ITEM 1. BUSINESS
Our Company
Décor Products International, Inc. (together with its subsidiaries, referred to herein as “we”, “us”, “DCRD” or the “Company”) was organized under the laws of the State of Florida in January 2007 under the name Murals by Maurice, Inc.
In July 2009, the Company acquired its current décor paper business in the People’s Republic of China (the “PRC”), changed its name to Décor Products International, Inc., and undertook a capital reorganization.
In May 2010, the Company re-domiciled from Florida to Nevada, and effected a 1-for-3 reverse split of its common stock. All common stock and per share data for prior periods have been restated to give effect to this reverse stock split and the aforementioned capital reorganization.
The Company, through its subsidiaries, engages primarily in the production and sale of high quality décor paper such as furniture decorative paper, wood-grain paper, and paperboard. All of the Company’s customers are located in the PRC.
The Company’s first-tier, wholly-owned subsidiary is Wide Broad Group Limited, a limited liability company organized in the British Virgin Islands (“Wide Broad”). Wide Broad was formed in September 2006 and holds 100% of the Company’s operating subsidiary, Dongguan CHDITN Printing Co., Ltd. (“CHDITN”), a limited liability company organized in the PRC.
CHDITN was established in 1998 and is located in Chang’an Town, Dongguan, Guangdong, between Shenzhen and Guangzhou in southern China. CHDITN specializes in the production and sale of décor paper. CHDITN has taken a leadership position in introducing advanced microcomputer intaglio (gravure) printing production equipment. CHDITN also conducts research and development in the manufacture of 30g -120g PU paper, polyester paper, melamine paper, wear-proof paper, 3D wood grain paper, and different kinds of environmentally-friendly decorative papers.
Products and Services
Décor, or decoration, paper is a specialty paper used to finish the surface of wood materials. Wood-grain décor paper used in the manufacture of furniture and laminated flooring is one of the fastest growing grades of paper in the world. The production of décor paper requires very specific technological know-how.
Decorative base paper is used to furnish the surface of interior decorative materials, such as laminated board, which has wide application in interior decoration of buildings, transportation vehicles, processed products such as fortified wooden floorboard, furniture and composite office wares as well as interior decoration of hotels, home and workplace. Decorative base paper includes melamine, polyester, PU (Polyurethane), finish foil, painting paper, etc. Sale of decor paper is highly dependent on the furniture and fortified wooden floorboard industries.
The Company has three décor paper printing production lines, of which two are in full operation, with an aggregate one-year production capacity of 96 million meters. The remaining printing line completed its installation and testing in the first quarter of 2010.
The following is a summary of the different types of décor paper:
PU (Polyurethane) Paper
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Polyurethane paper is produced by superficial PU printing using original paper.
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Each roll has a width of 1.27 meters and volume of 1250-2500 meters.
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Weight specification is 30g-60g.
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Below are some of the product characteristics of polyurethane paper:
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The wood patterned paper surface passes through special handling; the surface is durable, pliable but hard to break, doesn’t degrade easily, and is environmental friendly.
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Suitable for adhering to particleboard, medium density fiberboard (MDF), high density fiberboard (HDF), cardboard, plywood, and furniture.
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Paint Paper
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Each roll has a width of 1.27 meters. Weight specification is 30g-60g.
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Below are some of the product characteristics of paint paper:
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Pre-soaked paint paper is a form of high anti-avulsion decorating paper which has high flexibility after soaking, and is easily adhered to surfaces.
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Suitable for particleboard, MDF and HDF, cardboard, plywood, and curved surfaces
Polyester Paper
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Each roll has a width 1.27 meters and volume of 1250-2500 meters.
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Weight specification is 30g.
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Below are some of the product characteristics of polyester paper:
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Easily adheres to most wooden surfaces, thus is one of the furniture industry’s most commonly used covering materials.
Melamine Furniture Surface Paper
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Melamine furniture surface paper is suitable for post-soaking, paste-pressed melamine board and reinforced floor board surfaces. The common paper thickness is 60-80g/meter.
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Below are some of the product characteristics of melamine furniture surface paper:
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Compared to polyester paper, melamine paper is more resistant to wear, heat, fire or smoke, and easier to clean. Melamine paper is fungus and mould proof and anti-static.
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Excellent texture and clear color has met the national standards of Europe and America. The design is diverse, environmentally friendly, and cost effective. Conforms to the current environmental protection trends.
Distribution Methods
Our customers consist primarily of furniture manufacturers and décor board manufacturers. We sell directly to our customers and also use distributors to sell our products.
Source and Availability of Raw Materials
We import raw materials primarily from national supply agents. Suppliers will usually transport the materials directly to out factory. We have regular and long term supply partners, which allows for relative stability of our supplies.
Patents, Trademarks, Royalties, Etc.
The Company has its own registered trademark in China. In the United States, the name Décor Products International, Inc. has been added to the supplemental register of the United States Patent and Trademark Office.
Government Approvals
The Company’s complies with all applicable government regulations governing its business and operations. The Company is familiar with the relevant government regulations, laws, and industrial policies governing its business. There are no specific laws or regulations governing the décor paper industry in the PRC.
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The Company holds an Industrial and Commercial Business License and tax registration certificates with the PRC.
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The Company holds a printing operation license with the PRC.
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The Company's products have passed all relevant inspection and quarantines.
Number of Employees
As of December 31, 2011, we had 75 full-time employees.
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Strategy and Implementation Summary
We plan to refine our range of business by focusing less on supplying decorative paper and more on supplying decorative board finished with our melamine surface paper. We anticipate that this change will help to increase our market share in the industry. We believe that demand for other types of decorative paper as surface materials will decrease and demand for melamine will increase. We believe that melamine board holds approximately 50% of the market share in the kitchen furniture industry, and is favored for this use because it can be cleaned easily.
Future product development strategy
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We plan to add up to three new décor paper printing production lines, one of which was completed and in the installation and testing phase in the first quarter of 2010. The three new lines will have aggregate capacity to produce 180 million meters of decor paper per year and house up to 35 laminating machines to enable the Company to offer pre-laminated wood panels to its customers.
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We continually conduct research and development on trends in international furniture and decoration.
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We also conduct new material and new technology studies, and develop new products that conform to market demand.
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Our goal is to become the industry leader in décor paper.
Expansion Plans
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We are about to commence major expansion at our plant in Chang’an Town, covering decor paper, decorative board production, R&D and some other fields.
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Our existing plant occupies approximately 60,000 square feet of land. We have leased 100,000 square feet of vacant land adjacent to the existing plant.
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The centerpiece of our expansion will be three new state-of-the-art water-based ink printing lines. The annual capacity of each line is 60 million meters. The use of water-based inks will significantly lower ink costs. Solvent-based inks currently represent 50% of our total manufacturing costs.
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In addition to the new printing lines, we have identified a new market for pre-laminated wooden panels for a number of our clients, particularly manufacturers of breakdown furniture. We will install several laminated board and pressing machines. The wooden panels, primarily medium density fiberboard (MDF) and high density fiberboard (HDF), will be purchased domestically.
We expect to execute our expansion plans in the coming three years and believe the “package” service will help to increase our market share in the global industry. By 2012, we expect to have two more décor paper production line and three new laminated board production lines.
Competition
We compete with several other Chinese décor paper manufacturers, as well as several European manufacturers. Major decorative paper manufacturers currently operate in Germany, Spain and Japan. The decorative base paper industry in the PRC is still in its early stage of development. We believe that more than 100 companies currently engage in this industry worldwide, although most are small scale operations with low output. Decorative paper manufacturers mainly distribute in areas in the PRC such as JiangSu, ZheJiang, HeBei, TianJin, ShanDong , ShangHai and GuangDong province.
Our major domestic competitors include: Wanli Industrial, Beijing Jingnan Decorative Materials Plant, Hebei Hengyuan Industrial, and The Interprint Group, China. We believe that we have an advantage over these manufacturers in that they are all located in Zhejiang Province in Eastern China (near Shanghai). While Zhejiang Province is a large producer of furniture, the market is not as large as Guangzhou and Shenzhen, which are two of our key markets in southern China.
We also have competition from a number of integrated paper companies, such as Shandong Lunan Paper, which produces décor paper on smaller paper machines. We have a freight cost advantage, as well as newer technology when compared to Shandong Lunan Paper.
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We also compete with European decor paper producers such as Schattdecor and Arjowiggins. However, we believe we have a significant freight cost advantage, and lower labor costs compared to these companies.
Competitive Advantages
We believe that are primary competitive advantages are the following:
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Ten years of decor paper manufacturing history.
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Profitable business - our after tax margins are more than 16%.
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Experienced, proven and motivated management.
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Sales force located in the major furniture producing regions.
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State-of-the-art technology and high quality control.
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Geographic advantage - freight cost advantage.
Market and Strategy
Apart from China’s dominant position as leading furniture exporter in the world, the rapid growth in disposable income in China has created a huge domestic market. China has become a major consumer of furniture and other household furnishings which, in turn, has created a high demand for decor paper used in furniture and laminate flooring manufacturing. With a current capacity of 96 million meters of decor paper capacity, we believe we are one of the largest high-class décor paper manufacturers in the PRC, with an estimated 7% market share in the PRC.
Intellectual Property
The Company is currently processing a registered trademark within the United States for Décor Products International, Inc. ™ This trademark serial number is 77833022 and was initially filed with the United States Patent and Trademark Office on September 23, 2009. The Company has a registered trademark in the name "CHDITN” in China, which is classified as No. 16 according to the International Classification of Goods. The time of validity for the trademark is from October 7, 2004 to October 6, 2014 with unlimited renewals. The trademark was issued by the Trademark Office under the State Administration for Industry and Commerce, PRC.
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ITEM 1A.
ITEM 1A. RISK FACTORS
Our future operating results are highly uncertain. Before deciding to invest in our common stock or to maintain or increase your investment, you should carefully consider the risks described below, in addition to the other information contained in this report and in our other filings with the SEC, including our reports on Forms 10-K, 10-Q and 8-K. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations. If any of these risks actually occur, that could seriously harm our business, financial condition or results of operations. In that event, the market price for our common stock could decline and you may lose all or part of your investment.
Our common shares are thinly traded and, you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares.
There is no liquid public trading market in our common stock and no such liquid trading market is expected to develop in the near future. We cannot predict the extent to which an active public market for our common stock will ever develop or be sustained.
Our common shares have historically been sporadically or "thinly-traded" on the “Over-the-Counter Bulletin Board”, meaning that the number of persons interested in purchasing our common shares at or near bid prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that current trading levels will be sustained.
The market price for our common stock is particularly volatile given our status as a relatively small company with a small and thinly traded “float” and lack of current revenues that could lead to wide fluctuations in our share price. The price at which you purchase our common stock may not be indicative of the price that will prevail in the trading market. You may be unable to sell your common stock at or above your purchase price if at all, which may result in substantial losses to you.
The application of the "penny stock" rules could adversely affect the market price of our common stock and increase your transaction costs to sell those shares.
