders. Option awards are generally granted with an exercise
price per share equal to the five-day average share price before the Board of
Directors’ approval. These options have up to ten-year contractual
life term.
Awards
generally vest over four years in equal installments on the next four succeeding
anniversaries of the grant date. The share-based compensation will be recognized
based on graded vesting method over the four years or over the three years
regarding the options granted to directors in order to match their directorship
terms. A summary of option activities under the 2006 Plan during the
nine months ended September 30, 2009 are presented as follows:
|
Stock Options
|
|
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Weighted -
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value at
Reporting
Date
|
|
|
Outstanding
at January 1, 2009
|
|
|
1,288,667
|
|
|
$
|
1.69
|
|
|
|
9.13
|
|
|
|
-
|
|
|
Granted
|
|
|
50,000
|
|
|
|
0.51
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
or expired
|
|
|
(10,750
|
)
|
|
|
11.10
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding
at September 30, 2009
|
|
|
1,327,917
|
|
|
|
1.62
|
|
|
|
8.96
|
|
|
$
|
-
|
|
|
Exercisable
at September 30, 2009
|
|
|
465,278
|
|
|
$
|
3.59
|
|
|
|
7.03
|
|
|
$
|
-
|
|
The
trading price of the Company’s common stock at September 30, 2009 was $0.40 per
share, no intrinsic value for options outstanding as of September 30, 2009 was
reported.
As
stock-based compensation expense recognized in the unaudited consolidated
statements of income for the nine months ended September 30, 2008 and 2009 was
based on awards ultimately expected to vest, it has been reduced for estimated
forfeitures. Forfeitures are estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. Forfeitures were estimated based on historical
experience. For the nine months ended September, 2008 and 2009,
stock-based compensation expenses recognized were $427,378 and $301,480
respectively.
NOTE
10 ─ RECONCILIATION OF EQUITY
|
|
|
Equity attributable
to common shares
|
|
|
Equity
attributable to
non-controlling
interest
|
|
|
Total equity
|
|
|
Balance
at January 1, 2009
|
|
|
24,810,199
|
|
|
|
2,520,704
|
|
|
|
27,330,903
|
|
|
Fair
value of stock option vested
|
|
|
301,480
|
|
|
|
-
|
|
|
|
301,480
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(4,265,143
|
)
|
|
|
(248,609
|
)
|
|
|
(4,513,752
|
)
|
|
Other
comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
(193,047
|
)
|
|
|
(1,424
|
)
|
|
|
(194,471
|
)
|
|
Comprehensive
loss
|
|
|
(4,458,190
|
)
|
|
|
(250,033
|
)
|
|
|
(4,708,223
|
)
|
|
Balance
at September 30, 2009
|
|
|
20,653,489
|
|
|
|
2,270,671
|
|
|
|
22,924,160
|
|
NOTE
11 ─ EARNINGS (LOSSES) PER SHARE
The
following table sets forth the computation of basic and diluted net earnings per
share for the periods indicated:
|
|
|
Nine Months Ended
September 30,
|
|
|
Three Months Ended
September 30,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common shareholders
|
|
$
|
(998,035
|
)
|
|
$
|
(4,265,143
|
)
|
|
$
|
(1,301,553
|
)
|
|
$
|
(1,217,550
|
)
|
|
Net
income (loss) used in computing diluted earnings per share
|
|
$
|
(998,035
|
)
|
|
$
|
(4,265,143
|
)
|
|
$
|
(1,301,553
|
)
|
|
$
|
(1,217,550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding – basic
|
|
|
22,245,762
|
|
|
|
22,072,000
|
|
|
|
22,137,326
|
|
|
|
22,072,000
|
|
|
Potential
diluted shares from stock options granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Weighted
average common share outstanding – diluted
|
|
|
22,245,762
|
|
|
|
22,072,000
|
|
|
|
22,137,326
|
|
|
|
22,072,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (losses) per share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.06
|
)
|
|
Diluted
earnings (losses) per share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.06
|
)
|
As
previously noted, all outstanding options are considered anti-dilutive for the
nine and three months ended September 30, 2008 and 2009.
NOTE
12 ─ SEGMENT REPORTING
The
Company currently operates mainly in backlight production with small portion of
new products of LED general lighting, Liquid Crystal Display and mini-computer
assembly. As the Company’s major production base is in China while
export revenue and net income in overseas entities is accounted for a
significant portion of total consolidated revenue and net income, management
believes that the following tables present useful information to chief operation
decision makers for measuring business performance, financing needs, and
preparing corporate budget, etc.
