UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
(Mark
one)
x
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the quarterly period ended June 30, 2008
or
o
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of
1934
For
the
transition period from _________ to _________.
Commission
File Number:
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.
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
o
|
|
Accelerated
filer
o
|
Non-accelerated filer
o
(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
o
No
x
As
of
June 30, 2008, the Company had 22,220,150 shares of common stock issued and
outstanding.
Diguang
International Development Co., Ltd.
Form
10-Q
For
the Quarter Ended June 30, 2008
Table
of Contents
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Page
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Part
I - Financial Information
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Item
1. Financial Statements
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Consolidated Balance
Sheets
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3
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Consolidated
Statements of Income and Comprehensive Income (Loss)
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4
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Consolidated
Statements of Cash Flows
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5
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Notes
to Consolidated Financial Statements
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6
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Item
2. Management's Discussion and Analysis of Financial Condition and
Results
of Operations
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14
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Item
3. Quantitative and Qualitative Disclosures About Market
Risk
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25
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Item
4. Controls and Procedures
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25
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Part
II - Other Information
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Item
1. Legal Proceedings
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25
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Item
1A. Risk Factors
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25
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Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
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25
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Item
3. Defaults Upon Senior Securities
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26
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Item
4. Submission of Matters to a Vote of Security Holders
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26
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Item
5. Other Information
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26
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Item
6. Exhibits
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27
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Signatures
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28
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Certifications
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DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
CONSOLIDATED
BALANCE SHEETS
(In
US Dollars)
|
|
December
31,
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|
June
30,
|
|
|
|
2007
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|
2008
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ASSETS
|
|
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|
(Unaudited)
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|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
16,250,727
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|
$
|
7,635,851
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Short
term investment in marketable securities
|
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|
-
|
|
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1,501,655
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|
Accounts
receivable, net of allowance for doubtful accounts $680,784 and
$702,539
|
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|
12,713,705
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21,764,677
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|
Inventories,
net of provision $841,518 and $950,269
|
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|
7,499,768
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11,788,520
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Other
receivables, net of provision $102,574 and $109,086
|
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|
389,764
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390,745
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VAT
recoverable
|
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407,376
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89,550
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Advance
to suppliers
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904,203
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1,628,603
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Deferred
tax asset
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86,572
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86,572
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Total
current assets
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|
38,252,115
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44,886,173
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Investment,
net of impairment $622,194 and $622,194
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877,806
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877,806
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Property
and equipment, net
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17,449,871
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18,479,851
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Construction
in progress
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|
-
|
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22,114
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|
|
|
|
|
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Total
assets
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|
$
|
56,579,792
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|
$
|
64,265,944
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LIABILITIES
AND SHAREHOLDERS’ EQUITY
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|
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Current
liabilities:
|
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|
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Accounts
payable
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$
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18,855,416
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|
$
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25,388,240
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Advance
from customers
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464,281
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565,856
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Accruals
and other payables
|
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3,358,199
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2,316,262
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Accrued
payroll and related expense
|
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795,690
|
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652,227
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|
Income
tax payable
|
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|
428,217
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450,756
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Amount
due to related parties
|
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|
1,465,790
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876,122
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Amount
due to stockholders - current
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1,100,000
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1,650,000
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Total
current liabilities
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26,467,593
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31,899,463
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Research
funding advanced
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245,730
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261,332
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Amount
due to stockholders
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1,100,000
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-
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Total
non-current liabilities
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1,345,730
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261,332
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|
Total
liabilities
|
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|
27,813,323
|
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32,160,795
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Minority
interest
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1,475,361
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2,505,939
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Stockholders’
equity:
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Common
stock, par value $0.001 per share, 50 million shares authorized,
22,593,000 shares and 22,593,000 issued, 22,340,700 shares and 22,220,150
outstanding
|
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|
22,593
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22,593
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Additional
paid-in capital
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|
20,028,955
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20,312,207
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Treasury
stock at cost
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(429,295
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)
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(567,336
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)
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Appropriated
earnings
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1,949,839
|
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|
2,047,477
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Retained
earnings
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3,127,110
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3,332,990
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Translation
adjustment
|
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|
2,591,906
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4,451,279
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|
Total
stockholders’ equity
|
|
|
27,291,108
|
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|
29,599,210
|
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Total
liabilities and stockholders' equity
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|
$
|
56,579,792
|
|
$
|
64,265,944
|
|
See
accompanying notes to financial statements.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
CONSOLIDATED
STATEMENTS OF INCOME
AND
COMPREHENSIVE INCOME (LOSS)
(In
US Dollars)
|
|
Six
Months Ended June 30
|
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Three
Months Ended June 30,
|
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|
2007
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2008
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2007
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2008
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(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
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Revenues:
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Revenues,
net
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|
$
|
15,658,508
|
|
$
|
33,096,769
|
|
|
|
|
|
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|
Cost
of sales
|
|
|
13,002,302
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28,276,106
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7,626,714
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|
14,715,749
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Gross
profit
|
|
|
2,656,206
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|
4,820,663
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1,269,707
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2,181,429
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Selling
expense
|
|
|
962,741
|
|
|
782,981
|
|
|
337,193
|
|
|
375,415
|
|
Research
and development costs
|
|
|
558,347
|
|
|
651,603
|
|
|
393,849
|
|
|
333,869
|
|
General
and administrative expenses
|
|
|
3,114,642
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|
|
2,461,218
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1,302,389
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1,111,965
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|
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|
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Income
(loss) from operations
|
|
|
(1,979,524
|
)
|
|
924,861
|
|
|
(763,724
|
)
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|
360,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Interest
income (expense), net
|
|
|
91,003
|
|
|
(122,454
|
)
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|
101,855
|
|
|
(64,028
|
)
|
Investment
income (loss)
|
|
|
87,050
|
|
|
29,179
|
|
|
87,050
|
|
|
249
|
|
Other
income
|
|
|
247,368
|
|
|
(213,349
|
)
|
|
43,793
|
|
|
(109,959
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
(1,554,103
|
)
|
|
618,237
|
|
|
(531,026
|
)
|
|
186,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
19,449
|
|
|
124,768
|
|
|
19,449
|
|
|
(8,217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) before minority interest
|
|
|
(1,573,552
|
)
|
|
493,469
|
|
|
(550,475
|
)
|
|
194,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
136,367
|
|
|
189,951
|
|
|
110,116
|
|
|
59,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) to common shareholders
|
|
$
|
(1,709,919
|
)
|
$
|
303,518
|
|
|
|
)
|
$
|
134,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic
|
|
|
22,593,000
|
|
|
22,300,646
|
|
|
22,593,000
|
|
|
22,274,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - basic
|
|
|
(0.08
|
)
|
|
0.01
|
|
|
(0.03
|
)
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - diluted
|
|
|
22,593,000
|
|
|
22,300,646
|
|
|
22,593,000
|
|
|
22,274,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning
per shares - diluted
|
|
|
(0.08
|
)
|
|
0.01
|
|
|
(0.03
|
)
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
(1,709,919
|
)
|
|
303,518
|
|
|
(660,591
|
)
|
|
134,788
|
|
Translation
adjustment
|
|
|
487,199
|
|
|
1,859,372
|
|
|
319,473
|
|
|
721,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss)
|
|
$
|
(1,222,720
|
)
|
$
|
2,162,890
|
|
|
|
)
|
$
|
855,977
|
|
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)
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
2008
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,709,919
|
)
|
$
|
303,518
|
|
Adjustments
to reconcile net income to net cash
provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
136,367
|
|
|
189,951
|
|
Depreciation
|
|
|
503,415
|
|
|
964,979
|
|
Inventory
provision
|
|
|
-
|
|
|
55,321
|
|
Share-based
compensation
|
|
|
785,020
|
|
|
283,252
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(4,597,189
|
)
|
|
(8,697,643
|
)
|
Inventory
|
|
|
(2,144,828
|
)
|
|
(4,136,591
|
)
|
Other
receivables
|
|
|
(221,198
|
)
|
|
(3,663
|
)
|
VAT
recoverable
|
|
|
152,877
|
|
|
315,060
|
|
Prepayments
and other assets
|
|
|
893,008
|
|
|
(896,937
|
)
|
Accounts
payable
|
|
|
2,567,994
|
|
|
6,366,846
|
|
Accruals
and other payable
|
|
|
359,851
|
|
|
(1,124,691
|
)
|
Advance
from customers
|
|
|
319,810
|
|
|
93,650
|
|
Taxes
payable
|
|
|
18,921
|
|
|
22,817
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
(2,935,871
|
)
|
|
(6,264,131
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(4,285,521
|
)
|
|
(1,788,752
|
)
|
Disposal
(purchase) of marketable securities
|
|
|
-
|
|
|
(1,501,655
|
)
|
Cash
paid for an acquisition transaction
|
|
|
(1,977,864
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(6,263,385
|
)
|
|
(3,290,407
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Stock
repurchase
|
|
|
-
|
|
|
(138,041
|
)
|
Due
to related parties
|
|
|
67,213
|
|
|
(1,093,119
|
)
|
Capital
infused by minority interest in North Diamond
|
|
|
-
|
|
|
737,500
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
67,213
|
|
|
(493,660
|
)
|
|
|
|
|
|
|
|
|
Effect
of changes in foreign exchange rates
|
|
|
289,165
|
|
|
1,433,322
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(8,842,878
|
)
|
|
(8,614,876
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of the period
|
|
|
20,550,032
|
|
|
16,250,727
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of the period
|
|
$
|
11,707,154
|
|
$
|
7,635,851
|
|
See
accompanying notes to financial statements.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 ─ REORGANIZATION, BUSINESS AND BASE OF PRESENTATION
Diguang
International Development Co., Ltd., the “Company”, was established under the
laws of the State of Nevada in 2000. The predecessor company was named
Online Processing, Inc. That name was changed into the current name after a
reverse merger transaction was consummated on March 17, 2006. The Company
currently has the following subsidiaries
·
|
Shenzhen
Diguang Electronics Co., Ltd., a China based entity owning 100%
interest;
|
·
|
Well
Planner Limited, a Hong Kong based entity owning 100%
interest;
|
·
|
Diguang
Science and Technology (HK) Limited, a British Virgin Islands based
entity
owning 100% interest;
|
·
|
Wuhan
Diguang Electronics Co., Ltd., a China based entity established on
March
13, 2007 owning 100% interest;
|
·
|
North
Diamond Limited, a British Virgin Islands based entity owning 65%
interest
acquired on January 3, 2007; and
|
·
|
Dongguan
Diguang Electronic Science and Technology Co., Ltd, a China based
entity
owning 100% interest acquired on December 30,
2007.
