UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
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 March 31, 2010
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
March 31, 2010, 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 March 31, 2010
Table of
Contents
|
|
Page
|
|
Part
I - Financial Information
|
3
|
|
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|
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Item
1. Financial Statements
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3
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|
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Consolidated Balance
Sheets
|
4
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|
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|
Consolidated
Statements of Income and Comprehensive Income
|
5
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
6
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|
|
|
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Notes
to Consolidated Financial Statements
|
7
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|
|
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
|
15
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|
|
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
21
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|
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Item
4. Controls and Procedures
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21
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Part
II - Other Information
|
21
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Item
1. Legal Proceedings
|
21
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Item
1A. Risk Factors.
|
21
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Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
21
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Item
3. Defaults Upon Senior Securities
|
22
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Item
4. Reserved
|
22
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Item
5. Other Information
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22
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Item
6. Exhibits
|
22
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Signatures
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23
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Certifications
|
|
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, the “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, 2009.
The
results of operations for the three-month period ended March 31, 2010 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
BALANCE SHEETS
(In
US Dollars)
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
6,190,513
|
|
|
$
|
5,630,416
|
|
|
Restricted
cash
|
|
|
4,341,112
|
|
|
|
7,311,803
|
|
|
Accounts
receivable, net of allowance for doubtful accounts $1,529,505 and
$1,592,221
|
|
|
13,972,086
|
|
|
|
15,908,878
|
|
|
Inventories,
net of provision $3,519,124 and $3,485,777
|
|
|
7,439,287
|
|
|
|
10,008,084
|
|
|
Other
receivables, net of provision $69,032 and $69,032
|
|
|
465,013
|
|
|
|
401,024
|
|
|
VAT
recoverable
|
|
|
82,497
|
|
|
|
548,969
|
|
|
Advance
to suppliers
|
|
|
900,328
|
|
|
|
1,608,134
|
|
|
Total
current assets
|
|
|
33,390,836
|
|
|
|
41,417,308
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment,
net of impairment $1,500,000 and $1,500,000
|
|
|
-
|
|
|
|
-
|
|
|
Plant,
property and equipment, net
|
|
|
17,868,845
|
|
|
|
18,698,964
|
|
|
Long-term
prepayments
|
|
|
439,502
|
|
|
|
417,533
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
51,699,183
|
|
|
$
|
60,533,805
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Bank
loans
|
|
$
|
10,213,683
|
|
|
$
|
11,745,728
|
|
|
Accounts
payable
|
|
|
15,446,721
|
|
|
|
17,386,496
|
|
|
Advance
from customers
|
|
|
325,165
|
|
|
|
331,422
|
|
|
Accruals
and other payables
|
|
|
2,510,206
|
|
|
|
2,472,450
|
|
|
Accrued
payroll and related expense
|
|
|
712,206
|
|
|
|
771,067
|
|
|
Income
tax payable
|
|
|
394,989
|
|
|
|
383,782
|
|
|
Amount
due to stockholders – current
|
|
|
943,378
|
|
|
|
352,835
|
|
|
Total
current liabilities
|
|
|
30,546,348
|
|
|
|
33,443,780
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
bank loans
|
|
|
-
|
|
|
|
6,592,634
|
|
|
Research
funding advanced
|
|
|
952,255
|
|
|
|
952,270
|
|
|
Total
non-current liabilities
|
|
|
952,255
|
|
|
|
7,544,904
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
31,498,603
|
|
|
|
40,988,684
|
|
|
|
|
|
|
|
|
|
|
|
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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
|
|
|
22,593
|
|
|
|
22,593
|
|
|
Additional
paid-in capital
|
|
|
20,881,635
|
|
|
|
20,892,854
|
|
|
Treasury
stock at cost
|
|
|
(674,455
|
)
|
|
|
(674,455
|
)
|
|
Appropriated
earnings
|
|
|
802,408
|
|
|
|
802,408
|
|
|
Accumulated
deficit
|
|
|
(7,644,254
|
)
|
|
|
(8,221,079
|
)
|
|
Translation
adjustment
|
|
|
4,338,891
|
|
|
|
4,299,891
|
|
|
Total
stockholders’ equity
|
|
|
17,726,818
|
|
|
|
17,122,212
|
|
|
Non-controlling interest
|
|
|
2,473,762
|
|
|
|
2,422,909
|
|
|
Total
equity
|
|
|
20,200,580
|
|
|
|
19,545,121
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
51,699,183
|
|
|
$
|
60,533,805
|
|
See
accompanying notes to financial statements
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
CONSOLIDATED
STATEMENTS OF INCOME
AND
COMPREHENSIVE INCOME
(In
US Dollars)
|
|
|
Three months ended March 31
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Revenues,
net
|
|
$
|
5,999,853
|
|
|
$
|
12,484,194
|
|
|
Cost
of sales
|
|
|
5,378,488
|
|
|
|
10,779,840
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
621,365
|
|
|
|
1,704,354
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expense
