Item 1.
Business.
Corporate History
The Company was incorporated under the laws of the State of Florida on September 26, 2007.
On September 26, 2007, GDWP entered into a share exchange transaction with the equity owners of Green Dragon Industrial Inc. (“GDI”) (formerly Fit Sum Group Limited). Pursuant to the share exchange transaction, GDI’s equity owners transferred 100% of the equity interest in GDI in exchange for 200,000 shares of common stock of the Company. Upon completion of the share exchange, GDI became a wholly-owned subsidiary of the Company, and GDWPCL, through GDI, became an indirect wholly-owned operating subsidiary of the Company.
GDWPCL was incorporated as a limited liability company in Hong Kong Special Administrative Region of the People’s Republic of China (“the PRC” or “China”) on March 14, 2000. The principal activity of GDWPCL is trading of wood logs, wood lumber, wood veneers and other wood products in Hong Kong.
GDI was incorporated as a limited liability company in the British Virgin Islands (“BVI”) on May 30, 2007, for the purpose of holding 100% equity interest in Green Dragon Wood Products Company Limited (“GDWPCL”). On May 30, 2007, GDI entered into an exchange agreement with the equity owners of GDWPCL, whereby GDI transferred 37,500 shares of its common stock to the shareholders of GDWPCL in exchange for 5,000,000 ordinary shares of GDWPCL. Upon the completion of the share exchange, GDWPCL became a wholly-owned subsidiary of GDI.
The following diagram sets forth the current corporate structure of Green Dragon:
The Company, through its subsidiaries, mainly engages in the re-sale and trading of wood logs, wood lumber, wood veneer and other wood products in Hong Kong.
Neither Green Dragon nor GDI has any operations or plans to have any operations in the future other than acting as a holding company and management company for GDWPCL and raising capital for its operations. However, we reserve the right to change our operating plans regarding Green Dragon and GDI.
Our Business
Overview
Since inception, the Company has engaged in the import/export of various species of wood logs and veneers from the United States, Africa, Europe, New Zealand and Southern China. As a natural resource, wood is available in many species. We spend time researching the various species that will best fit the needs of our customers and the availability of the raw wood. Different woods have different geographical, seasonal, and cutting season variables. The decisions we make regarding these three differences are crucial to our business.
Our business is comprised of trading raw material such as logs, lumber and veneer. Green Dragon collects information from its customers and their demands for wood and veneers. Our buyer then determines the best source to obtain the wood. Since wood has historically been susceptible to trends that may last up to a decade, it is necessary for us to keep abreast of the current market trends in the demand for wood. As a result of the ever changing trend in demand for wood, negotiation of prices and the terms of trade must be completed prior to the execution of any purchase.
The raw wood materials we import/export are used in furniture, molding, flooring, furnishings, doors, and musical instruments. We trade our products primarily to importers or distributors.
Principal Products
We import wood logs and veneer from various countries and regions, including the United States, United States, Africa, Europe, New Zealand and Southern China. These imports are used in wood products such as furniture, flooring, wooden doors and musical instruments. Currently we export approximately 64% of our products to several distributors in China, with the remaining 36% exported to approximately 26 customers located throughout the world, including India, Italy, and the United Arab Emirates.
Approximately 55% of the wood products we trade are various species of logs, 44% are veneer and 1% is lumber.
The sale of our logs, lumber and plywood represents approximately 55% of our total sales due to the higher profit margins. The remaining 44% of our sales are in our veneer product line. Although we import veneer from all parts of the world to China, they are primarily derived from African and European species of wood. We also export veneer produced in China to various regions including India, Europe, the Middle East and South Korea.
When we import our wood logs and veneers, we are always the principal in the transaction. Prior to importing our wood logs and veneers, we receive a purchase order from our client. We are occasionally required by suppliers to put up deposit or advance payment for some of the purchase of highly demanded species of logs. Most of our export sales are by Letter of Credit terms and Telegraphic Transfer basis from our clients.
Due to the special relationships that have been built by our President, Mr. Kwok Leung Lee, a client may, under special circumstances, be granted different terms. This is the exception to our policy.
When the product is ready for shipping and payment has been made and arrangements have been made for shipping, title and responsibility for the product transfer to the client. The client may insure his shipment with the carrier or not. Green Dragon will take the responsibility if the quality or shortage of volume becomes an issue, we will also take the claim to our suppliers.
Distribution of our Products
The primary delivery of our wood products is through our office location in Hong Kong. Shipping and delivery of our products to locations within geographical driving distance are shipped via truck. Products that are shipped internationally are shipped via maritime vessels.
Competition
In order to compete effectively in the wood products industry, a company must understand and respond to the needs of its customers. Many of our competitors have greater financial resources than we have, enabling them to finance and purchase in a quick fashion and in greater volume to meet their needs to address rising demands and to reap unexpected business opportunity and economic benefits. In addition, many of these companies can offer additional products and services not provided by us such as open credit terms to their customers, and more variety of wood species. Our competitors may have the luxury of sacrificing profitability in order to capture a greater portion of the market. They may also be in a position to accept lower fees than we would for the same customer. Consequently, we may encounter significant competition in our efforts to achieve our internal and external growth objectives.
With our limited financial capacity, we are not able to offer a great variety of species of wood products or services such as open credit and warehouse facilities to make us stand above our competition, however we have chosen to refine and enhance the availability of the number of types of wood logs and veneers that fall within our capability to import/export.
Sources and Availability of Raw Materials
While there are many suppliers of wood and veneer, weather conditions can play a major role in availability. In times of heavy rain we find that there is limited availability. However, we try to import higher volume and encourage our customers to purchase more wood product in times of good weather. At this time we do not see a critical dependence on any supplier(s) that could adversely affect our operations. Over the years we have developed good relationships with mutual trust among many of our customers and suppliers.
Since we are dealing with mostly a primary source of wood in log form in the forest, the supply of such raw material can be adversely affected by seasonal change such as winter, summer, dry and rainy season, as well as by government change of regulation such as ban on log exports. However, we are trying to tackle these risks exposures by engaging only sustainable forest sources.
Customers
For this fiscal year we focus on two major customers in Southern China. While approximately 50% of our business is generated from these two distributors, these relationships are long-term and have become mutually beneficial.
For the years ended March 31, 2014 and 2013, our principal customer, which accounted for 32% and 58% of our revenue, respectively, was Rong Ze Wood Company. Our other major customer, Bo Tao Mu Ye Company, accounted for approximately 18% and 22% of our revenue for the years ended March 31, 2014 and 2013, respectively.
Started from December 2013, we have broadened our customer base in China, as we have contracted two personnel in Togo, West Africa to help us to source and inspect another new species of wood, these new species of wood have started to import to China recently. Also we have expanding our European logs business such as white oak and beech logs into China for furniture and flooring industry.
Suppliers
We work with more than 42 different suppliers throughout the world. We maintain a strong relationship with our suppliers and their trust and willingness to work with us has given us a competitive edge over other companies in our industry trading companies.
For the years ended March 31, 2014 and 2013, our principal supplier, which accounted for 34% and 17% of our purchases, respectively, was Bo Tao Mu Ye Company.
Research and Development
During the last two fiscal years no money was spent directly on research and development.
Our President travelled a lot over the world for the last two fiscal years, and based on his high value experience in this industries, and good connection with our suppliers which most of them have good reputation in this industry, we can have good sources of special species logs and veneer with good quality.
We have, however, spent more than $100,000 for our President and other personnel to inspect wood from different suppliers and develop new sourcing in Africa, Europe, New Zealand, and for business development in China and India.
Intellectual Property
We own the domain name www.greendragonglobal.com. We do not own any patents, trademarks, licenses (other than the usual business license in Hong Kong), franchises, concessions, royalty agreements or labor contracts. In the future, our success may depend in part upon our ability to preserve our trade secrets, obtain and maintain patent protection for our technologies, products and processes, and operate without infringing upon the proprietary rights of other parties. However, we may rely on certain proprietary technologies, trade secrets, and know-how that are not patentable. Although we may take action to protect our unpatented trade secrets and our proprietary information, in part, by the use of confidentiality agreements with our employees, consultants and certain of our contractors, we cannot guaranty that:
(a) these agreements will not be breached;
(b) we would have adequate remedies for any breach; or
(c) our proprietary trade secrets and know-how will not otherwise become known or be independently developed or discovered by competitors.
We cannot guarantee that our actions will be sufficient to prevent imitation or duplication of our products and services by others.
Government Approval of Principal Products or Services
None of the wood products we import/export require specific governmental approval. The current regulations in Hong Kong and the People’s Republic of China do not place a burden on the company. Permits may be obtained from our suppliers as needed
Government Regulation
The import/export of our wood logs to and from the United States is subject to a number of U.S. laws, including the National Environmental Policy Act (NEPA) and the National Forest Management Act (NFMA). We are most impacted by NFMA. This act dictates that the forest service can sell timber on national forest land to private entities only under the following conditions:
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They can sell timber at no less than its appraised value;
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They must advertise all sales unless extraordinary conditions exist or the appraised value is less than $10,000;
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They must provide a prospectus with detailed information to prospective buyers;
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They must ensure open and fair competition in the bidding process and eliminate collusive bidding practices; and
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They must promote orderly harvesting (usually requiring harvesting within a 3-5 year period).
Our U.S. suppliers must comply with NFMA before any of their logs or lumber can be exported out of the United States.
Logs that are transported to Congo are subject to the appropriate tax and valid documentation must be presented. The Congo Forestry Law requires that the quota for processing is 85% local and only 15% exported. Additionally, all Congo exporters, including GDWP’s suppliers, must be registered with SGS Group, a quality control company, for inspection services.
The International Tropical Timber Agreement of 1994, signed by 58 countries, specifically governs the exportation of logs, sawn wood, veneer sheets and plywood. The primary objectives of this Agreement were to provide a forum for consultation, international cooperation and policy development with regard to all relevant aspects of the world timber economy and to contribute to the process of sustainable development.
The International Tropical Timber Agreement of 1994 currently does not affect our importation of wood logs and veneers. Government regulation may change in the future and could place a burden on Green Dragon to conform to more paperwork with various government agencies in various countries. Should there be a change in government regulations, we will endeavor to remain in compliance at all times.
Environmental Regulation
As an import/export company we are not directly subject to any federal, state or local environmental laws and regulations. The companies that ship us the wood and veneer that we ship to our customers do have a duty to comply with any environmental impact rules and regulations pertaining to the wood products that we import/export.
Employees
As of March 31, 2014, we have 9 regular paid full-time employees. We currently have no key employees, other than Mr. Lee, our President and Chairman of the Board, and Ms. Law, a Director. Our employees are paid regular salaries for their employment with GDWPCL.
We use commissioned sales/distribution representatives to sell and distribute our wood logs. These representatives are not employed by the Company and are not permitted to act on behalf of the Company without our express approval. These outside sales representatives are used only for selling our wood logs. Their commission is based on the total sale amount. We have different payment arrangements with each representative. Due to the nature of our business being based on mutual trust, we do not have any written agreements with our key sales representatives.
Our key outside sales representatives may be terminated at any time for any reason without prior notice. Conversely, our outside representatives may choose not to sell our wood logs at any time any for any reason.
Executive Offices
Our executive offices are located at Unit 312, 3rd Floor, New East Ocean Centre, 9 Science Museum Road, Kowloon, Hong Kong. Our telephone number is (011) 852-2482-5168.
Item 1A.
Item 1A.
Risk Factors.
Our business, financial condition, operating results and cash flows can be affected by a number of factors, including, but not limited to, those set forth below, any one of which could cause our actual results to vary materially from recent results or from our anticipated future results. The risks described below are not the only ones we face, but those we currently consider to be material. There may be other risks which we now consider immaterial, or which are unknown or unpredictable, with respect to our business, our competition, the regulatory environment or otherwise that could have a material adverse effect on our business.
Risks Related To Our Business
We engage in importing/exporting wood products which involves a high degree of risk.
The wood importing/exporting industry is significantly affected by changes in economic and other conditions, such as:
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Geographical availability;
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Seasonal availability;
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Cutting seasons;
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The popularity of a wood species at any a given time; and
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Macroeconomic cycles.
These factors can negatively affect the supply of, demand for and pricing of our wood products. We are also subject to a number of factors, many of which are beyond our control, including:
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Delays in suppliers’ delivery of the raw materials to us;
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Changes in governmental regulations regarding the importing and exporting of our products;
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Increases in shipping costs; and
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A shortage of raw wood.
Our dependence on a small number of key third party sales agents to distribute our products may affect our profitability.
Most of our wood sales are currently made through commission-based sales agents. Our other wood product sales are sold through our in-house sales person. The commission-based sales agents perform various tasks in the supply of our products to the customer. Our profitability might be negatively affected if our present relationships with our key sales agents or customers were disrupted or became unstable.
We are dependent on the furniture and construction industries; lower than expected growth or a downturn in demand for our products in those industries could adversely affect our results of operations.
The sales of our products are dependent to a significant degree on the level of activity in the furniture manufacturing and construction industries. Because of the cyclical demand for our products, we may have short or long-term overcapacity. A decreased demand for wood products may result in an inability to maximize our resources. Furthermore, it is possible that our expected growth in demand from companies in the furniture manufacturing and construction industries may not occur. The demand for such products can be adversely affected by several factors, including decreases in the level of new residential construction activity, which is subject to changes in economic conditions; increases in interest rates; decreases in population; and other factors. Additionally, weakness in the economies of countries in which we sell our products, as well as any downturn or continuation of current downturns in these economies, are likely to have a material adverse effect on the construction, home building, and remodeling industries, as well as on the demand for furniture items manufactured by our third party mill with our wood logs or veneers.
Our dependence, to a large extent, on maritime transport may affect our ability to deliver products to our offshore markets.
We are highly dependent on maritime means to transport products to our offshore markets. Space on international maritime shipping vessels is limited and difficult to secure. We have at times experienced difficulty in arranging shipping to our export markets. We may not be able to secure in the future adequate container space on ships that deliver our products to our offshore markets. We have no control over established marine shipping routes and the present routes that transport ships use may not continue to be used by maritime transport services. Increases in fuel prices may also increase our shipping costs. In addition, the products we transport may not reach our markets in marketable condition. Moreover, strict security measures regarding maritime transport may be implemented in the future and may increase the cost of shipping our products. These challenges to the maritime transport of our products to our offshore markets could cause an adverse effect on our profitability.
We may face significant competition in the markets in which we sell our products, which could adversely affect both our share of those markets as well as the price at which we sell our products.
Currently, we face strong competition from competitors in all of the countries and regions in which we operate. In the case of our wood products, we face competition from foreign competitors in other regions of the world, such as West Africa and China. In the future we may face increased competition in other countries in which we operate from domestic or foreign competitors, some of which may have greater financial resources than we do. In addition, we may face increased competition as a result of existing competitors increasing their production capacity. An increase in competition in the wood market or other value added wood products markets could adversely affect both our share of those markets and the price at which we are able to sell our products.
We depend on free international trade and the absence of import and export restrictions in our principal markets.
Our ability to compete effectively in our principal markets could be materially and adversely affected by a number of factors relating to government regulation of trade. Exchange rate manipulation, subsidies or the imposition of increased tariffs, or other trade barriers could materially affect our ability to move raw materials and/or finished products across national borders. If our ability to have our third party mill make, transport, or sell our products competitively in one or more of our principal export markets became impaired by any of these developments, it could be difficult for us to re-allocate our products to other markets on equally favorable terms. Thus, our business, financial condition, and results of operations could be adversely affected.
Some of our key products, such as wood veneer, may be subject to price volatility, and prolonged or severe weakness in the markets for wood veneer could adversely affect our financial condition and results of operations.