|
The
Company designs, develops, manufactures, and sells 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. The Company’s customers are located in both China and
overseas.
The
above
two acquisitions incurred in 2007 were accounted for assets exchanges between
the entities under the common control in accordance with the Appendix D of
the
SFAS No. 141 as the owners of 65% interest in North Diamonds and 100% interest
in Dongguan Diguang Electronic Science and Technology Co., Ltd., “Dongguan
Diguang S&T” thereafter, also own more than 50% interest of the Company.
Accordingly, the consolidated financial statements for the half year ended
June
30, 2007 were respectively restated to include the financial position and
operating results of Dongguan Diguang S&T for the half year of 2007.
The
accompanying unaudited consolidated financial statements have been prepared
in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X.
Accordingly, they do not include all the information and footnotes required
by
generally accepted accounting principles for the complete consolidated financial
statements. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, considered necessary for fair presentation have been
included. Operating results for the six-month period ended June 30, 2008 are
not
necessarily indicative of the results that may be expected for the year ending
December 31, 2008.
NOTE
2 ─ RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The
Company adopted SFAS No. 157,
“
Fair
Value Measurements
”
(SFAS
No.
157) and SFAS No. 159,
“
The
Fair Value Option for Financial Assets and Financial Liabilities, including
an
amendment of FASB Statement No. 115
”
(SFAS
No.159) to account for its financial assets, short term deposit. The short
term
deposit placed in a reputable commercial bank in Hong Kong was measured under
fair value estimated by the Bank on a monthly basis. The adoption of SFAS No.
157 and SFAS No. 159 do not have impact on the Company’s financial position and
operating results for the first half year of 2008.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 ─ RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)
In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141 (revised 2007), “
Business
Combinations
”
(“SFAS No. 141(R)”). SFAS 141(R) changes accounting for acquisitions
that close beginning in 2009. SFAS No. 141R broadens the guidance of SFAS No.
141, extending 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. SFAS No. 141R
expands on required disclosures to improve the statement users’ abilities to
evaluate the nature and financial effects of business combinations.
SFAS No. 141R is effective for fiscal years beginning on or after
December 15, 2008 (fiscal year beginning July 1, 2009 for the Company). The
Company is currently assessing the impact that the adoption of SFAS No.
141R may have on its financial position, results of operations, and cash flows.
The adoption of SFAS No. 141R will have impact on future acquisition
transactions.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, “
Noncontrolling
Interests in Consolidated Financial Statements, An Amendment of ARB
No. 51
”
(“SFAS No. 160”). SFAS No. 160 requires that a noncontrolling 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. SFAS No. 160 requires retroactive adoption of the
presentation and disclosure requirements for existing minority interests. The
Company is currently assessing the impact that the adoption of SFAS No. 160
may have on its financial position, results of operations, and cash flows.
NOTE
3 ─ ACCOUNTS RECEIVABLES AND ALLOWANCE FOR DOUBTFUL
ACCOUNTS
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 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, 2007 and June 30, 2008 were adequate, respectively. However,
actual write-off might exceed the recorded allowance.
The
following table presents allowance activities in accounts
receivable.
|
|
December
31,
|
|
June
30,
|
|
|
|
2007
|
|
2008
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
751,145
|
|
$
|
680,784
|
|
Additions
charged to expense
|
|
|
501,684
|
|
|
-
|
|
Translation
changes
|
|
|
-
|
|
|
21,755
|
|
Recovery
|
|
|
-
|
|
|
-
|
|
Write-off
|
|
|
(572,045
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
680,784
|
|
$
|
702,539
|
|
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4 ─ INVENTORIES
Inventories
consisted of the following:
|
|
December
31,
|
|
June
30,
|
|
|
|
2007
|
|
2008
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
3,631,197
|
|
$
|
5,356,148
|
|
Work
in progress
|
|
|
1,603,662
|
|
|
1,552,774
|
|
Finished
goods
|
|
|
1,802,523
|
|
|
3,168,429
|
|
Consignment
goods
|
|
|
1,303,904
|
|
|
2,661,438
|
|
|
|
|
|
|
|
|
|
|
|
|
8,341,286
|
|
|
12,738,789
|
|
Provision
|
|
|
(841,518
|
)
|
|
(950,269
|
)
|
|
|
|
|
|
|
|
|
Inventories,
net
|
|
$
|
7,499,768
|
|
$
|
11,788,520
|
|
NOTE
5 ─ PROPERTY AND EQUIPMENT
A
summary
of property and equipment at cost is as follows:
|
|
December
31,
|
|
June
30,
|
|
|
|
2007
|
|
2008
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Land
usage rights
|
|
$
|
2,993,885
|
|
$
|
3,183,974
|
|
Plant
and office buildings
|
|
|
10,505,835
|
|
|
11,284,480
|
|
Machinery
|
|
|
4,090,772
|
|
|
4,791,930
|
|
Office
equipment
|
|
|
937,505
|
|
|
1,098,459
|
|
Vehicles
|
|
|
277,925
|
|
|
296,854
|
|
Software
|
|
|
111,260
|
|
|
140,193
|
|
Leasehold
improvement
|
|
|
1,322,537
|
|
|
1,488,810
|
|
|
|
|
|
|
|
|
|
|
|
|
20,239,719
|
|
|
22,284,700
|
|
Accumulated
depreciation
|
|
|
(2,789,848
|
)
|
|
(3,804,849
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
17,449,871
|
|
$
|
18,479,851
|
|
The
depreciation and amortization for the six-months ended June 30, 2007 and 2008
were $503,415 and $964,979, 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
|
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
6 ─ RELATED PARTY TRANSACTIONS (Continued)
After
acquiring 100% interest in Dongguan Diguang S&T, the Company assumed the
loan of RMB10 million borrowed by Dongguan Diguang S&T from Shenzhen Diguang
Engine and Equipment on October 20, 2006. RMB5 million of the principal was
repaid during six months ended June 30, 2008 and at June 30, 2008, the
outstanding loan balance was RMB6,009,407, equivalent of $876,122, and the
cumulative interest for the aforementioned loan was RMB1,009,407, equivalent
of
$147,163. The accrued interest will be paid together with the repayment of
principal when the loan matures. The loan will mature on November 30, 2008.
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 will be repaid through four installment payments
on
June 30, 2008, December
31,
2008,
March 31, 2009 and June 30, 2009, respectively. $550,000 was paid at June 30,
2008. The accrued interest on the $2.2 million payable for the six months ended
June 30, 2008 was $74,350.
NOTE
7 ─ 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:
|
|
2008
|
|
2009
|
|
Sino
Olympics Industries Limited
|
|
|
2,000,000
|
|
|
2,000,000
|
|
After-tax
Profit Target (in million) (1)
|
|
$
|
31.9
|
|
$
|
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 the shareholders of
Diguang
International Development Co., Ltd.
can earn
any of the above presented shares each year. The Company estimated that the
net
income for six months ended June 30, 2008 would not meet the proportion of
the
after-tax profit target for the entire year and did not book any share-based
compensation for Song Brothers during this reporting period.