|
|
|
418,234
|
|
|
|
600,831
|
|
|
Research
and development
|
|
|
406,324
|
|
|
|
528,984
|
|
|
General
and administrative
|
|
|
1,116,939
|
|
|
|
1,068,932
|
|
|
Loss
on disposing assets
|
|
|
14,039
|
|
|
|
2,686
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(1,334,171
|
)
|
|
|
(497,079
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense), net
|
|
|
(87,446
|
)
|
|
|
(169,226
|
)
|
|
Investment
income (expense)
|
|
|
500
|
|
|
|
-
|
|
|
Other
income (expense)
|
|
|
177,921
|
|
|
|
38,592
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(1,243,196
|
)
|
|
|
(627,713
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
3,088
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(1,246,284
|
)
|
|
|
(627,713
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to non-controlling interest
|
|
|
(35,866
|
)
|
|
|
(50,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common shares
|
|
$
|
(1,210,418
|
)
|
|
$
|
(576,825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding – basic
|
|
|
22,072,000
|
|
|
|
22,072,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses
per share – basic
|
|
|
(0.05
|
)
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding – diluted
|
|
|
22,072,000
|
|
|
|
22,072,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses
per shares – diluted
|
|
|
(0.05
|
)
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,246,284
|
)
|
|
$
|
(627,713
|
)
|
|
Translation
adjustment
|
|
|
(245,869
|
)
|
|
|
(38,965
|
)
|
|
Comprehensive
loss
|
|
|
(1,492,153
|
)
|
|
|
(666,678
|
)
|
|
Comprehensive
loss attributable to non-controlling interest
|
|
|
(39,661
|
)
|
|
|
(50,853
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
attributable to common shares
|
|
$
|
(1,452,492
|
)
|
|
$
|
(615,825
|
)
|
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)
|
|
|
Three months ended March 31,
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,246,284
|
)
|
|
$
|
(627,713
|
)
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
427,287
|
|
|
|
446,606
|
|
|
Bad
debts allowance
|
|
|
-
|
|
|
|
62,698
|
|
|
Inventory
provision
|
|
|
(21,068
|
)
|
|
|
(33,398
|
)
|
|
Loss
on disposing assets
|
|
|
14,039
|
|
|
|
2,686
|
|
|
Share-based
compensation
|
|
|
100,090
|
|
|
|
11,219
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,581,302
|
|
|
|
(1,999,455
|
)
|
|
Inventory
|
|
|
(1,168,677
|
)
|
|
|
(2,535,342
|
)
|
|
Other
receivables
|
|
|
155,994
|
|
|
|
63,989
|
|
|
VAT
recoverable
|
|
|
(38,258
|
)
|
|
|
(466,465
|
)
|
|
Prepayments
and other assets
|
|
|
29,694
|
|
|
|
(707,798
|
)
|
|
Accounts
payable
|
|
|
(3,801,009
|
)
|
|
|
1,939,835
|
|
|
Accruals
and other payable
|
|
|
(380,104
|
)
|
|
|
28,130
|
|
|
Advance
from customers
|
|
|
(27,290
|
)
|
|
|
6,257
|
|
|
Taxes
payable
|
|
|
(1,036
|
)
|
|
|
(11,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(4,375,320
|
)
|
|
|
(3,819,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(56,690
|
)
|
|
|
(1,257,632
|
)
|
|
Proceeds
from disposal of fixed assets
|
|
|
13,464
|
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(43,226
|
)
|
|
|
(1,257,423
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Due
to related parties
|
|
|
(83,409
|
)
|
|
|
(597,568
|
)
|
|
Repayments
for short-term bank facilities
|
|
|
-
|
|
|
|
(1,438,624
|
)
|
|
Proceeds
from import financing loans
|
|
|
|
|
|
|
2,970,691
|
|
|
Restricted
cash pledged for import financing loans
|
|
|
-
|
|
|
|
(2,970,691
|
)
|
|
Proceeds
from long-term loan facilities
|
|
|
-
|
|
|
|
6,592,731
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash received from financing activities
|
|
|
(83,409
|
)
|
|
|
4,556,539
|
|
|
Effect
of changes in foreign exchange rates
|
|
|
(222,780
|
)
|
|
|
(39,255
|
)
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(4,724,735
|
)
|
|
|
(560,097
|
)
|
|
Cash
and cash equivalents, beginning of the year
|
|
|
15,024,363
|
|
|
|
6,190,513
|
|
|
Cash
and cash equivalents, end of the year
|
|
$
|
10,299,628
|
|
|
$
|
5,630,416
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
|
66,451
|
|
|
|
120,912
|
|
|
Cash
paid for income taxes
|
|
|
5,546
|
|
|
|
-
|
|
See
accompanying notes to financial statements
NOTE
1 ─ ORGANIZATION AND OVERVIEW OF BUSINESS
Diguang
International Development Co., Ltd., formerly known as Online Processing, Inc.,
“Online”, was established under the laws of the State of Nevada in 2000.
On January 10, 2006, Online entered into a stock exchange agreement with Diguang
International Holdings Limited., “Diguang Holdings”. On March 17, 2006,
Online issued 2.4 million shares of its common stock in exchange for the gross
proceeds of $12 million and issued 18,250,000 shares of its common stock in
exchange for 100% equity interest in Diguang Holdings, making Diguang Holdings a
wholly owned subsidiary of Online. Consummating the above two transactions
simultaneously, Online and Diguang Holdings successfully fulfilled their
contractual obligations, respectively, under the stock exchange agreement on
March 17, 2006. One of the conditions to closing the transaction was
changing the name from Online Processing, Inc. to “Diguang International
Development Co., Ltd.”, and the name was changed on February 28,
2006.
The
Company specializes in the design, production and distribution of 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, taking 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. In late 2009, the
Company started its trial run of producing LED TV sets with two
sizes.
The
Company’s headquarter is located 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.;
|
|
|
·
|
Dongguan
Diguang Electronics Science and Technology Co., Ltd.;
and
|
|
|
·
|
Shenzhen
Optimum Electronics 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.