Wood veneer is a globally traded commodity product and is subject to competition from manufacturers worldwide. We, like other participants in the industry, have limited influence over the timing and extent of price changes for wood veneer. Product pricing is significantly affected by the relationship between supply and demand in the primary raw material industry. Demand is also subject to fluctuations due to changes in economic conditions, interest rates, population growth, weather conditions, and other factors. We are not able to predict with certainty market conditions and selling prices for our products and prices for wood veneer may decline from current levels. A prolonged and severe weakness in the markets for wood veneer could adversely affect our financial condition and results of operations.
The majority of raw wood materials used to produce our wood products are supplied by outside mills and companies.
We procure the majority of the raw wood materials that we use in our products from unaffiliated companies in West Africa, United States, Europe and Southern China in accordance with long standing relationships between us and the suppliers. We may not be able to maintain these relationships and continue to secure the raw materials to have our contracted manufacturers produce our products. In addition, the prices we pay for raw materials may increase as a result of higher fuel costs paid by our suppliers. An inability to secure the raw materials used in the production of our wood products or to transport such materials in a cost-effective manner could have an adverse effect on our operations.
We may not be able to maintain present favorable tax treatment or exemptions from certain tax payments in certain jurisdictions in which we operate.
One driving force behind some of our efforts has been the goal of achieving more favorable tax treatment in certain jurisdictions in which we operate. It is possible that local governments in certain municipalities may levy higher taxes on us or our products in the future. In addition, we may not be able to maintain important exemptions from certain tax regimes in the various jurisdictions in which we operate. Unfavorable tax treatment of our company in the future or an increase in the taxes levied on us may cause an adverse effect on our results of operations.
Adverse climate conditions, wind storms, fires, disease, pests, and other natural threats could adversely affect forests.
Forests that produce our wood are subject to a number of naturally occurring threats such as adverse climate conditions, wind, fire, disease and other pests. Damage caused by strong windstorms, such as uprooting and stems breakage, is considered by management to be a major natural risk to the forests that produce our wood. Fire is a risk to all forests and our warehouses and operations. Accumulation of combustible raw materials and possible deficiencies in our preparation for fires could cause fire hazards and no preventative measures can provide assurance that fires will not occur. We may experience fire in the future and such a fire may materially adversely affect us. Disease and pests are another risk to forests and plantations. Disease or pests may have a material adverse effect on forests and plantations in the future. Other risks to forests that produce our wood include, but are not limited to, losses caused by earthquakes, floods, and other non-man-made catastrophic events.
Energy shortages and increased energy costs could adversely affect our business.
Any shortage of energy could cause disruptions in our manufacturers operations as well as our operations. Higher electricity costs or disruptions in the supply of electricity or natural gas could adversely affect our financial condition and results of operations.
A downturn in the Chinese economy may adversely affect us.
We sell a large part of our products in China, and accordingly, the results of our operations and financial condition are sensitive to and dependent upon the level of economic activity in China. China's recent rates of gross domestic product growth may not continue in the future, and future developments in or affecting the Chinese economy could impair our ability to proceed with our business plan or materially adversely affect our business, financial condition, or results of operations.
We currently rely on two customers for a majority of our revenue.
We currently rely on 2 customers for approximately 50% and 80% of our revenue for the fiscal year ended March 31, 2014 and 2013, respectively. Any disruption in the relationships between us and these clients would adversely affect our business. In the event of any disruption and loss of business from one or both of these clients, purchasers of our stock would be at risk to lose most or all of their investment.
GDWPCL’s failure to compete effectively may adversely affect our ability to generate revenue.
Through GDWPCL, we compete in a highly developed market with companies that have significantly greater experience and history in our industry. If we do not compete effectively, we could lose market share and experience falling prices, adversely affecting our financial results. Our competitors will expand in the key markets and implement new technologies making them more competitive. There is also the possibility that competitors will be able to offer additional products, services, lower prices, or other incentives that we cannot or will not offer or that will make our products less profitable. We cannot assure you that we will be able to compete effectively with current or future competitors or that the competitive pressures we face will not harm our business.
We may not be able to effectively control and manage the growth of GDWPCL.
If GDWPCL’s business and markets grow and develop, it will be necessary for us to finance and manage expansion in an orderly fashion. An expansion would increase demands on existing management, workforce and facilities. Failure to satisfy such increased demands could interrupt or adversely affect our operations and cause delay in delivery of our wood products, as well as administrative inefficiencies.
We may require additional financing in the future and a failure to obtain such required financing will inhibit our ability to grow.
The continued growth of our business may require additional funding from time to time, which we expect to raise in private placements of our equity or debt securities with accredited investors or by offering our securities for sale pursuant to an effective registration statement on a market where our common stock is traded. The proceeds of this funding would be used for general corporate purposes of GDWPCL, which could include acquisitions, investments, repayment of debt and capital expenditures among other things. We may also use the proceeds to repurchase our capital stock or for our corporate overhead expenses. If we borrow funds we expect to be the primary obligor on any debt. Obtaining additional funding would be subject to a number of factors including market conditions, operating performance and investor sentiment, many of which are outside of our control. These factors could make the timing, amount, terms and conditions of additional funding unattractive or unavailable to us. Our management believes that we currently have sufficient funds from working capital to meet our current operating costs over the next 12 months.
The terms of any future financing may adversely affect your interest as stockholders.
If we require additional financing in the future, we may be required to incur indebtedness or issue equity securities, the terms of which may adversely affect your interests in us. For example, the issuance of additional indebtedness may be senior in right of payment to your shares upon our liquidation. In addition, indebtedness may be under terms that make the operation of our business more difficult because the lender's consent could be required before we take certain actions. Similarly the terms of any equity securities we issue may be senior in right of payment of dividends to your common stock and may contain superior rights and other rights as compared to your common stock. Further, any such issuance of equity securities may dilute your interest in us.
We, through our subsidiaries GDI or GDWPCL, may engage in future acquisitions that could dilute the ownership interests of our stockholders, cause us to incur debt and assume contingent liabilities.
We, through our subsidiaries GDI or GDWPCL, may review acquisition and strategic investment prospects that we believe would complement the current product offerings of GDWPCL, augment its market coverage or enhance its technical capabilities, or otherwise offer growth opportunities. From time to time we review investments in new businesses and we, through our subsidiaries, GDI or GDWPCL, expect to make investments in, and to acquire, businesses, products, or technologies in the future. We expect that when we raise funds from investors for any of these purposes we will be either the issuer or the primary obligor. In the event of any future acquisitions, we could:
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issue equity securities which would dilute current stockholders’ percentage ownership;
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incur substantial debt;
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assume contingent liabilities; or
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expend significant cash.
These actions could have a material adverse effect on our operating results or the price of our common stock. Moreover, even if through our subsidiaries GDI or GDWPCL, we do obtain benefits in the form of increased sales and earnings, there may be a lag between the time when the expenses associated with an acquisition are incurred and the time when we recognize such benefits. Acquisitions and investment activities also entail numerous risks, including:
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difficulties in the assimilation of acquired operations, technologies and/or products;
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unanticipated costs associated with the acquisition or investment transaction;
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the diversion of management’s attention from other business concerns;
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adverse effects on existing business relationships with suppliers and customers;
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risks associated with entering markets in which GDWPCL has no or limited prior experience;
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the potential loss of key employees of acquired organizations; and
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substantial charges for the amortization of certain purchased intangible assets, deferred stock compensation or similar items.
We cannot ensure that we will be able to successfully integrate any businesses, products, technology, or personnel that we might acquire in the future and our failure to do so could have a material adverse effect on our and/or GDWPCL’s business, operating results and financial condition.
We are responsible for the indemnification of our officers and directors.
Our Articles of Incorporation provides for the indemnification and/or exculpation of our directors, officers, employees, agents and other entities which deal with it to the maximum extent provided, and under the terms provided, by the laws and decisions of the courts of the state of Florida. Since we do not hold any indemnification insurance, these indemnification provisions could result in substantial expenditures, which we may be unable to recoup, which could adversely affect our business and financial conditions. Kwok Leung Lee, our President and Chairman of the Board, and Mei-Ling Law, our director, are key personnel with rights to indemnification under our Articles of Incorporation.
We may not have adequate internal accounting controls. While we have certain internal procedures in our budgeting, forecasting and in the management and allocation of funds, our internal controls may not be adequate.
We are constantly striving to improve our internal control over financial reporting. We expect to continue to improve our internal accounting control for budgeting, forecasting, managing and allocating our funds and to better account for them as we grow. There is no guarantee that such improvements will be adequate or successful or that such improvements will be carried out on a timely basis.
We are dependent on certain key personnel and loss of these key personnel could have a material adverse effect on our business, financial condition and results of operations.
Our success is, to a certain extent, attributable to the management, sales and marketing, and operational expertise of key personnel. Kwok Leung Lee, our President, and Mei-Ling Law, one of our directors, perform key functions in the operation of our business.
On January 30, 2013, the Company executed an Employment Agreement with Mr. Kwok Leung Lee, chief executive officer of the Company. The agreement, which has a term of 3 years, provides for annual compensation to Mr. Lee of HK$487,500 (approximately equal to $62,897). The agreement also provided for the Company’s issuance of 2,000,000 shares of the Company’s Series A Convertible Preferred Stock to Mr. Lee at a price of $0.25 per share (representing the equivalent number of common stock at $0.005 per share). As of March 31, 2014 and 2013, the Company had a total of 2,000,000 shares of its preferred stock issued and outstanding. We also carry key man life insurance for Mr. Lee. Loss of his services would adversely affect our ability to effectively run our business and pursue our business strategy as well as our results of operations.
As of March 31, 2014 and 2013, the Company had a total of 2,000,000 shares of its preferred stock issued and outstanding. We also carry key man life insurance for Mr. Lee. Loss of his services would adversely affect our ability to effectively run our business and pursue our business strategy as well as our results of operations.
In addition, to execute our growth plan, we must attract and retain highly qualified personnel. Competition for these employees is intense, and we may not be successful in attracting and retaining qualified personnel. We could also experience difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. If we fail to attract new personnel, or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.
We may not be able to hire and retain qualified personnel to support our growth and if we are unable to retain or hire these personnel in the future, our ability to improve our products and implement our business objectives could be adversely affected.
Competition for senior management and senior personnel in Hong Kong is intense, the pool of qualified candidates in the Hong Kong is very limited, and we may not be able to retain the services of our senior executives or senior personnel, or attract and retain high-quality senior executives or senior personnel in the future. This failure could materially and adversely affect our future growth and financial condition. We have contracted two personnel in Togo, West Africa to help us to source and inspect new species of wood in that area.
Our operating results may fluctuate as a result of factors beyond our control.
Our operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are beyond our control. These factors include:
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the costs of wood products;
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seasonality or effect of natural disasters on the availability of our raw materials;
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the relative speed and success with which we can obtain and maintain customers, merchants and vendors for our products;
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capital expenditure for equipment;
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marketing and promotional activities and other costs;
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changes in our pricing policies, suppliers and competitors;
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the ability of our suppliers to provide products in a timely manner to their customers;
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changes in operating expenses;
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increased competition in the import/export markets; and
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other general economic and seasonal factors.
Risks Related To Doing Business in The PRC
Changes in the policies of the PRC government could have a significant impact upon the business we may be able to conduct in the PRC and the profitability of such business.
Due to our significant business in Southern China, our business operations may be adversely affected by the current and future political environment in the PRC. The PRC has operated as a socialist state since the mid-1900s and is controlled by the Communist Party of China. The Chinese government exerts substantial influence and control over the manner in which we and it must conduct our business activities. The PRC has only permitted provincial and local economic autonomy and private economic activities since 1988. The government of the PRC has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy, through regulation and state ownership. Our ability to operate in the PRC may be adversely affected by changes in Chinese laws and regulations, including those relating to taxation, import and export tariffs, raw materials, environmental regulations, land use rights, property and other matters. Under current leadership, the government of the PRC has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the government of the PRC will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.
The PRC's economy is in a transition from a planned economy to a market oriented economy subject to five-year and annual plans adopted by the government that set national economic development goals. Policies of the PRC government can have significant effects on the economic conditions of the PRC. The PRC government has confirmed that economic development will follow the model of a market economy. Under this direction, we believe that the PRC will continue to strengthen its economic and trading relationships with foreign countries and business development in the PRC will follow market forces. While we believe that this trend will continue, there can be no assurance that this will be the case.
A change in policies by the PRC government could adversely affect our interests by, among other factors: changes in laws, regulations or the interpretation thereof, confiscatory taxation, restrictions on currency conversion, imports or sources of supplies, or the expropriation or nationalization of private enterprises. Although the PRC government has been pursuing economic reform policies for more than two decades, there is no assurance that the government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting the PRC's political, economic and social life.
A slowdown, inflation or other adverse developments in the PRC economy may harm our customers and the demand for our services and products.
A significant amount of our operations and sales are conducted or generated in the PRC. Although the PRC economy has grown significantly in recent years, we cannot assure you that this growth will continue. A slowdown in overall economic growth, an economic downturn, a recession or other adverse economic developments in the PRC could significantly reduce the demand for our products and harm our business.
While the PRC economy has experienced rapid growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth could lead to growth in the money supply and rising inflation. If prices for our products rise at a rate that is insufficient to compensate for the rise in the costs of supplies, it may harm our profitability. In order to control inflation in the past, the PRC government has imposed controls on bank credit, limits on loans for fixed assets and restrictions on state bank lending. Such an austere policy can lead to a slowing of economic growth.
Because our principal assets are located outside of the United States and most of our directors and all of our officers reside outside of the United States, it may be difficult for you to enforce your rights based on U.S. federal securities laws against us and our officers or to enforce U.S. court judgment against us or them in Hong Kong.
Most of our directors and all of our officers reside outside of the United States. In addition, our operating company is located in Hong Kong and substantially all of our assets are located outside of the United States. It may therefore be difficult for investors in the United States to enforce their legal rights based on the civil liability provisions of the U.S. Federal securities laws against us in the courts of either the U.S. or Hong Kong and, even if civil judgments are obtained in U.S. courts, to enforce such judgments in Hong Kong courts. Further, it is unclear if extradition treaties now in effect between the United States and Hong Kong would permit effective enforcement against us or our officers and directors of criminal penalties, under the U.S. Federal securities laws or otherwise.
The relative lack of public company experience of our management team may put us at a competitive disadvantage.
Our management team lacks public company experience, which could impair our ability to comply with legal and regulatory requirements such as those imposed by Sarbanes-Oxley Act of 2002. The individuals who now constitute our senior management have not previously had responsibility for managing a publicly traded company. Such responsibilities include complying with federal securities laws and making required disclosures on a timely basis. Our senior management may not be able to implement programs and policies in an effective and timely manner that adequately responds to such increased legal, regulatory compliance and reporting requirements. Our failure to comply with all applicable requirements could lead to the imposition of fines and penalties and distract our management from attending to the growth of our business.