NOTE
8 ─ STOCK OPTIONS
The
Company adopted Statement of Financial Accounting Standards No.123 (amended
2008), “Share-Based Payment” (FAS 123(R)).
The
Company recognized the share-based compensation based on the grant-date fair
value estimated in accordance with the provisions of FAS 123(R). During the
six
months ended June 30, 2008, the Company granted 40,000 stock options with an
exercise price at $1.91 per share to two employees. The Company used
Black-Scholes option pricing model to determine the fair value of stock options
on the grant date. The fair value of 40,000 options was at approximately $1.36
per share, resulting in a share-based compensation totaling $54,400. As of
June
30, 2008, 236,556 shares of stock options became exercisable.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 ─ STOCK OPTIONS (Continued)
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:
|
|
June
30,
|
|
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
Expected
volatility
|
|
|
105.04
|
%
|
|
95.76
|
%
|
Weighted
average volatility
|
|
|
N/A
|
|
|
N/A
|
|
Expected
term
|
|
|
7
years
|
|
|
7
years
|
|
Risk
free interest rate
|
|
|
4.51
|
%
|
|
3.75
|
%
|
The
expected volatilities are based on the historical volatility of the Company’s
stock. The observation is made on a daily basis. The period of observation
covered was from March 1, 2007 to February 29, 2008. The expected terms of
stock
options are based on the average vesting period and the contractual life of
stock options granted. The newly granted 40,000 shares of stock options granted
to two employees are to be vested at 1/36 of
each
month over 36 months period.
The
risk-free rate is consistent with the expected terms of stock option and based
on the U.S. Treasury yield curve in effect at the time of the 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
market price of the grant date. 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 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 six months ended June 30, 2008 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, 2008
|
|
|
407,417
|
|
$
|
5.00
|
|
|
8.22
|
|
|
-
|
|
Granted
|
|
|
40,000
|
|
|
1.91
|
|
|
9.92
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
Forfeited
or expired
|
|
|
(1,000
|
)
|
|
5.00
|
|
|
-
|
|
|
-
|
|
Outstanding
at June 30, 2008
|
|
|
446,417
|
|
|
5.00
|
|
|
8.14
|
|
|
-
|
|
Exercisable
at June 30, 2008
|
|
|
236,556
|
|
$
|
5.00
|
|
|
7.99
|
|
|
-
|
|
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 ─ STOCK OPTIONS (Continued)
(Note:
The trading price of the Company’s common stock at June 30, 2008 was $1 per
share. Therefore, no intrinsic value reported.)
A
summary
of the status of the Company’s non-vested stock options during the six months
ended June 30, 2008 is presented below:
Non-Vested
Options
|
|
Shares
|
|
Weighted-Average
Grant
Date Fair Value
|
|
Non-vested
at January 1, 2008
|
|
|
262,028
|
|
$
|
10.66
|
|
Granted
|
|
|
40,000
|
|
|
1.36
|
|
Vested
|
|
|
(91,167
|
)
|
|
10.24
|
|
Forfeited
or expired
|
|
|
(1,000
|
)
|
|
11.10
|
|
|
|
|
|
|
|
|
|
Non-vested
at June 30, 2008
|
|
|
209,861
|
|
$
|
9.08
|
|
As
stock-based compensation expense recognized in the unaudited consolidated
statements of income for the six months ended June 30, 2007 and 2008 was based
on awards ultimately expected to vest, it has been reduced for estimated
forfeitures. SFAS 123(R) requires forfeitures to be 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 six months ended June 30, 2007 and 2008, stock-based
compensation expenses recognized were $785,020 and $283,252
respectively.
NOTE
9 ─ EARNINGS PER SHARE
The
following table sets forth the computation of basic and diluted net earnings
per
share for the periods indicated:
|
|
Six
Months Ended June 30,
|
|
Three
Months Ended June 30,
|
|
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common shareholders
|
|
$
|
(1,709,919
|
)
|
$
|
303,518
|
|
|
(660,591
|
)
|
$
|
134,788
|
|
Net
income (loss) used in computing diluted earnings per share
|
|
$
|
(1,709,919
|
)
|
$
|
303,518
|
|
|
(660,591
|
)
|
$
|
134,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic
|
|
|
22,593,000
|
|
|
22,300,646
|
|
|
22,593,000
|
|
|
22,274,485
|
|
Potential
diluted shares from stock options granted
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Weighted
average common share outstanding - diluted
|
|
|
22,593,000
|
|
|
22,300,646
|
|
|
22,593,000
|
|
|
22,274,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
(0.08
|
)
|
$
|
0.01
|
|
$
|
(0.03
|
)
|
$
|
0.01
|
|
Diluted
earnings per share
|
|
$
|
(0.08
|
)
|
$
|
0.01
|
|
$
|
(0.03
|
)
|
$
|
0.01
|
|
As
previously noted, all options are considered anti-dilutive for the three and
six
months ended June 30, 2008.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10 ─FULFILLMENT OF CAPITAL INFUSION OBLIGATION TO NORTH
DIAMOND
The
minority interest party infused capital of $737,500 on May 7, 2008 to North
Diamond. After the capital infusion, the minority interest stockholder has
fulfilled its capital infusion obligation to North Diamond. The Company
fulfilled its part of capital infusion in the amount of $1,369,643 to North
Diamond on July 25, 2008, on which the proceeds resulted from the borrowing
incurred subsequent to June 30, 2008. See Note 12 for subsequent event. After
the capital infusion by both parties, the registered capital requirement of
Yangzhou Dihao under China laws and regulations is satisfied and the proportion
of ownership does not change.
NOTE
11 ─ SEGMENT REPORTING
The
Company currently operates only in one business segment. As the Company’s major
production base is in China while export revenue and net income in overseas
entities 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.
|
|
Six
Months Ended June 30,
|
|
Three
Months Ended June 30,
|
|
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Sales
to China domestic customers
|
|
$
|
3,113,870
|
|
$
|
8,698,474
|
|
$
|
1,702,620
|
|
$
|
3,969,898
|
|
Sales
to international customers
|
|
|
12,544,638
|
|
|
24,398,295
|
|
|
7,193,801
|
|
|
12,927,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,658,508
|
|
$
|
33,096,769
|
|
$
|
8,896,421
|
|
$
|
16,897,178
|
|
|
|
China
|
|
International
|
|
|
|
|
|
Customers
|
|
Customers
|
|
Total
|
|
|
|
|
|
|
|
|
|
As
of June 30, 2007
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,113,870
|
|
$
|
12,544,638
|
|
$
|
15,658,508
|
|
Gross
margin
|
|
|
12
|
%
|
|
18
|
%
|
|
17
|
%
|
Receivable
|
|
|
4,885,694
|
|
|
6,844,101
|
|
|
11,729,795
|
|
Inventory
|
|
|
6,549,228
|
|
|
-
|
|
|
6,549,228
|
|
Property
and equipment
|
|
|
15,943,525
|
|
|
-
|
|
|
15,943,525
|
|
Expenditures
for long-lived assets
|
|
|
4,285,521
|
|
|
-
|
|
|
4,285,521
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
8,698,474
|
|
$
|
24,398,295
|
|
$
|
33,096,769
|
|
Gross
margin
|
|
|
16
|
%
|
|
14
|
%
|
|
15
|
%
|
Receivable
|
|
|
5,590,960
|
|
|
16,876,256
|
|
|
22,467,216
|
|
Inventory
|
|
|
11,788,520
|
|
|
-
|
|
|
11,788,520
|
|
Property
and equipment
|
|
|
18,501,965
|
|
|
-
|
|
|
18,501,965
|
|
Expenditures
for long-lived assets
|
|
|
1,788,752
|
|
|
-
|
|
|
1,788,752
|
|
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
12 ─ SIGNIFICANT SUBSEQUENT EVENT
On
July
1, 2008, the Board of Directors of the Company approved the application of
Shenzhen Diguang Electronics Co., Ltd., “Shenzhen Diguang” thereafter for
banking facilities of RMB40 million from Shenzhen Pingan Bank Co. Ltd. The
banking facilities will be used for the purpose of expanding manufacture
activities in the newly built plant in Dongguan
Diguang
S&T, as well as the second phase capital contribution of Yangzhou Dihao. On
July 1, 2008, Shenzhen Diguang received a loan of RMB30 million from Shenzhen
Pingan Bank.