NOTE
1 ─ ORGANIZATION AND OVERVIEW OF BUSINESS (Continued)
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.
Diguang
Holdings acquired 65% interest of North Diamond on 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 Development 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. Dongguan Diguang S&T has started its manufacturing
activities since 2008.
On April
30, 2009, Well Planner established a wholly-owned entity named Shenzhen Optimum
Electronics Co., Ltd, “Shenzhen Optimum”, a China based entity. Shenzhen
Optimum concentrates in sales of large size LED TV sets manufactured by Diguang
Electronics to domestic customers throughout China.
NOTE
2 ─ RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Recently
Issued Accounting Pronouncements Not Adopted Yet
Adoption
of FASB ASU 2010-13
In April
2010, the FASB issued Accounting Standards Update ("ASU") No. 2010-13,
"Compensation - Stock Compensation (Topic 718): Effect of Denominating the
Exercise Price of a Share-Based Payment Award in the Currency of the Market in
Which the Underlying Equity Security Trades," which addresses the classification
of a share-based payment award with an exercise price denominated in the
currency of a market in which the underlying equity security trades. Topic 718
is amended to clarify that a share-based payment award with an exercise price
denominated in the currency of a market in which a substantial portion of the
entity’s equity securities trades shall not be considered to contain a market,
performance, or service condition. Therefore, such an award is not to be
classified as a liability if it otherwise qualifies as equity classification.
The amendments in this Update should be applied by recording a cumulative-effect
adjustment to the opening balance of retained earnings. The cumulative-effect
adjustment should be calculated for all awards outstanding as of the beginning
of the fiscal year in which the amendments are initially applied, as if the
amendments had been applied consistently since the inception of the award. ASU
2010-13 is effective for interim and annual periods beginning on or after
December 15, 2010 and is not expected to have a material impact on the Company’s
consolidated financial position or results of operations.
FASB ASU
2009-13
In
October 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition:
Multiple-Deliverable Revenue Arrangements” (ASU 2009-13). This update
removes the criterion that entities must use objective and reliable evidence of
fair value in separately accounting for deliverables and provides entities with
a hierarchy of evidence that must be considered when allocating arrangement
consideration. The new guidance also requires entities to allocate
arrangement consideration to the separate units of accounting based on the
deliverables’ relative selling price. The provisions will be effective for
revenue arrangements entered into or materially modified in our year 2011 and
must be applied prospectively. The Company is currently evaluating the
impact of the provisions of ASU 2009-13.
NOTE
3 ─ ALLOWANCE FOR ACCOUNTS RECEIVABLES
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 maintains its cash accounts at credit worthy
financial institutions and closely monitors the movements of its cash
positions.
The
Company regularly evaluates and monitors the creditworthiness of each customer
on a case-by-case basis. The Company includes any accounts 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, 2009 and March 31, 2010 were adequate, respectively. However,
actual write-off might exceed the recorded allowance.
The
following table presents allowance activities in accounts
receivable.
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
655,893
|
|
|
$
|
1,529,505
|
|
|
Additions
charged to expense
|
|
|
927,704
|
|
|
|
62,716
|
|
|
Recovery
|
|
|
-
|
|
|
|
-
|
|
|
Write-off
|
|
|
(54,092
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
1,529,505
|
|
|
$
|
1,592,221
|
|
As of
March 31, 2010, accounts receivable of RMB2,257,515, equivalent to approximately
$330,732, was pledged to China Merchants Bank Jinzhonghuan Branch in exchange
for issuance of bank acceptance bills of RMB2,144,640, equivalent to
approximately $314,196.
NOTE
4 ─ INVENTORIES
The
inventories are as follows:
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
5,661,873
|
|
|
$
|
6,707,737
|
|
|
Work
in progress
|
|
|
1,504,063
|
|
|
|
2,864,783
|
|
|
Finished
goods
|
|
|
3,092,724
|
|
|
|
3,884,552
|
|
|
Consignment
goods
|
|
|
699,751
|
|
|
|
36,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,958,411
|
|
|
$
|
13,493,861
|
|
|
Provision
|
|
|
(3,519,124
|
)
|
|
|
(3,485,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Inventories,
net
|
|
$
|
7,439,287
|
|
|
$
|
10,008,084
|
|
NOTE
5 ─ PROPERTY, PLANT, AND EQUIPMENT
A summary
of property, plant and equipment at cost is as follows:
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Land
usage rights
|
|
$
|
3,199,461
|
|
|
$
|
3,199,507
|
|
|
Plant
and office buildings
|
|
|
11,493,931
|
|
|
|
11,494,100
|
|
|
Machinery
|
|
|
5,282,122
|
|
|
|
5,232,464
|
|
|
Office
equipment
|
|
|
1,425,128
|
|
|
|
1,501,454
|
|
|
Vehicles
|
|
|
277,171
|
|
|
|
361,942
|
|
|
Software
|
|
|
153,309
|
|
|
|
153,311
|
|
|
Leasehold
improvement
|
|
|
2,096,803
|
|
|
|
2,102,287
|
|
|
Construction
in process
|
|
|
132,079
|
|
|
|
1,243,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,060,004
|
|
|
$
|
25,288,713
|
|
|
Accumulated
depreciation
|
|
|
(6,191,159
|
)
|
|
|
(6,589,749
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,868,845
|
|
|
$
|
18,698,964
|
|
The
Company is constructing the manufacturing facility for production of large size
LED products in the Guangming District of Shenzhen City. The construction
of the plant will be completed at the end of 2010. Total budgeted capital
investment for this facility is estimated to be $10.5 million, excluding cost of
land usage right, which had net book value of $2,388,346 as of March 31,
2010.