|
|
|
Nine Months Ended
September 30,
|
|
|
Three Months Ended September
30,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
to China domestic customers
|
|
$
|
12,929,883
|
|
|
$
|
11,745,244
|
|
|
$
|
4,231,409
|
|
|
$
|
5,654,407
|
|
|
Sales
to international customers
|
|
|
33,766,174
|
|
|
|
17,914,112
|
|
|
|
9,367,879
|
|
|
|
7,801,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
46,696,057
|
|
|
$
|
29,659,356
|
|
|
$
|
13,599,288
|
|
|
$
|
13,456,366
|
|
NOTE
12 ─ SEGMENT REPORTING (Continued)
|
|
|
China
|
|
|
International
|
|
|
|
|
|
|
|
Customers
|
|
|
Customers
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
nine months ended and as of September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
12,929,883
|
|
|
$
|
33,766,174
|
|
|
$
|
46,696,057
|
|
|
Gross
margin
|
|
|
11
|
%
|
|
|
12
|
%
|
|
|
12
|
%
|
|
Receivable
|
|
|
5,971,824
|
|
|
|
11,934,943
|
|
|
|
17,906,767
|
|
|
Inventory
|
|
|
9,587,866
|
|
|
|
-
|
|
|
|
9,587,866
|
|
|
Property
and equipment
|
|
|
18,639,295
|
|
|
|
-
|
|
|
|
18,639,295
|
|
|
Expenditures
for long-lived assets
|
|
|
3,336,543
|
|
|
|
-
|
|
|
|
3,336,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
nine months ended and as of September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
11,745,244
|
|
|
$
|
17,914,112
|
|
|
$
|
29,659,356
|
|
|
Gross
margin
|
|
|
8
|
%
|
|
|
6
|
%
|
|
|
7
|
%
|
|
Receivable
|
|
|
6,716,631
|
|
|
|
6,521,866
|
|
|
|
13,238,497
|
|
|
Inventory
|
|
|
9,668,601
|
|
|
|
-
|
|
|
|
9,668,601
|
|
|
Property
and equipment
|
|
|
17,983,687
|
|
|
|
-
|
|
|
|
17,983,687
|
|
|
Expenditures
for long-lived assets
|
|
|
87,631
|
|
|
|
-
|
|
|
|
87,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
three months ended and as of September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
4,231,409
|
|
|
$
|
9,367,879
|
|
|
$
|
13,599,288
|
|
|
Gross
margin
|
|
|
(8
|
)%
|
|
|
13
|
%
|
|
|
6
|
%
|
|
Receivable
|
|
|
5,971,824
|
|
|
|
11,934,943
|
|
|
|
17,906,767
|
|
|
Inventory
|
|
|
9,587,866
|
|
|
|
-
|
|
|
|
9,587,866
|
|
|
Property
and equipment
|
|
|
18,639,295
|
|
|
|
-
|
|
|
|
18,639,295
|
|
|
Expenditures
for long-lived assets
|
|
|
3,336,543
|
|
|
|
-
|
|
|
|
3,336,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
three months ended and as of September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
5,654,407
|
|
|
$
|
7,801,959
|
|
|
$
|
13,456,366
|
|
|
Gross
margin
|
|
|
7
|
%
|
|
|
7
|
%
|
|
|
7
|
%
|
|
Receivable
|
|
|
6,716,631
|
|
|
|
6,521,866
|
|
|
|
13,238,497
|
|
|
Inventory
|
|
|
9,668,601
|
|
|
|
-
|
|
|
|
9,668,601
|
|
|
Property
and equipment
|
|
|
17,983,687
|
|
|
|
-
|
|
|
|
17,983,687
|
|
|
Expenditures
for long-lived assets
|
|
|
87,631
|
|
|
|
-
|
|
|
|
87,631
|
|
NOTE
13 ─ SUBSEQUENT EVENTS
The
Company evaluated all events or transactions that occurred after September 30,
2009 up through November 14, 2009, the date the Company issued these financial
statements. During this period the Company did not have any material
recognizable subsequent events.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This
Report contains forward-looking statements, including statements that include
the words "believes," "expects," "estimates," "anticipates" or similar
expressions. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the Company’s
actual results, performance or achievements to differ materially from those
expressed or implied by such forward-looking statements. Risk factors
include, but are not limited to, costs associated with financing new products;
the Company’s ability to cost-effectively manufacture its products on a
commercial scale; the concentration of the Company’s current customer base;
competition; the Company’s ability to comply with applicable regulatory
requirements; potential need for expansion of the Company’s production facility;
the potential loss of a strategic relationship; inability to attract and retain
key personnel; management's ability to effectively manage the Company’s growth;
difficulties and resource constraints in developing new products; protection and
enforcement of the Company’s intellectual property and intellectual property
disputes; compliance with environmental laws; climate uncertainty; currency
fluctuations; control of the Company’s management and affairs by principal
shareholders.
The
reader should carefully consider, together with the other matters referred to
herein, the information contained under the caption "Risk Factors" in the
Company’s most recent Annual Report on Form 10-K for a more detailed description
of these significant risks and uncertainties. The Company cautions
the reader, however, not to unduly rely on these forward-looking
statements.
RISK
FACTORS
Investment
in the Company’s common stock involves risk. The investor should refer to
information contained under the caption “Risk Factors” in the Company’s most
recent Annual Report on Form 10-K. You should carefully consider the investing
risks before deciding to invest. The market price of the Company’s common stock
could decline due to any of these risks, in which case you could lose all or
part of your investment. In assessing these risks, you should also refer to the
other information included in this report, including the Company’s consolidated
financial statements and the accompanying notes. You should pay particular
attention to the fact that the Company is a holding company with substantial
operations in China and is subject to legal and regulatory environments that in
many respects differ from that of the United States. The Company’s
business, financial condition or results of operations could be affected
materially and adversely by any of the risks discussed below and any others not
foreseen. This discussion contains forward-looking statements.