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 OUR 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; OUR ABILITY TO COST-EFFECTIVELY
MANUFACTURE OUR PRODUCTS ON A COMMERCIAL SCALE; THE CONCENTRATION OF OUR CURRENT
CUSTOMER BASE; COMPETITION; OUR ABILITY TO COMPLY WITH APPLICABLE REGULATORY
REQUIREMENTS; POTENTIAL NEED FOR EXPANSION OF OUR PRODUCTION FACILITY; THE
POTENTIAL LOSS OF A STRATEGIC RELATIONSHIP; INABILITY TO ATTRACT AND RETAIN
KEY
PERSONNEL; MANAGEMENT'S ABILITY TO EFFECTIVELY MANAGE OUR GROWTH; DIFFICULTIES
AND RESOURCE CONSTRAINTS IN DEVELOPING NEW PRODUCTS; PROTECTION AND ENFORCEMENT
OF OUR INTELLECTUAL PROPERTY AND INTELLECTUAL PROPERTY DISPUTES; COMPLIANCE
WITH
ENVIRONMENTAL LAWS; CLIMATE UNCERTAINTY; CURRENCY FLUCTUATIONS; CONTROL OF
OUR
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 OUR
CURRENT REPORT ON FORM 8-K FILED WITH THE COMMISSION ON MARCH 21, 2006 FOR
A
MORE DETAILED DESCRIPTION OF THESE SIGNIFICANT RISKS AND UNCERTAINTIES. WE
CAUTION THE READER, HOWEVER, NOT TO UNDULY RELY ON THESE FORWARD-LOOKING
STATEMENTS.
RISK
FACTORS
Investment
in our common stock involves risk. You should carefully consider the investing
risks before deciding to invest. The market price of our 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 prospectus, including our consolidated financial
statements and the accompanying notes. You should pay particular attention
to
the fact that we are a holding company with substantial operations in China
and
are subject to legal and regulatory environments that in many respects differ
from that of the United States. Our 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
We
specialize 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.
Our
Headquarter is in Shenzhen, China. We conduct our business principally through
the operations of Shenzhen Diguang Electronics, based in Shenzhen along with
its
main backlight manufacturing operation in Dongguan, Guangdong Province, China,
Dihao Co., Ltd., based in Yangzhou, thereafter “Dihao” and Wuhan Diguang
Electronics Co., Ltd, based in Wuhan, thereafter “Wuhan.”. Shenzhen Diguang
Electronics had approximately 2,500 full-time employees as of June 30, 2008,
Dihao
is
a 100% wholly owned subsidiary of North Diamond. We gained controlling interest
of Dihao by acquiring 65% of North Diamond on January 3, 2007. As of June 30,
2008, Dihao has approximately 280 full-time employees.
Wuhan
was
established on March 13, 2007 and commenced its operation on July 1, 2007.
Wuhan
was established with the capacity to provide large inches of TFT-LCD which
are
mainly soled to its customers from Taiwan. Wuhan had approximately 230 employees
as of June 30, 2008.
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 upon acquisition. As of June 30, 2008, Dongguan Diguang S&T has
approximately 30 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 our financial condition presented in this section
are
based on our 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 June 30, 2008 and 2007
Revenue
Net
revenue was approximately $16.9 million for the three months ended June 30,
2008, an increase of $8.0 million, or 90%, compared with $8.9 million for the
same period in the prior year. Of the $8.0 million increase, $4.0 million came
from the sales of CCFL products at the Wuhan facilities which started operation
on July 1, 2007, and $3.6 million in revenue was attributable to Shenzhen
Diguang Electronics. The remaining increase of 0.3 million came from the sales
of mid-size LED and CCFL products manufactured at the Yangzhou facility. The
backlight products manufactured at the Wuhan facilities were delivered mainly
to
certain top TFT-LCD panel makers for the higher-priced 19” CCFL products. The
increase in revenue generated by Shenzhen Diguang Electronics was due mainly
to
additional sales to new customers and revenue from the LCD module, “LCM”,
assembly, which include the LCD panel that displays images and a backlight
unit
that supplies light to the LCD panel makers. Increased sales in Yangzhou were
mainly due to an increase of sales from one of its major customers. The
backlight products manufactured at Yangzhou facility were delivered mainly
to
Taiwanese customers located in the Eastern China region, particularly in
Shanghai where certain famous international and domestic LCD module
manufacturers reside.
Our
total
net revenue can be divided into international sales and domestic sales as
follows:
|
|
Three
Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
International
sales
|
|
|
12,927,000
|
|
|
7,194,000
|
|
Domestic
sales
|
|
|
3,970,000
|
|
|
1,702,000
|
|
Total
|
|
|
16,897,000
|
|
|
8,896,000
|
|
Sales
to
international customers totaled $12.9 million for the three months ended June
30, 2008, an increase of $5.7 million, or 79%, compared with $7.2 million for
the same period in the prior year. The increase in revenue was due primarily
to
the global demand for digital display products such as automobile TV, portable
DVD, MP3 and MP4 and LCD product series, resulting in a surge in demand for
the
LED backlight and also the LCM assembly for both CCFL and LED backlights. Of
the
$5.7 million increase, approximately $4.0 million was mainly attributable to
sales to Taiwanese customers generated at the Wuhan facilities, which was
attributable to the mass production starting January 2008. The sales to major
Korean customers increased to $3.4 million for the second quarter of 2008,
an
increase of $2.5 million, or 277%, compared with $901,000 for the same period
of
2007. The increase in revenue generated from Korean customers was attributable
mainly to the continued delivery of the mid size CCFL products to a giant
customer. In the mean time, sales to Taiwanese customers by Shenzhen Diguang
Electronics decreased by $1.1 million, due to transfer of product orders from
certain customers to the Wuhan facilities.
Sales
to
domestic customers were $4.0 million for the second quarter of 2008, an increase
of $2.3 million, or 135%, compared with $1.7 million for the same period in
2007. The increase in domestic sales was mainly attributable to the sale of
the
mid-size LED to a new customer amounting to $1.5 million in the second quarter
this year in Shenzhen Diguang Electronics since its maiden sales in the first
quarter this year.
We
currently have three manufacturing facilities located in the East China region
(Yangzhou), Central China region (Wuhan), and Southern China region (Dongguan).
Especially, we have various capacities in the principal manufacturing facility
located in Dongguan to serve the customers who are LCD TV and monitor
manufacturers and LCD module assembly firms. Based on the three manufacturing
facilities, we believe that we have strategically deployed our production
capacity in China for our long term growth.
From
the
product mix aspect, our sales can be divided into four main categories: CCFL
backlight, LED backlight, LCM and LED general lighting products as follows.
|
|
Three
Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
CCFL
backlight
|
|
|
10,702,000
|
|
|
4,807,000
|
|
LED
backlight
|
|
|
5,488,000
|
|
|
4,089,000
|
|
LCM
|
|
|
621,000
|
|
|
-
|
|
LED
general lighting
|
|
|
87,000
|
|
|
-
|
|
Total
|
|
|
16,898,000
|
|
|
8,896,000
|
|
During
the three months ended June 30, 2008, CCFL products accounted for 63% of our
total sales revenue, compared with 54% for the same period in 2007. Sales of
CCFL backlights totaled $10.7 million for the second quarter of 2008, an
increase of $5.9 million, or 123%, compared with $4.8 million for 2007. The
increase is mainly attributable to the sales generated at the Wuhan facilities
delivering large size CCFL products amounting to $4.0 million in the second
quarter of 2008 on an OEM basis to a giant customer. Moreover, sales generated
from the Yangzhou facilities to Taiwanese customers and a significant Korean
customer was another significant contributing factor.
Sales
of
LED backlight products totaled $5.5 million for the second quarter of 2008,
an
increase of $1.4 million, or 34%, compared with $4.1 million for the second
quarter in 2007. The proportion of LED backlight products, primarily small
to
medium sizes of backlight, accounted for 32% for the second quarter of 2008,
which is 13% lower than 46% in the second quarter of 2007 mainly due to the
increase in large size CCFL manufactured in the Wuhan facilities. Comparing
with
small to medium size of backlight basis, LED products contributed to 43% and
51%
for the second quarter for 2008 and 2007. The increase of sales of LED
backlights is mainly due to the rise of LED products demanded by new and
existing customers in the global market for more small inch LCD products. Mobile
phones and electrical products require LED backlight; therefore, there is a
significant increase in LED products ranging from 4” to 10.5” delivered to our
customers. The shift to LED products is due to the acceptance of our low-cost
solution on its application by our customers. The trend to shift the LED mid
size backlights can increase our total revenue as the average selling price
of
LED products is higher than that of the CCFL backlights.
We
expect
our LED shipments will continue to grow and can be more sustainable as the
transition from CCFL to LED backlights becomes more compelling due to its
superior performance in contrast ratio, color gamut, localized dimming and
low
power consumption.
We
have
successfully penetrated into the LCM assembly following our integration
strategy. The TFT-LCD glass substitute is supplied by our customers on an OEM
basis to lessen our working capital funding and this quarter we have recorded
$621,000 revenue for both CCFL and LED LCM to the LCD panel makers. This
provides us a vast opportunity for downstream integration.