RISKS RELATED TO OUR COMMON STOCK
Our officers and directors control us through their positions and stock ownership and their interests may differ from other stockholders.
As of July 8, 2014, there were 23,725,000 shares of our common stock issued and outstanding. Our officers and directors beneficially own approximately 85% of our common stock. Mr. Kwok Leung Lee, our President, beneficially owns approximately 60% of our common stock. As a result, he is able to influence the outcome of stockholder votes on various matters, including the election of directors and extraordinary corporate transactions including business combinations. Yet Mr. Lee’s interests may differ from those of other stockholders. Furthermore, ownership of 85% of our common stock by our officers and directors reduces the public float and liquidity, and may affect the market price, of our common stock as quoted on the middle tier of the OTC Markets Group, Inc., or OTCQB.
We are not likely to pay cash dividends in the foreseeable future.
We intend to retain any future earnings for use in the operation and expansion of our business. We do not expect to pay any cash dividends in the foreseeable future but will review this policy as circumstances dictate. Should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries. In addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions to us, including restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions.
Investors may have difficulty liquidating their investment because our common stock is subject to the "penny stock" rules, which require delivery of a schedule explaining the penny stock market and the associated risks before any sale.
Our common stock may be subject to regulations prescribed by the SEC relating to "penny stocks." The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market price (as defined in such regulations) of less than $5 per share, subject to certain exceptions. These regulations impose additional sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 and individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 (individually) or $300,000 (jointly with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of these securities and have received the purchaser's prior written consent to the transaction. Additionally, for any transaction, other than exempt transactions, involving a penny stock, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Legal remedies, which may be available to the investor, are as follows:
●
If penny stocks are sold in violation of the investor's rights listed above, or other federal or state securities laws, the investor may be able to cancel his purchase and get his money back.
●
If the stocks are sold in a fraudulent manner, the investor may be able to sue the persons and firms that caused the fraud for damages.
●
If the investor has signed an arbitration agreement, however, s/he may have to pursue a claim through arbitration.
If the person purchasing the securities is someone other than an accredited investor or an established customer of the broker-dealer, the broker-dealer must also approve the potential customer's account by obtaining information concerning the customer's financial situation, investment experience and investment objectives. The broker-dealer must also make a determination whether the transaction is suitable for the customer and whether the customer has sufficient knowledge and experience in financial matters to be reasonably expected to be capable of evaluating the risk of transactions in such securities. Accordingly, the SEC's rules may limit the number of potential purchasers of the shares of our common stock and stockholders may have difficulty selling their securities.
A large number of shares may be eligible for future sale and may depress our stock price.
We may be required, under terms of future financing arrangements, to offer a large number of common shares to the public, or to register for sale by future private investors a large number of shares sold in private sales to them.
Sales of substantial amounts of common stock, or a perception that such sales could occur, and the existence of options or warrants to purchase shares of common stock at prices that may be below the then-current market price of our common stock, could adversely affect the market price of our common stock and could impair our ability to raise capital through the sale of our equity securities, either of which would decrease the value of any earlier investment in our common stock.
Item 1B.
Item 1B.
Unresolved Staff Comments.
Not applicable.
Item 2.
Item 2.
Properties.
Our principal business location is at Unit 312, 3rd Floor, New East Ocean Centre, 9 Science Museum Road, Kowloon, Hong Kong. We own our furniture, computers, ancillary equipment, and office supplies. We occupy approximately 1,296 square feet under a two-year lease, expiring in February 2015 that costs $32,400 Hong Kong dollars or approximately $4,181 USD per month. At the present time we do not have a showroom for our customers.
We do not own or lease any warehouse space. In the event we have an overstock of wood logs or veneers, we rent space on a daily basis from one of our distributors. This allows us to avoid long term contracts that are expensive for the short term needs that occur for requisite storage of our products when we are overstocked. Because overstocking occurs on an irregular basis, management believes that the daily rental fees paid are in the best financial interests of the Company.
Item 3.
Item 3.
Legal Proceedings.
On February 12, 2009, a claim was filed by Chi Yim Yip, Roger (“Mr. Yip”) and Characters Capital Group Limited (“CCGL”) against Mr. Kwok Leung Lee (“Mr. Lee”), a director of the Company, and GDWPCL alleging (i) breach of contract by GDWP concerning the engagement of CCGL to assist GDWPCL in securing GDWP’s listing on the OTC Bulletin Board and (ii) defamation by Mr. Lee related to the contract dispute. Damages being sought include $31,287 in liquidated damages from GDWPCL, aggravated/exemplary damages and injunction from further defamation. The claim was filed with the High Court of the Hong Kong Special Administrative Region, Court of First Instance.
On April 9, 2009, Mr. Lee and GDWPCL filed a Defense and Counterclaim. GDWPCL asserted a breach of contract claim against CCGL, alleging that CCGL failed to fulfill its obligations pursuant to the CCGL agreement to effect the listing of GDWP through a reverse merger by the use of a company that was listed on the Pink Sheets. Mr. Lee additionally asserted a breach of contract claim against Mr.Yip for the Stock Purchase Agreement dated March 31, 2007, for failing to deliver a shell company, Tabatha V, Inc., that was listed on the Pink Sheets, which, pursuant to the Stock Purchase Agreement, was to be purchased by Mr. Lee. Both Mr. Lee and GDWPCL also claimed damages for fraudulent misrepresentation related to the failure to deliver the Pink Sheet shell company. On May 22, 2009, Mr.Yip and CCGL replied to the counterclaim.
On January 26, 2011, the High Court of the Hong Kong Special Administrative Region granted leave to Mr. Yip and CCGL to set the case down for a 7-day trial. The hearing occurred in October 2012 and the parties are waiting for the judgment of the court. At March 31, 2014, in the opinion of Company management, the resolution of this matter will not have a material effect on the Company’s financial statements in the foreseeable future.
On March 17, 2014, Paul Stamper (“Plaintiff”) filed a complaint (the “Complaint”) against, among other parties, GDWPCL, in the Hendricks Superior Court located in Hendricks County in the State of Indiana, Case No. 32D05-1403-MI-70, seeking, among other things, enforcement of a judgment entered into against all defendants on December 8, 2011 in Wabash County Circuit Court, Case No. 85C01-1112-MI-1013, in the aggregate principal amount of $42,697.14 plus interest and costs (the “Judgment”). The Company, its officers and directors deny the material allegations of the Complaint since the Company does not conduct business in the State of Indiana and intend to vigorously defend itself in this action.
Other than as disclosed above, we know of no material, active, pending or threatened proceeding against us or our subsidiaries, nor are we, or any subsidiary, involved as a plaintiff or defendant in any material proceeding or pending litigation.
Item 4.
Item 4.
Mine Safety Disclosures.
Not Applicable.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
There is no established public trading market for our securities and a regular trading market may not develop or, if developed, may not be sustained. We have no plans, proposals, arrangements or understandings with any person with regard to the development of a trading market in any of our securities. Our securities are currently qualified for quotation on the middle tier of the OTC Markets, Inc., or OTCQB, under the symbol “GDWP”, but are unpriced and have not traded.
As of July 8, 2014, we had approximately 33 shareholders of record of our common stock, including the shares held in street name by brokerage firms.
Penny Stock Regulations
The SEC has adopted regulations which generally define "penny stock" to be an equity security that has a market price of less than $5.00 per share. Our common stock, falls within the definition of penny stock and subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000, or annual incomes 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 such securities and have received the purchaser's prior written consent to the transaction. Additionally, for any transaction, other than exempt transactions, involving a penny stock, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the "penny stock" rules may restrict the ability of broker-dealers to sell our common stock and may affect the ability of investors to sell their common stock in the secondary market.
Dividends
Cash dividends have not been paid during the fiscal years ended March 31, 2014 and 2013. In the near future, we intend to retain any earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. The declaration and payment of cash dividends by us are subject to the discretion of our board of directors. Any future determination to pay cash dividends will depend on our results of operations, financial condition, capital requirements, contractual restrictions and other factors deemed relevant at the time by the board of directors. We are not currently subject to any contractual arrangements that restrict our ability to pay cash dividends.
Recent Sales of Unregistered Securities
We did not sell any unregistered securities during the fiscal year ended March 31, 2014.
Equity Compensation Plan Information
The table set forth below provides information as of March 31, 2014 with respect to shares of common stock that may be issued under the Company’s existing equity plans. For additional information, see “Item 11 - Executive Compensation”.
Issuer Purchases of Equity Securities.
None.
Item 6.
Item 6.
Selected Financial Data.
Not applicable.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Statements
We make certain forward-looking statements in this report. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings), demand for our services, and other statements of our plans, beliefs, or expectations, including the statements contained under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” as well as captions elsewhere in this document, are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can”, “could,” “may,” “should,” “will,” “would,” and similar expressions. The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. You are cautioned not to place undue reliance on such forward-looking statements. These risks and uncertainties, together with the other risks described from time to time in reports and documents that we file with the SEC should be considered in evaluating forward-looking statements.
The nature of our business makes predicting the future trends of our revenue, expenses, and net income difficult. Thus, our ability to predict results or the actual effect of our future plans or strategies is inherently uncertain. The risks and uncertainties involved in our business could affect the matters referred to in any forward-looking statements and it is possible that our actual results may differ materially from the anticipated results indicated in these forward-looking statements. Important factors that could cause actual results to differ from those in the forward-looking statements include, without limitation, the following:
·
the effect of political, economic, and market conditions and geopolitical events;
·
legislative and regulatory changes that affect our business;
·
the availability of funds and working capital;
·
the actions and initiatives of current and potential competitors;
·
investor sentiment; and
·
our reputation.
We do not undertake any responsibility to publicly release any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this report, except as required by law.
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes thereto as filed with the SEC and other financial information contained elsewhere in this report.
Except as otherwise indicated by the context, references in this Form 10-Q to “we,” “us,” “our,” “the Registrant”, “Green Dragon”, “our Company,” or “the Company” are to Green Dragon Wood Products, Inc., a Florida corporation and its consolidated subsidiaries. Unless the context otherwise requires, all references to (i) “BVI” are to British Virgin Islands; (ii) “PRC” and “China” are to the People’s Republic of China; (iii) “U.S. dollar,” “$” and “US$” are to United States dollars; (iv) “RMB” are to Yuan Renminbi of China; (v) “Securities Act” are to the Securities Act of 1933, as amended; and (vi) “Exchange Act” are to the Securities Exchange Act of 1934, as amended.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States ("US GAAP"). US GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expenses amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of condensed consolidated our financial statements.
We believe the following is among the most critical accounting policies that impact our condensed consolidated financial statements. We suggest that our significant accounting policies, as described in our condensed consolidated financial statements in the Summary of Significant Accounting Policies, be read in conjunction with this Management's Discussion and Analysis of Financial Condition and Results of Operations.
Accounts receivable and allowance for doubtful accounts
Accounts receivable are recorded at the invoiced amount and do not bear interest, which are due within contractual payment terms, generally 60 to 180 days from shipment. The Company extends unsecured credit to its customers in the ordinary course of business, based on evaluation of a customer's financial condition, the customer credit-worthiness and their payment history. Accounts receivable outstanding longer than the contractual payment terms are considered past due. Past due balances over 180 days and those over a specified amount are reviewed individually for collectability. 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. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
The credit terms of our two major customers are summarized as below:
In March 2010, the Company entered into a tri-parties settlement arrangement among Customer A and Customer B. Under such arrangement, Customer A agreed to transfer its accounts receivable balance to Customer B and Customer B agreed to receive such accounts receivable balance from Customer A, on behalf of the Company, to offset against its trade payable due to the Company.
Accounting Standard Codification ("ASC") Topic 605
We recognize revenue in accordance with ASC Topic 605, “Revenue Recognition” when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured.
The majority of the Company's revenue results from sales contracts with direct customers and revenues are generated upon the shipment of goods. The Company's pricing structure is fixed and there are no rebate or discount programs. Management conducts credit background checks for new customers as a means to reduce the subjectivity of assuring collectability. Based on these factors, the Company believes that it can apply the provisions of ASC Topic 605 with minimal subjectivity.
Results of Operations
For the Year Ended March 31, 2014 as Compared to the Year Ended March 31, 2013
The following table summarizes the results of our operations during the years ended March 31, 2014 and 2013, and provides information regarding the dollar and percentage increase or (decrease) from the year ended March 31, 2014 to the year ended March 31, 2013.
Revenue
Revenue for the year ended March 31, 2014 was $9,296,384, a decrease of $4,907,764 or 35% from $14,204,148 for the comparable period in 2013. This decrease was primarily attributable to the outcome of the Government of PRC performing the macroeconomic control in the year of 2013, caused the decrease in demand of the company’s products in China Market.
Cost of revenue and gross profit
Cost of revenue for the year ended March 31, 2014 was $8,586,820, a decrease of $4,627,080 or 35% from $13,213,900 for the comparable period in 2013. This decrease was primarily attributable to a decrease in sales.
Gross profit for the year ended March 31, 2014 was $709,564, a decrease of $280,684 or 28% from $990,248 for the comparable period in 2013. This decrease was primarily attributable to a decrease in revenue. The gross profit margin for the year ended March 31, 2014 increase to7.6% to 7% for the comparable period in 2013. The increase was primarily attributable to increase in sales of high profit margin products.
General and Administrative
General and administrative expenses for the year ended March 31, 2014 was $923,799 a decrease of $114,006 or 11% from $1,037,805 for the comparable period in 2013. This decrease was primarily attributable to cost saving.
Other (Expense)/Income
Other expense for the year ended March 31, 2014 was $196,012, a decrease $221,549 in other income or around 9 times from other income of $25,537 for the comparable period in 2013. The decrease in income was primarily attributable to loss in foreign exchange currency and loss on surrender of life insurance.
Loss before income tax
Loss before income tax for the year ended March 31, 2014 was $410,247, an increase in loss of $388,227 or around 18 times compared to income of $22,020 for the comparable year in 2013. The decrease in income was due primarily attributable to the increase in cost of revenue, general and administrative expenses as discussed above.
Net loss
Net loss for the year ended March 31, 2014 was $419,351, an increase in loss of $397,134 or around 18 times from loss of $22,217 for the comparable period in 2013. This increase loss was due primarily to the decrease of income before income tax discussed above.
Liquidity and Capital Resources
Cash and Cash Equivalents
Our cash and cash equivalents as at the beginning of the year ended March 31, 2014 was $342,329 and decreased to $34,597 by the end of the year ended, a decrease of $307,732 or 9 times. The decrease was primarily attributable to decrease in accounts payables.
Net cash (used in) / provided by operating activities
Net cash used in operating activities for the year ended 31, 2014 was $1,484,033, an increase in cash outflow of $1,927,643 or around 4 times from cash provided by operating activities of $443,610 for the comparable period in 2013. The increase in cash used in was primarily attributable an increase in cash outflow of $1,659,656 in accounts payables and an increase in cash outflow of $306,682 of prepayments, deposits and other receivables, and set off $227,266 increase in cash inflow of accounts receivable and $171,422 increase in cash inflow of accrued liabilities and other payables.
Net cash provided by investing activities
Net cash inflow provided by investing activities was $1,060,928 and $0 for the year ended March 31, 2014 and 2013, respectively. The increase was primarily attributable to $393,362 proceed from disposal of available-for-sales securities and $667,630 from proceed from surrender of life insurance.
Net cash provided by / (used in) financing activities
Net cash provided by financing activities for the year ended March 31, 2014 was $103,040, a decrease in cash outflow of $281,656 or 158% from cash used in financing activities of $178,616 for the comparable period in 2013. The increase in cash used in financing activities was primarily attributable to change in restricted cash.
Non-cash transaction
In March 2010, the Company entered into a tri-parties settlement arrangement among two major customers, Customer A and Party B. Under such arrangement, Customer A agreed to transfer its accounts receivable balance to Party B and Party B agreed to receive such accounts receivable balance from Customer A, on behalf of the Company, to offset against its trade payable due to the Company.
Pursuant to the terms of the Tri-parties Settlement Arrangement among Customer A, Party B and us;
1.
Customer A agrees to make cash payments directly to the designated bank accounts of Party B, per our monthly instruction;
2.
We and Party B agree to offset the cash proceeds against the accounts payable which we owe to Party B, and;
3.
In any event if Party B is not reimbursed by Customer A, we are responsible to chase Customer A for the settlement under obligation among the sales contracts. Meanwhile, we are legally liable to repay the accounts payable to Party B under the purchase contract.
Under this arrangement, we can assure the collection from Customer A to meet with the purchase payable due to Party B on a timely basis. We also can reduce the time and costs to handle the fund remittance among Customer A, Party B and ourselves. As we continue to make the purchase orders to Party B, the accounts receivable originally due from Customer A will be gradually eliminated and offset by our future accounts payable due to Party B.