As long as the trading price of our common shares is below $5 per share, the open-market trading of our common shares will be subject to the "penny stock" rules. The "penny stock" rules impose additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of securities and have received the purchaser's written consent to the transaction before the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the broker-dealer must deliver, before the transaction, a disclosure schedule prescribed by the Securities and Exchange Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. These additional burdens imposed on broker-dealers may restrict the ability or decrease the willingness of broker-dealers to sell our common shares, and may result in decreased liquidity for our common shares and increased transaction costs for sales and purchases of our common shares as compared to other securities.
Volatility in our common share price may subject us to securities litigation.
The market for our common stock is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management's attention and resources.
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Our corporate actions are substantially controlled by a single stockholder.
Man Kwai Ming currently owns approximately 65.69% of our outstanding Common Stock, representing a majority of our voting power. This shareholder could exert substantial influence over matters such as electing directors and approving mergers or other business combination transactions. In addition, because of the percentage of ownership and voting concentration in the principal shareholder, elections of our board of directors will generally be within the control of this shareholder. While all of our shareholders are entitled to vote on matters submitted to our shareholders for approval, the concentration of shares and voting control presently lies with this principal shareholder. As such, it would be extremely difficult for shareholders to propose and have approved proposals not supported by the Man Kwai Ming. There can be no assurances that matters voted upon by the Man Kwai Ming will be viewed favorably by all shareholders of our company.
We do not intend to pay any dividend for the foreseeable future.
We do not anticipate paying cash dividends in the foreseeable future. The future payment of dividends is directly dependent upon future earnings, financial requirements and other factors to be determined by our board of directors. We anticipate that any earnings that may be generated from operations will be used to finance growth and that cash dividends will not be paid to shareholders.
We may need to issue more stock, which could dilute your stock.
If we do not have enough capital to meet future capital requirements, we may need to raise additional capital in order to continue operations. To the extent that additional capital is raised through the sale of equity and/or convertible debt securities, the issuance of such securities could result in dilution to shareholders and/or increased debt service commitments. Accordingly, if we issue additional stock, it could reduce the value of your shares.
If we lose the services of a number of key employees, our business could suffer.
Our success is highly dependent upon the continued services of Liu Rui Sheng, who is President, CEO and Chairman of our Board of Directors. We have a written employment agreement with Mr. Liu until July 2011, and we have a new employment with Mr.Liu from July 2011 to June 2016.untillbut the loss of his services would have a material adverse effect on our business. There can be no assurance that we would be able to replace this executive in the event his services become unavailable. We do not have any key-man life insurance on any of our employees.
Changes in the cost or availability of raw materials, energy and transportation could affect our profitability.
We rely heavily on certain raw materials (primarily paper and ink), energy sources (principally natural gas, coal and fuel oil), and third party companies that transport our goods. Our profitability has been, and will continue to be, affected by changes in the costs and availability of such raw materials, energy sources and transportation sources. If the costs of these raw increase and we cannot pass along such increases to our customers, our profitability will decline.
The industries in which we operate experience economic cyclicality, changes in consumer preferences, and fluctuations in selling prices.
Substantially all of our businesses have experienced, and are likely to continue to experience, cycles relating to industry capacity and general economic conditions. The length and magnitude of these cycles have varied over time and by product. In addition, changes in consumer preferences may increase or decrease the demand for our fiber-based products and non-fiber substitutes. Consequently, our operating cash flow is sensitive to changes in the pricing and demand for our products.
In addition, the polyurethane paper, paint paper, polyester paper, and melamine furniture surface paper industries historically have experienced significant fluctuations in selling prices. If we are unable to maintain the selling prices of products within these industries, that inability may have a material adverse effect on our results of operations and financial condition. We are not able to predict with certainty market conditions or the selling prices for our products.
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Competition in the global market could negatively impact our financial results.
We operate in a competitive international environment in all of our operating segments. Pricing or product strategies pursued by competitors could negatively impact our financial results. Increased competition from either domestic or foreign paper producers provides alternatives to the company's products. Increases in competitive production capacity, can result in sales declines from reduced shipment volume and/or lower net selling prices in order to maintain shipment volume.
Continued adverse developments in general business and economic conditions could have an adverse effect on the demand for our products and our financial condition and results of operation.
General economic conditions may adversely affect industrial non-durable goods production, consumer spending, commercial printing and advertising activity, and consumer confidence, all of which impact demand for our products. In addition, continued volatility in the capital and credit markets, which impacts interest rates, currency exchange rates and the availability of credit could have a material adverse effect on our business, financial condition and our results of operations.
Material disruptions at one or more of our manufacturing facilities could negatively impact our financial results.
We operate our facilities in compliance with applicable rules and regulations and take measures to minimize the risks of disruption at our facilities. A material disruption at one or more of our manufacturing facilities could prevent us from meeting customer demand, reduce our sales and/or negatively impact our financial results. Any of our manufacturing facilities, or any of our machines within an otherwise operational facility, could cease operations unexpectedly due to a number of events, including:
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unscheduled maintenance outages;
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prolonged power failures;
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an equipment failure;
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a chemical spill or release;
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failure of a boiler;
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the effect of a drought or reduced rainfall on its water supply;
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labor difficulties;
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disruptions in the transportation infrastructure, including roads, bridges, railroad tracks and tunnels;
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fires, floods, earthquakes, hurricanes or other catastrophes;
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terrorism or threats of terrorism;
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domestic and international laws and regulations applicable to our Company and our business partners, including joint venture partners, around the world; and
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other operational problems.
Any such downtime or facility damage could prevent us from meeting customer demand for our products and/or require us to make unplanned capital expenditures. If one of these machines or facilities were to incur significant downtime, our ability to meet our production targets and satisfy customer requirements could be impaired, resulting in lower sales and having a negative effect on our financial results.
We may experience high account receivables balances, which may have an adverse effect on our operating profitability and cash flow and financing needs.
We generally have the credit terms of accounts receivable from 90 to 180 days accounts receivable period, and if our customers extend the period in which they pay, we will experience a reduced cash flow, which could have an adverse effect on our ability to fund our operations and growth. One result may be that we will have to obtain outside financing and our operating expense will increase. Extension of the accounts receivable period may also result in reduced collections, which will adversely affect our operations and profitability.
We depend on certain customers
In the fiscal year ended December 31, 2011, our top ten customers accounted for 42.2% of sales. The loss of these customers could have a material adverse effect on sales and, depending on the significance of the loss, our results of operations, financial condition or cash flows.
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We may have difficulty managing our growth
Our business plans call for significant expansion, which may place a significant strain on our management, operational and financial resources. To manage the expected growth of operations and personnel, we will be required to improve existing and implement new transaction processing, operational and financial systems, procedures and controls, and to expand, train and manage our growing employee base. We also will be required to expand finance, administrative and operations staff. Further, we may be required to enter into relationships with various strategic partners necessary to our business. There can be no assurance that the current and planned personnel systems, procedures and controls will be adequate to support our future operations, that management will be able to hire, train, retain, motivate and manage required personnel or that our management will be able to identify, manage and exploit existing and potential strategic relationships and market opportunities. Our failure to manage growth effectively could have a material adverse effect on business, results of operations and financial condition.
If appropriate opportunities present themselves, we intend to acquire technologies, services or products that we believe are strategic. The process of integrating an acquired technology, service or product may result in unforeseen operating difficulties and expenditures and may absorb significant management attention that would otherwise be available for ongoing development of business. Moreover, there can be no assurance that the anticipated benefits of any acquisition will be realized.
Further, acquisitions of technologies, services or products could result in potentially the incurrence of debt, contingent liabilities and/or amortization expenses related to goodwill and other intangible assets, which could materially adversely affect business, results of operations and financial condition. Any such future acquisitions of other businesses, technologies, services or products might require us to obtain additional equity or debt financing, which might not be available on terms favorable to us, or at all, and such financing, if available, might be dilutive to our common stockholders.
You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us, our management or the experts named in this current report.
We conduct substantially all of our operations in the PRC and substantially all of our assets are located in the PRC. In addition, most of our senior executive officers reside within the PRC. As a result, it may not be possible to effect service of process within the United States or elsewhere outside of China upon our senior executive officers, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Moreover, the PRC does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgment of courts in most instances.
We face risks related to health epidemics and other outbreaks.
Our business could be adversely affected by the effects of SARS or another epidemic or outbreak. China reported a number of cases of SARS in April 2004. Any prolonged recurrence of SARS or other adverse public health developments in China may have a material adverse effect on our business operations. For instance, health or other government regulations adopted in response may require temporary closure of our production facilities or of our offices. Such closures would severely disrupt our business operations and adversely affect our results of operations. We have not adopted any written preventive measures or contingency plans to combat any future outbreak of SARS or any other epidemic.
PRC laws and regulations governing our business are uncertain. If we are found to be in violation, we could be subject to sanctions. In addition, changes in such PRC laws and regulations may materially and adversely affect our business.
There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing our business. We are considered a foreign person or foreign invested enterprise under PRC law. As a result, we are subject to PRC law limitations on foreign ownership of Chinese companies. These laws and regulations are relatively new and may be subject to change, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.
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The PRC government has broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business and other licenses and requiring actions necessary for compliance. In particular, licenses and permits issued or granted to us by relevant governmental bodies may be revoked at a later time by higher regulatory bodies. We cannot predict the effect of the interpretation of existing or new PRC laws or regulations on our businesses. We cannot assure you that our current ownership and operating structure would not be found in violation of any current or future PRC laws or regulations. As a result, we may be subject to sanctions, including fines, and could be required to restructure our operations or cease to provide certain services. Any of these or similar actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which could materially and adversely affect our business, financial condition and results of operations.
Fluctuations in currency exchange rates could adversely affect our business and the value of our stock.
The value of our common stock is indirectly affected by the foreign exchange rate between the U.S. dollar and the Chinese currency (known as the Renminbi Yuan, or “RMB”), and between those currencies and other currencies in which our sales may be denominated. Because substantially all of our earnings and cash assets are denominated in RMB, fluctuations in the exchange rate between the U.S. dollar and the RMB will affect the relative purchasing power of our monies, our balance sheet and our earnings per share in U.S. dollars. In addition, appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar, without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we may issue that will be exchanged into U.S. dollars as well as earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
Presently, we lease a plant that is 60,000 square feet. We also lease 100,000 square feet of vacant land adjacent to our plant for future expansion. Our plant is located at Chang’an Town, Dongguan, Guangdong, between Shenzhen and Guangzhou in southern China.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On December 4, 2009, CHDITN signed a Promissory Note (the “Note”) with Greentree Financial Group Inc. (“Greentree”), stating that CHDITN promised to pay to the order of Greentree the sum of $140,000, plus interest of 8% per annum, payable quarterly, with a maturity date of December 4, 2010. On or about January 5, 2011, Greentree filed a lawsuit against the Company and CHDITN in the Circuit Court of Broward County, Florida, Case No. 11-000245-09, seeking payment of the principal of the Note in the amount of $140,000 plus unpaid interest, late charges, attorneys’ fees and court costs. Despite the Company’s attempts to negotiate a settlement with Greentree, on April 11, 2011, Greentree filed for a default judgment against the Company seeking $140,000 in repayment of the principal amount of the Note plus $4,200 in unpaid interest, $7,000 in late charges, $1,441 in attorneys’ fees and $561 in court costs. The Company believes that it has meritorious defenses against the lawsuit due to a failure of consideration, as well as significant counterclaims against Greentree and other outside advisors to the Company, in that the consulting services purportedly provided to the Company and its predecessors were negligent, defective and caused harm to the Company. At this time, the Company cannot predict the ultimate outcome of this legal action.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded the Over-The-Counter Bulletin Board under the symbol “DCRD.” The Over-The-Counter Bulletin Board is a quotation medium for subscribing members only, and only market makers can apply to quote securities on the Over-The-Counter Bulletin Board. Trading in our common stock in the over-the-counter market has been limited and sporadic and the quotations set forth below are not necessarily indicative of actual market conditions. Further, these prices reflect inter-dealer prices without retail mark-up, mark-down, or commission, and may not necessarily reflect actual transactions. The following tables set forth the high and low sale prices for our common stock as reported on the Electronic Bulletin Board for the periods indicated.