The
depreciation and amortization for the three months ended March 31, 2009 and 2010
were $427,287 and $424,630 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
|
|
Stockholders
|
|
|
|
|
|
|
|
Balance
at December 31, 2009
|
|
$
|
943,378
|
|
|
Accrued
interest
|
|
|
22,897
|
|
|
Payments
made
|
|
|
(613,440
|
)
|
|
Balance
at March 31, 2010
|
|
$
|
352,835
|
|
NOTE
6 ─ RELATED PARTY TRANSACTIONS (Continued)
During
the process of acquiring 100% interest of Dongguan Diguang Science and
Technology, “Dongguan Diguang S&T”, Sino Olympics Industrial Limited, “Sino
Olympics”, owns 92% of interest and Shenzhen Diguang Engine & Equipment owns
the remaining 8% of interest at Dongguan Diguang S&T. Accordingly, the
entire consideration of $4.2 million was allocated $3,864,000 to Sino Olympics
and $336,000 to Shenzhen Diguang Engine & Equipment. Based on the fact
that the Song brothers are the owners of both Sino Olympics and Shenzhen Diguang
Engine & Equipment, the entire consideration of the $4.2 million was treated
as amount due to the Song Brothers. Of the $4.2 million acquisition price,
$2 million was paid in cash before the end of 2007 and the remaining balance of
$2.2 million should be paid through four installment payments on June 30, 2008,
December 31, 2008, March 31, 2009 and June 30, 2009, respectively. The
balance of $352,835 was overdue as of March 31, 2010, among which, $ 18,933 was
accrued interest and $ 333,902 was outstanding purchase
consideration.
NOTE
7 ─ BANK LOANS
Loans
from Shenzhen Ping’an Bank
Diguang
Electronics renewed bank loans of RMB30 million with Shenzhen Ping’an Bank.
RMB10 million, equivalent to approximately $1,465,030, and RMB20 million,
equivalent to approximately $ 2,930,059, were received on December 25, 2009 and
January 6, 2010, respectively. The renewed bank loan will mature in one
year. Pursuant to the renewed loan agreements, the plant in Dongguan
Diguang S&T with net book value of $4,343,073 was put as pledge and the
prevailing annual standard rate was 5.47% under the stipulation from the
People's Bank of China.
The
abovementioned RMB30 million loans were borrowed under the RMB30 million bank
loan facilities provided by Shenzhen Ping’an Bank. Diguang Electronics
also received pledged import financing loans from Shenzhen Ping’an Bank.
The import financing loans were guaranteed by equivalent deposit of
cash.
Bank
loans of $2,194,175 and $2,159,475 were obtained 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
1.68% and 1.94%. The proceeds of the above $4,353,650 loans were received
in U.S. Dollars, and Diguang Electronics was required to repay the loans in RMB
at fixed exchange rates of 6.8354 and 6.8336 between U.S. Dollar and RMB
respectively when the loans fall mature. The impact of change in exchange
rate on the loan was immaterial as of March 31, 2010. The loans were
guaranteed by an equivalent cash deposit in local currency of RMB 29,630,958,
equivalent to approximately $4,341,023, with an annual deposit rate of
2.25%.
On
January 12, 2010, Diguang Electronics received import financing loan of
$2,996,989 from Shenzhen Ping’an Bank with annual interest of 2.31%, which will
mature on January 12, 2011. Diguang Electronics was required to repay the
loan in RMB at the fixed exchange rate of 6.7601 between U.S. Dollar and RMB
when the loan falls mature. The cash deposit to guarantee the loan was
RMB20,277,948, equivalent to approximately $2,970,780 as of March 31, 2010 with
an annual deposit rate of 2.25%.
NOTE
7 ─ BANK LOANS (Continued)
Loans
from China Development Bank
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 the new facility located on the land owned
by Diguang Electronics in the Guangming District of Shenzhen City.
On
December 30, 2009, Diguang Electronics paid RMB3 million to China Development
Bank as five years’ guarantee expense for the RMB100 million bank facilities and
the bank facilities formally became effective then. Diguang Electronics
received RMB30 million, equivalent to approximately $4,395,089, from the bank on
January 5, 2010 and RMB15 million, equivalent to approximately $2,197,545, on
February 1, 2010.
The
RMB100 million banking facilities are secured by the followings: two joint and
several personal guarantees from Mr. Song Yi and Mr. Song Hong, directors of the
Company; collateral placed on the office space owned by Diguang Electronics with
a carrying amount of $2,245,645; collateral placed on the land use rights on a
piece of land located in the Guangming District of Shenzhen with a carrying
amount of $2,388,346.
NOTE
8 ─ 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.
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 below assumptions.