We have developed a prolonged business relationship with Party “B” in the sale and purchase of wood veneer and the related products with a history of 10 years. In the normal course of business, Party B is acting as a “customer” or a “vendor”, who generally sells and buys different types of wood products to and from us on an arm-length basis. These sale and purchases transactions are independent.
We expect to sustain and continue this prolonged business relationship with Party B, because;
1.
Party B has a long-term commercial history and experience in sale and procurement of wood products in China;
2.
Party B has developed an extensive marketing and sourcing network in China, and;
3.
We have built up a prolonged trust and confidence in doing business with each other.
We believe that there is no collectability concern with regard to the accounts receivable balance due from Party B, which will be recoverable by our future purchase orders.
As of March 31, 2014 and 2013, the accounts receivable balance transferred from Customer A to Party B was $ 951,161 and $1,195,887, respectively. The accounts receivable balances of Customer A and Party B under the tri-parties settlement arrangement is presented as follows:
As of March 31, 2014 and 2013, the aging analysis of Party B is as follow:
Trends
We are not aware of any trends, events or uncertainties that have or are reasonably likely to have a material impact on our short-term or long-term liquidity.
Inflation
We believe that inflation has not had a material or significant impact on our revenue or our results of operations.
Working Capital
Our working capital was $2,140,324 and $2,245,851 at March 31, 2014 and 2013, respectively.
We currently generate our cash flow through our operations. We believe that our cash flow generated from operations will be sufficient to sustain operations for at least the next 12 months. There is no identifiable expansion plan as of March 31, 2014, but from time to time, we may identify new business opportunities to improve the profitability and working capital from operations.
Capital Resources
As of March 31, 2014, the Company has a revolving line of credit with DBS Bank (Hong Kong) Limited with an outstanding balance of $1,810,274, a revolving line of credit with Industrial and Commercial Bank of China (Asia) Limited with an outstanding balance of $875,188, a revolving line of credit with Shanghai Commercial Bank with an outstanding balance of $650,023, an outstanding balance of $255,414 with ICICI Bank Limited , and a trade financing payable to Tai Wah Timber Factory Limited in an aggregate of $850,812. The company requires additional fund if expand our business.
Bank Credit Facilities
On February 4, 2013, the Company entered into a credit facility and financing agreement with the DBS Bank (Hong Kong) Limited (“DBS”) provides for borrowings up to HK$14,000,000 (approximately $1,806,000) for up to 120 days generally with interest at (i) 1% per annum below Prime Rate for Hong Kong Dollar bills and (ii) Standard Bills Rate quoted by DBS from time to time for foreign currency bills on the outstanding amount from drawdown until repayment in full as conclusively calculated by DBS.
The credit facility with the Industrial and Commercial Bank of China (Asia) Limited (“ICBC”) provides for borrowings up to HK$8,000,000 (approximately $1,032,000), which bears interest at a rate of 1% per annum below the ICBC’s Hong Kong Dollar Best Lending Rate and are guaranteed by the Hong Kong Mortgage Corporation Limited (“HKMC”), and Ms. Mei Ling Law and Mr. Kwok Leung Lee, directors of the Company.
The credit facility with Shanghai Commercial Bank Limited provides for borrowings up to HK$ 6,500,000 (approximately $838,500), which bears interest at a rate of 0.25% per annum over Hong Kong prime for HK dollars facilities and at a rate of 0.25% per annum over US prime for US dollars facilities and is personally guaranteed by Mr. Lee, director of the Company. The Company also is required to maintain a minimum cash deposit not less than $264,500 that is considered restricted as compensating balances to the extent the Company borrows against this line of credit. In addition, the Company is subject to the settlement of accounts due and payable to the restricted vendors under the line of credit at the bank’s discretion. The line will be extended or renewed on a regular basis at the option of the bank.
The credit facility with ICICI Bank at March 31, 2014 was the used credit amount of HK$1,979,957 (approximately $255,414), and it is change from time to time.
The company terminated the credit line with HSBC in October 2013 after fully paid the bank loans.
Financing Arrangement
The financing arrangement with Tai Wah Timber Factory Limited provides for borrowings for trade payable financing with maturities of 2 to 3 months. The Company is charged a commission fee of 5% on each amount drawn from the line, payable monthly and an interest of 12% per annum, payable monthly. Additional interest is charged on any overdue balance.
As of March 31, 2014 and 2013, the outstanding balance was $850,812 and $773,894.
While the capital resources of the Company are stable from a cash perspective, the credit of the Company for debt financing if necessary is extremely strong due to our strong banking relations and the credit facilities provided for our veneer products. From time to time we do have a need to exercise our credit options on a short term basis due to the nature of our business as importers/exporters. The company has established lines of credit with banks and management maintains very strong relations with these banks. Management believes that its current lines of credit are more than sufficient to cover any short and long term liquidity needs. Our historical financial liquidity needs have been shown to be more than adequately covered by our credit facilities. We believe that the strength of our management team to maintain strict internal control of its cash flow and liquidity that the current credit facilities are adequate for our needs.
Our accounts receivable balance as at March 31, 2014 is $6,202,445. Our accounts receivable are not considered by management to be high due to the nature of payment for our products. Our clients are required to provide credit facilities for their product by a Letter of Credit or other negotiable method of payment for the amount owed. We draw off of the Letter of Credit prior to delivery only in the event that it is needed to maintain sufficient cash flow to cover our operations. We do pay the cost of drawing on any Letter of Credit. Because our cash flow is typically sufficient to cover our operations we do not carry accounts receivable unless prior arrangements have been made. It is company policy to recognize revenue when the product is shipped to our customers.
In the event we are unable to generate sufficient funds to continue our business efforts or if the company is pursued by a larger company for a business combination, we will analyze all strategies to continue the company and increase shareholder value. Only under these circumstances would we consider a merger, acquisition, joint venture, strategic alliance, a roll-up, or other business combination to increase business and potentially increase the shareholder value of the Company. Management believes its responsibility to increase shareholder value is of paramount importance, which means the Company should consider the aforementioned alternatives in the event funding is not available on favorable terms to the Company when and if needed.
Off-Balance Sheet Arrangements
On April 29, 2014, the Company entered into a $4.0 million credit facility, it is a back to back LC line. The Company shall, at all times, maintain a cash margin equivalent to 5% of the amount of the facility utilized with the Bank in the form of a fixed deposit. The facility is secured by assignment of receivable under the Parent LC opened in favor of the Customer from time to time to the bank. The Company paid one-off $15,000.- to the bank for processing fee.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
Item 8.
Item 8.
Financial Statements and Supplementary Data.
Our audited consolidated financial statements for the fiscal years ended March 31, 2014 and 2013, together with the report of the independent certified public accounting firm thereon and the notes thereto, are presented beginning at page.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Green Dragon Wood Products, Inc.
We have audited the accompanying consolidated balance sheets of Green Dragon Wood Products, Inc. and its subsidiaries (“the Company”) as of March 31, 2014 and 2013 and the related consolidated statements of operations and comprehensive income, cash flows and changes in stockholders’ equity for the years ended March 31, 2014 and 2013. The 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 audit 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 include 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 March 31, 2014 and 2013 and the results of operations and cash flows for the years then ended and in conformity with accounting principles generally accepted in the United States of America.
/s/ HKCMCPA Company Limited
HKCMCPA Company Limited
Certified Public Accountants
Hong Kong, China
July 15, 2014
Green Dragon Wood Products, Inc.
Consolidated Balance Sheets
As of March 31, 2014 and 2013
(Currency expressed in United States Dollars ("US$"), except for number of shares)
See accompanying notes to consolidated financial statements.
Green Dragon Wood Products, Inc.
Consolidated Balance Sheets
As of March 31, 2014 and 2013
(Currency expressed in United States Dollars ("US$"), except for number of shares)
See accompanying notes to consolidated financial statements.
Green Dragon Wood Products, Inc.
Consolidated Statements of Operations and Comprehensive Income
FOR THE YEARS ENDED MARCH 31, 2014 AND 2013
(Currency expressed in United States Dollars ("US$"), except for number of shares)
See accompanying notes to consolidated financial statements.
Green Dragon Wood Products, Inc.
Consolidated Statements of Stockholders' Equity
FOR THE YEARS ENDED MARCH 31, 2014 AND 2013
(Currency expressed in United States Dollars ("US$"), except for number of shares)
See accompanying notes to consolidated financial statements.
Green Dragon Wood Products, Inc.
Consolidated Statements of Cash Flows
FOR THE YEARS ENDED MARCH 31, 2014 AND 2013
(Currency expressed in United States Dollars ("US$"), except for number of shares)
Green Dragon Wood Products, Inc.
Consolidated Statements of Cash Flows
FOR THE YEARS ENDED MARCH 31, 2014 AND 2013
(Currency expressed in United States Dollars ("US$"), except for number of shares)
See accompanying notes to consolidated financial statements.
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014 AND 2013
(Currency expressed in United States Dollars (“US$”), except for number of shares)
1. ORGANIZATION AND BUSINESS BACKGROUND
Green Dragon Wood Products, Inc., (the “Company” or “GDWP”) was incorporated under the laws of the State of Florida on September 26, 2007.
The Company, through its subsidiaries, mainly engages in re-sale and trading of wood logs, wood lumber, wood veneer and other wood products in Hong Kong.
Details of the Company’s subsidiaries:
GDWP and its subsidiaries are hereinafter referred to as the “Company”.
2. SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
The accompanying consolidated financial statements reflect the application of certain significant accounting policies as described in this note and elsewhere in the accompanying consolidated financial statements and notes.
·
Basis of presentation
These accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America.
·
Basis of consolidation
The condensed consolidated financial statements include the accounts of GDWP and its subsidiaries. All inter-company balances and transactions between the Company and its subsidiaries have been eliminated upon consolidation.
·
Use of estimates
In preparing these consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the years reported. Actual results may differ from these estimates.
·
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.
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014 AND 2013
(Currency expressed in United States Dollars (“US$”), except for number of shares)
·
Restricted cash
As of March 31, 2014 and 2013, the Company maintained minimum cash balances of $395,893 and $909,941 in a pledged deposit account as collateral for the revolving lines of credit and long-term bank borrowings provided by the financial institutions in Hong Kong.
·
Accounts receivable and allowance for doubtful accounts
Accounts receivable are recorded at the invoiced amount less an allowance for any uncollectible accounts and do not bear interest, which are due within contractual payment terms, generally 60 to 180 days from shipment. The Company extends unsecured credit to its customers in the ordinary course of business, based on evaluation of a customer’s financial condition, the customer credit-worthiness and their payment history. Accounts receivable outstanding longer than the contractual payment terms are considered past due. Past due balances over 180 days and those over a specified amount are reviewed individually for collectability. 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. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
·
Inventories
Inventories mainly include wood veneers for re-sale and are stated at lower of cost or market value using weighted average method.
·
Marketable securities
The Company classifies marketable securities as “available-for-sale”, which is stated at fair value, with the unrealized gains and losses, reported in accumulated other comprehensive income. The Company uses quoted prices in active markets for identical assets (consistent with the Level 1 definition in the fair value hierarchy) to measure the fair value of its investments on a recurring basis pursuant to Accounting Standards Codification ("ASC") Topic 820, “Fair Value Measurements and Disclosures” .
·
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:
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.
·
Cash Value of life insurance
The cash value of life insurance relates to the Company-owned life insurance policies on a current executive officer, which is stated at the cash surrender value of the contract, net of policy loans.
·
Impairment of long-lived assets
In accordance with Accounting Standards Codification ("ASC") Topic 360-10-5, “ Impairment or Disposal of Long-Lived Assets ”, the Company reviews its long-lived assets, including plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable or that useful lives are no longer appropriate. If the total of the expected undiscounted future net cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying amount of the asset. There has been no impairment charge as of March 31, 2014 and 2013.
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014 AND 2013
(Currency expressed in United States Dollars (“US$”), except for number of shares)
·
Revenue recognition
In accordance with ASC Topic 605, “Revenue Recognition” , the Company recognizes revenue when the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectability is reasonably assured.
Revenue from re-sale and trading of wood logs, wood lumber, wood veneer and other wood products is recognized upon shipment to the customer when title and risk of loss are transferred and there are no continuing obligations to the customer. Title and the risks and rewards of ownership transfer to the customer at varying points, which is determined based on shipping terms. Revenue is recorded net of sales discounts, returns, allowances, customer rebates and other adjustments that are based upon management’s best estimates and historical experience and are provided for in the same period as the related revenues are recorded. Based on historical experience, management estimates that sales returns are immaterial and has not made allowance for estimated sales returns.
Interest income is recognized on a time apportionment basis, taking into account the principal amounts outstanding and the interest rates applicable.
·
Cost of revenue
Cost of revenue includes cost of wood logs, wood lumber and wood veneers for re-sale to the customers, purchase returns and sales commission. Shipping and handling costs associated with the distribution of the products to the customers totaled approximately $275,837 and $218,068 for the years ended March 31, 2014 and 2013, respectively, which are recorded in cost of revenue.
·
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 condensed consolidated statements of changes in 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.
·
Income taxes
The provision for income taxes is 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 discloses 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.
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014 AND 2013
(Currency expressed in United States Dollars (“US$”), except for number of shares)
The Company conducts major businesses in Hong Kong 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.
·
Net loss per share
The Company calculates net loss per share in accordance with ASC Topic 260, “Earnings per Share.” Basic loss per share is computed by dividing the net loss by the weighted-average number of common share outstanding during the year. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common share that would have been outstanding if the potential common stock equivalents had been issued and if the additional common shares were dilutive.
·
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 consolidated statement of operations.
The reporting currency of the Company is United States Dollar ("US$") and the accompanying condensed consolidated financial statements have been expressed in US$. In addition, the Company’s operating subsidiary in Hong Kong maintains its books and record in its local currency, Hong Kong Dollar (“HK$”), which is a functional currency as being the primary currency of the economic environment in which their operations are conducted. In general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not US$ are translated into US$, in accordance with ASC Topic 830-30, “ Translation of Financial Statement”, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the year. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statements of changes in stockholders’ equity.
Translation of amounts from HK$ into US$1 has been made at the following exchange rates for years ended March 31, 2014 and 2013:
·
Related parties
Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence.
·
Segment reporting
ASC Topic 280, “ Segment Reporting ” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in the financial statements. For the years ended March 31, 2014 and 2013, the Company operates one reportable business segment in Hong Kong.
·
Fair value of financial instruments
The carrying value of the Company’s financial instruments (excluding revolving lines of credit and long-term bank borrowings): cash, accounts receivable, prepayments, deposits and other receivables, accounts payable, amount due to a director, income tax payable, accrued liabilities and other payable approximate at their fair values because of the short-term nature of these financial instruments. The fair value of the marketable securities is based on quoted prices in active exchange-traded or over-the-counter markets.
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014 AND 2013
(Currency expressed in United States Dollars (“US$”), except for number of shares)
Management believes, based on the current market prices or interest rates for similar debt instruments, the fair value of its revolving lines of credit and long-term bank borrowing approximate the carrying amount.
The Company also follows the guidance of 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
~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.
·
Economic and political risk
The Company’s major operations are conducted in Hong Kong. Accordingly, the political, economic, and legal environments in Hong Kong, as well as the general state of Hong Kong’s economy may influence the Company’s business, financial condition, and results of operations.
The Company’s major operations in Hong Kong are subject to considerations and significant risks typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic, and legal environment. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, and rates and methods of taxation, among other things.
·
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.
On May 1, 2013, the Company adopted changes in accordance with guidance issued by the Financial Accounting Standards Board ("FASB"), which requires additional disclosures for the reclassification of significant amounts from accumulated comprehensive income to net income. This guidance requires that certain significant amounts be presented either on the face of the consolidated statements of income or in a single note. For other amounts, the Company is required to cross-reference disclosures that provide additional detail about such amounts. The adoption of these changes did not have a material impact on the Company's consolidated financial statements.
In July 2013, the FASB issued guidance regarding the classification of an unrecognized tax benefit as a reduction of a deferred tax asset when a net operating loss carry-forward, a similar tax loss, or a tax credit carry-forward exists. This guidance became effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption and retrospective application is permitted. The adoption of this change is not expected to have a material impact on the Company's consolidated financial statements.
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014 AND 2013
(Currency expressed in United States Dollars (“US$”), except for number of shares)
3. LIFE INSURANCE
The Company has purchased insurance on the life of a key executive officer, Mr. Kwok Leung Lee, the stockholder and director of the Company. As beneficiary, the Company receives the cash surrender value if the policy is terminated and, upon death of the insured, receives all benefits payable. Cash value of this life insurance is presented in the accompanying financial statement, net of policy loans. The loans carry interest at an effective rate of 1% per annum over 1 or 3 months Hong Kong Interbank Offered Rate (“HIBOR”). The Company fully repaid the policy loan in September 2013 and terminated the life insurance on October 8, 2013, which resulted in a loss of $99,580 upon surrender of this life insurance.