This
quarter we are able to deliver maiden sales of LED general lighting products
of
$87,000 to Xiangfan Municipal Government in Hubei Province in China. This
provides us the roadmap to explore the business in
LED
general lighting including the road light, scenic lighting, government
departments, schools, hospitals and commercial buildings.
Cost
of Sales
Since
the
basic materials for all backlight products are similar, we discuss cost of
sales
in the aggregate for all products. Cost of sales was $14.7 million for the
second quarter of 2008, an increase of $7.0 million, or 93%, compared with
$7.7
million for the second quarter in 2007. The increase in cost of sales was in
line with the increase of 90% in total revenue for the second
quarter.
Raw
material cost was $11.9 million for the second quarter of 2008, an increase
of
$5.7 million, or 92%, compared with $6.2 million for the second quarter of
2007.
The increase in raw materials cost for the second quarter of 2008 was mainly
attributable to the increase of sales volume. Furthermore, we were unable to
decrease the procurement cost in the same percentage as the reduction in the
unit price pressured by market force as a general trend because the supplies
of
certain components were limited. Regarding the increase of raw material cost,
the increase of large size CCFL product volume accounted for the majority in
the
increase of raw material cost as the materials used for CCFL products had a
much
higher cost tag attached than the cost of raw materials used for manufacturing
other products. Raw material cost accounted for 70% of total revenue in the
second quarter of 2008, compared with 70% in the second quarter of 2007. To
decrease the working capital requirement in relation to purchasing raw materials
used for large size of CCFL backlight, we processed the products for one of
our
key Taiwanese customers in Wuhan on an OEM basis. The OEM operation of Wuhan
increased the percentage of raw material cost to total revenue since the main
cost of sales in Wuhan is raw materials. To improve the Company’s overall gross
profit, we tried very hard to develop new customers through tough negotiation
in
order for us to become one of their vendors.
Labor
cost was $1.8 million for the second quarter of 2008, representing an increase
of $664,000, or 60%, compared with $1.1 million for the same period of 2007.
Compared with the 93% increase in cost of sales, the increase of 60% in labor
cost was not significant. As a percentage of labor cost to revenue, labor cost
accounted for 11% of total net revenue for the second quarter of 2008, compared
with 13% of total net revenue for the same period in 2007. Decrease in
proportion of labor cost to total revenue demonstrated our efforts to control
labor cost through improving our productivity. In addition, the increase in
the
production of large inches of CCEL products did not require as much labor cost
as producing the small and medium size of CCFL products.
Production
overhead was $1.0 million for the three months ended June 30, 2008, an increase
of $706,000, or 240%, compared with $294,000 for the second quarter of 2007
resulting from an increase in production volume and indirect overhead such
as
water and electricity expense, depreciation charges for new addition of
machineries, repairs and maintenance expenses for new manufacturing facilities
in Wuhan and Yangzhou. Production overhead accounted for 6% of total revenue
in
the second quarter of 2008, compared with 3% of total revenue for the same
period in 2007.
Gross
Margin
The
overall gross margin for the second quarter in 2008 was 12.9%, a 0.8% decrease,
compared with 13.7% gross margin for the same period in 2007. During the second
quarter of 2008, we continued to suffer a price reduction pressure on similar
products compared with the unit price we got in the second quarter of 2007.
We
were unable to transfer the price reduction pressure to our suppliers, which
meant that we still paid the market price to procure our raw materials. The
sales volume for 19” and 22” CCFL LCD increased dramatically in the second
quarter of 2008, amounting to $4.0 million, for a giant Taiwanese customer
on an
OEM basis in order to lower our working capital requirement, which had an
average gross margin of only 4.3%. Moreover, in order to move into the high-end
products, the price of certain components contained in our customers’
specifications, particularly the mid size LED backlights, was comparatively
higher than the price of the same type of components used in the low-end
products. Hence, we may sacrifice a reduction of gross margin to secure the
customers because we were unable to pass the entire burden to our customers
in
order to maintain our market share in this industry. To the extent we were
able
to purchase our raw materials at a lower price, which was consistent with the
general trend of that particular product market, we did everything possible
to
take advantage of the lower prices, which mitigated the price pressure from
our
customers.
Regarding
international sales, our gross margin was approximately 12% for the second
quarter of 2008, a 1% increase, compared with 11% for the second quarter of
2007. Regarding domestic sales, our gross margin was approximately 15%, a 12%
decrease, compared with 27% for the second quarter of 2007 due to the higher
margin generated from the shift to mid-size LED backlight.
We
expect
the gross margin may decrease slightly during the next six months and we are
trying hard to expand the volume of total sales to mitigate the impact of
dropped gross margin.
Selling
Expenses
Selling
expenses were $375,000 for the second quarter of 2008, an increase of
approximately $38,000, or 11%, compared with $337,000 for the second quarter
of
2007. For the selling expenses, transportation expenses increased by $110,000,
or 133%, which is in line with the surge in revenue by 90% in this quarter.
The
sample fees increased $33,000 and office expenses increased $41,000 compared
with the same period in 2007. On the other hand, there was a decrease of
$146,000 in commission expenses for the agents exploring markets due to the
reversal of $100,000 overprovided expenses for prior years on an accumulative
basis. Our commission expenditure presented a decreasing trend during the past
several quarters; the major reason for this decrease is due to a sales decline
to our one big Hong Kong customer and we can explore new customers through
our
marketing team. Also, we reduced the overall commission rate to our sales agents
due to lower gross margin. As a percentage of total revenue, selling expenses
were approximately 2.2% for the second quarter of 2008 and 3.8% for the same
period in the prior year, respectively.
Research
and Development Expenses
The
net
research and development expenses were $334,000 for the second quarter of 2008,
a decrease of $60,000 or 15%, compared with $394,000 for the same period in
2007. The decrease was mainly attributable to the mould income of $101,000
from
customers and the financial subsidy for the research fund of $71,000 for the
second quarter ended June 30, 2008. On the other hand, there is an increase
in
payroll expense of $90,000 related to our engineers performing research and
development functions. As a percentage of total sales revenue, research and
development expenses were approximately 2.0% and 4.4% for the three months
ended
June 30, 2008 and 2007, respectively.
General
and Administrative Expenses
General
and administrative expenses were $1.1 million for the second quarter of 2008,
a
decrease of $190,000, or 15%, compared with $1.3 million for the same period
in
2007. The major components of general and administrative expenses include
payroll, share-based compensation, water and electricity fee, rental fee and
professional service etc. Share-based compensation for the second quarter of
2008 was $146,000, a decrease of $12,000, or 7.6%, compared to $158,000 for
the
second quarter of 2007. A decrease of $91,000 in rental fee is mainly due to
Shenzhen Diguang Electronics not incurring any rental expenses from 2008
onwards. Also, the commencement expenses in connection with the Wuhan office
in
the second quarter of 2007 amounted to $103,000 and no such expenses incurred
this quarter. As a percentage of total sales revenue, general and administrative
expenses represented 6.6% and 14.6% for the three months ended June 30, 2008
and
2007, respectively. Excluding the stock compensation expense, the remaining
general and administrative expense for the three months ended June 30, 2008
and
2007 represented 5.7% and 12.9% of total revenue, respectively.
Interest
Expense
The
net
interest expenses was $64,000 for the quarter ended June 30, 2008, representing
an increase of $166,000, compared with an interest income of $102,000 in the
same quarter in 2007. We had no third party interest-bearing debt outstanding
during both quarters ended June 30, 2008 and 2007, respectively. Among the
increase of net interest expenses in the second quarter of 2008, there is an
interest of $33,000 accrued for outstanding consideration for acquisition of
100% interest in Dongguan S&T. Interest expense accrued for a related party
company loan in Dongguan S&T for the second quarter of 2007 was capitalized,
but the interest expense $22,000 was expensed in the second quarter of 2008.
No
interest income was recognized during the second quarter of 2008, compared
with
an interest income of $67,000 from short-term deposit in the same period of
prior year. The L/C factoring expenses amounted to $44,000 for Wuhan Diguang
during the second quarter of 2008 and there were no such expenses in 2007.
Net
Interest expenses (income) for the periods ended June 30, 2008 and 2007
represented 0.38% and( 1.14% )of total sales revenue, respectively.
Income
Tax Provision
Income
tax income for the quarter ended June 30, 2008 was approximately $8,000 compared
with $19,000 provision for the same period in 2007. The decrease in income
tax
provision was attributable mainly to income tax provided in Shenzhen Diguang
Electronics. $34,000 of income tax expense was reversed in Shenzhen Diguang
Electronics during the second quarter of 2008 due to the taxable loss occurred.