Business
Overview
The
Company specializes in the design, production and distribution of small to
medium-sized Light Emitting Diode, “LED”, and Cold Cathode Fluorescent Lamp,
“CCFL”, backlights for various Thin Film Transistor Liquid Crystal Displays,
“TFT-LCD”, and Super-Twisted Nematic Liquid Crystal Display, “STN-LCD”, Twisted
Nematic Liquid Crystal Display, “TN-LCD”, and Mono LCDs, taken together, these
applications are referred to as “LCD” applications. Those applications
include color displays for cell phones, car televisions and navigation systems,
digital cameras, televisions, computer displays, camcorders, PDAs and DVDs, CD
and MP3/MP4 players, appliance displays and the like.
The
Company’s headquarter is in Shenzhen, China. The Company conducts its business
principally through the operations of Shenzhen Diguang Electronics Co., Ltd.,
“Diguang Electronics”, based in Shenzhen along with its main backlight
manufacturing operation in Dongguan, Guangdong Province, China, Dihao Co., Ltd.,
based in Yangzhou, “Dihao” and Wuhan Diguang Electronics Co., Ltd, based in
Wuhan, “Wuhan Diguang.” Shenzhen Diguang Electronics had approximately 1,954
full-time employees as of September 30, 2009.
Dihao is
a 100% wholly-owned subsidiary of North Diamond. The Company gained
controlling interest of Dihao by acquiring 65% of North Diamond on January 3,
2007. As of September 30, 2009, Dihao had approximately 183 full-time
employees.
Wuhan
Diguang was established on March 13, 2007 and commenced its operation on July 1,
2007. Wuhan Diguang was established with the capacity to provide
large inches of TFT-LCD which are mainly sold to its customers from Taiwan.
Wuhan Diguang had approximately 254 employees as of September 30,
2009.
Dongguan
Diguang Electronics Science and Technology Co. Ltd., “Dongguan Diguang S&T”,
was established to be the production base of Shenzhen Diguang Electronics Co
Ltd. It became a wholly-owned subsidiary of Diguang Holdings
since December 30, 2007 following acquisition. As of September 30,
2009, Dongguan Diguang S&T had approximately 89 full-time
employees.
Well
Planner is involved in the import of raw materials into China and export of
finished products from China.
Diguang
Science and Technology Limited, based in Hong Kong, is directly involved with
the international buying of raw materials and selling of backlight products for
Shenzhen Diguang Electronics. Diguang S&T purchases raw materials from
international suppliers and acts as an international sales group for both
Shenzhen Diguang Electronics and Well Planner.
Critical
Accounting Policies and Estimates
There
have been no significant changes in the critical accounting polices and
estimates disclosed in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included in the most recent Annual Report
on Form 10-K.
The
discussion and analysis of the Company’s financial condition presented in this
section are based on the Company’s financial statements, which have been
prepared in accordance with the generally accepted accounting principles in the
United States of America. The preparation of these financial
statements requires the use of estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amount of revenues and expenses during the reporting
period. Management periodically evaluates the estimates and judgments
made. Management bases its estimates and judgments on historical
experience and on various factors that management believes reasonable under the
circumstances. Actual results may differ from these estimates as a
result of different assumptions or conditions.
Results
of Operations
Comparison
of Three Months Ended September 30, 2009 and 2008
Revenue
Net
revenue was approximately $13.5 million for the three months ended September 30,
2009, nearly the same as $13.6 million for the third quarter of the prior year.
During the third quarter of the prior year, the worldwide finance crisis has
adversely affected and weakened market demand; and during the third quarter of
this year, the deeply depressed market demand has just slowly recovered from the
impact of the worldwide crisis. The similar amount of revenue during these two
quarters reflected such an impact. The Company’s effort to expand new market
mitigated a decrease of revenue in traditional products.
Although
the sale revenue was almost the same during the third quarter of 2009 and 2008,
the sales revenue varied in the three manufacturing facilities in Dongguan,
Wuhan and Yangzhou. There is a significant decrease of $1.4 million
in sales of mid-size LED CCFL and Liquid Crystal Module (LCM) products in the
Yangzhou facility, which was mainly due to loss of purchase orders from one of
its major customers since the fourth quarter of last year. The sales
revenue increase of $0.9 million and $0.4 million respectively in Shenzhen
Diguang Electronics, which has manufacture factory in Dongguan, and the Wuhan
facility, mitigated the decrease of sales revenue in the Yangzhou
facility.
The total
net revenue can be divided into international sales and domestic sales as
follows:
|
|
|
Three Months Ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
International
sales
|
|
|
7,802,000
|
|
|
|
9,368,000
|
|
|
Domestic
sales
|
|
|
5,654,000
|
|
|
|
4,231,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
13,456,000
|
|
|
|
13,599,000
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
sales amounted to 42% of total sales revenue in the third quarter of 2009,
compared with 31% in the same period of 2008. The increase trend in proportion
of domestic sales reflected both the adverse impact of the world wide financial
crisis in the international market and management’s effort in developing the
domestic market.
Sales to
international customers totaled $7.8 million for the three months ended
September 30, 2009, a decrease of $1.6 million, or 17%, compared with $9.4
million for the same period in the prior year. Loss of one major Hong
Kong customer led to a $2.3 million decrease of revenue, which was mitigated
partially by an $1.5 million increase of revenue from other new Hong Kong
customers. At the same time, loss of one major Taiwanese customer led to a $1.2
million decrease in revenue, which was slightly mitigated by an $0.4 million
increase in sales revenue from other Taiwanese customers.