The
expected volatilities are essentially based on the historical volatility of the
Company’s stock. The observation was made on a daily basis. The
periods of observation covered were from March 17, 2006 though the grant day for
all the options granted. The expected terms of stock options are based on
the average vesting period and the contractual life of stock options
granted. 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 three months ended March 31, 2010 are presented as
follows:
NOTE
8 ─ STOCK OPTIONS (Continued)
|
Stock Options
|
|
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Weighted –
Average
Remaining
Contractual Term
|
|
|
Outstanding
at January 1, 2010
|
|
|
1,201,917
|
|
|
$
|
1.77
|
|
|
|
8.71
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
or expired
|
|
|
(13,000
|
)
|
|
|
0.95
|
|
|
|
8.53
|
|
|
Outstanding
at March 31, 2010
|
|
|
1,188,917
|
|
|
|
1.78
|
|
|
|
7.45
|
|
|
Exercisable
at March 31, 2010
|
|
|
747,694
|
|
|
$
|
2.57
|
|
|
|
6.82
|
|
The
trading price of the Company stock at March 31, 2009 and 2010 was $0.28 and
$0.30 per share, respectively. As of March 31, 2010, the exercise price of
476,917 shares of outstanding stock option was higher than trading price of the
Company’s common stock and did not have any intrinsic value; the exercise price
of the other 712,000 shares granted in December 2008 was lower than trading
price and reported intrinsic value. Intrinsic value for outstanding and
exercisable options as of March 31, 2010 was $134,160 and $62,440,
respectively.
NOTE
9 ─ EARNINGS PER SHARE
The
following table sets forth the computation of basic and diluted net earnings per
share for the periods as indicated:
|
|
|
Three Months Ended March31,
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net
income (loss) attributable to the Company
|
|
$
|
(1,210,418
|
)
|
|
$
|
(576,825
|
)
|
|
Net
income (loss) used in computing diluted earnings per share
|
|
$
|
(1,210,418
|
)
|
|
$
|
(576,825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding – basic
|
|
|
22,072,000
|
|
|
|
22,072,000
|
|
|
Weighted
average common share outstanding – diluted
|
|
|
22,072,000
|
|
|
|
22,072,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.03
|
)
|
|
Diluted
earnings per share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.03
|
)
|
NOTE
10 ─ SEGMENT REPORTING
The
Company currently operates mainly in backlight production with portions of new
products of LED monitors, LED general lighting and LED TV sets 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.
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Sales
to China domestic customers
|
|
$
|
1,721,751
|
|
|
$
|
6,006,812
|
|
|
Sales
to international customers
|
|
|
4,278,102
|
|
|
|
6,477,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,999,853
|
|
|
$
|
12,484,194
|
|
|
|
|
China
|
|
|
|
International
|
|
|
|
|
|
|
|
|
Customers
|
|
|
|
Customers
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,721,751
|
|
|
|
$
|
4,278,102
|
|
|
|
$
|
5,999,853
|
|
|
Gross
margin
|
|
|
16
|
%
|
|
|
|
8
|
%
|
|
|
|
10
|
%
|
|
Receivable
|
|
|
2,955,278
|
|
|
|
|
5,410,879
|
|
|
|
|
8,366,157
|
|
|
Inventory
|
|
|
8,461,214
|
|
|
|
|
-
|
|
|
|
|
8,461,214
|
|
|
Property
and equipment
|
|
|
18,740,891
|
|
|
|
|
-
|
|
|
|
|
18,740,891
|
|
|
Expenditures
for long-lived assets
|
|
|
56,690
|
|
|
|
|
-
|
|
|
|
|
56,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
6,006,812
|
|
|
|
$
|
6,477,382
|
|
|
|
$
|
12,484,194
|
|
|
Gross
margin
|
|
|
17
|
%
|
|
|
|
10
|
%
|
|
|
|
14
|
%
|
|
Receivable
|
|
|
8,332,146
|
|
|
|
|
7,576,732
|
|
|
|
|
15,908,878
|
|
|
Inventory
|
|
|
10,008,084
|
|
|
|
|
-
|
|
|
|
|
10,008,084
|
|
|
Property
and equipment
|
|
|
18,698,964
|
|
|
|
|
-
|
|
|
|
|
18,698,964
|
|
|
Expenditures
for long-lived assets
|
|
|
1,257,632
|
|
|
|
|
-
|
|
|
|
|
1,257,632
|
|
NOTE
11 ─ SUBSEQUENT EVENTS
The
Company evaluated all events or transactions that occurred after March 31, 2010
up through 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 1,459
full-time employees as of March 31, 2010.
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 March 31, 2010, Dihao had approximately 171 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 498 employees as of March 31, 2010.
Dongguan
Diguang Electronics Science and Technology Co. Ltd., “Dongguan Diguang S&T”,
was established as 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 March 31, 2010, Dongguan
Diguang S&T had approximately 265 full-time employees.
Shenzhen
Optimum Electronics Co., Ltd, “Shenzhen Optimum”, was established for sales of
large size LED TV sets manufactured by Diguang Electronics to domestic customers
throughout China. As of March 31, 2010, Shenzhen Optimum had approximately 11
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 March 31, 2010 and 2009
Revenue
Net
revenue was approximately $12.5 million for the three months ended March 31,
2010, an increase of $6.5 million, or 108%, compared with $6 million for the
same period in the prior year. The increase in sales revenue was primarily due
to the increased demand of the backlights market as the effect of recovery from
the global financial crisis suffered from the second half year of 2008 through
the first half year of 2009. From the third quarter of 2009, the market
showed an upward trend and the Company expanded sales revenue both on its
traditional products and newly developed products of large size LED backlights
and LED monitors. The Company’s three manufacturing facilities in
Dongguan, Wuhan, and Yangzhou contributed increases in sales revenue of $1.9
million, $4.2 million, and $0.4 million, respectively, in the first quarter of
2010.