* We effected a 1-for-3 reverse stock split on May 24, 2010.
Holders
As of March 31, 2012 there were approximately 87 holders of record of our common stock.
Dividends
All shares of common stock are entitled to participate proportionally in dividends if our Board of Directors declares them out of funds legally available. These dividends may be paid in cash, property or additional shares of common stock. We have not paid any dividends since our inception and presently anticipate that all earnings, if any, will be retained to develop our business. Any future dividends will be at the discretion of our Board of Directors and will depend upon, among other things, our future earnings, operating and financial condition, capital requirements, and other factors.
Equity Compensation Plan and Stock Option Plan Information
The Company, at the current time, has no stock option plan or any equity compensation plans
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
During the period covered by this report (fiscal year ended December 31, 2011), the registrant has not issued any securities without registration under the Securities Act of 1933, as amended:
Purchases of Equity Securities
During the fourth quarter of the fiscal year ended December 31, 2011, there were no purchases of the registrant’s common stock by or on behalf of the registrant or any affiliated purchaser.
Transfer Agent
The Company’s transfer agent is Globex Transfer, LLC. located at 780 Deltona Blvd., Suite 202, Deltona, FL 32725.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Since the Company qualifies as a smaller reporting company, it is not required to provide the information required by this Item.
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ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward Looking Statements
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Annual Report. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including without limitation the disclosures made in Item 1A of Part I of this Annual Report under the caption “Risk Factors.”
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2011 and 2010
The following table sets forth certain consolidated statement of operating data for the periods indicated:
Revenues
We had revenues of $19,007,639 and $26,828,833 for the years ended December 31, 2011 and 2010, respectively. The sales revenues were due primarily to the sales of our décor paper. Our revenues decreased from 2010 to 2011 due primarily to the economic environment becoming worse. Our revenues increased from 2009 to 2010 due primarily to an improved economic climate in 2010.
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Cost of Revenue
Cost of revenue primarily includes cost of supplies to manufacture our décor paper. We had $13,346,303 and $ 16,681,992 in cost of sales, or 70.2% and 62.2% of sales revenues, respectively, during the years ended December 31, 2011 and 2010. The cost of revenue as a percentage of revenue increased from 2010 to 2011 due primarily to increase in purchase price of raw materials, ink and paper.
Operating Expenses
We had operating expenses of $1,622,772 and $2,380,917 for the years ended December 31, 2011 and 2010 respectively. The significant decrease in operating expenses in 2011 was due primarily to the sales revenues decrease .We initiatively reduce the operating expenses.
Interest Expense
We had interest expense of $502,359 and $1,266,716 for the year ended December 31, 2011 and 2010, respectively. The decrease in interest expense in 2011 compared with 2010 was primary due to amortization of debt discount reducing from convertible notes payable.
Income Taxes
We had income taxes of $ 874,341 and $ 1,993,328 for the years ended December 31, 2011 and 2010, respectively. The decrease in income tax expense in 2011 compared with 2010 was primarily due to the decrease in taxable income. The effective tax rate in the periods presented is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. We have subsidiaries and operations in various countries, United States, BVI and the PRC, that are subject to taxes in the jurisdictions in which they operate, as follows:
United States of America
The Company is registered in the State of Nevada and is subject to the tax laws of the United States of America.
British Virgin Islands
Under the current BVI law, Wide Broad is not subject to tax on its income or profits. For the years ended December 31, 2011 and 2010, Wide Broad had incurred an operating loss of $152,996 and $371,029, respectively.
The PRC
On March 16, 2007, the National People’s Congress approved the Corporate Income Tax Law of the People’s Republic of China (the “New CIT Law”). The new CIT Law, among other things, imposes a unified income tax rate of 25% for both domestic and foreign invested. Starting from January 1, 2009, CHDITN is entirely subject to the unified income tax rate of 25% on the taxable income under the New CIT Law.
Net Income
We had net income of $ 2,672,785 and $ 4,506,926 for the years ended December 31, 2011 and 2010, respectively. The net income in these periods was due primarily to sales of our décor paper. Our net income is a function of revenues, cost of sales and other expenses as described above. The decrease in net income from 2010 to 2011 was due primarily to the economic environment becoming worse.
Impact of Inflation
We believe that inflation has had a negligible effect on operations. We believe that we can offset inflationary increases in the cost of operations by increasing sales and improving operating efficiencies.
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Liquidity and Capital Resources
Cash flows provided by operating activities were 6,054,149 and $7,777,054 for the years ended December 31, 2011 and 2010, respectively. Positive cash flows from operations for the year ended December 31, 2011 were due primarily to the net income of $2,672,785, and the adjustment for depreciation of $2,807,507, the decrease in accounts receivable and advance to suppliers of $618,616 and $725,804, respectively, partially offset by increase in deposits and prepayments of $110,622, decrease in accounts payables, income tax payable and accrued liabilities and other payable of $150,300, $303,608 and $148,584, respectively. Positive cash flows from operations for the year ended December 31, 2010 were due primarily to the net income of $4,506,926, and the adjustment for depreciation and amortization of debt discount of $1,559,958 and $860,292, respectively, the decrease in accounts receivable, advance to suppliers and deposits and prepayments of $92,687, $487,622 and $139,637, respectively, and the decrease in accrued liabilities and other payable of $645,889; partially offset by the decrease in accounts payables and income tax payable of $310,558 and $151,764, respectively.
Cash flows used in investing activities were $9,428,158 and $7,124,445 for the year ended December 31, 2011 and 2010, respectively. The cash flows used in investments for the year ended December 31, 2011 were due primarily to the payments to plant and equipment of $2,559,200 and payment to construction in progress of $6,872,831. The cash flows used in investments for the year ended December 31, 2010 were due primarily to the payments of plant and equipment of $5,789,573 and payments to construction in progress of $1,336,923.
Cash flows from financing activities were negative $2,954,178and $445,954 for the years ended December 31, 2011 and 2010, respectively. Negative cash flows from financing activities during the year ended December 31, 2011 were mainly due to the partial repayment of convertible loan by $193,534 and payments on bank loans in the amount of $1,752,721, offset by the proceeds from bank loans of $4,647,992, and the increase in advance from a related party of $252,441. Positive cash flows from financing activities during the year ended December 31, 2010 were due primarily to proceeds from bank loans of $2,507,837, offset by the repayment of loan to a related party of $937,308, the partial repayment of convertible loan by $310,967 and payments on bank loans in the amount of $1,705,516.
We project that we will need additional capital to fund operations over the next 6 months. We anticipate we will need an additional $2,000,000 per year in 2012 and 2013.
Overall, we have funded our cash needs from inception through December 31, 2011 with a series of debt and equity transactions, primarily with related parties. If we are unable to receive additional cash from our related parties, we may need to rely on financing from outside sources through debt or equity transactions. Our related parties are under no legal obligation to provide us with capital infusions. Failure to obtain such financing could have a material adverse effect on operations and financial condition.
We had cash of $578,494 on hand as of December 31, 2011. Currently, we have enough cash to fund our operations for about six months. This is based on our current cash flows from operating activities and financing activities, our positive working capital and projected revenues. However, if the projected revenues fall short of needed capital we may not be able to sustain our capital needs. We will then need to obtain additional capital through equity or debt financing to sustain operations for an additional year. Our current level of operations would require capital of approximately $2,000,000 per year starting in 2011. Modifications to our business plans may require additional capital for us to operate. For example, if we are unable to raise additional capital in the future we may need to curtail our number of product offers or limit our marketing efforts to the most profitable geographical areas. This may result in lower revenues and market share for us. In addition, there can be no assurance that additional capital will be available to us when needed or available on terms favorable to us.
On a long-term basis, liquidity is dependent on continuation and expansion of operations, receipt of revenues, additional infusions of capital and debt financing. However, there can be no assurance that we will be able to obtain additional equity or debt financing in the future, if at all. If we are unable to raise additional capital, our growth potential will be adversely affected. Additionally, we will have to significantly modify our business plan.
Demand for the products and services will be dependent on, among other things, market acceptance of our products, décor paper market and laminated board market in general, and general economic conditions, which are cyclical in nature. Inasmuch as a major portion of our activities is the receipt of revenues from the sales of our products, our business operations may be adversely affected by our competitors and prolonged recession periods.
Our success will be dependent upon implementing our plan of operations and the risks associated with our business plans. We are specializing in the production and sales of high quality decor paper such as furniture decorative paper, wood-grain paper, and paperboard. We plan to strengthen our position in these markets. We also plan to expand our operations through aggressively marketing our products and our concept.
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ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures about Market Risk
We do not use derivative financial instruments in our investment portfolio and has no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents, trade accounts receivable, accounts payable and long-term obligations. We consider investments in highly liquid instruments purchased with a remaining maturity of 90 days or less at the date of purchase to be cash equivalents. However, in order to manage the foreign exchange risks, we may engage in hedging activities to manage our financial exposure related to currency exchange fluctuation. In these hedging activities, we might use fixed-price, forward, futures, financial swaps and option contracts traded in the over-the-counter markets or on exchanges, as well as long-term structured transactions when feasible.
Foreign Exchange Rates
All of our sales are denominated in Renminbi Yuan (“RMB”). As a result, changes in the relative values of U.S. Dollars and RMB affect our reported levels of revenues and profitability as the results are translated into U.S. Dollars for reporting purposes. Fluctuations in exchange rates between the U.S. dollar and RMB affect our gross and net profit margins and could result in foreign exchange and operating losses.
Our results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in our statement of shareholders’ equity. We recorded net foreign currency gains of $1,679,684 and $1,246,720 in fiscal 2011 and 2010 respectively. We have not used any forward contracts, currency options or borrowings to hedge our exposure to foreign currency exchange risk. We cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur net foreign currency losses in the future.
