Attached files
file | filename |
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EX-32.1 - EX-32.1 - DUOYUAN PRINTING, INC. | h04213exv32w1.htm |
EX-31.2 - EX-31.2 - DUOYUAN PRINTING, INC. | h04213exv31w2.htm |
EX-31.1 - EX-31.1 - DUOYUAN PRINTING, INC. | h04213exv31w1.htm |
Table of Contents
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-27129
Duoyuan Printing, Inc.
(Exact Name of Registrant as Specified in its Charter)
Wyoming (State or Other Jurisdiction of Incorporation or Organization) |
91-1922225 (IRS Employer Identification Number) |
No. 3 Jinyuan Road
Daxing Industrial Development Zone
Beijing 102600, Peoples Republic of China
(Address of Principal Executive Offices)
Daxing Industrial Development Zone
Beijing 102600, Peoples Republic of China
(Address of Principal Executive Offices)
Tel: +86 10-6021-2222
(Registrants telephone number)
(Registrants telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer,
accelerated filer and smaller reporting
company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of May 11, 2010, the Company had 30,563,217 shares of common stock, par value $0.001 per share,
issued and outstanding.
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
DUOYUAN PRINTING, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS ASIAN FINANCIAL, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
AS OF MARCH 31, 2010 AND JUNE 30, 2009
(FORMERLY KNOWN AS ASIAN FINANCIAL, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
AS OF MARCH 31, 2010 AND JUNE 30, 2009
June 30, | ||||||||
2009 | ||||||||
March 31, | As adjusted | |||||||
2010 | (1) | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash |
$ | 91,224,531 | $ | 31,044,070 | ||||
Accounts receivable, net of allowance for doubtful accounts of $499,158
and $1,401,689 as of March 31, 2010 and June 30, 2009, respectively |
49,144,143 | 37,259,616 | ||||||
Inventories |
29,494,371 | 25,883,242 | ||||||
Other current assets |
133,090 | 26,912 | ||||||
Total current assets |
169,996,135 | 94,213,840 | ||||||
Plant and equipment, net |
41,578,172 | 43,123,153 | ||||||
Other assets: |
||||||||
Intangible assets, net |
3,865,322 | 3,939,476 | ||||||
Advances on equipment purchases |
7,284,609 | 7,274,677 | ||||||
Total other assets |
11,149,931 | 11,214,153 | ||||||
Total assets |
$ | 222,724,238 | $ | 148,551,146 | ||||
Liabilities and Equity |
||||||||
Current liabilities: |
||||||||
Bank loans |
$ | 14,376,600 | $ | 14,357,000 | ||||
Accounts payable |
1,998,096 | 756,116 | ||||||
Accrued liabilities |
1,175,195 | 2,251,419 | ||||||
Taxes payable |
2,124,934 | 1,512,727 | ||||||
Total current liabilities |
19,674,826 | 18,877,262 | ||||||
Warrants |
7,588,389 | 1,180,477 | ||||||
Total liabilities |
27,263,215 | 20,057,739 | ||||||
Commitments and contingencies |
||||||||
Equity: |
||||||||
Preferred stock; $0.001 par value; 1,000,000 shares authorized;
no shares issued and outstanding as of March 31, 2010 and June 30, 2009 |
| | ||||||
Common stock; $0.001 par value; 100,000,000 shares authorized;
30,563,217 shares issued and outstanding as of March 31, 2010 and
25,000,050 shares issued and outstanding as of June 30, 2009 |
30,563 | 25,000 | ||||||
Additional paid-in capital |
74,567,372 | 27,263,040 | ||||||
Statutory reserves |
11,693,438 | 9,428,573 | ||||||
Retained earnings |
95,933,386 | 79,226,497 | ||||||
Accumulated other comprehensive income |
10,990,337 | 10,788,585 | ||||||
Total Duoyuan Printing, Inc. shareholders equity |
193,215,096 | 126,731,695 | ||||||
Noncontrolling interest |
2,245,927 | 1,761,712 | ||||||
Total equity |
195,461,023 | 128,493,407 | ||||||
Total liabilities and equity |
$ | 222,724,238 | $ | 148,551,146 | ||||
(1) | June 30, 2009 balances were extracted from audited financial statements, as adjusted for the adoption of an accounting pronouncement regarding noncontrolling interests. |
1
Table of Contents
DUOYUAN PRINTING, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS ASIAN FINANCIAL, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2010 AND 2009
(FORMERLY KNOWN AS ASIAN FINANCIAL, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2010 AND 2009
Three months ended | Nine months ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
2009 | 2009 | |||||||||||||||
2010 | As adjusted(2) | 2010 | As adjusted (2) | |||||||||||||
Revenues, net |
$ | 23,403,356 | $ | 17,411,937 | $ | 99,106,325 | $ | 80,428,651 | ||||||||
Cost of revenues |
11,099,977 | 8,354,157 | 46,453,081 | 37,293,982 | ||||||||||||
Gross profit |
12,303,379 | 9,057,780 | 52,653,244 | 43,134,669 | ||||||||||||
Research and development expenses |
461,286 | 285,994 | 1,454,119 | 1,470,595 | ||||||||||||
Selling expenses |
2,050,983 | 1,475,783 | 9,115,804 | 6,974,735 | ||||||||||||
General and administrative expenses |
3,680,503 | 1,056,541 | 8,799,149 | 3,332,876 | ||||||||||||
Income from operations |
6,110,607 | 6,239,462 | 33,284,171 | 31,356,463 | ||||||||||||
Change in fair value of warrants |
(2,452,121 | ) | 30,271 | (5,686,118 | ) | 194,347 | ||||||||||
Other expenses |
| | | (956,936 | ) | |||||||||||
Interest expense |
(213,101 | ) | (210,648 | ) | (660,546 | ) | (637,387 | ) | ||||||||
Interest income and
other income |
55,220 | 104,309 | 128,467 | 173,496 | ||||||||||||
Other expense, net |
(157,881 | ) | (106,339 | ) | (532,079 | ) | (1,420,827 | ) | ||||||||
Income before provision for
income taxes
and noncontrolling interest |
3,500,605 | 6,163,394 | 27,065,975 | 30,129,983 | ||||||||||||
Provision for income taxes |
2,295,043 | 1,180,761 | 7,553,521 | 3,711,891 | ||||||||||||
Net income |
1,205,562 | 4,982,633 | 19,512,453 | 26,418,092 | ||||||||||||
Less: Net income attributable to
noncontrolling interest |
99,709 | 71,652 | 481,613 | 350,375 | ||||||||||||
Net income attributable to Duoyuan
Printing, Inc. |
$ | 1,105,853 | $ | 4,910,981 | $ | 19,030,840 | $ | 26,067,717 | ||||||||
Net income per share attributable
to Duoyuan Printing, Inc. common shareholders |
||||||||||||||||
Basic |
$ | 0.04 | $ | 0.20 | $ | 0.68 | $ | 1.04 | ||||||||
Diluted |
$ | 0.03 | $ | 0.20 | $ | 0.67 | $ | 1.04 | ||||||||
Weighted average shares used in
calculating net income per share: |
||||||||||||||||
Basic |
30,563,217 | 25,000,050 | 27,958,190 | 25,000,050 | ||||||||||||
Diluted |
31,575,934 | 25,000,050 | 28,312,903 | 25,000,050 | ||||||||||||
(2) | Amounts were extracted from Form 10-Q for the quarter ended March 31, 2009, as adjusted for the adoption of an accounting pronouncement regarding noncontrolling interests. |
2
Table of Contents
DUOYUAN PRINTING, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS ASIAN FINANCIAL, INC.)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME (unaudited)