The
Company’s total net revenue can be divided into international sales and domestic
sales as follows:
|
|
|
Three Months Ended March
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
International
sales
|
|
|
6,477,000
|
|
|
|
4,278,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
sales
|
|
|
6,007,000
|
|
|
|
1,722,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,484,000
|
|
|
|
6,000,000
|
|
Sales to
international customers totaled $6.5 million for the three months ended March
31, 2010, representing an increase of $2.2 million, or a 51% increase, compared
with $4.3 million for the first quarter of 2009. Of the $2.2 million
increase, approximately $1.9 million came from sales of large size CCFL
backlight products to Taiwanese customers in the Wuhan facility due to increased
downstream demand. Sales to other international customers of Hong Kong and
Korea remained at relatively low level as in the same period in
2009.
Sales to
domestic customers were $6.0 million for the first quarter of 2010, representing
an increase of $4.3 million, or a 253% increase, compared with $1.7 million for
the same period of 2009. Along with positive influence from overall market
circumstances, the Company’s great effort on development of domestic market
contributed significantly to the increase in domestic sales revenue. Sales
of mid to larger size LED backlight products and large size LCD to newly
developed domestic customers contributed $3.8 million of increase in
revenue.
Domestic
sales and international sales accounted for 48% and 52% of total sales revenue
respectively in the current period, compared with 29% and 71% in the same period
of the prior year. The Company expects that the proportion of domestic
sales will keep increasing on a going forward basis.
Because
the Company has thousands of categories of products and has constantly changed
its product mixtures in order to adapt to market demands, and because the sale
prices are quite different for different categories of products, it is almost
impossible to discuss the impact of changes in volume and changes in product
price here.
The
Company already has three manufacturing facilities located in the East China
region (Yangzhou), the Central China region (Wuhan), and the Southern China
region (Dongguan). There are various capacities in the principal manufacturing
facility of Dongguan to serve the customers which are LCD TV and monitor
manufacturers and LCD assembly enterprises. The Company has commenced to
produce LED general light products in the Dongguan facility since June 2008 and
large size LED backlights and monitors from 2009. The Yangzhou factory
used to focus on producing small and mid size CCFL and LED backlight products
and began to produce new products of large size LCM products since the fourth
quarter of 2009. The Wuhan facility solely manufactures large size CCFL
backlight products. The Company is now establishing a new manufacturing
facility in Shenzhen of Southern China. This new facility will be used to
manufacture large size LED back light products and LED TV sets. Based on
these manufacturing facilities, the Company believes that it has strategically
deployed the production capacity in China for its long term growth.
From the
product mix aspect, the sales can be divided into six main categories: LED
backlight, CCFL backlight, LCM, Mini-notebook assembly products, LED general
light and LED monitor as follows.
|
|
|
Three Months Ended March
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
LED
backlight
|
|
|
5,698,000
|
|
|
|
3,127,000
|
|
|
|
|
|
|
|
|
|
|
|
|
CCFL
backlight
|
|
|
4,443,000
|
|
|
|
2,041,000
|
|
|
|
|
|
|
|
|
|
|
|
|
LCM
|
|
|
1,690,000
|
|
|
|
439,000
|
|
|
|
|
|
|
|
|
|
|
|
|
LED
general lighting
|
|
|
236,000
|
|
|
|
246,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Mini
note-books
|
|
|
-
|
|
|
|
147,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquid
Crystal Display
|
|
|
417,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,484,000
|
|
|
|
6,000,000
|
|
The
Company’s product mix has changed continuously in recent years with the trend
that the proportion of LED products sales is increasing and the proportion of
CCFL products is decreasing. For the first quarter of 2010, sales of LED
products, which included LED backlights, LED LCM, LED general lights and LED
monitors, amounted to $7.8 million, representing 62% of total sales revenue,
whereas the CCFL products including CCFL backlights and CCFL LCM amounted to
$4.7 million, representing 38% of total sales revenue. Comparatively, the
proportion of sales of LED products and CCFL products were 66% and 34%
respectively in the first quarter of 2009. LED products enjoy
superiorities in contrast ratio, color gamut, localized dimming and low power
consumption, which meet the environmental protection requirements of the
market. In addition, the small to mid size of LED backlights have
advantages of lower cost than the same size of CCFL products. The Company
has concentrated in research and development of LED products in recent years and
has adjusted its product mix by enhancing sales proportion of LED products
gradually. The Company expects the overall LED product shipments to grow
and be more sustainable as the transition from CCFL to LED backlights becomes
more compelling due to its high performance in all aspects.
Sales of
LED backlight products totaled $5.7 million in the first quarter of 2010,
representing an increase of $2.6 million, or an 84% increase, compared with $3.1
million in the same period of 2009. Sales of the newly developed large
size LED backlight products contributed $1.4 million in increase of sales
revenue; and sales of traditional mid size LED products increased approximately
$1 million.
Sales of
CCFL backlights totaled $4.4 million in the first quarter of 2010, representing
an increase of $2.4 million, or a 120% increase, compared with $2 million for
2009. The significant increase was primarily contributed by sales of large
size of CCFL backlights in the Wuhan facility due to increased downstream
demand.
Total
revenue from sales of LCM increased from $0.4 million in the first quarter of
2009 to $1.7 million in the first quarter of 2010, representing an increase of
approximately $1.3 million, or a 325% increase. Sales of LED backlighted
LCM and CCFL backlighted LCM was $1.4 million and $0.3 million, accounting for
82% and 18%, respectively, for the first quarter of 2010.