Our financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is RMB. The value of your investment in our stock will be affected by the foreign exchange rate between U.S. dollars and RMB. To the extent we hold assets denominated in U.S. dollars, including the net proceeds to us from this offering, any appreciation of the RMB against the U.S. dollar could result in a change to our statement of operations and a reduction in the value of our U.S. dollar denominated assets. On the other hand, a decline in the value of RMB against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results, the value of your investment in our company and the dividends we may pay in the future, if any, all of which may have a material adverse effect on the price of our stock.
The exchange rates used to translate amounts in RMB into U.S. Dollars for the purposes of preparing the consolidated financial statements or otherwise stated in this MD&A were as follows:
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
Our consolidated financial statements appear in a separate section of this Annual Report on Form 10-K beginning on page.
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ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management, under the supervision and with the participation of its chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2011. Based on that evaluation, the Company’s chief executive officer and chief financial officer concluded that, as of December 31, 2011, the disclosure controls and procedures employed at the Company were effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined under Exchange Act Rules 13a-15(f). The Company’s internal control system is designed to provide reasonable assurance to its management and Board of Directors regarding the preparation and fair presentation of published financial statements. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under that framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2011.
We believe that our consolidated financial statements for the year ended December 31, 2011 included in this report fairly present our financial position, results of operations and cash flows as of and for the periods presented in all material respects.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2011, that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors and Executive Officers
Directors are elected at the Company’s annual meeting of stockholders and generally serve for one year until the next annual stockholders’ meeting or until their successors are elected and qualified. Officers are elected by the Board of Directors and their terms of office are, except to the extent governed by employment contract, at the discretion of the Board. The Company may reimburse all directors for their expenses in connection with their activities as directors of the Company. Directors of the Company who are also employees of the Company will not receive additional compensation for their services as directors.
We do not have a standing audit committee or an audit committee financial expert. We do not have an audit committee financial expert because of the small size of our company and our board of directors at this time, and also because the cost related to retaining a financial expert at this time would be prohibitive.
The following table sets forth certain information with respect to our directors, executive officers and key employees.
Liu, Rui Sheng - CEO, President and Chairman
Mr. Liu serves as President, Chairman and CEO of DCRD. He incorporated CHDITN in 1998 and oversees all of the operations management and strategic planning for the company. He has more than 15 years experience in the industry. Prior to establishing CHDITN, Mr. Liu was engaged in the production and processing of printing ink, chemical products and decoration paper sales. Mr. Liu holds a bachelor’s degree in Corporate Management from the Beijing Academy of Management in Economics and Trade.
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Zhao, Baotang - Chief Sales Officer
Mr. Zhao graduated from Tian Jin Business College with a Bachelor’s Degree. He joined CHDITN in 2004 as an Area Sales Manager. He is now the Chief Sales Officer of DCRD. He has numerous years of marketing experience and is familiar with marketing analysis, marketing channels, managing sales teams, and customer service.
Zhang, Shaowen - Manager of Production
Mr. Zhang graduated from Yi Chun Teachers Professional College with a Bachelors Degree in Chemistry 1993. He joined DCRD in August 2010 as a Manager of Production and Technical controller. Mr. Zhang has worked in the dye and paint industry for more than 16 years. He was also a technical consultant of DCRD for many years responsible for research and development of pigment. Mr. Zhang has extensive professional knowledge in painting of décor paper and familiar with the basic operations, particularly in the operation and management of manufacturing technique work flow.
Effective as of November 1, 2011, Tai Chim Lau, and Chak Ming Li resigned as directors of the Company and Wai Fai Law resigned as our chief financial officer. The resignation of each of these individuals was not the result of any disagreement with our company, known to an executive officer of the Company, on any matter relating to the company's operation, policies (including accounting or financial policies) or practices.
Appointment of Officers and Directors
Effective November 1, 2011, our board of directors appointed the following individuals to the positions noted below, to fill the vacancies caused by the resignations discussed above. Such individuals will hold office until the next annual meeting of shareholders and until their respective successors are duly elected and qualified or until their resignation or removal.
Qing Hua Lin, age 30, has been appointed as our Chief Financial Officer and a member of our board of directors. Since April 2005, Mr. Lin has been the accounting supervisor of our wholly owned subsidiary Dongguan CHDITN Printing Co., Ltd. ("CHDITN Printing") Mr. Lin is responsible for our daily accounting reporting and management. In 2003, Mr. Lin graduated from Guangzhou Maritime College with an Associate Degree in Accounting. Mr. Lin has received a Certificate of Accounting Professional Qualification in China.
The board of directors appointed Mr. Lin as director and Chief Financial Officer based on his experience in accounting and financial management for our company and the contributions he can make to our strategic direction. Mr. Lin has not served as a director of any company during the past five years which is required to file reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Exchange Act") or is subject to the requirements of Section 15(d) of the Exchange Act or is registered as an investment company under the Investment Company Act of 1940.
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Mr. Lin is an employee of our company and has agreed to serve as a director without additional compensation.
Zhang Xie, age 33, has been appointed as our corporate secretary and a member of our board of directors. Since 2005, Mr. Xie has been working as Chairman Assistant of CHDITN Printing and provides assistance in coordinating corporate matters, strategic planning, marketing, corporate financing, and management of daily operations. From September 2002 until December 2004, Mr. Xie was engaged in sales of our products. Mr. Xie graduated from Guangdong University of Business Studies in 2002 with a Bachelor Degree of Economics concentrating in marketing.
The board of directors appointed Mr. Xie as director based on his experience in sales and marketing for our company and the contributions he can make to our strategic direction. Mr. Xie has not served as a director of any company during the past five years which is required to file reports with the Securities and Exchange Commission under the Exchange Act is subject to the requirements of Section 15(d) of the Exchange Act or is registered as an investment company under the Investment Company Act of 1940.
Mr. Xie is an employee of our company and has agreed to serve as a director without additional compensation.
Compensation of Directors
The Board of Directors may compensate directors for their services as such. Our Chairman, who also serves as President and CEO, is not paid any additional compensation in connection with his role as a member of our Board. We currently compensate our two independent directors for their service on the Board in the amount of HKD$180,000 per year, which equals approximately USD$23,121 based on current exchange rates. The Board of Directors may also provide for the payment of travel and out-of-pocket expenses in connection with directors’ attendance at Board meetings. Each director serves for a one year term until elections are held at each annual meeting.
Directors are elected at the Company’s annual meeting of Stockholders and serve for one year until the next annual Stockholders’ meeting or until their successors are elected and qualified. Officers are elected by the Board of Directors and their terms of office are, except to the extent governed by employment contract, at the discretion of the Board. The Company may reimburse all Directors for their expenses in connection with their activities as directors of the Company. Directors of the Company who are also employees of the Company will not receive additional compensation for their services as directors.
Involvement in Certain Legal Proceedings
To the best of our knowledge, during the past five years, none of the following occurred with respect to a present or former director or executive officer of the Company: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of any competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; and (4) being found by a court of competent jurisdiction (in a civil action), the Commission or the commodities futures trading commission to have violated a Federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
Section 16(a) Beneficial Ownership Reporting Compliance
Under Section 16(a) of the Exchange Act, all executive officers, directors, and each person who is the beneficial owner of more than 10% of the common stock of a company that files reports pursuant to Section 12 of the Exchange Act, are required to report the ownership of such common stock, options, and stock appreciation rights (other than certain cash-only rights) and any changes in that ownership with the Commission. Specific due dates for these reports have been established, and we are required to report, in this Form 10-K, any failure to comply therewith during the fiscal year ended December 2009. We believe that all of these filing requirements were satisfied by our executive officers, directors and by the beneficial owners of more than 10% of our common stock. In making this statement, we have relied solely on copies of any reporting forms received by us, and upon any written representations received from reporting persons that no Form 5 (Annual Statement of Changes in Beneficial Ownership) was required to be filed under applicable rules of the Commission.
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Code of Ethics
We have adopted a Code of Ethics that apply to our employees, including our principal executive officer, principal financial officer, principal accounting officer, and controller, and our directors. Our Code of Ethics is filed as an exhibit to this Annual Report on Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth, for the years indicated, all cash compensation paid, distributed or accrued for services, including salary and bonus amounts, rendered in all capacities by the Company’s Chief Executive Officer, all other executive officers during 2011, and our directors.
Summary Compensation Table
# Based upon the salary amount in the employment contracts on a twelve-months’ basis, annualized for Messrs. Xie and Lin, who join the Company on November 1, 2011.
Outstanding Equity Awards At Fiscal Year-End Table. None.
Option Exercises And Stock Vested Table. None.
Pension Benefits Table. None.
Nonqualified Deferred Compensation Table. None.
All Other Compensation Table. None.
Perquisites Table. None.
Potential Payments Upon Termination Or Change In Control Table. None.
Long-Term Incentive Plan Awards
We do not have any long-term incentive plans that provide compensation intended to serve as incentive for performance to occur over a period longer than one fiscal year, whether such performance is measured by reference to our financial performance, our stock price, or any other measure.
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Compensation of Directors and Executive Officers
We have employment agreements between CHDITN and/or Wide Broad and our executive officers, and agreements relating to the service of our independent directors on our board. Our executive officers and directors have agreed to perform services under these contracts. Below are the terms of these contracts for our executive officers and directors.
Employee: Liu Rui Sheng
CHDITN
Term: March 31, 2010 to June31, 2016
Salary: RMB 35,000 per month.
Wide Broad
Term: July 1, 2011 to June 30, 2016
Remuneration: HK$ 1,300,000/year, paid over 13 months on the last day of each month.
Employee: Law Wai Fai (Former CFO)
Wide Broad
Term: November 1, 2009 to November 1, 2011
Remuneration: HK$ 520,000/year paid over 13 months on the last day for each month.
Employee: Baotang Zhao
CHDITN
Term: June 30, 2011 to May 31,2016 Salary: RMB 15,000 per month.
Employee: Zhang Shaowen
CHDITN
Term: August 1, 2010 to July 31, 2013 Salary: RMB 15,000 per month.
Director: Lau Thai Chim
Wide Broad
Term: July 1, 2009 to July 1, 2011
Remuneration: HK$ 180,000/year paid on the last day for every quarter in four installments.
Director: Li Chak Ming
Wide Broad
Term: July 1, 2009 to July 1, 2011
Remuneration: HK$ 180,000/year paid on the last day for every quarter in four installments.
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ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCK HOLDER MATTERS.
The following table sets forth certain information regarding beneficial ownership of the common stock as of March 31, 2012 by each person who is known by the Company to own beneficially more than 5% of any classes of outstanding Stock, and all directors and executive officers of the Company as a group.
The number and percentage of shares beneficially owned is determined in accordance with Rule 13d-3 and 13d-5 of the Exchange Act, and the information is not necessarily indicative of beneficial ownership for any other purpose. We believe that each individual or entity named has sole investment and voting power with respect to the securities indicated as beneficially owned by them, subject to community property laws, where applicable, except where otherwise noted.