(FORMERLY KNOWN AS ASIAN FINANCIAL, INC.)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME (unaudited)
Common Stock | Retained earnings | |||||||||||||||||||||||||||||||||||||||
Accumulated | Total Duoyuan | |||||||||||||||||||||||||||||||||||||||
Additional | other | Printing, Inc. | Total | |||||||||||||||||||||||||||||||||||||
Number of | paid-in | Statutory | comprehensive | shareholders | Noncontrolling | comprehensive | ||||||||||||||||||||||||||||||||||
shares | Amount | capital | reserves | Unrestricted | income | equity | interest | Total Equity | income | |||||||||||||||||||||||||||||||
Balance, July 1, 2009 |
25,000,050 | $ | 25,000 | $ | 27,263,040 | $ | 9,428,573 | $ | 79,226,497 | $ | 10,788,585 | $ | 126,731,695 | $ | 1,761,712 | $ | 128,493,407 | $ | ||||||||||||||||||||||
Cumulative effect of reclassification of
warrants |
| | (1,672,815 | ) | | (59,086 | ) | | (1,731,901 | ) | | (1,731,901 | ) | |||||||||||||||||||||||||||
Issuance of ordinary shares in connection with
Initial Public Offering, net of offering costs |
5,500,000 | 5,500 | 41,910,036 | | | | 41,915,536 | | 41,915,536 | |||||||||||||||||||||||||||||||
Stock-based compensation |
6,057,064 | | | | 6,057,064 | | 6,057,064 | |||||||||||||||||||||||||||||||||
Issuance of ordinary shares in connection with
cashless exercise of warrants |
63,167 | 63 | 1,010,047 | | | | 1,010,110 | | 1,010,110 | |||||||||||||||||||||||||||||||
Net income |
| | | | 19,030,840 | | 19,030,840 | 481,613 | 19,512,453 | 19,512,453 | ||||||||||||||||||||||||||||||
Adjustment to statutory reserves |
| | | 2,264,865 | (2,264,865 | ) | | | | | ||||||||||||||||||||||||||||||
Foreign currency translation adjustments |
| | | | | 201,752 | 201,752 | 2,602 | 204,354 | 204,354 | ||||||||||||||||||||||||||||||
Balance, March 31, 2010 |
30,563,217 | $ | 30,563 | $ | 74,567,372 | $ | 11,693,438 | $ | 95,933,386 | $ | 10,990,337 | $ | 193,215,096 | $ | 2,245,927 | $ | 195,461,023 | $ | 19,716,807 | |||||||||||||||||||||
3
Table of Contents
DUOYUAN PRINTING, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS ASIAN FINANCIAL, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
FOR THE NINE MONTHS ENDED MARCH 31, 2010 AND 2009
(FORMERLY KNOWN AS ASIAN FINANCIAL, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
FOR THE NINE MONTHS ENDED MARCH 31, 2010 AND 2009
2010 | 2009 | |||||||
Cash Flows from Operating Activities: |
||||||||
Net income |
$ | 19,512,453 | $ | 26,418,092 | ||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||
Depreciation |
2,758,582 | 2,095,986 | ||||||
Amortization |
79,500 | 60,065 | ||||||
Change in allowance for bad debts |
(904,075 | ) | | |||||
Change in fair value of warrants |
5,686,118 | (194,347 | ) | |||||
Stock-based compensation |
6,057,064 | | ||||||
Foreign exchange transaction gain |
| (84,358 | ) | |||||
Write off of deferred expenses |
| 587,347 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(10,924,745 | ) | (3,006,474 | ) | ||||
Inventories |
(3,573,429 | ) | (4,870,619 | ) | ||||
Other current assets |
(106,141 | ) | (9,168 | ) | ||||
Accounts payable |
1,240,441 | (726,516 | ) | |||||
Accrued liabilities |
(1,077,601 | ) | 144,756 | |||||
Taxes payable |
609,891 | (442,570 | ) | |||||
Net cash provided by operating activities |
19,358,058 | 19,972,194 | ||||||
Cash Flows from Investing Activities: |
||||||||
Purchase of equipment and improvements |
(1,155,386 | ) | (5,270,119 | ) | ||||
Advances on equipment purchases |
| (10,562,227 | ) | |||||
Payments for capitalized interest |
| (257,388 | ) | |||||
Net cash used in investing activities |
(1,155,386 | ) | (16,089,734 | ) | ||||
Cash Flows from Financing Activities: |
||||||||
Proceeds from bank loans |
14,367,800 | 14,352,100 | ||||||
Payments for bank loans |
(14,367,800 | ) | (11,423,100 | ) | ||||
Proceeds from Initial Public Offering, net of offering costs |
41,915,537 | | ||||||
Net cash provided by financing activities |
41,915,537 | 2,929,000 | ||||||
Effect of Exchange Rate Changes on Cash |
62,252 | 81,083 | ||||||
Increase in Cash |
60,180,461 | 6,892,543 | ||||||
Cash, beginning of period |
31,044,070 | 14,199,700 | ||||||
Cash, end of period |
$ | 91,224,531 | $ | 21,092,243 | ||||
Supplemental Disclosure of Cash Flow Information: |
||||||||
Cash paid for interest |
$ | 655,974 | $ | 893,333 | ||||
Cash paid for income tax |
$ | 7,001,395 | $ | 3,783,775 | ||||
Non-cash transactions: |
||||||||
Issuance of common stock for cashless warrants exercise |
$ | 1,010,110 | $ | |
4
Table of Contents
DUOYUAN PRINTING, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS ASIAN FINANCIAL, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(UNAUDITED)
(FORMERLY KNOWN AS ASIAN FINANCIAL, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(UNAUDITED)
1. ENTITIES
Duoyuan Printing, Inc. owns 100% of the equity interest of Duoyuan Digital Press Technology
Industries (China) Co., Ltd. (Duoyuan China) and Hunan Duoyuan Machinery Manufacturing Co., Ltd.
(Hunan Machinery). Duoyuan China has two subsidiaries, a 99.4% ownership in Hunan Duoyuan Printing
Machinery Co., Ltd. (Hunan Duoyuan) and 95% ownership in Langfang Duoyuan Digital Technology Co.,
Ltd. (Langfang Duoyuan).
In addition, Duoyuan Printing, Inc. has established the following subsidiaries: Langfang
Duoyuan Publishing Equipment Manufacturing Co., Ltd. (Langfang Chuban), Langfang Duoyuan
Precision Manufacturing Co., Ltd. (Langfang Jingmi) and Langfang Duoyuan Shitong Packaging
Equipment Co., Ltd. (Langfang Shitong). Langfang Chuban was established on November 20, 2009.
Langfang Jingmi and Langfang Shitong were established on January 11, 2010. These entities did not
have any operations during the three and nine months ended March 31, 2010.
2. BASIS OF PREPARATION
(a) The accompanying unaudited condensed consolidated financial statements include the
accounts of Duoyuan Printing, Inc. and its subsidiaries (collectively, the Company). All
significant intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America (US
GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X, as promulgated by the Securities and Exchange Commission (the SEC). Accordingly,
they do not include all of the information and notes required by US GAAP for completing annual
financial statements. However, management believes that the disclosures are adequate to ensure the
information presented is not misleading. US GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, contingencies and results of
operations. While management has based its assumptions and estimates on the facts and circumstances
existing as of March 31, 2010, final amounts may differ from these estimates.