Sales to
domestic customers were $5.7 million for the third quarter of 2009, an increase
of $1.5 million, or 36%, compared with $4.2 million for the same period in 2008.
The increase was mainly attributed to the high volume sales of approximately
$1.7 million to a new customer which was developed during the second quarter of
2009 by Shenzhen Diguang Electronics. In the meantime, the sales
revenue to existing domestic customers had a small decrease of $0.2
million.
The
Company currently has three manufacturing facilities in the East China region
(Yangzhou), Central China region (Wuhan), and Southern China region
(Dongguan). In particular, the Company has various capacities in the
principal manufacturing facility in Dongguan to serve customers who are Liquid
Crystal Display TV and monitor manufacturers and Liquid Crystal Display (LCD)
module assembly firms. Moreover, to expand the market, the Dongguan facility
developed and commenced to produce new products of LED general lightings from
the second quarter of 2008 and LCD from the second quarter of
2009. Based on the three manufacturing facilities, the Company
believes that it has strategically deployed the production capacity in China for
long term growth.
From the
product mix aspect, the sales can be divided into six main categories: CCFL
backlight, LED backlight, Liquid Crystal Module (LCM), LED general lighting,
Mini Note-books and Liquid Crystal Display (LCD) products as
follows.
|
|
|
Three Months Ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
LED
backlight
|
|
|
6,757,000
|
|
|
|
7,650,000
|
|
|
|
|
|
|
|
|
|
|
|
|
CCFL
backlight
|
|
|
2,884,000
|
|
|
|
4,722,000
|
|
|
|
|
|
|
|
|
|
|
|
|
LCM
|
|
|
3,694,000
|
|
|
|
1,160,000
|
|
|
|
|
|
|
|
|
|
|
|
|
LED
general lighting
|
|
|
21,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Mini
note-books
|
|
|
15,000
|
|
|
|
67,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquid
Crystal Display
|
|
|
85,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
13,456,000
|
|
|
|
13,599,000
|
|
|
|
|
|
|
|
|
|
|
|
Sales
revenue of LED backlight products totaled $6.8 million for the third quarter of
2009, a small decrease of $0.9 million compared with $7.7 million for the same
period in 2008. Loss of the major Taiwanese customer in Yangzhou
resulted in $0.6 million decrease in sales of LED backlight products. Also, the
Company lost a major Hong Kong customer, which contributed nearly $2.3 million
of mid size LED product sales in the third quarter of 2008; the decrease was
mitigated partially by increase in sales to other customers.
During
the three months ended September 30, 2009, sales revenue of CCFL backlights
totaled $2.9 million, a decrease of $1.8 million, or 38%, compared with $4.7
million in the same period of 2008. The sales revenue for CCFL
products accounted for 21% of total revenue, a decrease of 14% compared with 35%
for the same period in 2008. The decrease was the joint effect of the overall
slide in ending digital display products market and the market trend of
replacing CCFL products by LED products.
Under the
depressed market conditions, management concentrated on development of new
products in addition to looking for new customers for existing
products. The Company developed new products of LCM, LED general
lightings and Liquid Crystal Display since the second quarter of
2008. Sales of LCM amounted to $3.7 million in the third quarter of
2009, $2.5 million, or 208%, higher than $1.2 million in the same period of the
prior year. The Company successfully won $2.5 million sales orders of LCM
primarily from new customers during the third quarter of 2009.
The
Company ceased to produce mini note-books since the second quarter of 2009 due
to the aggressive market competition. Sales of mini note-books in the third
quarter of 2009 were to get rid of the inventory.
The
Company lost two of the major sales managers during the third quarter of
2009. Loss of these two sales managers may have an adverse impact on
the Company’s sales revenue in the near future.
Cost
of Sales
Since the
basic materials for all backlight products are similar, the Company discusses
cost of sales in the aggregate for all products. Cost of sales was $12.5 million
for the third quarter of 2009, a slight decrease of $0.2 million, or 1.6%,
compared with $12.7 million for the third quarter in 2008.
Raw
material cost was $10.7 million for the third quarter of 2009, an increase of
$0.7 million, or 7%, compared with $10 million for the third quarter of
2008. The increase of raw material cost was mainly due to an increase
of $412,000 inventory provision estimated in the third quarter of 2009. Yangzhou
Dihao recognized an impairment on inventory of $103,000 due to loss of its major
customers and subsequently obsolescence of inventories. Shenzhen
Diguang Electronics recognized $335,000 for obsolescent raw materials. The
obsolescence of raw material in Shenzhen Diguang was mainly caused by changes in
demands from customers as a result of the worldwide financial
crisis. Affected by the worldwide financial crisis, some customers
cancelled their orders and raw material prepared for such orders became idle and
obsolescent. The Company tried to reorganize its Business Unit model
during 2008 in order to enhance operating efficiency and
effectiveness. After the trial period, management realized that its
Business Unit model resulted in significant increases in slow-moving raw
materials and subsequently abandoned this model in the second quarter of
2009. Under the abandoned Business Unit Model, a business unit would
not use existing expensive raw materials in order to maximize its gross margin
even though all Business Units had been facing cancellation of sales orders,
revision of products design, and some over-purchased raw materials become
slow-moving raw materials. Management uses its best knowledge and judgment to
estimate the provision for slow-moving raw materials based on its current
understanding of future usage. If its current understanding of usage is reduced
in the future, further provision will be provided based on the estimates made by
management on the next reporting date.