Sales of
Liquid Crystal Display (LCD) were $417,000 in the first quarter of 2010. LCD
products were newly launched in 2009. The Company began mass production of LCD
since the fourth quarter of 2009 and sales of LCD continued to grow in the first
quarter of 2010. The Company expects further growth on sales of LED monitors in
the near future.
Sales of
LED general lights decreased slightly from $246,000 in the first quarter of 2009
to $236,000 in the first quarter of 2010 due to aggressive
competition.
The
Company terminated production for mini note-book due to aggressive competition
and low gross margin.
Cost
of Sales
Since the
basic materials for all backlight products are similar, the Company discusses
cost of sales in aggregate for all products. Cost of sales was $10.8
million for the first quarter of 2010, representing an increase of $5.4 million,
or a 100% increase, compared with $5.4 million for the first quarter in
2009. Increase in cost of sales was primarily due to increase in sales
volume.
Raw
material cost was $9.3 million for the first quarter of 2010, representing an
increase of $5.1 million, or a 121% increase, compared with $4.2 million for the
first quarter of 2009. The increase in raw material cost was primarily due
to increase in sales volume and changes in product mix. The percentage of
raw material cost to total cost of sales was 86% for the first quarter of 2010,
compared with 78% for the same period of 2009; the increase of this percentage
was also the result of changes in product mix. The Company began to put
into scale production for new products of large size LED backlights and LED
monitors; these new products have higher raw material tie-up since the unit
purchase price of raw materials used in new products is higher than traditional
products. Raw materials cost accounted for 74% and 70% of total sales
revenue in the first quarter of 2010 and 2009, respectively.
Labor
cost was $777,000 for the first quarter of 2010, representing an increase of
$268,000, or a 53% increase, compared with $509,000 for the same period of
2009. The percentage of labor cost to total cost of sales was 7% for the
first quarter in 2010, compared with 9% for the same period in 2009. The
increase of labor cost was mainly due to increased sales volume. Labor
cost accounted for 6% and 8% of total sales revenue in the first quarter of 2010
and 2009 respectively.
Production
overhead was $716,000 for the first quarter of 2010, representing an increase of
$51,000, or an 8% increase, compared with $665,000 for the first quarter of
2009. The production overhead includes depreciation charges for fixed
assets and amortization for building improvement, water and electricity
expenses, repair expenses, and rentals, etc. Due to the semi-variable
nature of production overhead, the increase of production overhead is not
directly associated with the increase of cost of sales. Production
overhead accounted for 6% and 11% of total sales revenue in the first quarter of
2010 and 2009 respectively.
Gross
Margin
The
overall gross margin for the first quarter of 2010 was 14%, representing a 4%
increase, compared with 10% for the first quarter of 2009. The increase in
gross margin was contributed by sales of LED products. The gross margin on
sales of overall LED products, including LED backlights, LED LCM, LED general
lights, mini notebooks and Liquid Crystal Display, was 17% for the first quarter
of 2010, representing an 8% increase compared with 9% for the first quarter of
2009. However, the increase in gross margin on sales of LED products was
offset by decreased gross margin in sales of CCFL products; gross margin on
sales of CCFL backlights and CCFL LCM was 9% for the first quarter of 2010,
representing a 3% decrease compared with 12% for the first quarter of
2009.
Sales of
LED products consisted of three types of large size, mid size, and small size
products. The newly developed large size LED backlight products had a high
gross margin of 32% in the first quarter of 2010 because mass production of new
products always has a higher gross margin. Sales of small size LED
backlights for the first quarter of 2010 had a gross margin of negative 3%,
representing a 6% increase compared to negative 9% for the first quarter of
2009. The Company strategically cut off production of deeply low priced
small size LED backlights used for cell phones to improve overall gross
margin. For the first quarter of 2010, gross margin on sales of mid size
LED backlights was 15%, the same as for the first quarter of 2009. Sales
of large size, mid size, and small size LED backlight products accounted for
25%, 66%, and 9%, respectively, of total sales revenue of LED
products.
The sales
of CCFL products comprised mainly of large size and mid size CCFL
backlights. For the first quarter of 2010, sales of mid size CCFL
backlights had a gross margin of 18%, representing a 15% increase compared with
3% for the first quarter of 2009. The increase in gross margin on sales of
mid size CCFL backlights was mainly due to newly launched models CCFL products
having relatively higher gross margin. Sales of large size CCFL backlights
for the first quarter of 2010 had a gross margin of 8%, representing a slightly
decrease of 2% compared with 10% for the first quarter of 2009.
Regarding
international sales, the gross margin was approximately 10% for the first
quarter of 2010, representing a 2% increase, compared with 8% for the first
quarter of 2009. And for domestic sales, the gross margin was 17%,
representing a 1% increase, compared with 16% for the first quarter of
2009.
The
overall increase in gross margin was mainly attributed to the Company’s efforts
on development of new products and markets.
Selling
Expenses
Selling
expenses were $601,000 for the first quarter of 2010, representing an increase
of $183,000, or a 44% increase, compared with $418,000 for the first quarter of
2009. The increase in selling expenses was primarily attributed to
increased commission paid for increased revenue.
Selling
expenses accounted for 5% and 7% of total sales revenue in the first quarter of
2010 and 2009 respectively.
Research
and Development Expenses
The net
research and development expenses were $524,000 for the first quarter of 2010,
representing an increase of $118,000, or a 29% increase, compared with $406,000
for the first quarter of 2009. The increase was mainly an increase in payroll
expenses and raw materials costs, due to increased research and development
activities on new products.