In the opinion of the management of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments, consisting only of normal recurring
adjustments, which are necessary for a fair presentation of the results for the interim periods
presented. These financial statements should be read in conjunction with the audited financial
statements and notes thereto included in the Companys audited financial statements on Form 10-K
for the fiscal year ended June 30, 2009. The results of operations for the interim periods
presented are not indicative of the operating results to be expected for any subsequent interim
period or for the Companys fiscal year ending June 30, 2010.
Duoyuan Printing, Inc. uses the United States (U.S.) dollar as its reporting currency. The
Company uses Chinese Renminbi (RMB) as its functional currency. The financial records of the
Companys Peoples Republic of China (PRC) subsidiaries are maintained in Renminbi (RMB), their
functional currency and the currency of the PRC. Their balance sheets are translated into U.S.
dollars based on the exchange rate quoted by the Peoples Bank of China as of the balance sheet
date. Their statements of operations are translated using a weighted average exchange rate for the
period. Translation adjustments are reflected in accumulated other comprehensive income in
stockholders equity.
The RMB is not freely convertible into U.S. dollars or other currencies. All foreign exchange
transactions involving RMB must take place through the Peoples Bank of China or other institutions
authorized to buy and sell foreign currencies. The exchange rates adopted for the foreign exchange
transactions are the rates of exchange quoted by the Peoples Bank of China.
(b) The accompanying unaudited condensed consolidated financial statements have been prepared
using the same accounting policies as used in the preparation of the Companys consolidated
financial statements on Form 10-K for the fiscal year ended June 30, 2009 except for the adoption of the newly adopted accounting pronuncements set out in (1) below:
(1) Newly Adopted Accounting Pronouncements
5
Table of Contents
Effective July 1, 2009, the Company adopted the new Accounting Standards Codification (the
ASC) as issued by the FASB. The ASC has become the source of authoritative US GAAP recognized by
the FASB to be applied by nongovernmental entities and provides that all such pronouncements carry an equal level of
authority. The ASC is not intended to change or alter existing GAAP. The ASC is effective for
interim and annual periods ending after September 15, 2009. The adoption of the ASC did not have
any significant impact on the Companys financial condition or results of operations.
Effective July 1, 2009, the Company adopted the provisions of an accounting standard regarding
instruments that are indexed to an entitys own stock. This accounting standard specifies that a
contract that would otherwise meet the definition of a derivative but is both (a) indexed to the
Companys own stock and (b) classified in stockholders equity in the statement of financial
position would not be considered a derivative financial instrument. It provides a new two-step
model to be applied in determining whether a financial instrument or an embedded feature is indexed
to an issuers own stock and thus able to qualify for the scope exception within the standards. See
Note 10 Warrants, for additional information.
Effective July 1, 2009, the Company adopted an authoritative pronouncement issued by the FASB
regarding noncontrolling interests in consolidated financial statements, which was retrospectively
applied. The pronouncement requires noncontrolling interests to be separately presented as a
component of stockholders equity in the unaudited condensed consolidated financial statements. See
Note 11 Noncontrolling interest, for additional information.
Effective July 1, 2009, the Company adopted new authoritative accounting guidance on earnings
per share, which provides that nonvested share-based payment awards containing nonforfeitable
rights to dividends (whether paid or unpaid) are participating securities and will be included in
the computation of earnings per share pursuant to the two-class method. The adoption of this
pronouncement did not have any significant impact on the Companys financial condition or results
of operations.
Effective July 1, 2009, the Company adopted new authoritative accounting guidance on
estimating fair value when the volume and level of activity for the asset or liability have
significantly decreased and requires disclosure of a change in valuation technique. The adoption
of the guidance did not have a material impact on the Companys consolidated financial statements.
(2) Recently Issued Accounting Pronouncements Not Yet Adopted
On June 12, 2009, the FASB issued an authoritative pronouncement, which changes how a company
determines whether an entity should be consolidated when such entity is insufficiently capitalized
or is not controlled by the company through voting (or similar rights). The determination of
whether a company is required to consolidate an entity is based on, among other things, the
entitys purpose and design and the companys ability to direct the activities of the entity that
most significantly impact the entitys economic performance. The pronouncement retains the scope of
previously issued pronouncement but added entities previously considered qualifying special purpose
entities, since the concept of these entities was eliminated by FASB. The pronouncement is
effective as of the beginning of an entitys first fiscal year that begins after November 15, 2009.
The Company does not expect the adoption of this pronouncement to have a significant effect on its
consolidated financial position or results of operations.
On September 23, 2009, the FASB issued an authoritative pronouncement regarding revenue
arrangements with multiple deliverables. This pronouncement was issued in response to practice
concerns related to accounting for revenue arrangements with multiple deliverables under the
existing pronouncement. Although the new pronouncement retains the criteria under the exiting
pronouncement on when delivered items in a multiple-deliverable arrangement should be considered
separate units of accounting, it removes the separation criterion under the existing pronouncement
that objective and reliable evidence of fair value of any undelivered items must exist for the
delivered items to be considered a separate unit or separate units of accounting. The new
pronouncement is effective for fiscal years beginning on or after June 15, 2010. Entities can elect
to apply this pronouncement (1) prospectively to new or materially modified arrangements after the
pronouncements effective date or (2) retrospectively for all periods presented. Early application
is permitted; however, if the entity elects prospective application and early adopts this
pronouncement after its first interim reporting period, it must also do the following in the period
of adoption: (1) retrospectively apply this pronouncement as of the beginning of that fiscal year
and (2) disclose the effect of the retrospective adjustments on the prior interim periods revenue,
income before taxes, net income, and earnings per share. The Company is in the process of
evaluating the effect of adoption of this pronouncement.
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Table of Contents
On September 23, 2009, the FASB issued an authoritative pronouncement regarding software
revenue recognition. This new pronouncement would amend the existing pronouncement to exclude from
their scope all tangible products containing both software and nonsoftware components that function
together to deliver the products essential functionality. That is, the entire product (including
the software deliverables and non-software deliverables) would be outside the scope of ASC 985-605
and would be accounted for under other accounting literature (e.g., ASC 605-25). The new pronouncement includes factors that entities should consider when determining whether
the software and non-software components function together to deliver the products essential
functionality and are thus outside the revised scope of ASC 985-605. In addition, the new
pronouncement includes examples illustrating how entities would apply the revised scope provisions.
The pronouncement is effective for fiscal years beginning on or after June 15, 2010. Entities can
elect to apply this pronouncement (1) prospectively to new or materially modified arrangements
after the pronouncements effective date or (2) retrospectively for all periods presented. Early
application is permitted; however, if the entity elects prospective application and early adopts
this pronouncement after its first interim reporting period, it must also do the following in the
period of adoption: (1) retrospectively apply this pronouncement as of the beginning of that fiscal
year and (2) disclose the effect of the retrospective adjustments on the prior interim periods
revenue, income before taxes, net income, and earnings per share. The Company is in the process of
evaluating the effect of adoption of this pronouncement.