Labor
cost was $948,000 for the third quarter of 2009, representing a decrease of
$752,000, or 44%, compared with $1.7 million for the same period of 2008. The
decrease of 44% for labor cost was higher than the decrease of 1.6% in cost of
sales. The Company has enhanced its control over labor costs and cut headcounts
of employees during the first nine months of 2009. As a percentage of
labor cost to revenue, labor cost accounted for 7% of total net revenue for the
third quarter of 2009, compared with 12% of total net revenue for the same
period in 2008.
Production
overhead was $818,000 for the three months ended September 30, 2009, a slight
decrease of $177,000, compared with $995,000 for the third quarter of 2008.
Since most of the production overhead expenses are relatively fixed, it did not
vary too much between periods.
Gross
Margin
The
overall gross margin for the third quarter of 2009 was 7%, a slight increase of
0.5%, compared with 6.5% for the same period in 2008. The Company’s effort in
reducing labor cost contributed to an increase of gross margin.
Selling
Expenses
Selling
expenses were $714,000 for the third quarter of 2009, an increase of $232,000,
or 48%, compared with $482,000 for the third quarter of 2008. The
increase of selling expenses was mainly due to the Company’s effort in promoting
its products and exploring the market. As a percentage of total revenue, selling
expenses were approximately 5.3% for the third quarter of 2009 and 3.5% for the
same period of 2008, respectively.
Research
and Development Expenses
Research
and development expenses were $461,000 for the third quarter of 2009, an
increase of $134,000, or 41%, compared with $327,000 for the same period in
2008. The increase was attributable mainly to mould charges which were incurred
for design and development of new products. As a percentage of total sales
revenue, research and development expenses were approximately 3.4% and 2.4% for
the three months ended September 30, 2009 and 2008, respectively.
General
and Administrative Expenses
General
and administrative expenses were $998,000 for the third quarter of 2009, a
decrease of $302,000, or 23%, compared with $1.3 million for the same period in
2008. The major components of general and administrative expenses
include payroll, share-based compensation, water and electricity fee, rental fee
and professional service etc. With the management’s efforts in
cutting expenditures, nearly all the expenses decreased to varying
extents. As a percentage of total sales revenue, general and
administrative expenses represented 7.4% and 9.6% for the three months ended
September 30, 2009 and 2008, respectively.
Interest
Expense
The net
interest expense was $126,000 for the quarter ended September 30, 2009,
representing an increase of $78,000, or 163%, compared with interest expenses of
$48,000, in the same period of 2008. Under the depressed economic
situation, the Company has to borrow more cash through bank loans to support its
operating and research and development activities, which resulted in higher
interest expenses. Net interest expenses for the three months ended
September 30, 2009 and 2008 represented 0.94% and 0.35% of total sales revenue,
respectively.
Income
Tax Provision
Income
tax provision was approximately negative $1,000 for the quarter ended September
30, 2009, compared with $1,000 for the same period in 2008. Considering the
depressed operating results, the Company did not recognize any deferred tax
assets for accumulated operating loss.
Net
Loss
Net loss
was $1.2 million for the three months ended September 30, 2009, compared with a
net loss of $1.3 million for the same period of 2008, representing a slight
decrease of approximately $100,000 in net loss.
Losses
per Share
The basic
losses per share were $0.06 for the third quarter of 2009, which was same as the
basic losses per share for the third quarter of 2008.
Comparison
of Nine Months Ended September 30, 2009 and 2008
Revenue
Net
revenue was approximately $29.7 million for the nine months ended September 30,
2009, a decrease of $17 million, or 36%, compared with $46.7 million for the
same period in the prior year. The decrease in revenue was mainly due
to the adverse effect of the worldwide financial crisis on the digital display
products market. The shrinkage market for automobile TV, portable DVD, MP3 and
MP4 and LCD product series resulted in a weak demand for the CCFL and LED
backlights. Although the market began to warm up since the third
quarter of 2009, the overall trend of decrease in sale revenue has not changed
yet.
Total net
revenue can be divided into international sales and domestic sales as
follows:
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
International
sales
|
|
|
17,914,000
|
|
|
|
33,766,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
sales
|
|
|
11,745,000
|
|
|
|
12,930,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
29,659,000
|
|
|
|
46,696,000
|
|
|
|
|
|
|
|
|
|
|
|
Sales to
international customers totaled $17.9 million for the nine months ended
September 30, 2009, a decrease of $15.9 million, or 47%, compared with $33.8
million for the same period of 2008. The decrease of international
sales contributed 93% of the overall decrease in sales revenue. The
world wide finance crisis has much more adverse impact on international sales
than on domestic sales. The Company lost some major international customers
during the finance crisis, which resulted in greatly diminished international
sales revenue.
Sales to
domestic customers were $11.7 million for the first nine months of 2009, a
decrease of $1.2 million, or 9%, compared with $12.9 million for the same period
in 2008. The decrease in domestic sales was mainly due to reduction
in sales of small and mid size LED backlight products used in mobile phones and
GPS products. On the other hand, there was an increase of $2.2
million in sales to a new domestic customer of mid size LED backlight used for
portable DVD.