Beneficial Owners as of March 31, 2012
[1] Based on 7103622 issued and outstanding shares of common stock
Beneficial Owners after the Shares for the Debt (1) and Warrants are Issued
[1]
Applicable percentage of ownership is based on 8,592,468 shares outstanding once the underlying debt and warrants owed to Zhuang, Jinghua and Shi, Quanling, Greentree Financial Group Inc., Precursor Management Inc., Linear Capital Partners LLC and Maurice Katz have been issued (6,866,122 as of April 15, 2011 plus 1,726,346 of the amount of shares to be registered that have not been issued yet). Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities.
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ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related Party Transactions
Since January 1, 2011, there has not been, nor is there currently proposed, any transaction in which the Company was or is to be a participant and (a) the amount involved exceeds the lesser of $120,000 or one percent of the average of the Company’s total assets at year end for the last two completed fiscal years, and (b) in which any related person of the Company had or will have a direct or indirect material interest.
For a list of the “parents” of the Company, please refer to Item 12 above entitled “Security Ownership of Certain Beneficial Owners and Management and Related Stock Holder Matters”.
Director Independence
Our Board of Directors currently consists of three members: Rui Sheng Liu, Qing Hua Lin and Zhang Xie. We have not yet adopted a standard of independence nor do we have a policy with respect to independence requirements for our board members or that a majority of our board be comprised of “independent directors.” Messrs. Liu, Lin and Xie would not qualify as “independent” under standards of independence set forth in the listing standards of the NASDAQ Stock Market.
Subject to some exceptions, these director independence standards generally provide that a director will not be independent if (a) the director is, or in the past three years has been, an employee of ours; (b) a member of the director’s immediate family is, or in the past three years has been, an executive officer of ours; (c) the director or a member of the director’s immediate family has received more than $120,000 per year in direct compensation from us other than for service as a director (or for a family member, as a non-executive employee); (d) the director or a member of the director’s immediate family is, or in the past three years has been, employed in a professional capacity by our independent public accountants, or has worked for such firm in any capacity on our audit; (e) the director or a member of the director’s immediate family is, or in the past three years has been, employed as an executive officer of a company where one of our executive officers serves on the compensation committee; or (f) the director or a member of the director’s immediate family is an executive officer of a company that makes payments to, or receives payments from, us in an amount which, in any twelve-month period during the past three years, exceeds the greater of $1,000,000 or two percent of that other company’s consolidated gross revenues.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Fees Billed For Audit and Non-Audit Services
The following table represents the aggregate fees billed for professional audit services rendered to the independent auditor, HKCMCPA Company Limited (“HKCMCPA”) for our audit of the annual financial statements for the years ended December 31, 2011 and 2010. Audit fees and other fees of auditors are listed as follows:
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(1)
Audit Fees. These are fees for professional services for the audit of our annual financial statements, and for the review of the financial statements included in our filings on Forms 10-Q and 10-K, and for services that are normally provided in connection with statutory and regulatory filings or engagements.
(2)
The amounts shown for 2011 relate to (i) the audit of our annual financial statements for the fiscal year ended December 31, 2011, and (ii) the review of the financial statements included in our filings on Form 10-Q for the first, second and third quarters of 2011.
(3)
The amounts shown for 2010 relate to (i) the audit of our annual financial statements for the fiscal year ended December 31, 2010, and (ii) the review of the financial statements included in our filings on Form 10-Q for the second and third quarters of 2010.
(4)
Audit-Related Fees. These are fees for the assurance and related services reasonably related to the performance of the audit or the review of our financial statements.
(5)
Tax Fees. These are fees for professional services with respect to tax compliance, tax advice, and tax planning.
(6)
All Other Fees. These are fees for permissible work that does not fall within any of the other fee categories, i.e., Audit Fees, Audit-Related Fees, or Tax Fees.
Pre-Approval Policy for Audit and Non-Audit Services
We do not have a standing audit committee, and the full Board performs all functions of an audit committee, including the pre-approval of all audit and non-audit services before we engage an accountant. All of the services rendered to us by HKCMCPA were pre-approved by our Board of Directors.
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PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements
1. The following financial statements of Decor Products International, Inc. are included in this Annual Report on Form 10-K:
Report of Independent Registered Public Accounting Firm Balance Sheet at December 31, 2011
Consolidated Statements of Operations - for the years ended December 31, 2011 and 2010
Consolidated Statements of Cash Flows - for the years ended December 31, 2011 and 2010
Consolidated Statements of Stockholders’ Equity - for the years ended December 31, 2011 and 2010
Notes to Consolidated Financial Statements
(b) Exhibits
3.1 Articles of Incorporation of Murals by Maurice, Inc. *
3.2 Amendment to Articles of Incorporation of Murals by Maurice, Inc. *
3.3 Bylaws of Murals by Maurice, Inc. *
10.1 Plan of Exchange between Murals by Maurice, Inc. and Wide Broad Group Ltd.*
10.2 Warrant with Zhuang, Jinghua *
10.3 Warrant with Shi Quan Ling *
10.4 CHDITN Trademark *
10.5 Lease Agreement for Dongguan CHDITN Printing Co., Ltd. *
10.6 CHDITN Employment Agreement with Liu Rui Sheng *
10.7 Wide Broad Employment Agreement with Liu Rui Sheng *
10.8 Wide Broad Director Agreement with Lau T.C. *
10.9 Wide Broad Director Agreement with Li Chak Ming *
10.10 Wide Broad Employment Agreement with Law Wai Fai*
10.11 CHDITN Employment Agreement with Baotang Zhao *
10.12 CHDITN Employment Agreement with Wen Qifeng *
10.13 Guaranty by Décor for Precursor $40,000 Promissory Note *
10.14 Guaranty by Décor for Precursor $40,000 Promissory Note *
10.15 Guaranty by Décor for Precursor $60,000 Promissory Note *
10.16 Stock Pledge Agreement between Décor, and Precursor *
10.17 Guaranty by Décor for Precursor $565,000 Promissory Note *
10.18 Promissory Note between CHDITN and Precursor for $565,000 *
10.19 Subsidiary Loan Agreement between Dongguan CHDITN Printing Co., Ltd and Zhuang, Jinghua *
10.20 Subsidiary Loan Agreement between Dongguan CHDITN Printing Co., Ltd and Shi Quan Ling *
10.21 Pledge Agreement between Décor Products International, Inc. and Zhuang, Jinghua, Shi Quan Ling, and Greentree Financial Group, Inc. *
10.22 Guaranty in favor of Zhuang, Jinghua and Shi Quan Ling *
10.23 Promissory Note of Décor Products International, Inc. to Dongguan CHDITN Printing Co., Ltd *
10.24 Escrow Agreement between Décor Products International, Inc. and Zhuang, Jinghua, Shi Quan Ling, and Greentree Financial Group, Inc. *
10.25 Security Agreement between Dongguan CHDITN Printing Co., Ltd and Shi Quan Ling*
10.26 Security Agreement between Dongguan CHDITN Printing Co., Ltd and Zhuang, Jinghua
10.27 Consulting Agreement with Greentree Financial Group, Inc. *
10.28 Convertible Promissory Note between Dongguan CHDITN Printing Co., Ltd and Greentree Financial Group Inc. *
10.29 Convertible Promissory Note between Dongguan CHDITN Printing Co., Ltd and Precursor Management Inc. *
10.30 Convertible Promissory Note between Dongguan CHDITN Printing Co., Ltd and Linear Capital Partners LLC *
10.31 Convertible Promissory Note between Dongguan CHDITN Printing Co., Ltd and Maurice Katz *
10.32 Warrant with Greentree Financial Group Inc. *
10.33 Warrant with Precursor Management Inc. *
10.34 Warrant with Linear Capital Partners LLC *
10.35 Warrant with Maurice Katz *
- 24 -
14.1 Code of Ethics *
21.1 Subsidiaries. The only subsidiaries of the Company are Wide Broad Group Limited, a limited liability company organized in the British Virgin Islands (“Wide Broad”), and Dongguan CHDITN Printing Co., Ltd. (“CHDITN”), a limited liability company organized in the PRC.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
101.INS** XBRL INSTANCE DOCUMENT
101.SCH** XBRL TAXONOMY EXTENSION SCHEMA
101.CAL** XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
101.DEF** XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
101.LAB** XBRL TAXONOMY EXTENSION LABEL LINKBASE
101.PRE** XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
*
Previously filed with the SEC under the corresponding exhibit number to the Company’s Registration Statement on Form S-1 (File No. 333-164858) filed on February 11, 2010.
** In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise Exhibit 101 in this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed”.
- 25 -
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Decor Products International, Inc.
Date: April 16, 2012 By: /s/ Rui Sheng Liu
Rui Sheng Liu
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Rui Sheng Liu
Rui Sheng Liu
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
April 16, 2012
/s/ Qing Hua Lin
Qing Hua Lin
Vice President and Chief Financial Officer and Director
(Principal Financial and Accounting Officer)
April 16, 2012
/s/ Zhang Xie
Zhang Xie
Director
April 16, 2012
- 26 -
DÉCOR PRODUCTS INTERNATIONAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations And Comprehensive Income (Loss)
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Stockholders’ Equity
Notes to Consolidated Financial Statements
-
F - 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Décor Products International, Inc.
We have audited the accompanying consolidated balance sheets of Décor Products International, Inc. and its subsidiaries (“the Company”) as of December 31, 2011 and 2010 and the related consolidated statements of operations and comprehensive income, cash flows and changes in stockholders’ equity for the years ended December 31, 2011 and 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2011 and 2010 and the results of its operations and its cash flows for the years ended December 31, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has made default in repayment of convertible notes and promissory notes that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ HKCMCPA Company Limited
HKCMCPA Company Limited
Certified Public Accountants
Hong Kong, China
April 16, 2012
F - 2
DÉCOR PRODUCTS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
See accompanying notes to consolidated financial statements.
F - 3
DÉCOR PRODUCTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
See accompanying notes to consolidated financial statements.
F - 4
DÉCOR PRODUCTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
See accompanying notes to consolidated financial statements.
F - 5
DÉCOR PRODUCTS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
See accompanying notes to consolidated financial statements.
F - 6
DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011AND 2010
(Currency expressed in United States Dollars (“US$"), except for number of shares)
1.
ORGANIZATION AND BUSINESS BACKGROUND
Décor Products International, Inc. (“DCRD” or the “Company”) was organized under the laws of the State of Florida on January 11, 2007 as Murals by Maurice, Inc. On July 1, 2009, the Company changed to its current name.
The Company, through its subsidiaries, mainly engaged in the manufacture and sales of furniture decorative paper and related products in the People’s Republic of China (the “PRC”). All the customers are located in the PRC.
On April 8, 2010, the Company approved the Plan of Merger for the purpose of re-domiciling the Company to the State of Nevada. Concurrently, the Company approved a 1 for 3 reverse stock split of its common stock. All common stock and per share data for all periods presented in the consolidated financial statements have been restated to give effect to the reverse stock split.
The Company, through its subsidiaries, is mainly engaged in the manufacture and sales of furniture decorative paper and related products in the People’s Republic of China (the “PRC”). All the customers are located in the PRC.
Description of subsidiaries
The Company and its subsidiaries are hereinafter referred to as (the “Company??.