In January 2010, the FASB issued authoritative guidance to improve disclosures about fair
value measurements. This guidance amends previous guidance on fair value measurements to add new
requirements for disclosures about transfers into and out of Levels 1 and 2 and separate
disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurement on a
gross basis rather than on a net basis as currently required. This guidance also clarifies existing
fair value disclosures about the level of disaggregation and about inputs and valuation techniques
used to measure fair value. This guidance is effective for annual and interim periods beginning
after December 15, 2009, except for the requirement to provide the Level 3 activities of purchases,
sales, issuances, and settlements on a gross basis, which will be effective for annual and interim
periods beginning after December 15, 2010. Early application is permitted and, in the period of
initial adoption, entities are not required to provide the amended disclosures for any previous
periods presented for comparative purposes. The Company does not expect the adoption of this
pronouncement to have a significant impact on its financial condition or results of operations.
On March 5, 2010, the FASB issued authoritative guidance to clarify the type of embedded
credit derivative that is exempt from embedded derivative bifurcation requirements. Specifically,
only one form of embedded credit derivative qualifies for the exemption one that is related only
to the subordination of one financial instrument to another. As a result, entities that have
contracts containing an embedded credit derivative feature in a form other than such subordination
may need to separately account for the embedded credit derivative feature. This guidance also has
transition provisions, which permit entities to make a special one-time election to apply the fair
value option to any investment in a beneficial interest in securitized financial assets, regardless
of whether such investments contain embedded derivative features. This guidance is effective on the
first day of the first fiscal quarter beginning after June 15, 2010. Early adoption is permitted at
the beginning of any fiscal quarter beginning after March 5, 2010. The Company does not expect the
adoption of this pronouncement to have a significant impact on its financial condition or results
of operations.
In March 2010, the FASB issued authoritative guidance on milestone method of revenue
recognition. The scope of this consensus is limited to arrangements that include milestones
relating to research or development deliverables. The guidance specifies guidance that must be met
for a vendor to recognize consideration that is contingent upon achievement of a substantive
milestone in its entirety in the period in which the milestone is achieved. The guidance applies to
milestones in arrangements within the scope of this consensus regardless of whether the arrangement
is determined to have single or multiple deliverables or units of accounting. The guidance will be
effective for fiscal years, and interim periods within those years, beginning on or after June 15,
2010. Early application is permitted. Companies can apply this guidance prospectively to milestones
achieved after adoption. However, retrospective application to all prior periods is also permitted.
The Company does not expect the adoption of this pronouncement to have a significant impact on its
financial condition or results of operations.
In March 2010, the FASB issued authoritative guidance on effect of denominating the exercise
price of a share-based payment award in the currency of the market in which the underlying equity
securities trades and that currency is different from (1) entitys functional currency, (2)
functional currency of the foreign operation for which the employee provides services, and (3)
payroll currency of the employee. The guidance clarifies that an employee share-based payment award
with an exercise price denominated in the currency of a market in which a substantial portion of
the entitys equity securities trades should be considered an equity award assuming all other
criteria for equity classification are met. The guidance will be effective for interim and annual
periods beginning on or after December 15, 2010, and will be applied prospectively. Affected
entities will be required to record a cumulative catch-up adjustment for all awards outstanding as
of the beginning of the annual period in which the guidance is adopted. The Company is in the
process of evaluating the effect of adoption of this pronouncement.
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3. FINANCIAL INSTRUMENTS
Financial instruments consist of cash and cash equivalents, restricted cash, accounts
receivable, other receivables, accounts payable, accrued expenses, other payables, income taxes
payable, and other taxes payable.
The carrying values of these financial instruments approximate their fair values due to the
short-term nature of these instruments. The Company does not use derivative instruments to manage
risks.
4. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand, demand deposits and highly liquid
investments, which are unrestricted as to withdrawal or use, and which have remaining maturities of
three months or less when purchased.
5. ACCOUNTS RECEIVABLE
Accounts receivable are stated at the amount the Company expects to collect. The Company
maintains allowances for doubtful accounts for estimated losses. Management considers the
following factors when determining the collectability of specific accounts: credit worthiness of
the clients, aging of the receivables and other specific circumstances related to the accounts.
Allowance for doubtful accounts is made based on aging of accounts receivable and on any
specifically identified accounts receivable that may become uncollectible. The Company re-evaluated its accounting estimate on allowance for doubtful accounts for the three months
ended March 31, 2010 and reversed a $1,113,248 bad debt provision.
The components of accounts receivable as of March 31, 2010 and June 30, 2009 were as follows:
March 31, 2010 | June 30, 2009 | |||||||
Accounts receivable |
$ | 49,643,301 | $ | 38,661,305 | ||||
Less: accounts receivable allowance |
(499,158 | ) | (1,401,689 | ) | ||||
Total accounts receivable, net |
$ | 49,144,143 | $ | 37,259,616 | ||||
6. INVENTORIES
Inventories are stated at the lower of cost (weighted average method) or market. The
components of inventories as of March 31, 2010 and June 30, 2009 were as follows:
March 31, 2010 | June 30, 2009 | |||||||
Raw materials |
$ | 9,598,174 | $ | 6,494,433 | ||||
Work-in-process |
13,409,729 | 13,125,837 | ||||||
Finished goods |
6,486,468 | 6,262,972 | ||||||
Totals |
$ | 29,494,371 | $ | 25,883,242 | ||||
7. LAND USE RIGHTS
The Company amortizes the cost of the land use rights over their life, 50 years, using the
straight-line method.
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March 31, 2010 | June 30, 2009 | |||||||
Land use rights |
$ | 4,493,302 | $ | 4,487,176 | ||||
Less: accumulated amortization |
(627,980 | ) | (547,700 | ) | ||||
Total |
$ | 3,865,322 | $ | 3,939,476 | ||||
Total amortization expense for the three months ended March 31, 2010 and 2009 amounted to
$39,404 and $20,027, respectively. Total amortization expense for the nine months ended March 31,
2010 and 2009 amounted to $79,500 and $60,065, respectively.
8. PLANT AND EQUIPMENT
Plant and equipment consist of the following:
March 31, 2010 | June 30, 2009 | |||||||
Buildings |
$ | 14,422,051 | $ | 13,699,189 | ||||
Office equipment |
916,473 | 928,051 | ||||||
Motor vehicles |
546,963 | 382,372 | ||||||
Plant and machinery |
32,353,079 | 32,008,907 | ||||||
Construction-in-progress |
4,292,379 | 4,286,527 | ||||||
Total |
52,530,945 | 51,305,046 | ||||||
Less: accumulated depreciation |
(10,952,773 | ) | (8,181,893 | ) | ||||
Plant and equipment, net |
$ | 41,578,172 | $ | 43,123,153 | ||||
Depreciation expense for the three months ended March 31, 2010 and 2009 amounted to
approximately $940,000 and $751,000, respectively. Depreciation expense for the nine months ended
March 31, 2010 and 2009 amounted to approximately $2,759,000 and $2,096,000, respectively.
Land use right and the building in Hunan are collateralized for the bank loans (see Note 9).
The carrying value of the collateralized land use right and the building as of March 31, 2010
and June 30, 2009 amounted to approximately $4,103,000 and $4,206,000, respectively.
No interest
costs were capitalized during the three months and nine months ended March 31, 2010 and 2009.