But during the same period of prior year, $19,000 of income tax expenses was
provided in Shenzhen Diguang Electronics. Income tax expense provided in Yanzhou
Dihao and Dongguan S&T during the second quarter of 2008 amounted to $26,000
for the taxable profit recognized. As a percentage of net revenue, income tax
(income)/provision amounted to (0.05%) and 0.22% for the three months ended
June
30, 2008 and 2007, respectively.
Net
Income
Net
income was $135,000 for the three months ended June 30, 2008, compared with
a
net loss of $661,000 for the three months ended June 30, 2007, representing
an
increase of approximately $796,000 in net income. Minority interest portion
of
net income generated at North Diamond was $60,000 and $110,000 for the second
quarter of 2008 and 2007, respectively, representing 31% of net income for
the
second quarter of 2008 and 20% of net loss for the first quarter of 2007. The
increase in net income was mainly due to the increase in gross profit brought
by
increased revenue and decrease in research and development expenses and general
and administrative expenses, offset by the increase in selling expense and
net
interest expenses. As a percentage of total revenue, net income for the three
months ended June 30, 2008 accounted for 0.8% whereas net loss for the second
quarter of 2007 accounted for (7.4%), representing an increase of 8.2%.
Earnings
per Share
The
basic
earnings per share were $0.01 for the second quarter of 2008, compared with
basic loss per share of $0.03 for the second quarter of 2007. Increase in basic
earnings was due to increase in net income.
Comparison
of Six Months Ended June 30, 2008 and 2007
Revenue
Net
revenue was approximately $33.0 million for the six months ended June 30, 2008,
an increase of $17.3 million, or 110%, compared with $15.7 million for the
same
period in the prior year. Of the $17.3 million increase, $7.8 million came
from
the sales of CCFL products at the Wuhan facilities which started operation
on
July 1, 2007, and $7.0 million in revenue was attributable to Shenzhen Diguang
Electronics. The remaining increase of $2.5 million came from the sales of
both
mid-size LED and CCFL products manufactured at the Yangzhou facility. The
backlight products manufactured at the Wuhan facilities were delivered mainly
to
certain top TFT-LCD panel makers for the higher-priced 19” CCFL products. The
increase in revenue generated by Shenzhen Diguang Electronics was due mainly
to
additional sales to new customers and the LCD module, “LCM”, assembly including
the LCD panel that displays images and a backlight unit that supplies light
to
the LCD panel makers. Increased sales in Yangzhou were mainly due to an increase
of sales from one of its major customers. The backlight products manufactured
at
the Yangzhou facility were delivered mainly to Taiwanese customers located
in
the Eastern China region, particularly in Shanghai where certain famous
international and domestic LCD module manufacturers reside.
Our
total
net revenue can be divided into international sales and domestic sales as
follows:
|
|
Six
Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
International
sales
|
|
|
24,398,000
|
|
|
12,545,000
|
|
Domestic
sales
|
|
|
8,699,000
|
|
|
3,114,000
|
|
Total
|
|
|
33,097,000
|
|
|
15,659,000
|
|
Sales
to
international customers totaled $24.4 million for the six months ended June
30,
2008, an increase of $11.9 million, or 95%, compared with $12.5 million for
the
first half year in the prior year. The increase in revenue was due primarily
to
the global demand for digital display products such as automobile TV, portable
DVD, MP3 and MP4 and LCD product series, resulting in a surge in demand for
the
LED backlight and also the LCM assembly for both CCFL and LED backlights. Of
the
$11.9 million increase, approximately $10.1 million was mainly attributable
to
sales to Taiwanese customers generated at the Wuhan and Yangzhou facilities,
and
a $1.7 million decrease in sales to Taiwanese customers by Shenzhen Diguang
Electronics. The increase in sales generated by the Yangzhou facility was due
to
the increase in orders placed by one big customer along with its business
expansion and the increase in sales generated by the Wuhan facilities was
attributable to the mass production starting January 2008. The sales to major
Korean customers increased to $5.9 million for the first half year of 2008,
an
increase of $4.1 million, or 228%, compared with $1.8 million for the same
period of 2007. The increase in revenue generated from Korean customers was
attributable mainly to the continued delivery of the mid size CCFL products
to a
giant customers.
Sales
to
domestic customers were $8.7 million for the first half year of 2008, an
increase of $5.6 million, or 181%, compared with $3.1 million for the same
period in 2007. The increase in domestic sales was mainly attributable to the
sale of the mid-size LED to a new customer amounting $4.4 million in the first
half year in 2008 in Shenzhen Diguang Electronics since its maiden sales in
the
first quarter this year.
We
currently have three manufacturing facilities located in the East China region
(Yangzhou), Central China region (Wuhan), and Southern China region (Dongguan).
Especially, we have various capacities in the principal manufacturing facility
located in Dongguan to serve the customers who are LCD TV and monitor
manufacturers and LCD assembly firms. Based on the three manufacturing
facilities, we believe that we have strategically deployed our production
capacity in China for our long term growth.
From
the
product mix aspect, our sales can be divided into four main categories: CCFL
backlight, LED backlight, LCM and LED general lighting products as
follows.
|
|
Six
Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
CCFL
backlight
|
|
|
19,013,000
|
|
|
8,720,000
|
|
LED
backlight
|
|
|
13,376,000
|
|
|
6,939,000
|
|
LCM
|
|
|
621,000
|
|
|
-
|
|
LED
general lighting
|
|
|
87,000
|
|
|
-
|
|
Total
|
|
|
33,097,000
|
|
|
15,659,000
|
|
During
the six months ended June 30, 2008, CCFL products accounted for 57% of our
total
sales revenue, compared with 56% for the same period in 2007. Sales of CCFL
backlights totaled $19.0 million for the first half year of 2008, an increase
of
$10.3 million, or 118%, compared with $8.7 million for 2007. The increase is
mainly attributable to the sales generated at the Wuhan facilities delivering
large size CCFL products amounting to $7.8 million in the first half year of
2008 on an OEM basis to a giant customer. Moreover, sales generated from the
Yangzhou facilities to Taiwanese customers and a significant Korean customer
was
another significant contributing factor.
Sales
of
LED backlight products totaled $13.4 million for the first half of 2008, an
increase of $6.5 million, or 94%, compared with $6.9 million for the first
half
year in 2007. The proportion of LED products, primarily small to medium sizes
of
backlight, accounted for 40% for the first half year of 2008, which is 4% lower
than 44% in the same period of 2007 mainly due to the increase in large size
CCFL manufactured in the Wuhan facilities. Comparing with small to medium size
of backlight basis, LED products contributed to 60% and 53% for the first half
year for 2008 and 2007 respectively. The increase in sales of LED products
is
mainly due to the rise of LED products demanded by new and existing customers
in
the global market for more small inch LCD products. Mobile phones and electrical
products require LED backlight; therefore, there is a significant increase
in
LED products ranging from 4” to 10.5” delivered to our customers. The shift to
LED products is due to the acceptance of our low-cost solution on its
application by our customers. The trend to shift the LED mid size backlights
can
increase our revenue as the average selling price is higher than that of the
CCFL backlights. Yangzhou Dihao has delivered LED products to the customers
amounting to $2.4 million, which accounts for 45% of total sales in Yangzhou,
whereas it only delivered CCFL products in the first half year of 2007.
We
expect
our LED shipments will continue to grow and can be more sustainable as the
transition from CCFL to LED backlights becomes more compelling due to its
superior performance in contrast ratio, color gamut, localized dimming and
low
power consumption.
We
have
successfully penetrated into the LCM assembly following our integration
strategy. The TFT-LCD glass substitute is supplied by our customers on an OEM
basis to lessen our working capital funding and we have recorded $621,000
revenue for both CCFL and LED LCM to the LCD panel makers for the first half
year of 2008. This provides us the vast opportunity for downstream
integration.
From
the
second quarter ended June 30ô2008 onwardsô we are able to deliver maiden sales
of LED lighting of $87,000 to Xiangfan Municipal Government in Hubei Province
in
China. This provides us the roadmap to explore the business in
LED
general lighting including the road light, scenic lighting, government
departments, schools, hospitals and commercial buildings.
Cost
of Sales
Since
the
basic materials for all backlight products are similar, we discuss cost of
sales
in the aggregate for all products. Cost of sales was $28.3 million for the
first
half year of 2008, an increase of $15.3 million, or 118%, compared with $13.0
million for the first half year of 2007. The increase in cost of sales was
in
line with the increase of 111% in total revenue for the second
quarter.