2.
GOING CONCERN UNCERTAINTIES
The accompanying consolidated financial statements have been prepared using the going concern basis of accounting, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
As of December 31, 2011, the Company defaulted on the repayment of convertible notes and promissory notes with an aggregate amount of $2 million, which became immediately due and payable. The continuation of the Company as a going concern through December 31, 2012 is dependent upon the continuing financial support from its stockholders or negotiation of repayment term. Management believes the existing shareholders will provide the additional cash to meet the Company’s obligations as they become due.
These factors raise substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that may result in the Company not being able to continue as a going concern.
F - 7
DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011AND 2010
(Currency expressed in United States Dollars (“US$"), except for number of shares)
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
l
Basis of presentation
These accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”).
l
Use of estimates
In preparing these consolidated financial statements, management makes estimates and assumptions that affect the reported amount of assets and liabilities in the balance sheets and revenues and expenses during the years reported. Actual results may differ from these estimates.
l
Basis of consolidation
The consolidated financial statements include the accounts of DCRD and its subsidiaries. All significant inter-company balances and transactions within the Company have been eliminated upon consolidation.
l
Cash and cash equivalents
Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.
l
Accounts receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest, which are due within contractual payment terms, generally 90 to 180 days. Credit is extended based on evaluation of a customer's financial condition. Accounts receivable outstanding longer than the contractual payment terms are considered past due. Past due balances over 180 days and over a specified amount are reviewed individually for collectibility. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history and the current economic conditions to make adjustments in the allowance when it is considered necessary. When receivable balances are determined to be uncollectible, these balances are written off. The Company does not have any off-balance-sheet credit exposure related to its customers.
As of December 31, 2011 and 2010, the Company did not record an allowance for doubtful accounts.
l
Inventories
Inventories consist of raw papers, painting materials and components used in the manufacture of the Company’s products and the related parts and supplies. Inventories are stated at the lower of cost or net realizable value, with cost being determined on a weighted average basis. Costs include purchased cost of papers and painting inks, direct labor and manufacturing overhead costs. The Company periodically reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand.
As of December 31, 2011 and 2010, the Company did not record an allowance for obsolete inventories, nor have there been any write-offs.
F - 8
DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011AND 2010
(Currency expressed in United States Dollars (“US$"), except for number of shares)
l
Advances to suppliers
The Company makes advances to certain vendors for purchase of its inventory items or raw material. Advances to suppliers are interest free and unsecured, which are recorded when payment is made by the Company and relieved against inventory when goods are received. All inventory items or raw materials relating to these advances are subsequently relieved upon delivery to the Company.
l
Plant and equipment
Plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational and after taking into account their estimated residual values:
Expenditure for repairs and maintenance is expensed as incurred. When assets have retired or sold, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the results of operations.
l
Construction in progress
Construction in progress is stated at cost and represents the cost of acquiring contracts to build the now printing lines and prepayments paid to equipment vendors or builders during the construction of the new manufacturing facility (until it is substantially complete and ready for its intended use). No provision for depreciation is made on construction in progress until such time as the relevant assets are completed and put into operational use. No capitalized interest was incurred during the period of construction.
l
Valuation of long-lived assets
In accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 360-10-5, “Impairment or Disposal of Long-Lived Assets”, all long-lived assets such as plant and equipment and construction in progress held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of assets to estimated discounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. There has been no impairment charge for the years presented.
l
Revenue recognition
In accordance with ASC Topic 605, “Revenue Recognition”, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectibility is reasonably assured.
The Company derives revenues from the sales of furniture decorative paper and related products. The Company recognizes its revenues net of value-added taxes ("VAT"). The Company is subject to VAT which is levied on the majority of the products at the standard rate of 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales. The Company experienced no material product returns and recorded no reserve for sales returns for the years ended December 31, 2011 and 2010.
F - 9
DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011AND 2010
(Currency expressed in United States Dollars (“US$"), except for number of shares)
Interest income is recognized on a time apportionment basis, taking into account the principal amounts outstanding and the interest rates applicable.
l
Cost of revenue
Cost of revenues consists primarily of material costs, direct labor, depreciation and manufacturing overhead, which are directly attributable to the manufacture of products. Shipping and handling costs, associated with the distribution of finished products to customers, are recorded in cost of revenue by the Company.
l
Advertising expense
Advertising costs are expensed as incurred under ASC Topic 720-35, “Advertising Costs”. The Company incurred no such cost for the years ended December 31, 2011 and 2010, respectively.
l
Comprehensive income
ASC Topic 220, “Comprehensive Income”, establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as defined includes all changes in equity during a period from non-owner sources. Accumulated other comprehensive income, as presented in the accompanying consolidated statement of stockholders’ equity, consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit.
l
Income taxes
Income taxes are determined in accordance with ASC Topic 740, “Income Taxes” (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.
For the years ended December 31, 2011 and 2010, the Company did not have any interest and penalties associated with tax positions. As of December 31, 2011 and 2010, the Company did not have any significant unrecognized uncertain tax positions.
The Company conducts major businesses in the PRC and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that are subject to examination by the foreign tax authority. For the year ended December 31, 2011, the Company filed and cleared a 2010 tax return with its tax authority in the PRC.
l
Net income per share
The Company calculates net income per share in accordance with ASC Topic 260, “Earnings per Share.” Basic income per share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period. Diluted income per share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options. In periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion will be anti-dilutive.
F - 10
DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011AND 2010
(Currency expressed in United States Dollars (“US$"), except for number of shares)
l
Foreign currencies translation
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the statement of operations.
The reporting currency of the Company is the United States Dollars ("US$"). The Company's subsidiary in the PRC maintain its books and records in its local currency, Renminbi Yuan ("RMB"), which is functional currency as being the primary currency of the economic environment in which the entity operates.
In general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not US$ are translated into US$, in accordance with ASC Topic 830-30, “Translation of Financial Statement”, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.
Translation of amounts from RMB into US$1 has been made at the following exchange rates for the respective year:
l
Stock based compensation
The Company adopts ASC Topic 718, "Stock Compensation", ("ASC Topic 718") using the fair value method. Under ASC Topic 718, the stock based compensation is measured using the Black-Scholes option-pricing model on the date of grant.
For non-employee stock based compensation, the Company adopts ASC Topic 505-50, “Equity-Based Payments to Non-Employees”, stock based compensation related to non-employees is accounted for based on the fair value of the related stock or options or the fair value of the services on the grant date, which ever is more readily determinable.
l
Retirement plan costs
Contributions to retirement plans (which are defined contribution plans) are charged to general and administrative expenses in the accompanying consolidated statements of operation as the related employee service is provided.
l
Related parties
Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Companies are also considered to be related if they are subject to common control or common significant influence.
l
Segment reporting
ASC Topic 280, “Segment Reporting” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in financial statements. The Company operates in one reportable operating segment in the PRC.
F - 11
DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011AND 2010
(Currency expressed in United States Dollars (“US$"), except for number of shares)
l
Fair value of financial instruments
The carrying value of the Company’s financial instruments: cash, accounts receivable, advances to suppliers, deposits and prepayments, accounts payable, income tax payable, amount due to a related party, accrued liabilities and other payables approximate at their fair values because of the short-term nature of these financial instruments.
Management believes, based on the current market prices or interest rates for similar debt instruments, the fair value of short-term and long-term bank borrowings approximate at its carrying amount. The fair value of convertible notes and promissory notes is disclosed in Note 10 and 11.
The Company also follows the guidance of the ASC Topic 820-10, “Fair Value Measurements and Disclosures” ("ASC 820-10"), with respect to financial assets and liabilities that are measured at fair value. ASC 820-10 establishes a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:
Level 1 : Inputs are based upon unadjusted quoted prices for identical instruments traded in active markets;
Level 2 : Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and; and
Level 3 : Inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models.
Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
l
Reclassifications
Certain comparative figures have been reclassified to conform to the current period financial statement presentation.
l
Recent accounting pronouncements
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.
In December 2010, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2010-28 regarding the goodwill impairment test for reporting units with zero or negative carrying amounts. The guidance clarifies the steps to be performed to determine whether goodwill has been impaired and addresses the steps for reporting units with zero or negative carrying amounts. This guidance is effective for fiscal years (and interim periods within such years) beginning after December 15, 2010. The adoption of this guidance had no impact on the Company’s consolidated financial statements.
In May 2011, the FASB issued ASU No. 2011-04 regarding fair value measurements and disclosures. This new guidance clarifies the application of existing fair value measurement guidance and revises certain measurement and disclosure requirements to achieve convergence with International Financial Reporting Standards. This guidance is effective for the first interim or annual period beginning after December 15, 2011. In the period of adoption, the Company will include the required disclosures in its filings and believes the adoption will have no impact on its consolidated financial statements.
F - 12
DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011AND 2010
(Currency expressed in United States Dollars (“US$"), except for number of shares)
In June 2011, the FASB issued ASU No. 2011-05 regarding the presentation of comprehensive income. This new guidance amends the previous application of comprehensive income and the requirements regarding presentation in the financial statements. It requires the disclosure of the components of comprehensive income, which the Company currently discloses in other sections of its filings, to be presented as part of one statement of comprehensive income, or as a separate statement of comprehensive income following the statement of earnings. In December 2011, the FASB issued ASU No. 2011-12 which temporarily defers those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. This guidance is effective for fiscal years (and interim periods within such years) beginning after December 15, 2011. The Company is currently evaluating the impact the adoption will have on its consolidated financial statements.
In December 2011, the FASB issued ASU No. 2011-11 regarding disclosures about offsetting assets and liabilities. This new guidance requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. This guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company is currently evaluating the impact the adoption will have on its consolidated financial statements.
4.
ACCOUNTS RECEIVABLE
The majority of the Company?痵 sales are on open credit terms and in accordance with terms specified in the contracts governing the relevant transactions. Management periodically evaluates individual customer receivables and considers a customer’s financial condition, credit history and the current economic conditions. For the years ended December 31, 2011 and 2010, the Company continually monitored the collection of its accounts receivables and determined no write-off on the uncollectible receivables.
Up to February 29, 2012, the Company has subsequently recovered from approximately 20% of accounts receivable as of December 31, 2011.
5.
INVENTORIES
Inventories consisted of the following:
For the years ended December 31, 2011 and 2010, the Company recorded no allowance for slow moving and obsolete inventories.
F - 13
DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011AND 2010
(Currency expressed in United States Dollars (“US$"), except for number of shares)
6.
DEPOSITS AND PREPAYMENTS
Deposits and prepayments consisted of the following:
7.
PLANT AND EQUIPMENT
Plant and equipment consisted of the following:
Depreciation expense for the years ended December 31, 2011 and 2010 were $2,807,507 and $1,559,958, which included $2,805,331 and $1,548,603 in cost of revenue, respectively.
As of December 31, 2011, certain plant and equipment with the aggregate carrying value of $2,998,840 were pledged as securities in connection with long-term bank borrowings (see Note 14).