9. BANK LOANS
The bank loans represent short-term loans due to a bank that are due normally within one
year. These loans can be renewed with the bank. The loans are comprised of the following:
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March 31, 2010 | June 30, 2009 | |||||||
Loan from Bank of Agriculture, due March
11, 2011, interest rate of 5.841% per
annum, interest only paid quarterly,
secured by land use rights and buildings |
$ | 1,467,000 | $ | 1,465,000 | ||||
Loan from Bank of Agriculture, due July
2, 2010, interest rate of 5.841% per
annum, interest only paid quarterly,
secured by land use rights and buildings |
2,934,000 | 2,930,000 | ||||||
Loan from Bank of Agriculture, due July
9, 2010, interest rate of 5.841% per
annum, interest only paid quarterly,
secured by land use rights and buildings |
2,934,000 | 2,930,000 | ||||||
Loan from Bank of Agriculture, due July
16, 2010, interest rate of 5.841% per
annum, interest only paid quarterly,
secured by land use rights and buildings |
4,107,600 | 4,102,000 | ||||||
Loan from Bank of Agriculture, due July
23, 2010, interest rate of 5.841% per
annum, interest only paid quarterly,
secured by land use rights and buildings |
2,934,000 | 2,930,000 | ||||||
Total |
$ | 14,376,600 | $ | 14,357,000 | ||||
As of March 31, 2010 and June 30, 2009, land use right and building in Hunan are
collateralized for the bank loans (see Note 8).
Total interest expense for the above short term loans, net of capitalized interest, amounted
to approximately $213,000 and $210,000 for the three months ended March 31, 2010 and 2009,
respectively. Total interest expense, net of capitalized interest, amounted to approximately
$661,000 and $637,000 for the nine months ended March 31, 2010 and 2009, respectively.
10. WARRANTS
As part of the liquidation damage related to prior year financing activities, during the
year ended June 30, 2008, the Company issued 576,425 warrants with exercise price of $5.76. The
warrants provide the holder with the right to request the Company to cash-settle the warrants.
Therefore, the warrants were classified as liability and recorded at fair value of $1,447,936 on
December 31, 2007, the grant date, with the change in fair value recorded in the income of
current period. As of March 31, 2010, the fair value of these warrants was $2,563,359. A loss of
$849,448 and $2,392,992 was recognized for the three and nine months ended March 31, 2010,
respectively.
During the nine months ended March 31, 2010, 214,720 warrants were exercised using the
cashless exercise option. 63,167 of ordinary shares were issued to the warrant holders.
The changes in the fair value of warrants issued were as follows:
Amount | ||||
Balance, June 30, 2009 |
$ | 1,180,477 | ||
Transfer to additional paid in capital for warrants exercised |
(1,010,110 | ) | ||
Change in fair value |
2,392,992 | |||
Balance, March 31, 2010 |
$ | 2,563,359 | ||
In 2006, as part of the compensation to a placement agent, Roth Capital Partners, LLC (Roth
Capital), the Company issued to Roth Capital warrants to acquire 613,260 shares of common stock,
exercisable at any time after June 30, 2008. The warrants have a strike price equal to $4.21. In
addition, the Company issued to CCG Investor Relations Partners, LLC (CCG), an investor
relations firm, warrants to acquire 37,287 shares of common stock. The warrants have a strike
price equal to $4.61. The warrants have terms ranging from four to five years, and will permit
cashless or net exercise at all times. The shares underlying the warrants will have registration
rights. The warrant contains a standard anti-dilution provision for stock dividends, stock
splits, stock combination, recapitalization and a change of control transaction.
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Effective July 1, 2009, the Company adopted the provisions of an accounting standard
regarding instruments that are indexed to an entitys own stock. As a result, the 613,260 warrants
issued to Roth Capital and 37,287 warrants issued to CCG previously treated as equity are no
longer afforded equity treatment because the strike price of the warrants is denominated in the
U.S. dollar, a currency other than the Companys functional currency, the Chinese RMB. As a
result, the warrants are not considered indexed to the Companys own stock, and should be
reclassified to liability and all changes in the fair value of these warrants are recognized
currently in earnings until such time as the warrants are exercised or expire.
Therefore, on July 1, 2009, the Company reclassified the fair value of these warrants,
$1,731,901, from equity to liability as if these warrants were treated as a liability since their
issuance in October 2006. The Company also reclassified $1,672,815 from additional paid-in capital, as a
cumulative effect adjustment, $59,086, to the beginning retained earnings. As of March 31, 2010,
the fair value of these warrants amounted to $5,025,030.
The
Company recorded a loss of $1,602,673 and $3,293,129, respectively, for the change of
fair value of the warrants for the three and nine months ended March 31, 2010.
The changes in the fair value of the warrants were as follows:
Amount | ||||
Balance of warrants, July 1, 2009 |
$ | | ||
Cumulative effect of reclassification of warrants |
1,731,901 | |||
Change in fair value |
3,293,129 | |||
Balance of warrants, March 31, 2010 |
$ | 5,025,030 | ||
The fair value of warrants as of July 1, 2010 and March 31, 2010 was calculated using the
Black-Scholes-Merton model with the following assumptions:
July 1, 2009 | March 31, 2010 | |||||||
Fair value of common share |
$5.76 | $10.8 | ||||||
Expected term |
1.77 - 4 | 1.02-3.25 | ||||||
Expected volatility |
70% | 63% - 73% | ||||||
Expected dividend yield |
0% | 0% | ||||||
Risk-free interest rate |
0.93% - 2.04% | 0.41% - 1.73% |
Warrants outstanding, warrants exercisable, weighted average exercise price and average remaining life were as
follows:
Warrants | Warrants | Weighted Average | Average Remaining | |||||||||||||
Outstanding | Exercisable | Exercise Price | Contractual Life | |||||||||||||
Balance, June 30, 2009 |
1,226,972 | 1,226,972 | $4.95 | 4.25 | ||||||||||||
Granted |
| | | | ||||||||||||
Forfeited |
| | | | ||||||||||||
Exercised |
214,720 | 214,720 | | | ||||||||||||
Balance, March 31, 2010 |
1,012,252 | 1,012,252 | $4.78 | 3.17 | ||||||||||||
11. NONCONTROLLING INTEREST
Noncontrolling interest consists of the 5% interest of the noncontrolling shareholders in
Langfang Duoyuan and 0.6% interest of the noncontrolling shareholders in Hunan Duoyuan. Effective
July 1, 2009, the Company adopted an accounting standard regarding noncontrolling interests. The
adoption of this new standard requires retrospective application of the presentation and
disclosure requirements of the standard to all periods presented. Consequently, the
noncontrolling interests in the amounts of $2,245,927 and $1,761,712 have been included as a
component of total equity in the March 31, 2010 and June 30, 2009 consolidated balance sheets,
respectively, whereas previously they were shown outside of equity.
11
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12. INCOME TAXES
The Company is subject to U.S. federal and state income taxes and the Companys subsidiaries
incorporated in the PRC are subject to PRC income taxes.
Duoyuan Printing, Inc. was incorporated in the U.S. and has incurred net operating losses
for income tax purposes for the nine months ended March 31, 2010. As of March 31, 2010, the net
operating loss carryforwards for U.S. income taxes is $3,105,637 which may be available to reduce
future years taxable income. These carryforwards will expire, if not utilized, starting in 2027
through 2029. Management believes that the realization of the benefits from these losses appears
uncertain due to the Companys limited operating history and continuing losses for U.S. income
tax purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred
tax asset to reduce the asset to zero.
The Company has cumulative undistributed earnings of foreign subsidiaries of approximately
$115.1 million as of March 31, 2010, which is included in retained earnings on the consolidated
balance sheets and will continue to be indefinitely reinvested in international operations.