A summary of net cash value of life insurance as of March 31, 2014 is reported as below:
For the years ended 2014 and 2013, the HIBOR is 0.87% per annum and 0.85% per annum, respectively.
4. ACCOUNTS RECEIVABLE, NET
The majority of the Company’s sales are on open credit terms and in accordance with terms specified in the contracts governing the relevant transactions. The Company evaluates the need of an allowance for doubtful accounts based on specifically identified amounts that management believes to be uncollectible. If actual collections experience changes, revisions to the allowance may be required.
For the years ended March 31, 2014 and 2013, no provision for doubtful accounts charged to operations.
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014 AND 2013
(Currency expressed in United States Dollars (“US$”), except for number of shares)
5. PREPAYEMNT, DEPOSITS AND OTHER RECEIVABLES
Prepayments, deposits and other receivables consisted of:
Purchase deposits represent deposit payments made to vendors for procurement, which are interest-free, unsecured and relieved against accounts payable when goods are received by the Company.
6. PLANT AND EQUIPMENT
Plant and equipment consisted of:
Depreciation expense for the years ended March 31, 2014 and 2013 was $17,028 and $6,774, respectively.
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014 AND 2013
(Currency expressed in United States Dollars (“US$”), except for number of shares)
7. REVOLVING LINES OF CREDIT
Revolving lines of credit consist of:
On February 4, 2013, the Company entered into a credit facility and financing agreement with the DBS Bank (Hong Kong) Limited (“DBS”) provides for borrowings up to HK$14,000,000 (approximately $1,806,000) for up to 120 days generally with interest at (i) 1% per annum below Prime Rate for Hong Kong Dollar bills and (ii) Standard Bills Rate quoted by DBS from time to time for foreign currency bills on the outstanding amount from drawdown until repayment in full as conclusively calculated by DBS.
The credit facility with the Industrial and Commercial Bank of China (Asia) Limited (“ICBC”) provides for borrowings up to HK$8,000,000 (approximately $1,032,000), which bears interest at a rate of 1% per annum below the ICBC’s Hong Kong Dollar Best Lending Rate and are guaranteed by the Hong Kong Mortgage Corporation Limited (“HKMC”), and Ms. Mei Ling Law and Mr. Kwok Leung Lee, directors of the Company.
The credit facility with Shanghai Commercial Bank Limited provides for borrowings up to HK$ 6,500,000 (approximately $838,500), which bears interest at a rate of 0.25% per annum over Hong Kong prime for HK dollars facilities and at a rate of 0.25% per annum over US prime for US dollars facilities and is personally guaranteed by Mr. Lee, director of the Company. The Company also is required to maintain a minimum cash deposit not less than $264,500 that is considered restricted as compensating balances to the extent the Company borrows against this line of credit. In addition, the Company is subject to the settlement of accounts due and payable to the restricted vendors under the line of credit at the bank’s discretion. The line will be extended or renewed on a regular basis at the option of the bank.
The credit facility with ICICI Bank at March 31, 2014 was the used credit amount of HK$1,979,957 (approximately $255,414), and it is change from time to time.
The company terminated the credit line with HSBC in October 2013 after fully paid the bank loans.
At March 31, 2014, the Company had aggregate banking facilities of $3,931,914 in which $341,015 is unused.
The financing arrangement with Tai Wah Timber Factory Limited provides for borrowings for trade payable financing with maturities of 2 to 3 months. The Company is charged a commission fee of 5% on each amount drawn from the line, payable monthly and an interest of 12% per annum, payable monthly. Additional interest is charged on any overdue balance.
GREEN DRAGON WOOD PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014 AND 2013
(Currency expressed in United States Dollars (“US$”), except for number of shares)
8. SHORT-TERM BANK LOAN
In March 2013, the Company borrowed HK$2,000,000 (approximately $257,800) from Chinatrust Commercial Bank, Ltd. This loan bore interest at a rate of 3.4% per annum. Certain bank loan amounting to HK$1,000,000 loan was repaid on June 27, 2013 and the remainder was repaid subsequently on July 2, 2013.
9. OBLIGATION UNDER FINANCE LEASE
On February 20, 2013 the Company entered into a finance lease agreement with Wing Hang Bank Ltd to lease a motor vehicle. The lease has a term of 54 months expiring August 20, 2017 and provides for monthly lease payments of approximately $1,139 (HK$8,828).
As of March 31, 2014, the outstanding remaining lease payments under this finance lease are as follows:
10. LONG-TERM BANK LOAN
In March 2010, the Company received an installment loan of approximately $774,000 (HK$6,000,000) from The Hongkong and Shanghai Banking Corporation Limited for working capital purposes. The loan bears interest at a rate of 2% per annum over 1 month HIBOR with 60 monthly installments of approximately $12,900 (HK$100,000) each. The installment loan is personally guaranteed by Mr. Lee, director of the Company and guaranteed by the Government of HKSAR. The Company subsequently repaid in full the bank loan on October 8, 2013.
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014 AND 2013
(Currency expressed in United States Dollars (“US$”), except for number of shares)
11. AMOUNT DUE TO A DIRECTOR
As of March 31, 2014 and 2013, the balance represented temporary advances made to the Company by Mr. Lee, the director, which was unsecured, interest-free with no fixed terms of repayment. Imputed interest is not significant.
12. INCOME TAXES
For the years ended March 31, 2014 and 2013, the local (United States) and foreign components of income before income taxes were comprised of the following:
Provision for income taxes consisted of the following:
The effective tax rate in the years 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 and its subsidiaries are mainly operated in the United States of America, BVI and Hong Kong that are subject to taxes in the jurisdictions in which they operate, as follows:
United States of America
GDWP is registered in the State of Florida and is subject to the tax laws of the United States of America. For the years ended March 31, 2014 and 2013, the Company incurred no operation in the United States of America. GDWP is delinquent in filing its United States corporation income tax returns for the periods from inception in 2007 and has not concluded all U.S. federal income tax matters for the years through fiscal 2014, with remaining fiscal years subject to income tax examination by federal tax authorities. The Company has not completed filings of these delinquent returns. The Company’s policy is to recognize accrued interest and penalties related to unrecognized tax benefits in its income tax provision. The Company has not accrued or paid interest or penalties which were not material to its results of operations for the years ended March 31, 2014 and 2013.
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014 AND 2013
(Currency expressed in United States Dollars (“US$”), except for number of shares)
British Virgin Island
Under the current BVI law, GDI is not subject to tax on income or profit. For the years ended March 31, 2014 and 2013, GDI incurred no operation in the BVI.
Hong Kong
The Company’s major operating subsidiary is subject to Hong Kong Profits Tax, which is charged at the statutory income tax rate of 16.5% on its assessable income.
The reconciliation of income tax rate to the effective income tax rate based on income before income taxes from foreign operation for the years ended March 31, 2014 and 2013 are as follows:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. There was no significant temporary difference as of March 31, 2014 and 2013, therefore no deferred tax assets or liabilities have been recognized.
13. EQUITY SETTLED - SHARE BASED COMPENSATION
On April 16, 2013, the Company adopted a 2013 Incentive Stock Plan (the “Plan”) with a term of ten years. The Plan is designed to retain directors, executives, and selected employees and consultants and reward them for making contributions to the success of the Company. Under the Plan, the Board of Directors has the authority to grant common stock and stock options for eligible directors, officers, employees, and consultants up to a total of 4,000,000 shares.
On May 13, 2013, the Company issued a total of 3,525,000 shares of common stock to five eligible persons under the Plan, as a reward for the services render by them to the Company for the period from April to June 2013, at the value of $0.005 per share.
As no market value of the common stock was available for valuation, the measurement of fair value of the common stock was based on the value of the services rendered, and it was $17,625 which then been recognized as administrative expenses in the period of the serviced rendered.
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014 AND 2013
(Currency expressed in United States Dollars (“US$”), except for number of shares)
14. STOCKHOLDERS’ EQUITY
During the year ended March 31, 2014, the Company has the following stock transactions:
(a)
Preferred Stock - Series A Convertible Preferred Stock
On January 30, 2013, the Company’s Board of Directors approved amending the Company’s Articles of Incorporation to designate 2,000,000 shares of preferred stock (of the 50,000,000 authorized shares of preferred stock) as Series A Convertible Preferred Stock (the “Series A Preferred Stock“). Each share of Series A Preferred Stock is entitled to 50 votes per share, has a liquidation preference of $0.001 per share, and is convertible into 50 shares of Company common stock over three years as set forth in the Articles of Amendment to the Articles of Incorporation. Notwithstanding the rights to conversion upon the occurrence of either:
(i)
the Company attaining an audited net income of $500,000 in the fiscal year ended March 31, 2014 or the Corporation attaining an audited gross revenue of $17,500,000 in the fiscal year ended March 31, 2014, or
(ii)
the Company attaining an audited net income of $750,000 in the fiscal year ended March 31, 2015 or the Corporation attaining an audited gross revenue of $20,000,000 in the fiscal year ended March 31, 2015, and;
(iii)
the market price of the Company’s Common Stock on the date of conversion is equal to greater than $0.25,
Then, all shares of Series A Preferred Stock held by each holder shall immediately be convertible.
Concurrently, on January 30, 2013, the Company executed an Employment Agreement with Mr. Kwok Leung Lee, chief executive officer of the Company. The agreement, which has a term of 3 years, provides for annual compensation to Mr. Lee of HK$487,500 (approximately equal to $62,897). The agreement also provides for the Company’s issuance of 2,000,000 shares of the Company’s Series A Convertible Preferred Stock to Mr. Lee at a price of $0.25 per share (representing the equivalent number of common stock at $0.005 per share).
As of March 31, 2014 and 2013, the Company had a total of 2,000,000 shares of its preferred stock issued and outstanding.
(b)
Common Stock
On May 13, 2013, the Company issued a total of 3,525,000 shares of common stock to five eligible persons under the Plan, as a reward for the services render by them to the Company for the period from April to June 2013, at the value of $0.005 per share.
As of March 31, 2014 and 2013, the Company had a total of 23,725,000 and 20,200,000 shares of its common stock issued and outstanding.
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014 AND 2013
(Currency expressed in United States Dollars (“US$”), except for number of shares)
15. SEGMENT INFORMATION
The Company considers its business activities to constitute one single reportable segment. The Company’s chief operating decision makers use consolidated results to make operating and strategic decisions. The geographic distribution analysis of the Company’s revenues by region is as follows:
All of the Company’s long-lived assets are located in Hong Kong.
16. CONCENTRATIONS OF RISK
The Company is exposed to the following concentrations of risk:
(a) Major customers
For the years ended March 31, 2014 and 2013, the customer who accounts for 10% or more of the Company's revenues and its outstanding accounts receivable at year-end date, are presented as follows:
All of the Company’s major customers are not located in Hong Kong.
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014 AND 2013
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(b) Major vendors
For the years ended March 31, 2014 and 2013, the vendor who accounts for 10% or more of the Company's purchases and its outstanding accounts payable at year-end date, are presented as follows:
All of the Company’s major vendors are not located in Hong Kong.
(c) Credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and trade accounts receivable. The Company performs ongoing credit evaluations of its customers' financial condition, but does not require collateral to support such receivables.
(d) Interest rate risk
As the Company has no significant interest-bearing assets, the Company’s income and operating cash flows are substantially independent of changes in market interest rates.
The Company’s interest-rate risk arises from revolving lines of credit and bank borrowings. Borrowings issued at variable rates expose the Company to cash flow interest rate risk. The Company manages interest rate risk by varying the issuance and maturity dates variable rate debt, limiting the amount of variable rate debt, and continually monitoring the effects of market changes in interest rates. As of March 31, 2014, all of borrowings were at variable rates. The interest rates and terms of repayment of the borrowings are disclosed in Note 7, 8, 9 and 10.
(e) Exchange rate risk
The Company cannot guarantee that the current exchange rate will remain steady; therefore there is a possibility that the Company could post the same amount of profit for two comparable periods and because of the fluctuating exchange rate actually post higher or lower profit depending on exchange rate of HK$ converted to US$ on that date. The exchange rate could fluctuate depending on changes in political and economic environments without notice.
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014 AND 2013
(Currency expressed in United States Dollars (“US$”), except for number of shares)
17. COMMITMENTS AND CONTINGENCIES
(a) Operating lease commitments
The Company’s subsidiary in Hong Kong is committed under several non-cancelable operating leases with fixed monthly rentals, due through February 2015. Total rent expenses for the years ended 31, 2014 and 2013 were $127,734 and $118,135, respectively.
As of March 31, 2014, the Company has the future minimum rental payments $77,597 under various non-cancelable operating leases in the next twelve months.
(b) Legal proceedings
(i) On February 12, 2009, a claim was filed by Chi Yim Yip, Roger (“Mr. Yip”) and Characters Capital Group Limited (“CCGL”) against Mr. Kwok Leung Lee (“Mr. Lee”), a director of the Company, and GDWPCL alleging (i) breach of contract by GDWP concerning the engagement of CCGL to assist GDWPCL in securing GDWP’s listing on the OTC Bulletin Board and (ii) defamation by Mr. Lee related to the contract dispute. Damages being sought include $31,287 in liquidated damages from GDWPCL, aggravated/exemplary damages and injunction from further defamation. The claim was filed with the High Court of the Hong Kong Special Administrative Region, Court of First Instance.
On April 9, 2009, Mr. Lee and GDWPCL filed a Defense and Counterclaim. GDWPCL asserted a breach of contract claim against CCGL, alleging that CCGL failed to fulfill its obligations pursuant to the CCGL agreement to effect the listing of GDWP through a reverse merger by the use of a company that was listed on the Pink Sheets. Mr. Lee additionally asserted a breach of contract claim against Mr.Yip for the Stock Purchase Agreement dated March 31, 2007, for failing to deliver a shell company, Tabatha V, Inc., that was listed on the Pink Sheets, which, pursuant to the Stock Purchase Agreement, was to be purchased by Mr. Lee. Both Mr. Lee and GDWPCL also claimed damages for fraudulent misrepresentation related to the failure to deliver the Pink Sheet shell company. On May 22, 2009, Mr.Yip and CCGL replied to the counterclaim.
On January 26, 2011, the High Court of the Hong Kong Special Administrative Region granted leave to Mr. Yip and CCGL to set the case down for a 7-day trial. The hearing occurred in October 2012 and the parties are waiting for the judgment of the court. At March 31, 2014, in the opinion of Company management, the resolution of this matter will not have a material effect on the Company’s financial statements in the foreseeable future.
(ii) On March 17, 2014, Paul Stamper (“Plaintiff”) filed a complaint (the “Complaint”) against, among other parties, GDWPCL, in the Hendricks Superior Court located in Hendricks County in the State of Indiana, Case No. 32D05-1403-MI-70, seeking, among other things, enforcement of a judgment entered into against all defendants on December 8, 2011 in Wabash County Circuit Court, Case No. 85C01-1112-MI-1013, in the aggregate principal amount of $42,697.14 plus interest and costs (the “Judgment”). The Company, its officers and directors deny the material allegations of the Complaint since the Company does not conduct business in the State of Indiana and intend to vigorously defend itself in this action.
(c) Contractual commitment
The Company is committed to a series of 22 structured foreign exchange contracts with DBS bank to hedge the fluctuation between USD and RMB for a term of period from November 2013 to August 2015, monthly expiry. As of March 31, 2014, 5 contracts were fully executed with an aggregate realized exchange gain of $24,497 and the remaining 17 contracts are outstanding. The Company expects no material contingent loss from these committed contacts in the next twelve months.
18. SUBSEQUENT EVENTS
On April 29, 2014, the Company entered into a $4.0 million credit facility, it is a back to back LC line. The Company shall, at all times, maintain a cash margin equivalent to 5% of the amount of the facility utilized with the Bank in the form of a fixed deposit. The facility is secured by assignment of receivable under the Parent LC opened in favor of the Customer from time to time to the bank. The Company paid one-off $15,000.- to the bank for processing fee.
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
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), our management carried out an evaluation, with the participation of our Chief Executive Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) of the Exchange Act), as of the period covered by this report. Disclosure controls and procedures are defined as controls and other procedures that are designed to ensure that information required to be disclosed by us in reports filed with the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based upon their evaluation, our management (including our Chief Executive Officer) concluded that our disclosure controls and procedures were not effective as of March 31, 2014 based on the material weaknesses defined below.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a set of processes designed by, or under the supervision of, a company’s principal executive and principal financial officers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
●
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets,
●
provide reasonable assurance our transactions are recorded as necessary to permit preparation of our financial statements in accordance with US GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors, and
●
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statement.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted that any system of internal control, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. 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.
Under the supervision and with the participation of management, including its principal executive officer and principal financial officer, the Company’s management assessed the design and operating effectiveness of internal control over financial reporting as of March 31, 2014 based on the framework set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management concluded that the Company’s internal control over financial reporting was not effective as of March 31, 2014.
In connection with the assessment described above, management identified the following control deficiencies that represent material weaknesses at March 31, 2014:
●
The Company did not implement proper segregation of duties due to the Company’s small size and only one executive officer. In certain instances, persons responsible to review transactions for validity, completeness and accuracy were also responsible for preparation.
●
Due to the Company’s limited resources, the Company does not have accounting personnel with extensive experience in maintaining books and records and preparing financial statements in accordance with US GAAP which could lead to untimely identification and resolution of accounting matters inherent in the Company’s financial transactions in accordance with US GAAP. Additionally, the Company does not have a formal audit committee, and the Board does not have a financial expert, thus the Company lacks the board oversight role within the financial reporting process.
MANAGEMENT’S REMEDIATION PLAN
While management believes that the Company’s financial statements previously filed in the Company’s SEC reports have been properly recorded and disclosed in accordance with US GAAP, based on the control deficiencies identified above, we have designed and plan to implement, or in some cases have already implemented, the specific remediation initiatives described below:

The Company is currently looking for an outside consultant with considerable public company reporting experience and breadth of knowledge of US GAAP to assist it with the preparation and review of its financial statements. The Company is committed to establishing procedures and utilizing experienced individuals with professional supervision to properly segregate duties, prepare and approve the consolidated financial statements and footnote disclosures in accordance with US GAAP.

The Board of Directors will be more actively involved in providing additional oversight of the Company’s internal controls, formal review of our financial statements, and more detailed review of the periodic reports we anticipate filing with the SEC.

The Company has initiated efforts to ensure our employees understand the importance of internal controls and compliance with corporate policies and procedures.

The Company has retained third party specialists to assist us in the design, implementation and testing of our internal controls as necessary.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the exemption provided to issuers that are neither “large accelerated filers” nor “accelerated filers” under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No changes in the Company's internal control over financial reporting have come to management's attention during the Company's last fiscal quarter that have materially affected, or are likely to materially affect, the Company's internal control over financial reporting.
Item 9B.
Item 9B.
Other Information.
None.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance
Set forth below is certain information regarding our directors and executive officers. Our Board of Directors is comprised of two directors. Except as described below, there are no family relationships between any of our directors or executive officers. Each of our directors is elected to serve until the next annual meeting of our shareholders and until his successor is elected and qualified or until such director’s earlier death, removal or termination.
The following table sets forth certain information with respect to our directors and executive officers:
Our directors hold office until the next annual meeting of our shareholders and until their successors have been qualified after being elected or appointed. Our officers serve at the discretion of our Board of Directors.
Set forth below is biographical information about our current directors and executive officers:
Kwok Leung Lee has served as our President/Chairman of the Board of Directors since September 1998. Mr. Lee, also known as Stephen Lee, is a graduate of Michigan State University with a Bachelors Degree in Social Sciences. He received a Master of Science in Management from Shiga University in Japan in 1993 with a specialization in management and economics. Mr. Lee is fluent in Chinese, Japanese and English. Mr. Lee has traveled extensively worldwide for Green Dragon handling purchasing, negotiations with client companies, logistics, and administration and finance. He has more than thirteen (13) years of diverse product knowledge and global experience in wood products ranging from softwood to hardwood, log to lumber to veneer. His experience extends to furniture, flooring, interior decoration, musical instruments, and sports equipment.
Mei Ling Law has served as a director since our original formation in 1998. She is also the mother of our President, Mr. Lee. Ms. Law has been in the wood business for more than 10 years and serves as a liaison between the Company and its various vendors and customers. Ms. Law has been an entrepreneur for more than 30 years, has good connections in China, and possesses profound China trade experience as well as joint ventures in China.
To our knowledge, during the last ten years, none of our directors and executive officers (including those of our subsidiaries) has:

Had a 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.

Been convicted in a criminal proceeding or been subject to a pending criminal proceeding, excluding traffic violations and other minor offenses.

Been subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities.

Been found by a court of competent jurisdiction (in a civil action), the SEC, the Commodities Futures Trading Commission, or any self-regulatory organization or equivalent exchange, association, entity or organization that has disciplinary authority over the Company or the executive officer/director to have violated a federal or state securities or commodities law, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity, and the judgment or administrative order has not been reversed, suspended or vacated.
Board of Directors
Our Directors are elected by the vote of a plurality in interest of the holders of our voting stock and hold office for a term of one year and until a successor has been elected and qualified.
A majority of the authorized number of directors constitutes a quorum of the Board for the transaction of business. The directors must be present at the meeting to constitute a quorum. However, any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board individually or collectively consent in writing to the action.
The board held 4 meetings during the fiscal year of 2014. These meetings include meetings that were held by means of a conference telephone call, but do not include actions taken by unanimous written consent.
Each director attended at least 100 % of the total number of meetings of the board during the year. Our non-management directors did not meet in executive session during the fiscal year of 2014.
Director Experience
Our Board believes that each of the Company’s directors should possess the highest personal and professional ethics, integrity and values, and be committed to representing the long-term interests of the Company’s shareholders. When evaluating candidates for election to the Board, the Board seeks candidates with certain qualities that it believes are important, including integrity, an objective perspective, good judgment, and leadership skills. Our directors are highly educated and have diverse backgrounds and talents and extensive track records of success in what we believe are highly relevant positions. Our directors have served in our operating entity, GDWPCL, for many years and benefit from an intimate knowledge of our operations and corporate philosophy.
Audit Committee Financial Expert
The Company’s does not have an audit committee financial expert since Company’s board of directors currently acts as the audit committee and the board of directors currently consists of only two directors one of which is the Company’s sole officer. While the Company believe that the members of Board of Directors are collectively capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting the Company is currently engaged in a search to identify a qualified individual who will meet the definition of “audit committee financial expert as that term is defined by Item 407(d)(5) of Regulation S-K.
Audit Committee
We have not yet appointed an audit committee, and our Board of Directors currently acts as our audit committee. The Company intends to appoint an audit committee comprised entirely of independent directors, including at least one financial expert in foreseeable future.
Code of Ethics
We have adopted a code of ethics as of August 31, 2007 that applies to our principal executive officer, principal financial officer, and principal accounting officer as well as our employees. Our standards are in writing and are posted on our website www.greendragonglobal.com . A copy of the Company’s code of ethics are available to any person without charge upon written request to the Company at Unit 312, 3rd Floor, New East Ocean Centre, 9 Science Museum Road, Kowloon, Hong Kong, Attn: President.
Board Leadership and Risk Oversight
Our President also serves as Chairman of the Board. The Board believes that the Company’s President is best situated to serve as Chairman of the Board because he is the director most familiar with our business and industry and the director most capable of identifying strategic priorities and executing our business strategy. In addition, having one person serve as both Chairman and President eliminates potential for confusion and provides clear leadership for the Company, with a single person setting the tone and managing our operations. The Board oversees specific risks, including, but not limited to:

appointing, retaining and overseeing the work of the independent auditors, including resolving disagreements between the management and the independent auditors relating to financial reporting;

approving all auditing and non-auditing services permitted to be performed by the independent auditors;

reviewing annually the independence and quality control procedures of the independent auditors;

reviewing, approving, and overseeing risks arising from proposed related party transactions;

discussing the annual audited financial statements with the management;

meeting separately with the independent auditors to discuss critical accounting policies, management letters, recommendations on internal controls, the auditor’s engagement letter and independence letter and other material written communications between the independent auditors and the management; and