Approximately $885,704 and $686,848 of certain plant and machinery became fully depreciated as of December 31, 2011 and 2010, respectively.
8.
CONSTRUCTION IN PROGRESS
During the year ended December 31, 2011, the Company is anticipating a new manufacturing facility for the production of laminated boards, in an area of 100,000 square feet, adjacent to the existing facility, which is scheduled to be completed in the second quarter of 2012. Total estimated costs incurred for the construction of a new manufacturing facility are approximately $30 million. As of December 31, 2011, the Company incurred and capitalized $12,608,417 in “Construction in progress”.
F - 14
DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011AND 2010
(Currency expressed in United States Dollars (“US$"), except for number of shares)
9.
SHORT-TERM BANK BORROWINGS
Short-term bank borrowings consisted of the following:
10.
CONVERTIBLE NOTES
On November 10, 2009, the Company, through its subsidiary, CHDITN and Zhuang, Jinghua (“Mr. Zhuang”) entered into a Subsidiary Loan Agreement (the “Loan Agreement”). Pursuant to the terms of the Loan Agreement, Mr. Zhuang advanced $340,000 (equal to RMB2,321,350) to CHDITN and the fund was used to set up new printing production lines. The Company agreed to convert the loan amount into common stock of the Company at a fixed conversion price of $3 (post reverse split) per share, equal to 113,333 shares (post reverse split) of its common stock, any time before the maturity day upon the written notice from Mr. Zhuang. Interest was carried at the rate of 8% per annum, quarterly payable, with a maturity date of November 10, 2010.
Concurrently, on November 10, 2009, the Company, through its subsidiary, CHDITN and Shi Quan Ling (“Ms. Shi”) entered into a Subsidiary Loan Agreement (the “Loan Agreement”). Pursuant to the terms of the Loan Agreement, Ms. Shi advanced $2,000,000 (equal to RMB 6,827,500) to CHDITN and the fund was used to set up new printing production lines. The Company agreed to convert the loan amount into common stock of the Company at a fixed conversion price of $3 (post reverse split) per share, equal to 666,667 shares (post reverse split) of its common stock, any time before the maturity day upon the written notice of Ms. Shi. Interest was carried at a rate of 8% per annum, quarterly payable, with a maturity date of November 10, 2010.
In connection with the Loan Agreements, the Company also agreed to issue warrants to Mr. Zhuang and Ms. Shi, for consideration of $10, respectively, as incentive for Mr. Zhuang and Ms. Shi to lend money to the Company. The warrants entitled Mr. Zhuang and Ms. Shi to purchase 113,334 and 666,667 shares (post reverse split) of its common stock from the Company respectively at any time or times on or after November 10, 2009 with the expiry of November 10, 2014 at the exercise price per share of $3 (post reverse split) or as subsequently adjusted under the warrant agreements.
In addition, the President of the Company, Mr. Liu Rui Sheng (“Mr. Liu”), entered into a Pledge Agreement with Mr. Zhuang, Ms. Shi and Greentree Financial Group, Inc. as Escrow Agent. Pursuant to the Pledge Agreement, Mr. Liu agreed to irrevocably pledge to Mr. Zhuang and Ms. Shi with 4,510,667 shares (post reverse split) of DCRD’s common stock held by the major shareholder, Mr. Man Kwai Ming as collateral for the Loan Agreements between CHDITN and Mr. Zhuang and Ms. Shi.
F - 15
DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011AND 2010
(Currency expressed in United States Dollars (“US$"), except for number of shares)
On December 17, 2009, the Company received net aggregate proceeds of $2,081,000, net of expenses and deductions of prepaid interests, from Ms. Shi and Mr. Zhuang.
The Company has engaged an independent valuer to perform the valuation of the convertible notes and has determined that the convertible notes are recorded in accordance with ASC Topic 470-20, “Debt with conversion and other options”, the warrants and related convertible notes should be accounted for as two separate instruments (equity and debt instruments). The accounting for these instruments reflects the notion that the consideration received upon issuance must be allocated between equity and debt components. Proceeds from the sale of a debt instrument with stock purchase warrants are allocated to the two elements, based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance. The portion of the proceeds allocated to the warrants is accounted for as paid-in capital. The remainder of the proceeds is allocated to the debt instrument portion of the transaction as debt discount.
The discount is being amortized over the life of the debt using the effective interest method. For the years ended December 31, 2011 and 2010, the Company recognized $0 and $860,292 as amortization of debt discount and recorded as interest expense in the statement of operations. The warrants are measured at their fair value on the grant date using Black-Scholes option pricing model, with the following assumptions.
During the year ended December 31, 2011, the Company made the partial repayment of $193,534 to Mr. Zhuang. At December 31, 2011, the unpaid portion of convertible notes was matured and became overdue. In the event that the Company cannot pay the convertible note when due, an event of default would occur. The default interest shall be subject to 16%, if the Company has failed to make payments of interest and principal on the maturity date. Ms. Shi and Mr. Zhuang shall have rights to keep the proceeds from the sales of the pledge and the Shares to the extent of the unpaid interest and principal of the convertible notes. Ms. Shi and Mr. Zhuang shall have recourse for the outstanding balance.
As of December 31, 2011, the convertible notes became immediately due and the Company has been in negotiations with the holders of the convertible notes, but has not yet reached an agreement as to repayment schedule.
11.
CONVERTIBLE PROMISSORY NOTES
On June 1, 2009, the Company’s subsidiary, CHDITN entered into four promissory notes with Precursor Management, Inc. (“PMI”) for the aggregate principal amount of $705,000 to pay for certain transaction fees and professional fees associated with becoming a “public company”, with an interest rate of 6.5% per annum, fully payable on September 30, 2009. On November 19, 2009, both parties mutually agreed to extend the payment date to December 30, 2009.
In December 2009, the Company repaid $300,000 to the promissory note and both parties agreed to restructure four promissory notes in exchange for new notes in the remaining principal amount of $405,000 with an interest rate of 8% per annum, fully payable on December 4, 2010, by entering into the following new promissory notes with four different parties:
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DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011AND 2010
(Currency expressed in United States Dollars (“US$"), except for number of shares)
On December 4, 2009, the Company, through CHDITN signed a Promissory Note with Greentree Financial Group Inc. (“Greentree”), stating that CHDITN promised to pay to the order of Greentree the sum of $140,000, plus interest of $11,200 or approximately 8% interest per annum, quarterly payable, with a maturity date of December 4, 2010. In addition, Greentree shall have a right to convert the principal amount, partially or in full, into number of shares of Common Stock of the Company at the exercise price of $3 (post reverse split) per share.
On December 4, 2009, the Company, through CHDITN signed a Promissory Note with PMI, stating that CHDITN promised to pay to the order of PMI the sum of $140,000, plus interest of $11,200 or approximately 8% interest per annum, quarterly payable, with a maturity date of December 4, 2010. In addition, PMI shall have a right to convert the principal amount, partially or in full, into number of shares of Common Stock of the Company at the exercise price of $3 (post reverse split) per share.
On December 4, 2009, the Company, through CHDITN signed a Promissory Note with Linear Capital Partners LLC. (“Linear”), stating that CHDITN promised to pay to the order of Linear the sum of $40,000, plus interest of $3,200 or approximately 8% interest per annum, quarterly payable, with a maturity date of December 4, 2010. In addition, Linear shall have a right to convert the principal amount, partially or in full, into number of shares of Common Stock of the Company at the exercise price of $3 (post reverse split) per share.
On December 4, 2009, the Company, through CHDITN signed a Promissory Note with Maurice Katz (“Mr. Katz”), stating that CHDITN promised to pay to the order of Mr. Katz the sum of $85,000, plus interest of $6,800 or approximately 8% interest per annum, quarterly payable, with a maturity date of December 4, 2010. In addition, Mr. Katz shall have a right to convert the principal amount, partially or in full, into number of shares of Common Stock of the Company at the exercise price of $3 (post reverse split) per share.
In connection with these four Promissory Notes, the Company agreed to issue aggregate 405,000 shares of warrants to the holder of the promissory note, for consideration in the amount of $10 as incentive to lend money to the Company, respectively. The Warrants entitled the promissory note holders to purchase from the Company at any time or times on or after December 4, 2009, aggregate 405,000 shares of Common Stock of the Company at the exercise price of $3 (post reverse split) per share.
The Company has engaged an independent valuer to perform the valuation of the convertible promissory notes and has determined that the equity instruments issued in relation to the promissory notes are recorded in accordance with ASC Topic 505-50, “Equity-Based Payments to Non-Employees”. The fair value of the share-based payment transaction is determined at the earlier of performance commitment date or performance completion date.
For the year ended December 31, 2010, the Company recorded $593,421 as stock based compensation at their fair values, to reflect the beneficial conversion feature of the convertible promissory notes and fair value of the warrants granted. The warrants are measured at their fair value on the grant date using Black-Scholes option pricing model, with the following assumptions.
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DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011AND 2010
(Currency expressed in United States Dollars (“US$"), except for number of shares)
As of December 31, 2011, the promissory notes were matured and became overdue. In accordance with the terms and conditions in Promissory Notes, if the Company defaults in the payment of principal or interest due on the Promissory Notes, the holder of Promissory Notes (the “holder”) shall be entitled to receive and the Company agreed to pay all reasonable costs of collection incurred by holder, including, without limitation, reasonable attorney’s fees for consultation and suit. If any payment due is not made and remains unpaid for ten (10) days, it is in default hereof. Any such payment in default shall bear interest at 18% per annum. Should any payment not be made when due, there shall also be a late charge equal to 5% of the amount of the installment of principal or interest which is paid after the due date. In the event of default hereunder, the entire unpaid balance hereof shall, at the option of the holder, become due and payable upon demand. All costs and fees (including reasonable fees and disbursements of legal counsel) incurred by the holder as the result of any default by anyone liable hereunder or as the result of any collection effort by the holder shall also be due and owing to the holder. Failure to exercise any right shall not be deemed a waiver of the right to exercise the same at any subsequent date, or event.
As of December 31, 2011, the Company has been in negotiations with the holders of the promissory notes, but has not yet reached an agreement as to repayment schedule.
12.
AMOUNT DUE TO A RELATED PARTY
As of December 31, 2011 and 2010, amount due to a related party represented temporary advances made by Mr. Liu, the director of the Company, which was unsecured, interest-free with no fixed repayment term.
13.
ACCRUED LIABILITIES AND OTHER PAYABLE
Accrued liabilities and other payable consist of the following:
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DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011AND 2010
(Currency expressed in United States Dollars (“US$"), except for number of shares)
14.
LONG-TERM BANK BORROWINGS
Long-term bank borrowings were as follows:
As of December 31, 2011, the minimum future payments of the aggregate bank borrowings in the next five years are as follows:
(a)
These borrowings were collateralized by certain plant and machinery, which was repaid in full during the year ended December 31, 2011.
(b)
These borrowings were guaranteed by Mr. Liu, the director of the Company and collateralized by the real properties held by the director of the Company situated in the PRC. Interest carried at 5.76% per annum in the first year, subject to the annual lending rate of the bank in the remainder years, monthly payable. The principal is commenced to the repayment in the third year (April 2012), with the monthly principal and interest payable, due through March 8, 2015.