Additionally, the Chinese tax authorities have clarified that distributions made out of
pre-January 1, 2008 retained earnings would not be subject to the withholding tax. The Company has
not quantified the deferred income tax liability that would arise if earnings in the third quarter
were to be distributed or were determined to be no longer permanently reinvested.
Our effective tax rates were 19.8% and 12.4% for the nine months ended March 31, 2010 and
2009, respectively. The income tax rate for Duoyuan China in 2008 was 12.5%. Beginning on
January 1, 2009, the income tax rate for Duoyuan China increased to 25.0% as a result of the expiration of preferential
tax treatments granted to Duoyuan China in prior years. Hunan Duoyuan was tax exempted in 2009.
Beginning on January 1, 2010, the income tax rate for Hunan Duoyuan increased to 25.0% as a
result of the expiration of preferential tax treatments granted to Hunan Duoyuan in prior years.
The Company is subject to taxation in the U.S. and various states and foreign jurisdictions.
There are no ongoing examinations by taxing authorities at this time.
13. VALUE ADDED TAX
The Company is subject to a value added tax (VAT) in accordance with PRC laws at the
standard rate, 17%, of the gross sales price. A credit is available whereby VAT paid on the
purchases of semi-finished products or raw materials used in the production of the Companys
finished products can be used to offset the VAT due on sales of the finished products. A credit
is also available for VAT paid on the purchases of equipment.
Sales and purchases are recorded net of VAT collected and paid.
14. SHIPPING AND HANDLING
Shipping and handling costs related to goods sold are included in selling expenses. Shipping
and handling costs were approximately $482,000 and $273,000 for the three months ended March 31,
2010, and 2009, respectively. Shipping and handling costs were approximately $1,228,000 and
$1,107,000 for the nine months ended March 31, 2010 and 2009, respectively.
15. ADVERTISING COSTS
Advertising costs are expensed as incurred and included in selling expenses. Advertising
costs were approximately $42,000 and $41,000 for the three months ended March 31, 2010 and 2009,
respectively, and approximately $1,443,000 and $795,000 for the nine months ended March 31, 2010
and 2009, respectively.
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16. STOCK-BASED COMPENSATION
On October 16, 2009, the Board of Directors approved the 2009 Omnibus Incentive Plan (the
Plan) to provide additional incentives to the Companys employees. The Plan provides for the
grant of a share option and restricted ordinary shares.
Under the Plan, the Company granted an option on November 6, 2009 to its Chief Financial
Officer (CFO) to purchase 100,000 ordinary shares. In addition, the Company granted 875,000
nonvested share awards to certain executives and employees on November 6, 2009.
Share option
The share option was granted at an exercise price of $8.50, vests over 4 years of continuous
service, with 25% of the option to be vested on each of the second, third, fourth and fifth
anniversaries of the CFOs employment start date, and expire in ten years. Compensation expense
is recognized on a graded vesting schedule for each tranche. The value of options granted was
estimated on the date of the grant using the Black-Scholes-Merton model based on the following
assumptions:
Expected term |
6.2 years | |||
Expected volatility |
70 | % | ||
Expected dividend yield |
0 | % | ||
Risk-free interest rate |
2.45 | % |
The Company used the closing price of the Companys stock traded in the New York Stock
Exchange as the fair value of the common stock as of the grant date. Since the Company did not have
a trading history at the time the share option was granted, the expected volatility was based on
the historical volatilities of comparable publicly traded companies engaged in a similar industry
and/or operating in a similar region with a three to ten-year look back period, depending on the
trading history of each comparable publicly traded company. The fair value of the options granted
was $5.43 per share on the grant date. Accordingly, related compensation expense of $34,751 and
$57,755, respectively, for the three and nine months ended March 31, 2010 is included in general
and administrative expenses. The unrecognized compensation cost related to these options as of
March 31, 2010 amounted to approximately $485,000, which will be recognized ratably over the
weighted average period of approximately 3.5 years.
The following is a summary of the option activity:
Weighted | Weighted Average | |||||||||||||||||||
Average | Remaining | |||||||||||||||||||
Number of | Options | Exercise | Contractual Life | Aggregate | ||||||||||||||||
Options | Exercisable | Price | (Years) | Intrinsic Value | ||||||||||||||||
Outstanding, June 30, 2009 |
| | $ | | | | ||||||||||||||
Granted |
100,000 | | 8.50 | | | |||||||||||||||
Forfeited |
| | | | | |||||||||||||||
Exercised |
| | | | | |||||||||||||||
Outstanding,
March 31, 2010 |
100,000 | | $ | 8.50 | 9.60 | $ | 230,000 | |||||||||||||
Nonvested share awards
The
value of the nonvested share awards was based on the initial public offering price of
the Companys stock on the date of the grant. The common shares under this grant are subject to
a six-month cliff vesting period. Accordingly, the compensation expense is recognized ratably
over this vesting period, and compensation expense of $3,698,204 and $5,999,309, respectively,
for the three and nine months ended March 31, 2010 is recorded according to where the grantees
regular compensation is recorded as follows:
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Three months ended | Nine months ended | |||||||
March 31, 2010 | March 31, 2010 | |||||||
Cost of revenues |
$ | 81,994 | $ | 133,013 | ||||
Research and development expenses |
154,268 | 250,257 | ||||||
Selling expenses |
224,006 | 363,837 | ||||||
General and administrative expenses |
3,237,936 | 5,252,202 | ||||||
$ | 3,698,204 | $ | 5,999,309 | |||||
As
of March 31, 2010, the unrecognized compensation cost related to
the nonvested share
awards amounted to approximately $1,438,000, which will be recognized ratably over the weighted
average period of approximately 0.1 years.
17. COMPREHENSIVE INCOME
The comprehensive income included in the statement of stockholders equity relates to
adjustments for foreign currency translation (see Note 2). Accumulated comprehensive income
amounted to $10,990,337 and $10,788,585 as of March 31, 2010 and June 30, 2009, respectively.
Asset and liability accounts at March 31, 2010 were translated at RMB 6.82 to $1.00, as compared
to RMB 6.83 to $1.00 at June 30, 2009. The average translation rates applied to the consolidated
statements of income for the nine months ended March 31, 2010 and 2009 were RMB 6.82 to $1.00 and
RMB 6.83 to $1.00, respectively
18. EARNINGS PER SHARE
The Company reports earnings per share in accordance with the provisions of the related
accounting standard. This standard requires presentation of basic and diluted earnings per share
in conjunction with the disclosure of the methodology used in computing such earnings per share.
Basic earnings per share is computed by dividing net income attributable to holders of common stock of Duoyuan Printing, Inc. by the weighted average common shares outstanding during the period. Diluted
earnings per share takes into account the potential dilution that could occur if securities or
other contracts to issue common stock were exercised and converted into common stock.