From the
product mix aspect, the sales can be divided into six main categories: CCFL
backlight, LED backlight, LCM, LED general lighting, Mini Note-books and Liquid
Crystal Display products as follows.
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
CCFL
backlight
|
|
|
7,431,000
|
|
|
|
23,734,000
|
|
|
|
|
|
|
|
|
|
|
|
|
LED
backlight
|
|
|
15,405,000
|
|
|
|
21,114,000
|
|
|
|
|
|
|
|
|
|
|
|
|
LCM
|
|
|
5,679,000
|
|
|
|
1,781,000
|
|
|
|
|
|
|
|
|
|
|
|
|
LED
general lighting
|
|
|
587,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Mini
Note-books
|
|
|
369,000
|
|
|
|
67,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquid
Crystal Display
|
|
|
188,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
29,659,000
|
|
|
|
46,696,000
|
|
|
|
|
|
|
|
|
|
|
|
Sales of
LED backlight products totaled $15.4 million for the nine months ended September
of 2009, a decrease of $5.7 million, or 27%, compared with $21.1 million for the
same period in 2008. The degree of decrease in sales of LED backlights was less
than the degree of decrease in the total sales revenue; and sales of LED
products accounted for 52% of total sales for the first nine months of 2009, 7%
higher than 45% in the same period of 2008.
Sales of
CCFL backlights totaled $7.4 million for the first nine months of 2009, a
decrease of $16.3 million, or 69%, compared with $23.7 million for
2008. The rate of decrease in sales of CCFL products was higher than
that of the total sales revenue; and, CCFL products accounted for 25% of the
total sales revenue, compared with 51% for the same period in 2008. The changes
reflected the market trend of replacement of CCFL products by LED
products. In particular, one major customer changed its purchase
orders from CCFL to LED products during 2009.
Sales of
LCM had increased greatly in the first nine months of 2009. Total sales of LCM
products amounted to $5.7 million for the nine months ended on September 30,
2009, an increase of $3.9 million, or 217%, compared with sales of $1.8 million
in the same period of 2008. The market demand for LCM products,
especially large size LCM products, is growing during the year of 2009; the
Company seized the opportunity and actively acquired new customers to expand its
sales volume.
The
Company lost two of its major sales managers during the third quarter of
2009. Loss of these two sales managers may have an adverse impact on
the Company’s sales revenue in the near future.
Cost
of Sales
Since the
basic materials for all backlight products are similar, the Company discusses
cost of sales in the aggregate for all products. Cost of sales was $27.7 million
for the first nine months of 2009, a decrease of $13.3 million, or 32%, compared
with $41 million for the first nine months of 2008. The decrease in
cost of sales was primarily due to decline of sales revenue, but the decrease of
32% in cost of sales was lower than the decrease of 36% in total revenue for the
period. The major reason for the lower decrease rate in cost of sales was that
the Company recorded inventory provision of $570,000 in the first nine months of
2009.
Raw
material cost was $22.9 million for the first nine months of 2009, a decrease of
$10.2 million, or 31%, compared with $33.1 million for the same period of 2008.
The decrease in raw materials cost was mainly attributable to the decrease of
sales volume. Raw material cost accounted for 77% of total revenue in the first
nine months of 2009, compared with 71% in the first nine months of 2008. The
increase in material cost proportion was mainly due to an inventory provision of
$570,000 recorded in the first nine months of 2009 and the Company’s inability
to reduce the procurement cost of material in the same range as the decrease in
selling prices.
Labor
cost was $2.4 million for the first nine months of 2009, representing a decrease
of $2.6 million, or 52%, compared with $5 million for the same period of 2008.
The decrease of 52% in labor cost was higher than the decrease of 32% in cost of
sales. The Company has enhanced its control over labor costs and
cut headcounts of employees following the drop in sales volume and
production. As a percentage of labor cost to revenue, labor cost
accounted for 8% of total net revenue for the first nine months of 2009,
compared with 11% for the same period of 2008.
Production
overhead was $2.4 million for the first nine months of 2009, a slight decrease
of $0.4 million, or 14%, compared with $2.8 million for the same period of
2008. Since most of the production overhead expenses are relatively
fixed, it did not decrease in line with the reduced production
volume.
Gross
Margin
The
overall gross margin for the first nine months of 2009 was 7%, a 5% decrease,
compared with 12% gross margin for the same period of 2008. Under the
world wide financial crisis, reduced sales volume brought out relatively higher
production cost, which had an adverse impact on gross margin. On the
other hand, inventory provision of $570,000 recorded in the first three quarters
of 2009 contributed 2% of decrease in gross margin. The Company continued to
suffer price reduction pressure on nearly all its products, which continuously
reduced the gross margin, too.
Selling
Expenses
Selling
expenses were $1.7 million for the first nine months of 2009, an increase of
approximately $400,000, or 31%, compared with $1.3 million for the same period
of 2008. During the first nine months of 2009, the Company increased
its effort to promote its products and explore the market, which resulted in an
increase in expenses of payroll, exhibition, products samples and
travelling. The increase in promotion expenses has been mitigated by
a decrease in transportation charges, etc. As a percentage of total
sales revenue, selling expenses were approximately 5.6% and 2.7% for the nine
months ended September 30, 2009 and 2008, respectively.