Research
and development expenses accounted for 4% and 7% of total sales revenue in the
first quarter of 2010 and 2009 respectively.
General
and Administrative Expenses
General
and administrative expenses were $1.1 million for the first quarter of 2010,
which was approximately the same as for the first quarter of 2009. General
and administrative expenses mainly include payroll, share-based compensation,
water and electricity expenses, depreciation and insurance expenses, rental
expenses and professional service fee, etc.
General
and administrative expenses accounted for 9% and 19% of total sales revenue in
the first quarter of 2010 and 2009 respectively.
Interest
Expense
The net
interest expenses was $169,000 for the first quarter of 2010, representing an
increase of $82,000, or a 94% increase, compared with $87,000 in the first
quarter of 2009. With continuous losses through its operating activities,
the Company had to seek more funds from bank loans to support its working
capital demands. As of March 31, 2009, the balance of loan from bank was
$4.4 million, while as of March 31, 2010, the net balance of short-term and
long-term bank loans was $11 million. The interest expenses increased in
line with an increase in bank loans.
Interest
expenses accounted for 1.4% and 1.5% of total sales revenue in the first quarter
of 2010 and 2009 respectively.
Income
Tax Provision
There was
no income tax provision for the first quarter of 2010, compared with $3,000 for
the first quarter of 2009. As all operating subsidiaries of the Company
suffered losses during the first quarter of 2010, no income tax was
provided. Income tax provision for the first quarter of 2009 was only
minor adjustment to prior year’s provision.
Net
Loss
Net loss
was $577,000 for the first quarter of 2010, compared with a net loss of $1.2
million for the same period of 2009. Net loss decreased mainly due to increase
in both sales revenue and gross margin.
Losses
per Share
The basic
losses per share were $0.03 for the first quarter of 2010, compared with basic
losses per share of $0.05 for the first quarter of 2009. Decrease in basic
losses per share was due to decrease of net loss occurred in the first quarter
of 2010.
Liquidity
and Capital Resources
As of
March 31, 2010 and December 31, 2009, the Company had cash and cash equivalents
of $5.6 million and $6.2 million, respectively. The Company’s working
capital was approximately $8.0 million and $2.8 million, respectively, as of
March 31, 2010 and December 31, 2009.
The
Company’s operations were currently financed mainly by bank loans. As
of March 31, 2010, net balance of bank loans was $11.0 million. As of
March 31, 2010, the bank facility available to the Company was RMB55 million,
equivalent to $8.1 million, which was provided by China Development Bank.
The Company has the property in Dongguan facility with net carrying amount
of $3.5 million not yet pledged against bank loan or loan facilities; the
Company expects to be able to apply for additional bank facilities using the
property as collateral.
The
Company is now constructing the new manufacturing facility in the Guangming
District of Shenzhen City, the capital commitments on construction of the
facility was $9.0 million as of March 31, 2010.
The cash
on hand and bank facilities available are enough to meet the Company’s capital
commitments and day-to-day requirements at current operating level.
The Company may need to seek for further financing resources to supplement
operating cash flows if its operating activity expands more
rapidly. As abovementioned, the Company could apply for additional bank
facilities using the property as collateral.
For the
three months ended March 31, 2010, net cash used by operating activities was
$3.8 million, which represented a decrease of $0.6 million as compared to
the net cash used by operating activities of $4.4 million for the same period of
the prior year. The $0.6 million decrease was contributed by decrease of
net loss. Impact from non-cash items and changes in operating assets and
liabilities were approximately the same for the first quarters of 2010 and
2009.
As of
March 31, 2010, net cash occupied by accounts receivable increased by $2.0
million, which was fully mitigated by cash provided from an increase in accounts
payables. The Company usually provided longer credit terms to domestic
customers than international customers. With the proportion of domestic
sales revenue increasing, more working capital was tied in accounts
receivable. The Company also relied on financings from its suppliers
currently, which may lead to potential risks for its future operating.
As of March 31, 2010, net cash occupied by inventory increased by $2.5
million; the increased inventory was prepared for increased sales orders for the
subsequent period.
Net cash
used in investing activities was $1.3 million for the three months ended March
31, 2010, which was paid for construction of the new manufacturing facility in
the Guangming District of Shenzhen City.
Net cash
received from financing activities was $4.6 million for the three months ended
March 31, 2010. Proceeds from bank loans provided cash of $5.2 million.
The Company paid $0.6 million to stockholders for consideration of acquisition
of Dongguan Diguang S&T in the year of 2007.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK –
None
ITEM
4. 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
March 31, 2010, 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
for the year ended December 31, 2009. The Company’s management, including the
CEO and CFO, concluded that as of December 31, 2009 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, 2009, the Company’s management concluded that its disclosure
controls and procedures were not effective as of March 31, 2010.
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, 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, 2009.
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 three months ended March 31, 2010, no
shares were repurchased in the market. As of March 31, 2010, 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 March 31, 2010.
ITEM 3. DEFAULTS
UPON SENIOR SECURITIES
–
None.
ITEM 4. RESERVED
.
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:
May 17, 2010
|
By:
|
/s/Yi
Song
|
|
|
Yi
Song
|
|
|
Chairman
and Chief Executive Officer
|
|
|
|
|
|
Dated:
May 17, 2010
|
By:
|
/s/ Keith
Hor
|
|
|
Keith
Hor
|
|
|
Chief
Financial
Officer
|
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