The following is a reconciliation of the basic and diluted earnings per share computation:
2010 | 2009 | |||||||
For the three months ended March 31: |
||||||||
Net income attributable to
holders of common stocks of
Duoyuan Printing, Inc. |
$ | 1,105,853 | $ | 4,910,981 | ||||
Weighted average shares used in
computing basic net income
attributable to Duoyuan Printing,
Inc. per share: |
||||||||
Basic |
30,563,217 | 25,000,050 | ||||||
Dilutive
effect of nonvested
share awards |
521,147 | | ||||||
Dilutive effect of warrants |
491,570 | | ||||||
Dilutive effect of stock options |
| | ||||||
Diluted |
31,575,934 | 25,000,050 | ||||||
Earnings per share: |
||||||||
Basic |
$ | 0.04 | $ | 0.20 | ||||
Diluted |
$ | 0.03 | $ | 0.20 |
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2010 | 2009 | |||||||
For the nine months ended March 31: |
||||||||
Net income attributable to holders of
common stocks of Duoyuan Printing, Inc. |
$ | 19,030,840 | $ | 26,067,717 | ||||
Weighted average shares used in computing
basic net income contributable to Duoyuan
Printing, Inc. per share: |
||||||||
Basic |
27,958,190 | 25,000,050 | ||||||
Dilutive
effect of nonvested share awards |
97,334 | | ||||||
Dilutive effect of warrants |
257,379 | | ||||||
Dilutive effect of stock options |
| | ||||||
Diluted |
28,312,903 | 25,000,050 | ||||||
Earnings per share: |
||||||||
Basic |
$ | 0.68 | $ | 1.04 | ||||
Diluted |
$ | 0.67 | $ | 1.04 | ||||
At March 31, 2010, 1,012,252 warrants were included in the calculation of diluted earnings
per share because the average fair value of common stock exceeded weighted average exercise price
of warrants of $4.78. At June 30, 2009, 1,226,972 warrants, whose weighted average exercise
price is $4.95, were excluded from the calculation of diluted earnings per share because of their
anti-dilutive effect.
19. SEGMENT INFORMATION
The Companys chief operating decision maker is the Chief Executive Officer, who reviews
consolidated results of operations prepared in accordance with U.S. GAAP when making decisions
about allocating resources and assessing performance of the Group; hence, the Company has only
one operating segment.
The Company operates in the PRC and all of the Groups long-lived assets are located in the
PRC. All of the Companys revenues are generated from customers headquartered in the PRC.
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The gross revenues consist of the following products:
Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Pre-press |
||||||||||||||||
Computer-to-plate
systems |
$ | 1,028 | $ | 924 | $ | 2,980 | $ | 2,771 | ||||||||
Press |
||||||||||||||||
Single color small
format |
970 | 807 | 3,763 | 3,303 | ||||||||||||
Single color large
format |
1,824 | 1,687 | 7,524 | 8,467 | ||||||||||||
Multicolor small format |
8,041 | 6,020 | 31,763 | 25,474 | ||||||||||||
Multicolor large format |
11,587 | 8,165 | 54,175 | 41,269 | ||||||||||||
Adjustments |
(47 | ) | (191 | ) | (1,099 | ) | (855 | ) | ||||||||
Total Revenues |
$ | 23,403 | $ | 17,412 | $ | 99,106 | $ | 80,429 | ||||||||
Adjustments to revenue include sales rebates paid to distributors as part of our incentive
program that rewards those distributors who meet or exceed their sales targets for the three
months period. The sales rebates are paid at the end of each quarter. Adjustments also include
sales tax paid to the PRC taxing authorities for the sale of our products. Accordingly, these
amounts are netted against revenues.
20. RELATED PARTY TRANSACTIONS
The Company leased office space from Duoyuan China Water Recycle Technology Industry Co., a
related party. On June 30, 2008, the Company and Duoyuan Water Recycle Technology Industry Co.
terminated the lease pursuant to a termination agreement. The title of property transferred to
Duoyuan Information Terminal Manufacture (Langfang) Co., Ltd., a related party, which Mr. Wenhua
Guo is the sole shareholder. On July 1, 2008, the Company entered into a lease agreement with
Duoyuan Information Terminal Manufacture (Langfang) Co., Ltd., from July 1, 2008 to December 31,
2009. On December 15, 2009, the Company renewed its lease agreement with Duoyuan Information
Terminal Manufacture (Langfang) Co., Ltd., from January 1, 2010 to December 31, 2012. Total
lease expense for the three-year term will be $988,987 (See Note 22).
For the three months ended March 31, 2010 and 2009, rental expense related to this office
lease amounted to $82,416 and $41,153, respectively. For the nine months ended March 31, 2010
and 2009, rental expense related to this office lease amounted to $164,721 and $123,457,
respectively.
21. STATUTORY SURPLUS RESERVE FUND
The Company is required to transfer 10% of its net income, as determined in accordance with
the PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve
balance reaches 50% of the Companys registered capital.
The transfer to this reserve must be made before distribution of any dividends to
shareholders. For the three months ended March 31, 2010 and 2009, the Company transferred
$514,301 and $819,372, respectively, to this reserve. For the nine months ended March 31, 2010
and 2009, the Company transferred $2,264,865 and $4,377,614, respectively, to this reserve. The
surplus reserve fund is non-distributable other than during liquidation and can be used to fund
previous years losses, if any. It may also be utilized for business expansion or converted into
share capital by issuing new shares to existing shareholders in proportion to their shareholding
or by increasing the par value of the shares currently held by them, provided that the remaining
reserve balance after such issue is not less than 25% of the registered capital.
22. OPERATING LEASES
On July 1, 2008, the Company entered into a lease agreement (see Note 20) with Duoyuan
Information Terminal Manufacture (Langfang) Co. Ltd. with annual lease payments totaling
$164,610. On December 15, 2009, the Company renewed its lease agreement with Duoyuan Information
Terminal Manufacture (Langfang) Co., Ltd., from January 1, 2010 to December 31, 2012 with fixed
annual lease payments totaling $329,664.
16
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In addition, the Company leases sixteen sales offices in sixteen different Chinese provinces
with various terms with latest office lease due to expire in December 2010. The monthly lease
amounts for these offices are de minimis.
Total lease expense for the three months ended March 31, 2010 and 2009 was $122,634 and
$53,362, respectively. Total lease expense for the nine months ended March 31, 2010 and 2009 was
$273,750 and $191,787, respectively. Total future minimum lease payments at March 31, 2010, are
as follows:
Years ending June 30, | Amount | |||
2010 |
$ | 412,775 | ||
2011 |
329,664 | |||
2012 |
247,243 |
23. RETIREMENT PLAN
The Companys retirement plan includes two parts. The first to be paid by the Company is 20%
of the employees actual salary in the prior year. The other part, paid by the employee, is 8% of
the actual salary. The Companys contributions amounted to approximately $273,000 and $256,000
for the three months ended March 31, 2010 and 2009, respectively. The Companys contributions
amounted to approximately $819,000 and $769,000 for the nine months ended March 31, 2010 and
2009, respectively.
24. FAIR VALUE
The accounting standards regarding fair value of financial instruments and related fair
value measurements define financial instruments, define fair value, establish a three-level
valuation hierarchy for disclosures of fair value measurement, and enhance disclosure
requirements for fair value measures. The carrying amounts reported in the consolidated balance
sheets for receivables and payables qualify as financial instruments and reflect reasonable
estimates of fair value because of the short period of time between the origination of such
instruments and their expected realization. The three levels of valuation hierarchy are defined
as follows:
| Level 1 inputs to the valuation methodology which are quoted prices (unadjusted) for identical assets or liabilities in active markets. | |
| Level 2 inputs to the valuation methodology that includes quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, substantially for the full term of the financial instrument. | |
| Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
As of March 31, 2010, the Company held certain financial liabilities that are required to be
measured at fair value on a recurring basis. These consisted of the Companys warrants.