Research
and Development Expenses
The net
research and development expense was approximately $1.5 million for the first
nine months of 2009, an increase of approximately $508,000, or 52%, compared
with $978,000 for the same period of 2008. The increase was mainly attributable
to mould charges incurred for new product design and development purposes. As a
percentage of total sales revenue, research and development expenses were
approximately 5% and 2% for the nine months ended September 30, 2009 and 2008,
respectively.
General
and Administrative Expenses
General
and administrative expenses was $3.2 million for the first nine months of 2009,
a decrease of $600,000, or 16%, compared with $3.8 million for the same period
in 2008. The major components of general and administrative expenses
include payroll, share-based compensation, water and electricity fee, rental fee
and professional service etc. With the management’s efforts in
cutting expenditures, nearly all the expenses decreased to varying
extents. As a percentage of total sales revenue, general and
administrative expenses represented 10.7% and 8.1% for the first nine months of
2009 and 2008, respectively.
Interest
Expense
The net
interest expense was $286,000 for the first nine months of 2009, representing an
increase of $115,000, compared with interest expense of $171,000 in the same
period of 2008. Under the depressed economic situation, the Company has to
borrow more cash through bank loans to support its operating and research and
development activities, which resulted in higher interest
expenses. Net Interest expenses for the periods ended September 30,
2009 and 2008 represented 0.96% and 0.37% of total sales revenue,
respectively.
Income
Tax Provision
Income
tax provision for the first nine months ended September 30, 2009 was
approximately $31,000, a decrease of $95,000 or 75%, compared with $126,000
provision for the same period of 2008. The income tax provision
accrued in 2009 was adjustment to the prior year provision. Considering the
continued suffering operating losses, the Company reversed the previously
recognized deferred tax assets of $28,000 and did not recognize any deferred tax
assets in relation to the accumulated operating losses incurred so
far.
Net
Loss
Net loss
was $4.3 million for the nine months ended September 30, 2009, compared with net
loss of $998,000 for the same period of 2008, representing an increase of
approximately $3.3 million in net loss. The loss suffered by the
Company in the first nine months of 2009 was mainly due to reduced sales revenue
and dropped gross margin, as a result of material impact from the worldwide
financial crisis. The increase in selling expenses, in research and
development expenses also contributed to the increase in net loss for the three
quarters in 2009.
Losses
per Share
The basic
losses per share were $0.19 for the first nine months of 2009, compared with
basic losses per share of $0.04 for the same period of 2008. Increase in basic
losses per share was due to increased net loss occurred in the first nine
months of 2009 compared with the net income in the same period of
2008.
Liquidity
and Capital Resources
As of
September 30, 2009, the Company had total assets of $57.2 million, of which cash
amounted to $9.4 million and restrict cash amounted to $4.3
million. Accounts receivable amounted to $13.2 million and
inventories amounted to $9.7 million respectively. The working
capital was approximately $4.9 million and the equity was $20.7 million compared
with working capital of $7.9 million and equity of $24.8 million on December 31,
2008. The quick ratio was approximately 0.86:1 as of September 30,
2009, compared with 1.02:1 as of December 31, 2008.
As of
September 30, 2009, the cash position had a net decrease of $5.6 million as
compared with cash position of $15 million as of December 31,
2008. During the first nine months of 2009, the operating activities
used $8.9 million of cash, among which $6.6 million was tied in working capital.
The Company increased $4.4 million bank loans to supplement its cash used in
operating activities. The Company is working with China Development
Bank for application of the total RMB100 million bank facilities, among which
RMB30 million was already received in early July and the remaining RMB70 million
will be available recently after some routine procedures. The Company believes
that the current available credit line will be sufficient to meet its working
capital needs.
Net cash
used in operating activities was $8.9 million for the nine months ended
September 30, 2009, an increase of $2.1 million, compared with $6.8 million for
the same period of 2008.
Non-cash
items added approximately $2.1 million back to cash inflow from operating
activities for the nine months ended September 30, 2009, a slight increase of
$0.2 million, compared with $1.9 million for the same period of the prior
year. Of the non-cash items for the nine months ended September 30,
2009, approximately $301,000 was the share-based compensation, $126,000 lower
than $427,000 for the same period of the prior year; depreciation expenses was
$1,220,000, $197,000 lower than $1,417,000 for the same period of the prior
year. Inventory provision was $568,000 for the first three quarters of 2009,
approximately $512,000 higher than $56,000 for the same period of
2008.
The
impact of the changes in operating assets and liabilities on cash flow was
explained as follows. The accounts receivable increased $3,295,000,
compared with $4,963,000 increase for the first nine months of
2008. Inventory increased by $2,954,000 during the first nine months,
compared to a $2,046,000 increase in inventory for the same period of the prior
year. Deposits, prepayment and other receivables increased by
$261,000, compared with the $374,000 increased for the first nine months of
2008. VAT recoverable increased $257,000, compared with a $403,000 decrease for
the first nine months of 2008.