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DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011AND 2010
(Currency expressed in United States Dollars (“US$"), except for number of shares)
(c)
These borrowings were guaranteed by Mr. Liu, the director of the Company and collateralized by certain plant and machinery of the Company situated in the PRC. Interest carried at 8.418% per annum in the first year, subject to the annual lending rate of the bank in the remainder years, monthly payable.
15.
STOCKHOLDERS’ EQUITY
(a)
Common stock
On July 17, 2010, DCRD executed the Plan of Exchange (the “POE”) among the shareholders of DCRD, Wide Broad, the shareholders of Wide Broad and CHDITN. The POE stated that the capital of DCRD consists of 33,333,333 (post-reverse split) authorized shares of common stock, par value $0.001, of which 132,788 (post-reverse split) shares were issued and outstanding.
Pursuant to the POE, DCRD issued 6,666,667 (post-reverse split) new shares of common stock of DCRD to Wide Broad and simultaneously retired to treasury stock 620,833 (post-reverse split) shares of common stock held in the name of Maurice Katz (a former director), in exchange for 100% of the capital stock of Wide Broad.
Concurrently, DCRD effectuated a 1 for 4 reverse split of its common stock. All common stock and per share data for all periods presented in these financial statements have been restated to give effect to the reverse split.
On August 18, 2010, the Company executed an the Offshore Stock Purchase Agreement (the “Agreement”) with a private investor, Mr. Zhang Zijian to purchases 66,667 (post-reverse split) shares of restricted common stock for an aggregate amount of $200,000 of $3 per share. The proceeds were used to fund the working capital.
On April 8, 2011, the Company approved the Plan of Merger for the purpose of re-domiciling the Company to the State of Nevada. Concurrently, the Company approved a 1 for 3 reverse split of its common stock. All common stock and per share data for all periods presented in these financial statements have been restated to give effect to the reverse split.
As of December 31, 2011, the Company had a total of 6,866,122 shares of its common stock issued and outstanding.
(b)
Warrants
Transactions involving warrants granted during the years ended December 31, 2011 and 2010 are summarized as follows (warrants were not issued to employees):
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DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011AND 2010
(Currency expressed in United States Dollars (“US$"), except for number of shares)
As of December 31, 2011, the Company has 1,048,333 shares (post reverse split) of outstanding warrants at the weighted-average exercise price of $3.15. There was no movement during the year ended December 31, 2011. The Company measured the fair value of warrants on the grant date using the Black-Scholes option pricing model, with the following assumptions:
16.
NET INCOME PER SHARE
Basic net income per share is computed using the weighted-average number of the common shares outstanding during the year. The dilutive effect of potential common shares outstanding is included in diluted net income per share. The weighted average number of common shares issued and outstanding was adjusted to account for the effects of the reverse stock split as more fully described in Note 1. The following table sets forth the computation of basic and diluted net income per share for the years ended December 31, 2011 and 2010:
For the year ended December 31, 2011, warrants exercisable to 1,048,333 shares of common stock were excluded from the diluted income per share as the exercise price of the warrants was higher than the average market price of the common stock during the period, thereby making the warrants anti-dilutive under the treasury method.
17.
INCOME TAXES
For the years ended December 31, 2011 and 2010, the local (United States) and foreign components of income before income taxes were comprised of the following:
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DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011AND 2010
(Currency expressed in United States Dollars (“US$"), except for number of shares)
The effective tax rate in the periods presented is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. The Company has subsidiaries that operate in various countries: United States, BVI and the PRC that are subject to taxes in the jurisdictions in which they operate, as follows:
United States of America
The Company is registered in the State of Nevada and is subject to the tax laws of the United States of America.
British Virgin Island
Under the current BVI law, Wide Broad is not subject to tax on its income or profits. For the years ended December 31, 2011 and 2010, Wide Broad suffered from an operating loss of $152,996 and $371,029, respectively.
The PRC
The Company generated its income from a subsidiary operating in the PRC for the years ended December 31, 2011 and 2010. CHDITN is subject to the Corporate Income Tax Law of the People’s Republic of China (the “New CIT Law”) at a unified income tax rate of 25%.
A reconciliation of income tax rate to the effective income tax rate for the years ended December 31, 2011 and 2010 is as follows:
No provision for deferred tax assets or liabilities has been made, since the Company has no material temporary difference between the tax bases of assets and liabilities and their carrying amounts.
18.
STOCK BASED COMPENSATION
In September 2010, the Company entered into an Investor Relations Consulting Agreement with an Investor Relations (IR) firm (“IR firm”), in which the Company agreed to issue warrants to purchase an aggregate of 133,333 (post reverse split) shares of its common stock to the IR firm. These warrants are irrecoverable, non-cancelable and have an exercise price of $4.2 (post reverse split) per share, with piggy back registration rights. As of December 31, 2010 and 2011, none of these warrants were exercised.
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DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011AND 2010
(Currency expressed in United States Dollars (“US$"), except for number of shares)
The Company measured the fair value of warrants on the grant date using the Black-Scholes option pricing model, with the following assumptions:
The Company recognized $339,096 as stock based compensation at the fair value for the year ended December 31, 2010. No stock based compensation was incurred in 2011.
19.
CHINA CONTRIBUTION PLAN
Under the PRC Law, full-time employees of the Company’s subsidiaries in the PRC are entitled to staff welfare benefits including medical care, welfare subsidies, unemployment insurance and pension benefits through a China government-mandated multi-employer defined contribution plan. The Company is required to accrue for these benefits based on certain percentages of the employees’ salaries. The total contributions made for such employee benefits were $7,235 and $3,967 for the years ended December 31, 2011 and 2010, respectively.
20.
STATUTORY RESERVE
Under the PRC Law, the Company’s subsidiary in the PRC, CHDITN is required to make appropriation to the statutory reserve based on after-tax net earnings and determined in accordance with generally accepted accounting principles of the People’s Republic of China (the “PRC GAAP”). Appropriation to the statutory reserve should be at least 10% of the after-tax net income until the reserve is equal to 50% of the registered capital. The statutory reserve is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable other than in liquidation.
For the years ended December 31, 2011 and 2010, the Company contributed $64,810 and $597,998 to statutory reserve, respectively.
As of December 31, 2011, the statutory reserve has reached 50% of the registered capital and no further appropriation is required in the forthcoming years.
21.
CONCENTRATIONS OF RISK
The Company is exposed to the following concentrations of risk:
(a) Major customers
For the years ended December 31, 2011 and 2010, there was no single customer who accounted for 10% or more of the Company’s revenues.
(b) Major vendors
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DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011AND 2010
(Currency expressed in United States Dollars (“US$"), except for number of shares)
For the years ended December 31, 2011 and 2010, the vendor who accounted for 10% or more of the Company’s purchases and its outstanding balance at year-end date, are presented as follows:
(c) Credit risk
Financial instruments that are potentially subject to credit risk consist principally of accounts receivable. The Company believes the concentration of credit risk in its accounts and retention receivables is substantially mitigated by its ongoing credit evaluation process and relatively short collection terms. The Company does not generally require collateral from customers. Credit is extended based on evaluation of a customer's financial condition. The Company evaluates the need for an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.
(d) Exchange rate risk
The reporting currency of the Company is US$, to date the majority of the revenues and costs are denominated in RMB and a significant portion of the assets and liabilities are denominated in RMB. As a result, the Company is exposed to foreign exchange risk as its revenues and results of operations may be affected by fluctuations in the exchange rate between US$ and RMB. If RMB depreciates against US$, the value of RMB revenues and assets as expressed in US$ financial statements will decline. The Company does not hold any derivative or other financial instruments that expose to substantial market risk.
(e) Interest rate risk
As the Company has no significant interest-bearing assets, the Company’s income and operating cash flows are substantially independent of changes in market interest rates.
The Company’s interest-rate risk arises from bank borrowings, convertible notes and promissory notes. Borrowings issued at variable rates expose the Company to cash flow interest-rate risk. Borrowings issued at fixed rates expose the Company to fair value interest-rate risk. Company policy is to maintain approximately all of its borrowings in fixed rate instruments. At the year-end, the bank borrowings were both at fixed and floating rates.
(f) Economic and political risks
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DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011AND 2010
(Currency expressed in United States Dollars (“US$"), except for number of shares)
The Company's operations are conducted in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.
The Company's operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company's results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation.
22.
COMMITMENTS AND CONTINGENCIES
(a)
Operating lease commitments
The Company’s subsidiary in the PRC is committed under several non-cancelable operating leases of office premises and manufacturing facility with a term of 10 years with fixed monthly rentals, due through December 31, 2020. For the year ended December 31, 2011, the Company was granted by the landlord to waive an annual rent charge of $111,552 in relation to the manufacturing facility under the construction. Total rent expenses for the years ended December 31, 2011 and 2010 was $103,901 and $205,826, respectively.
As of December 31, 2011, the Company has future minimum rental payments due under non-cancelable operating leases in the next five years and thereafter, as follows:
(b)
Capital commitment
The Company is committed under a number of agreements with an independent contractors or suppliers in relation to the construction of the new manufacturing facility for the production of laminated boards. The construction is expected to be completed in the second quarter of 2012. Total estimated construction costs are approximately $30 million.
As of December 31, 2011, the Company has the aggregate contingent payments of approximately $8.3 million to the third party contractors and equipment vendors in the next twelve months.
(c)
Guarantees
As of December 31, 2011, the Company’s subsidiary, CHDITN is contingently liable as guarantor with respect to the maximum exposure of $4,722,700 (equivalent to RMB30,00,000) to a unrelated third party, Dongguan XiaoYuanDing Technology Co., Ltd (“DXT”) on a cross-guarantee basis. The term of these guarantees are commenced for 2 years, expiry in October 2012. At any time from the date of guarantees, should DXT fail to make its due debt payments, CHDITN will be obligated to perform under the guarantees by primarily making the required payments, including late fees and penalties.
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DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
In accordance with ASC 460-10, “Guarantees”, a guarantor must recognize a liability for the fair value of the obligations it assumes under certain guarantees. The Company did not receive any consideration for the guarantee and has determined the indemnification fair value to be insignificant. As of December 31, 2011, the Company has not recorded any liabilities under these guarantees.
(d)
Unused available line of credit
The Company has a credit facility with Industrial Bank Co., Ltd totaling $4,722,700 (equivalent to RMB30 million), including short-term bank borrowings and bills payable, under which the Company may borrow on an unsecured and cross-guarantee basis (see Note 22(c)), expiring in October 2012. As of December 31, 2011, the Company has the unused available line of credit totaling $3,148,466 on a cross-guarantee basis.
23.
SUBSEQUENT EVENTS
In accordance with ASC Topic 855, “Subsequent Events”, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued, the Company has evaluated all events or transactions that occurred after December 31, 2011 up through the date the Company issued the audited consolidated financial statements. During the period, the Company did not have any material recognizable subsequent events.
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