Raw
material cost was $23.1 million for the first half year of 2008, an increase
of
$12.7 million, or 122%, compared with $10.4 million for the s first half year
of
2007. The increase in raw materials cost for the first half year of 2008 was
mainly attributable to the increase of sales volume. Furthermore, we were unable
to decrease the procurement cost in the same percentage as the reduction in
the
unit price pressured by market force as a general trend because the supplies of
certain components were limited. Regarding the increase of raw material cost,
the increase of large size CCFL product volume accounted for the majority in
the
increase of raw material cost as the materials used for CCFL products had a
much
higher cost tag attached than the cost of raw materials used for manufacturing
other products. As a result, raw material cost accounted for 70% of total
revenue in the first half year of 2008, compared with 67% in the first half
year
of 2007. The increased percentage is mainly due to the extent of decreases
in
raw materials cost was lower than the extent of decreases in unit price for
finished goods. To decrease the working capital requirement in relation to
purchasing raw materials used for large size CCFL backlight, we processed the
products for one of our key Taiwanese customers in Wuhan on an OEM basis. The
OEM operation of Wuhan increased the percentage of raw material cost to total
revenue since the main cost of sales in Wuhan is raw materials. To improve
the
Company’s overall gross profit, we tried very hard to develop new customers
through tough negotiation in order for us to become one of their
vendors.
Labor
cost was $3.3 million for the first half year of 2008, representing an increase
of $1.2 million, or 57%, compared with $2.1 million for the same period of
2007.
Compared with the 118% increase in cost of sales, the increase of 57% in labor
cost was not significant. As a percentage of labor cost to revenue, labor cost
accounted for 10% of total net revenue for the first half year of 2008, compared
with 14% of total net revenue for the same period in 2007. Decrease in
proportion of labor cost to total revenue demonstrated our efforts to control
labor cost through improving our productivity. In addition, the increase in
the
production of large inches of CCEL products did not require as much labor cost
as producing the small and medium size of CCFL products.
Production
overhead was $1.9 million for the first half year ended June 30, 2008, an
increase of $1.4 million, or 319%, compared with the same level of $439,000
for
the same period of 2007 resulting from an increase in production volume and
indirect overhead such as water and electricity expense, depreciation charges
for new addition of machineries, repairs and maintenance expenses for new
manufacturing facilities in Wuhan and Yangzhou. Production overhead accounted
for 5% of total revenue in the first half year of 2008, compared with 3% of
total revenue for the same period in 2007.
Gross
Margin
The
overall gross margin for the first half year in 2008 was 14.6%, a 2.4% decrease,
compared with 17.0% gross margin for the same period in 2007. During the first
half year of 2008, we continued to suffer a price reduction pressure on similar
products compared with the unit price we got in the second quarter of 2007.
We
were unable to transfer the price reduction pressure to our suppliers, which
meant that we still paid the market price to procure our raw materials. The
sales volume for 19” and 22” CCFL LCD increased dramatically in the first half
year of 2008, amounting to $7.8 million, for a giant Taiwanese customer on
an
OEM basis in order to lower our working capital requirement, which had an
average gross margin of only 5.9% for the current year。 Moreover, in order to
move into the high-end products, the price of certain components contained
in
our customers’ specifications, particularly the mid size LED backlights, was
comparatively higher than the price of the same type of components used in
the
low-end products. Hence, we may sacrifice a reduction of gross margin to secure
the customers because we were unable to pass the entire burden to our customers
in order to maintain our market share in this industry. To the extent we were
able to purchase our raw materials at a lower price, which was consistent with
the general trend of that particular product market, we did everything possible
to take advantage of the lower prices, which mitigated the price pressure from
our customers.
Regarding
international sales, our gross margin was approximately 14% for the first half
year of 2008, a 4.2% decrease, compared with 18.2% for the second quarter of
2007. Regarding domestic sales, our gross margin was approximately 16%, a 4%
increase, compared with 12% for the first half year of 2007ò
We
expect
the gross margin may decrease slightly during the next six months and we are
trying hard to expand the volume of total sales to mitigate the impact of
dropped gross margin.
Selling
Expenses
Selling
expenses were $783,000 for the first half year of 2008, a decrease of
approximately $180,000, or 19%, compared with $963,000 for the second quarter
of
2007. For the selling expenses, there was a decrease of $373,000 in commission
expenses for the agents exploring markets due to the reversal of $100,000
overprovided expenses for prior years on an accumulative basis. Our commission
expenditure presented a decreasing trend during the past several quarters;
the
major reason for this decrease is due to a sales decline to our one big Hong
Kong customer and we can explore new customers through our marketing team.
Also,
we reduced the overall commission rate to our sales agents due to lower gross
margin. On the other hand, transportation expenses increased by $42,000 or
18%
and the marketing expenses increased by $88,000 or 106% and the salaries
increased by $63,000 or 29% for business expansion. As a percentage of total
revenue, selling expenses were approximately 2.3% for the first half year of
2008 and 6.2% for the same period in the prior year, respectively.
Research
and Development Expenses
The
net
research and development expenses were $652,000 for the first half year of
2008,
an increase of $94,000 or 17%, compared with $558,000 for the same period in
2007. During the first half year of 2008, there was increase in payroll expense
of $101,000 related to our engineers performing research and development
functions and the increase of $80,000 in materials and mould charges for
development of new products. On the other hand, we had received the mould income
of $101,000 from customers and the financial subsidy for the research fund
of
$71,000 for the first half year ended June 30, 2008. As a percentage of total
sales revenue, research and development expenses were approximately 2.0% and
3.6% for the half year ended June 30, 2008 and 2007, respectively.
General
and Administrative Expenses
General
and administrative expenses were $2.5 million for the first half year of 2008,
a
decrease of $566,000, or 18%, compared with $3.1 million for the same period
in
2007. The major components of general and administrative expenses include
payroll, share-based compensation, water and electricity fee, rental fee and
professional service etc. Share-based compensation for the first half year
of
2008 was $283,000, a decrease of $502,000, or 64%, compared to $785,000 for
the
first half of 2007 following certain employees entitling the employee option
scheme had already terminated the employment. A decrease of $133,000 in rental
fee is mainly due to Shenzhen Diguang Electronics not incurring any rental
expenses from 2008 onwards since the Company has acquired an office building
in
2007 and the previous office rental contract terminated. Also, the commencement
expenses in connection with the Wuhan office in the first half year of 2007
amounted to $103,000 and no such expenses incurred this quarter. Payroll expense
was $982,000 in the first half year of 2008, a slight increase of $119,000,
or
14%, compared with $863,000 for the same period in 2007. The remaining increase
of $53,000 related to the business expenses due to the business expansion.
As a
percentage of total sales revenue, general and administrative expenses
represented 7.0% and 20% for the half year ended June 30, 2008 and 2007,
respectively. Excluding the stock compensation expense, the remaining general
and administrative expense for the half year ended June 30, 2008 and 2007
represented 6.6% and 14.9% of total revenue, respectively.
Interest
Expense
The
net
interest expenses was $122,000 for the first half year ended June 30, 2008,
representing an increase of $213,000, compared with an interest income of
$91,000 in the same
period
in 2007.
We had no third party interest-bearing debt outstanding during both quarters
ended June 30, 2008 and 2007, respectively. Among the increase of net interest
expenses in the first half year of 2008, there is an interest of $74,000 accrued
for outstanding consideration for acquisition of 100% interest in Dongguan
S&T. Interest expense accrued for a related party company loan in Dongguan
S&T for the first half year of 2007 was capitalized, but the interest
expense $42,000 was expensed in the same period of 2008. No interest income
was
recognized during the six months ended June 30, 2008, compared with an interest
income of $78,000 from short-term deposit in the same period of prior year.
The
L/C factoring expenses amounted to $44,000 for Wuhan Diguang during the first
half year of 2008 and there were no such expenses in 2007. Net Interest
expenses(income) for the six months ended June 30, 2008 and 2007 represented
0.37% and (0.58%) of total sales revenue, respectively.
Income
Tax Provision
Income
tax provision for the half year ended June 30, 2008 was approximately $125,000,
an increase of $106,000 or 558%, compared with $19,000 provision for the same
period in 2007. The increase in income tax provision was attributable to an
increase of taxable income at Shenzhen Diguang Electronics and Yangzhou. The
taxable profit at Shenzhen Diguang Electronics was $314,000 for the first half
year of 2008, compared with a taxable loss of $595,000 for the first half year
in 2007, considering the fact that the applicable tax rate for Shenzhen Diguang
Electronics was 18% for 2008 and 15% for 2007, respectively. The taxable income
in Yangzhou facility was $621,000 for the first half year of 2008 and the income
tax rate was 12.5% in 2008, the taxable profit of $390,000 in the same period
of
2007 and no income tax was accrued due to Yangzhou in exemption period in 2007.
As a percentage of net revenue, income tax provision was 0.38% and 0.12% for
the
half year ended June 30, 2008 and 2007, respectively.
Net
Income
Net
income was $304,000 for the half year ended June 30, 2008, compared with a
net
loss of $1.7 million for the half year ended June 30, 2007, representing an
increase of approximately $2.0 million in net income. Minority interest portion
of net income generated at North Diamond was $190,000 and $136,000 for the
first
half year of 2008 and 2007, respectively, representing 38% of net income for
the
first half year of 2008 and 9% of net loss for the first half year of 2007.