Accounts
payable increased by $238,000, compared with a $209,000 increase in the first
nine months of 2008. Advances from customers decreased by $11,000, compared with
a $244,000 increase for the first nine months of 2008. Tax payable
decreased $17,000, compared with an increase of $3,000 for the same period of
the prior year. Accruals and other payables decreased by $70,000,
compared to a $1.4 million decreased for the first nine months of
2008. The following summarized the impact of changes in operating
assets and liabilities on cash flow between the first nine months of 2009 and
2008:
|
|
·
|
$1,668,000
from Accounts receivable (positive
impact)
|
|
|
·
|
$908,000
from inventory(negative impact)
|
|
|
·
|
$113,000
from deposits, prepayment and other receivable (positive
impact)
|
|
|
·
|
$660,000
from VAT recoverable (negative
impact)
|
|
|
·
|
$29,000
from accounts payable (positive
impact)
|
|
|
·
|
$1,347,000
from accruals and other payable (positive
impact)
|
|
|
·
|
$255,000
from advance from customers (negative
impact)
|
|
|
·
|
$20,000
from taxes payable (negative
impact)
|
The total
impact from above non-cash items and changes in operating assets and liabilities
was approximately $1.3 million (positive impact).
Net cash
used in investing activities amounted to $58,000 for the nine months ended
September 30, 2009, a decrease of $3,421,000, or 98%, compared to
$3,479,000 in the first nine months of 2008. During the first nine months of
2008, the Company purchased $1.5 million marketable securities and paid $1.8
million to acquire plant, property and equipment, but the Company did not have
much investing activities during the first nine months of 2009.
Net cash
provided by financing activities amounted to $3,600,000 for the first nine
months of 2009, compared with $3,752,000 for the same period of
2008. The Company borrowed $4.4 million and $4.3 million from banks
during the first three quarters of 2009 and 2008,
respectively. Finance from non-controlling interest was $738,000 for
the first nine months of 2008 compared with none in 2009. The Company
repurchased its common stocks at $243,000 during the first three quarters of
2008 but did not repurchase any stock in 2009. Repayment to related parties was
$801,000 and $1.1 million, respectively, during the first nine months of 2009
and 2008, respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK –
None
ITEM
4T. CONTROLS AND PROCEDURES
(a) Evaluation
of disclosure controls and procedures:
The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in its 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 Securities and
Exchange Commission’s, the “SEC”, rules and forms, and that such information is
accumulated and communicated to the Company’s management, including its chief
executive officer, the “CEO”, and chief financial officer, the “CFO”, as
appropriate, to allow timely decisions regarding required financial
disclosure.
As of
September 30, 2009, the Company’s management including the CEO and CFO concluded
that there have been no material changes to the disclosure control and
procedures previously discussed in Part II, Item 9A of the Company's Form 10-K/A
No. 1 for the year ended December 31, 2008. The Company’s management, including
the CEO and CFO, concluded that as of December 31, 2008 the Company's disclosure
controls and procedures were not effective because of the material weaknesses
described under “Management's Report on Internal Control over Financial
Reporting.” In light of the material weaknesses not significantly changed
since December 31, 2008, the Company’s management concluded that its disclosure
controls and procedures were not effective as of September 30,
2009.
To
address these material weaknesses, the Company performed additional analyses and
other procedures to ensure that in all material respects, the Company’s
financial position, the results of its operations and its cash flows for the
period presented in this Form 10-Q, in conformity with the accounting principles
generally accepted in the United States of America, “GAAP”.
(b)
Changes in internal control over financial reporting.
The
Company’s management, including CEO and CFO, concluded that there have been no
changes to the internal controls over financial reporting that occurred during
the quarter that have materially affected, or are reasonably likely to
materially affect internal control over financial reporting. The
Company is in the process of taking the steps necessary for remediation of the
material weaknesses identified in previously filed 10-K/A No. 1, and will
continue to monitor the effectiveness of these steps.
PART
II - OTHER INFORMATION
ITEM
1. Legal Proceedings
None.
ITEM
1A. Risk Factors.
There
have been no material changes to the risk factors previously discussed in Part
I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008.
ITEM 2. UNREGISTERED SALES OF
EQUITY SECURITIES AND USE OF PROCEEDS
Stock Repurchase
Program
On March
26, 2007, the Company announced that its Board of Directors had authorized the
repurchase of up to $5,000,000 of its common stock from the public market or in
private purchases. The terms of the repurchase program permitted the Company to
repurchase shares within twelve months and to repurchase shares at a pace at the
discretion of management. During the nine months ended September 30, 2009, no
shares were repurchased in the market. As of September 30, 2009, the
shares repurchased were held under the name of a security firm and presented at
line of treasury stock at cost on the balance sheet at September 30,
2009.
ITEM 3. DEFAULTS UPON SENIOR
SECURITIES
– None.
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
– None.
ITEM 5. OTHER INFORMATION
–
None.
ITEM
6. EXHIBITS
a.
EXHIBITS
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a - 14 (a) of the Securities
Exchange Act of 1934 (filed herewith
electronically)
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a - 14 (a) of the Securities
Exchange Act of 1934 (filed herewith
electronically)
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith
electronically).
|
|
32.2
|
Certification
of Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith
electronically).
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the
undersigned thereunto duly authorized.
|
|
DIGUANG
INTERNATIONAL
DEVELOPMENT
CO., LTD
|
|
|
|
|
|
Dated:
November 16, 2009
|
By:
|
/s/Yi
Song
|
|
|
Yi
Song
|
|
|
Chairman
and Chief Executive Officer
|
|
|
|
|
|
Dated:
November 16, 2009
|
By:
|
/s/ Keith
Hor
|
|
|
Keith
Hor
|
|
|
Chief
Financial Officer
|
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