monitoring the risks associated with management resources, structure, succession planning, development and selection processes, including evaluating the effect the compensation structure may have on risk decisions.
Nominating Procedures
During the fiscal year ended March 31, 2014 there were no material changes to the procedures by which security holders may recommend nominees to our Board of Directors.
Compliance with Section 16(a) of the Securities Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors and persons who own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of the our common stock and other equity securities, on Form 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders are required by the Securities and Exchange Commission regulations to furnish our company with copies of all Section 16(a) reports they file.
Based solely on our review of the copies of such reports received by us, and on written representations by our officers and directors regarding their compliance with the applicable reporting requirements under Section 16(a) of the Exchange Act, we believe that, with respect to the fiscal year ended March 31, 2014, our officers and directors, and all of the persons known to us to own more than 10% of our common stock, filed all required reports on a timely basis.
Item 11.
Item 11.
Executive Compensation.
The following table sets forth information concerning the annual and long-term compensation of our President, and the most highly compensated employees and/or executive officers who served at the end of the fiscal years March 31, 2014 and 2013.
Summary Compensation Table
(1) All other compensation represented provisions for the cost of living quarters provided by the Company.
Employment Agreements
On January 30, 2013 (the “Effective Date”), the Company entered into an employment agreement (the “Agreement”) with Stephen Lee (“Executive”) pursuant to which the Company renewed and extended the employment of Executive as President, Chief Financial Officer, Treasurer, Secretary, Principal Executive Officer and Principal Financial and Accounting Officer of the Company for a period of three (3) years from the Effective Date (the “Term”). The Agreement provides that Executive will receive an annual base salary of HKD$487,500 per year during the Term and shall be eligible to earn a cash bonus at the discretion of the Company’s board of directors. In addition, the Company shall issue Executive 2,000,000 shares of the Company’s series A convertible preferred stock (the “Series A Preferred Stock”). During the Term, Executive shall be entitled to participate in all medical and other employee benefit plans, including vacation, sick leave, retirement accounts and other employee benefits provided by the Company to similarly situated employees on terms and conditions no less favorable than those offered to such employees. The Company shall also reimburse Executive for reasonable and necessary expenses incurred by him on behalf of the Company in the performance of his duties hereunder during the Term, including, without limitation, reimbursement for cellular telephone expenses in accordance with the Company’s then customary policies, provided that such expenses are adequately documented.
The Series A Preferred Stock is convertible, at the option of Executive, in three equal parts, with one-third being convertible on each of the first, second and third anniversary of the Agreement, respectively. Each share of Series A Preferred Stock shall carry 50 votes and shall be convertible into 50 shares of the Company’s common stock. Notwithstanding the foregoing, upon the occurrence of either (i) the Company attaining an audited net income of $500,000 in the fiscal year ended March 31, 2014 or the Company attaining an audited gross revenue of $17,500,000 in the fiscal year ended March 31, 2014, or (ii) the Company attaining an audited net income of $750,000 in the fiscal year ended March 31, 2015 or the Company attaining an audited gross revenue of $20,000,000 in the fiscal year ended March 31, 2015 and the market price of the Company’s Common Stock on the date of conversion is equal to or greater than $0.25, all shares of Series A Preferred Stock held by Executive shall immediately be convertible. If prior to the third anniversary of the Executive’s employment, there is a sale, conveyance or disposition of all of the assets of the Company, an effectuation by the Company of a transaction or series of related transactions in which more than 50% of the voting power of the Company is disposed of, or a consolidation, merger or other business combination of the Company with or into any other individual, corporation, limited liability company, partnership, association, trust or other entity or organization where the Company is not the survivor, then the Executive shall be entitled to convert all shares of Series A Preferred Stock then owned as of such date.
The Company may terminate its employment of Executive under the Agreement for Cause (as defined in the Agreement) at any time by written notice to Executive. Employee may terminate the Agreement for Good Reason (as defined in the Agreement) at any time upon 30 days’ written notice to Employer, provided the Good Reason has not been cured within such period of time. If the Executive terminates his employment with the Company for Good Reason, such termination will be considered to be effectively the same as termination without cause and in such event, Executive shall, at the Company’s sole discretion, be entitled to either (i) monthly salary payments for two (2) months, based on Executive’s monthly rate of base salary at the date of such termination, or (ii) a lump-sum payment of Executive’s salary for such two-month period, based on Executive’s monthly rate of base salary at the date of such termination. Executive shall also be entitled to receive (i) payment for accrued and unpaid vacation pay and (ii) all bonuses that have accrued during the term of the Agreement, but not been paid. If the Executive voluntarily terminates his employment with the Company other than for Good Reason, the Executive shall cease to accrue salary, personal time off, benefits and other compensation on the date of voluntary termination and accrued benefits, if any, will be payable in accordance with applicable benefit plan provisions.
The Agreement also contains covenants (a) restricting the Executive from engaging in any activity competitive with the our business during the term of the Agreement and in the event of termination, for a period of two years thereafter, (b) prohibiting the Executive from disclosing confidential information regarding us, and (c) restricting Executive from soliciting our employees, customers and prospective customers during the term of the Agreement and for a period of two years thereafter.
Compensation Discussion and Analysis
We strive to provide our named executive officers (as defined in Item 402 of Regulation S-K) with a competitive base salary that is in line with their roles and responsibilities when compared to peer companies of comparable size in similar locations.
We plan to implement a more comprehensive compensation program, which takes into account other elements of compensation, including, without limitation, short and long term compensation, cash and non-cash, and other equity-based compensation such as stock options. We expect that this compensation program will be comparable to the programs of our peer companies and aimed to retain and attract talented individuals.
We will also consider forming a compensation committee to oversee the compensation of our named executive officers. The majority of the members of the compensation committee would be independent directors.
Compensation of Directors
The following table sets forth summary information concerning the total compensation paid to our non-employee directors in 2014 for services to our company.
Outstanding Equity Awards at Fiscal Year-End
None.
Pension and Retirement Plans
The Company’s subsidiary participates in a defined contribution pension scheme under the Mandatory Provident Fund Schemes Ordinance “MPF Scheme” for all its eligible employees in Hong Kong.
The MPF Scheme is available to all employees aged 18 to 64 with at least 60 days of service in the employment in Hong Kong. Contributions are made by the Company’s subsidiary operating in Hong Kong at 5% of the participants’ relevant income with a ceiling of approximately $3,224 (equivalent to HK$25,000). The participants are entitled to 100% of the Company’s contributions together with accrued returns irrespective of their length of service with the Company, but the benefits are required by law to be preserved until the retirement age of 65. The only obligation of the Company with respect to MPF Scheme is to make the required contributions under the plan. The assets of the schemes are controlled by trustees and held separately from those of the Company. The total contributions made for MPF Scheme were $9,602 and $6,952 for the years ended March 31, 2014 and 2013, respectively.
Other than the above-mentioned pension scheme, we do not offer any annuity, pension or retirement benefits to be paid to any of our officers, directors or employees. There are also no compensatory plans or arrangements with respect to any individual named above which results or will result from the resignation, retirement or any other termination of employment with our company, or from a change in our control.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth certain information with respect to the beneficial ownership of our voting securities by (i) any person or group owning more than 5% of any class of voting securities, (ii) each director, (iii) our President and (iv) all executive officers and directors as a group as of July 8, 2014.
* Less than 1%
(1)
Information with respect to beneficial ownership is based upon information furnished by each stockholder or contained in filings made with the Securities and Exchange Commission. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities.
In determining the percent of common stock owned by a person or entity on July 8, 2014, (a) the numerator is the number of shares of the class beneficially owned by such person and includes shares which the beneficial owner may acquire within 60 days upon conversion or exercise of a derivative security, and (b) the denominator is the sum of (i) the shares of that class outstanding on July 8, 2014 and (ii) the total number of shares that the beneficial owner may acquire upon conversion or exercise of a derivative security within such 60 day period. Unless otherwise stated, each beneficial owner has sole power to vote and dispose of the shares.
(2)
Mei Ling Law, a director, is the mother of our President and Chairman of the Board, Kwok Leung Lee.
(3)
The Series A Preferred Stock is convertible, at the option of Mr. Lee, in three equal parts, with one-third being convertible on each of the first, second and third anniversary of the Agreement, respectively. Each share of Series A Preferred Stock shall carry 50 votes and shall be convertible into 50 shares of the Company’s common stock. Notwithstanding the foregoing, upon the occurrence of either (i) the Company attaining an audited net income of $500,000 in the fiscal year ended March 31, 2014 or the Company attaining an audited gross revenue of $17,500,000 in the fiscal year ended March 31, 2014, or (ii) the Company attaining an audited net income of $750,000 in the fiscal year ended March 31, 2015 or the Company attaining an audited gross revenue of $20,000,000 in the fiscal year ended March 31, 2015 and the market price of the Company’s Common Stock on the date of conversion is equal to or greater than $0.25, all shares of Series A Preferred Stock held by Executive shall immediately be convertible. If prior to the third anniversary of the Mr. Lee’s employment, there is a sale, conveyance or disposition of all of the assets of the Company, an effectuation by the Company of a transaction or series of related transactions in which more than 50% of the voting power of the Company is disposed of, or a consolidation, merger or other business combination of the Company with or into any other individual, corporation, limited liability company, partnership, association, trust or other entity or organization where the Company is not the survivor, then Mr. Lee shall be entitled to convert all shares of Series A Preferred Stock then owned as of such date.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
To the best of our knowledge there are no transactions in our fiscal year ended March 31, 2014 involving any director, executive officer, or any security holder who is a beneficial owner or any member of the immediate family of the officers and directors.
The credit facility with DBS Bank (Hong Kong) Limited (“DBS”) provides for borrowings up to HK$14,000,000 (approximately $1,806,000) for up to 120 days generally with interest at (i) 1% per annum below Prime Rate for Hong Kong Dollar bills and (ii) Standard Bills Rate quoted by DBS from time to time for foreign currency bills on the outstanding amount from drawdown until repayment in full as conclusively calculated by DBS. This credit facility with DBS Bank is personally guaranteed by Mr. Lee, director of the Company.
The credit facility with Shanghai Commercial Bank Limited provides for borrowings up to HK$ 6,500,000 (approximately $838,500), which bears interest at a rate of 0.25% per annum over Hong Kong prime for HK dollars facilities and at a rate of 0.25% per annum over US prime for US dollars facilities and is personally guaranteed by Mr. Lee, director of the Company. The Company also is required to maintain a minimum cash deposit not less than $264,500 that is considered restricted as compensating balances to the extent the Company borrows against this line of credit. In addition, the Company is subject to the settlement of accounts due and payable to the restricted vendors under the line of credit at the bank’s discretion. The line will be extended or renewed on a regular basis at the option of the bank.
The credit facility with the Industrial and Commercial Bank of China (Asia) Limited (“ICBC”) provides for borrowings up to HK$8,000,000 (approximately $1,032,000), which bears interest at a rate of 1% per annum below the ICBC’s Hong Kong Dollar Best Lending Rate and are guaranteed by the Hong Kong Mortgage Corporation Limited (“HKMC”), and Ms. Mei Ling Law and Mr. Kwok Leung Lee, directors of the Company.
As of March 31, 2014 and 2013, Mr. Lee, our President and Chairman, loaned to the Company as short-term financing for totaling $16,318 and $29,259, respectively. The amounts owned are unsecured, interest-free with no fixed terms of repayment.
Procedures for Approval of Related Party Transactions
Our Board of Directors is charged with reviewing and approving all potential related party transactions. All such related party transactions must then be reported under applicable SEC rules. We have not adopted other procedures for review, or standards for approval, of such transactions, but instead review them on a case-by-case basis.
Director Independence
The Company currently does not have a director that qualifies as an “independent” director as that term is defined under the National Association of Securities Dealers Automated Quotation system. Our company, however, recognizes the importance of good corporate governance and intends to appoint an audit committee comprised entirely of independent directors, including at least one financial expert, in the near future.
Item 14.
Item 14.
Principal Accounting Fees and Services
Audit Fee
The Company incurred, in the aggregate, approximately $53,000 and $53,000 for professional services rendered by its independent registered public accounting firm for the audit of the Company’s annual financial statements for the years ended March 31, 2014 and 2013, respectively, and for the reviews of the financial statements included in its Quarterly Reports on Form 10-Q during these fiscal years.
Audit-Related Fees
The Company did not incur any fees from its independent registered public accounting firm for audit-related services during the years ended March 31, 2014 and 2013.
Tax Fees
The Company did not incur any fees from its independent registered public accounting firm for tax compliance or tax consulting services during the years ended March 31, 2014 and 2013.
All Other Fees
The Company did not incur any fees from its independent registered public accounting firm for services rendered to Green Dragon, other than the services covered in "Audit Fees" and “Audit-Related Fees” for the fiscal years ended March 31, 2014 and 2013.
PART IV
Item 15.
Item 15.
Exhibits, Financial Statements Schedules
Exhibit No.
Description of Exhibit
3.1
Articles of Incorporation - Hong Kong.(1)
3.2
Articles of Incorporation - British Virgin Islands. (1)
3.3
Articles of Incorporation - Florida. (1)
3.4
Certificate of Amendment to the Company’s Articles of Incorporation, as amended filed with the Secretary of State of the State of Florida on February 1, 2013 designating the Company’s Series A Preferred Stock (4)
3.5
Bylaws. (1)
10.1
Share Exchange Agreement, dated May 30, 2007, by and between between Fit Sum Group Limited, Inc., a British Virgin Islands corporation and Green Dragon Wood Products Co. Limited, a Hong Kong company. (1)
10.2
Share Exchange Agreement, dated September 26, 2007, by and between Green Dragon Wood Products, Inc., a Florida corporation and Fit Sum Group Limited, a British Virgin Islands company. (1)
10.3
Banking Facilities Agreement, dated June 8, 2009, by and between Green Dragon Wood Products Co., Limited and Shanghai Commercial Bank Ltd. (2).
10.4
Banking Facilities Agreement, dated December 21, 2009, by and between Green Dragon Wood Products Co., Limited and Hongkong and Shanghai Banking Corporation Ltd. (2).
10.5
Banking Facilities Agreement, dated December 21, 2009, by and between Green Dragon Wood Products Co., Limited and Hongkong and Shanghai Banking Corporation Ltd. (2).
10.6
Banking Facilities Agreement, dated August 23, 2011, by and between Green Dragon Wood Products, Inc. and Tai Wah Timber Factory Limited (3).
10.7
Employment Agreement, effective January 30, 2013, by and between Green Dragon Wood Products, Inc. and Kwok Leung Lee (4).
10.8
Subscription Agreement, dated January 30, 2013, by and between Green Dragon Wood Products, Inc. and Kwok Leung Lee (4).
10.9
Tenancy Agreement, dated April 8, 2013, by and between Luckon Technologies Limited and Green Dragon Wood Products Co. Limited (5)
10.10
Agreement of Collection and Transfer of Payment, dated March 1, 2010, by and among Green Dragon Wood Products Co. Ltd., Dongguan Rong Ze Trading Co. Ltd. and Dongguan Houjie Bo Tao Wood Trading Office (5)
10.11
Credit Facilities Agreement, dated April 27, 2014, by and between Green Dragon Wood Products Co., Limited and ICICI Bank Limited. (filed herewith)
14.1
Code of Ethics.(1)
21.1
List of Subsidiaries (filed herewith)
23.1
Consent of HKCMCPA Company Limited (filed herewith)
31.1
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (filed herewith)
32.1
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002 (filed herewith)
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
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(1) Incorporated by reference to the exhibit to our registration statement on Form SB-2 filed with the SEC on December 11, 2007.
(2) Incorporated by reference to the exhibit to our annual report on Form 10-K filed with the SEC on July 14, 2010.
(3) Incorporated by reference to the exhibit to our annual report on Form 10-K filed with the SEC on July 15, 2011.
(4) Incorporated by reference to the exhibit to our current report on Form 10-K filed with the SEC on February 8, 2013.
(5) Incorporated by reference to the exhibit to our current report on Form 10-Q filed with the SEC March 7, 2014.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
In accordance with the 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.
Name
Title
Date
/s/ Kwok Leung Lee
President and Chairman of the Board (principal executive, financial and accounting officer)
July 15, 2014
Kwok Leung Lee
/s/ Mei Ling Law
Director
July 15, 2014
Mei Ling Law