The
increase in net income was mainly due to the increase in gross profit brought
by
increased revenue and decrease in selling expense and general and administrative
expenses, offset by the increase in research and development costs and net
interest expenses. As a percentage of total revenue, net income for the six
months ended June 30, 2008 accounted for 0.9% whereas net loss for the same
period of 2007 accounted for 10.9%, representing an increase of 11.8%.
Earnings
per Share
The
basic
earnings per share were $0.01 for the first half year of 2008, compared with
basic loss per share of $0.08 for the same period of 2007. Increase in basic
earnings was due to increase in net income.
Liquidity
and Capital Resources
As
of
June 30, 2008, we had total assets of $64.3 million, of which cash amounted
to
$7.6 million, accounts receivable amounted to $21.8 million and inventories
amounted to $11.8 million. Our working capital was approximately $13.0 million
and our equity was $29.6 million compared with working capital of $11.8 million
and equity of $27.3 million on December 31, 2007. Our quick ratios were
approximately 1.04:1 compared with 1.16:1 at December 31, 2007.
As
of
June 30, 2008, our cash position had a net decrease of $8.6 million as compared
with cash position of $16.3 million at December 31, 2007.
Net
cash
used in operating activities was $6.3 million for the half year ended June
30,
2008, an increase of $
3.4
million
or
117%
,
compared to the net cash used in the operating activities of $2.9 million for
the same period of the prior year.
Non-cash
items added approximately
$6.6
million
back to cash inflow from operating activities for the half year ended June
30,
2008, compared with total non-cash items of
$1.2
million
for the same period of the prior year. Of the non-cash items for the half year
ended June 30, 2008, approximately $283,000 was the share-based compensation,
$502,000 lower than $785,000 for the same period of the prior year. Depreciation
was $965,000 for the half year ended June 30, 2008, $462,000 higher than
$503,000 for the prior period, primarily due to the addition of office building,
equipment and machinery for our new product lines, such as backlights for
computer monitors, during the current reporting period. Minority interest was
$190,000 for the half year ended June 30, 2008, $54,000 higher than $136,000
for
the prior year, due to the 65% interest of North Diamond.
The
impact of the changes in operating assets and liabilities on cash flow was
explained as follows. The accounts receivable during the first half year was
increased by approximately $8.7 million, comparing with a $4.6 million increase
in accounts receivable for the first half year of 2007. Inventory level
increased by $4.1 million during the first half year, compared to a $2.1 million
increase in inventory for the same period of the prior year. Deposits,
prepayment and other receivables increased by $897,000 during the current
period, compared with the $893,000 decrease for the first half year of 2007.
VAT
recoverable decreased by $315,000 during the current period compared with
$153,000 decrease for the first half year of 2007.
Accounts
payable increased by $6.4 million for the first half year ended June 30, 2008,
compared with a $2.6 million increase in the first half year of 2007. Advances
from customers increased by $94,000 during the current reporting period,
compared with a $320,000 increase for the first half year of 2007. In addition,
tax payable increased by $23,000 for the current reporting period, compared
with
an increase of $19,000 for the same period of the prior year. Accruals and
other
payables decreased by $1.1 million, compared to a $360,000 increase for the
first half year of 2007. The following summarized the impact of changes in
operating assets and liabilities on cash flow between quarters ended June 30,
2008 and June 30, 2007:
l
|
$4,100,000
from Accounts receivable (negative impact)
|
l
|
$1,992,000
from inventory(negative impact)
|
l
|
$
1,572,000
from deposits, prepayment and other receivable (negative impact)
|
l
|
$162,000
from VAT recoverable (positive impact)
|
l
|
$3,799,000
from accounts payable (positive impact)
|
l
|
$1,485,000
from accruals and other payable (negative impact)
|
l
|
$226,000
from advance from customers (negative
impact)
|
l
|
$4,000
from taxes payable (positive impact)
|
The
total
impact from above non-cash items and changes in operating assets and liabilities
was approximately $5.4 million (negative impact).
Net
cash
used in investing activities amounted to $3.3 million for the first half year
ended June 30, 2008, a decrease of $3.0 million or 47%, compared to the $6.3
million cash used in investing activities during the first half year of 2007.
For the half year ended June 30, 2008, we invested $1.8 million into plant,
property and equipment, a decrease of $2.5 million or 58%, compared with $4.3
million for the first half year of 2007. For the first half year of 2008, we
purchased $1.5 million marketable securities. And for the same period of 2007,
we acquired 65% interest of North Diamond by paying cash amounting to $1.98
million.
Net
cash
used in financing activities amounted to $ 494,000 for the first half year
ended
June 30, 2008, compared with the $67,000 cash provided by financing activities
during the first half year of 2007. We have repurchased common stock by paying
$138,000 for the first half year ended June 30, 2008. During the six month
period ended June 30, 2008, we have paid $1.1 million to the related parties,
$550,000 was the installment payment for the consideration of acquisition of
Dongguan S & T and the other $550,000 was repayment of shareholders’ loan
originally borrowed for financing the construction of the manufacturing
facilities in Dongguan S&T. In addition, we have received the capital
contribution of $738,000 in North Diamond from the minority shareholders in
the
second quarter of 2008.
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 the reports of the Company 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
June 30, 2008, the Company’s management including the CEO and CFO concluded that
there have been no material changes to the control and procedures previously
discussed in Part II, Item 9A of the Company's Form 10-K for the year ended
December 31, 2007. The Company’s management including the CEO and CFO concluded
that as of December 31, 2007 the Company's disclosure controls and procedures
were not effective because of the material weaknesses described under
“Management's Annual Report on Internal Control over Financial
Reporting.”
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 10-Q Form, in conformity with the accounting principles
generally accepted in the United States of America, “GAAP”.
(b)
Management’s report on internal control over financial reporting.
The
Company’s management including CEO and CFO concluded that there have been no
material changes to the internal control condition previously discussed in
Part
II, Item 9A of the Company’s Form 10-K for the year ended December 31, 2007
other than the fact that 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.
We
did not carry out appropriate testing procedures during the second quarter
in
2008 and therefore we are not able to evaluate the effectiveness of the changes
made to the internal control at this time.
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
II, Item 1A of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2007.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS -
None.
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 Company 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. Share repurchased under this program during the
three months ended June 30, 2008 were 93,050 shares with an average price of
US$0.99 per share. As of June 30, 2008, 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 June 30, 2008. The table of the repurchase of
shares during three months ended June 30, 2008 is as follows:
|
|
Shares
Repurchased
|
|
|
|
|
|
April
|
|
|
28,050
|
|
May
|
|
|
33,500
|
|
June
|
|
|
31,500
|
|
|
|
|
|
|
|
|
|
93,050
|
|
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
3.1(i)
|
Amended
and Restated Articles of Incorporation (Incorporated by reference
to the
Company’s Registration Statement on Form S-1 filed on October 30,
2006)
|
3.1(ii)
|
Amended
and Restated Bylaws (Incorporated by reference to the Company’s
Registration Statement on Form S-1 filed on October 30,
2006)
|
10.1
|
Amended
and Restated Share Exchange Agreement (Incorporated by reference
to the
Company’s Current Report on Form 8-K filed on March 21,
2006)
|
10.2
|
Amended
and Restated Purchase Option Agreement (Incorporated by reference
to the Company’s Quarterly Report on Form 10-Q filed on May 15,
2006)
|
10.3
|
Employment
Agreement of Yi Song (Incorporated by reference to the Company’s Current
Report on Form 8-K/A filed on April 21,
2006)
|
10.4
|
Employment
Agreement of Hong Song (Incorporated by reference to the Company’s Current
Report on Form 8-K/A filed on April 21,
2006)
|
10.5
|
Production
Building Lease Contract with Dongguan Diguang Electronics Science
&
Technology Co., Ltd. and Shenzhen Diguang Electronics Co. (Incorporated
by
reference to the Company’s Registration Statement on Form S-1 filed on
June 16, 2006)
|
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).
|
99.1
|
2006
Stock Incentive Plan (Incorporated by reference to the Company’s Current
Report on Form 8-K filed on June 26,
2006)
|
99.2
|
Form
of Stock Option Agreement (Incorporated by reference to the Company’s
Current Report on Form 8-K filed on June 26,
2006)
|
99.3
|
Code
of Ethics (Incorporated by reference to the Company’s Registration
Statement on Form S-1 filed on October 30,
2006)
|
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:
August 14, 2008
|
By:
|
/s/ Yi
Song
|
|
|
Yi
Song
|
|
Chairman
and Chief Executive Officer
|
|
|
|
Dated:
August 14, 2008
|
By:
|
/s/ Keith
Hor
|
|
|
Keith
Hor
|
|
Chief
Financial Officer
|
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