As
of March 31, 2010 and June 30, 2009,
the Companys management determined that certain inputs significant to
the fair value measurement of the Companys warrant liability
falls under level 3 of the
valuation hierarchy (i.e., the lowest level of input to the fair value measurement), and
therefore it rendered the fair value measurement of the warrant liability under the same
classification.
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There were no changes during the quarter ended March 31, 2010 to the Companys valuation
techniques used to measure the warrants liability fair values on a recurring basis. As of March
31, 2010, the Company did not have any non-financial assets or liabilities that are required to
be measured at fair value on a recurring or non-recurring basis.
The following tables set forth by level within the fair value hierarchy the Companys
financial assets and liabilities accounted for at fair value on a recurring basis.
Fair Value as of | Fair Value Measurement at March 31, 2010 | |||||||||||||||
March 31, 2010 | using Fair Value Hierarchy | |||||||||||||||
Liabilities |
Level 1 | Level 2 | Level 3 | |||||||||||||
Warrant liability |
$ | 7,588,389 | $ | 7,588,389 | ||||||||||||
Fair Value as of | Fair Value Measurement at June 30, 2009 | |||||||||||||||
June 30, 2009 | using Fair Value Hierarchy | |||||||||||||||
Liabilities |
Level 1 | Level 2 | Level 3 | |||||||||||||
Warrant liability |
$ | 1,180,477 | $ | 1,180,477 |
25. COMMITMENTS AND CONTINGENCIES
Construction-in-progress
Construction-in-progress relates to the building and equipment improvement initiative at the
Langfang Duoyuan facility. On February 20, 2010, the Company entered into a construction
agreement with China Construction Sixth Engineering Bureau Civil Engineering Co. Ltd. to build a
new manufacturing facility. As of March 31, 2010, approximately $15 million remains outstanding
on this agreement. This project is expected to be completed in September 2010.
Equipment purchase agreement
In August 2008, Langfang Duoyuan entered into a packing material equipment purchase
agreement with Beijing Jingneng Mechanical & Electrical Equipments Ltd. As of March 31, 2010,
$378,696, or 5% of the total commitment, remains outstanding on this agreement.
18
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
This quarterly report on Form 10-Q for the quarter ended March 31, 2010 contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange
Act. Generally, the words believe, anticipate, may, will, should, expect, intend,
estimate, predict, continue, and similar expressions or the negative thereof or comparable
terminology are intended to identify forward-looking statements which include, but are not limited
to, statements concerning expectations of us and our directors and officers regarding, among other
things, working capital requirements, financing requirements, business prospects, trends affecting
us and other statements of expectations, beliefs, future plans and strategies, anticipated events
or trends and similar expressions concerning matters that are not historical facts. Such statements
are subject to certain risks and uncertainties, including the matters set forth in this quarterly
report on Form 10-Q or other reports or documents we file with the Securities and Exchange
Commission, or the SEC, from time to time, which could cause actual results or outcomes to differ
materially from those projected. Undue reliance should not be placed on these forward-looking
statements which speak only as of the date hereof. We do not ordinarily make projections of our
future operating results and undertake no obligation (and expressly disclaim any obligation) to
publicly update or revise any forward-looking statements, whether as a result of new information,
future events or otherwise, except as required by law. Readers should carefully review this
document and the other documents filed by us with the SEC. In addition, the forward-looking
statements in this quarterly report on Form 10-Q for the quarter ended March 31, 2010 involve known
and unknown risks, uncertainties and other factors that could cause the actual results, performance
or achievements of us to differ materially from those expressed in or implied by the
forward-looking statements contained herein. Please see the Risk Factors in Item 1A of Part II of
this quarterly report on Form 10-Q.
General Overview
Business
We are a leading offset printing equipment supplier in China, headquartered in Beijing. We design,
manufacture and sell offset printing equipment used in the offset printing process. The offset
printing process includes the following three stages: (1) pre-press, which is the transfer of
images to printing plates; (2) press, which is the transfer of images from printing plates to
another media, such as paper; and (3) post-press, which is the last step of the offset printing
process that includes cutting, folding, binding, collating and packaging. We manufacture one
product under the pre-press product category (a computer-to-plate system, or CTP system) and
seventeen products across four product lines under the press product category (single color small
format presses, single color large format presses, multicolor small format presses and multicolor
large format presses). We plan to begin commercial production and sale of certain post-press
products, including cold-set corrugated paper machines, which make corrugated cardboard paper, by
the end of 2010. Through our technical innovation and precision engineering, we offer a broad range
of quality and durable offset printing equipment at competitive prices. With over 85 distributors
in over 65 cities and 28 provinces, we have one of the largest distribution networks for offset
printing equipment suppliers in China. We believe our extensive network allows us to be closer to
our end-user customers and enables us to be more responsive to local market demand.
Corporate History
We are organized under the law of the State of Wyoming. On October 6, 2006, we closed an equity
transfer agreement with Duoyuan Investments Limited, or Duoyuan Investments, pursuant to which we
acquired Duoyuan Digital Press Technology Industries (China) Co., Ltd., or Duoyuan China, and
commenced our present line of offset printing equipment business. We conduct all of our business
through our principal operating subsidiary, Duoyuan China, and three manufacturing subsidiaries,
Langfang Duoyuan Digital Technology Co., Ltd., or Langfang Duoyuan, Hunan Duoyuan Printing
Machinery Co., Ltd., or Hunan Duoyuan and Hunan Duoyuan Machinery Manufacturing Co., Ltd., or Hunan
Machinery. Duoyuan Chinas principal business activities include marketing and sale of our offset
printing equipment, technical support to our distributors, as well as overall strategic planning
and management of our business. Langfang Duoyuans principal business activities include the
manufacturing of our CTP system, and two of our press products, namely our single color small
format presses and multicolor small format presses. Hunan Duoyuans principal business activities
include the manufacturing of two of our press products, namely our single color large format
presses and multicolor large format presses. Hunan Machinerys principal business activities
include production and supply of key parts and components to the other manufacturing subsidiaries.
Our majority shareholder is Duoyuan Investments, which is a British Virgin Islands company wholly
owned by Wenhua Guo, our chairman of the board.
On November 2, 2006, we closed the transactions contemplated by a securities purchase agreement by
and between us and certain investors, and issued an aggregate of 6,132,622 shares of our common
stock to certain investors for an aggregate purchase price of $23.5 million. This private placement
was made pursuant to the exemption from the registration provisions of the Securities Act provided
by Section 4(2) of the Securities Act, and Rule 506 of Regulation D promulgated thereunder, for
issuances not involving a public offering.
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In November 2009, we completed our initial public offering of 6,455,918 common shares, including
5,500,000 common shares offered by us and 955,918 common shares offered by the selling
shareholders, at an initial public offering price of $8.50 per common share. Our shares are listed
on the New York Stock Exchange under the symbol DYP.
Changes in PRC Tax Regulations
Our Chinese subsidiaries have enjoyed significant tax preferential treatments. These preferential
tax treatments were applicable to foreign invested manufacturing enterprises scheduled to operate
for a period of not less than ten years in accordance with the Foreign Invested Enterprise Income
Tax Law, or FIE Income Tax Law, which was effective until December 31, 2007. The additional tax
that would otherwise be payable without such preferential tax treatments totaled $7.9 million for
the year ended June 30, 2008 and $4.3 million for the year ended June 30, 2009. The additional tax
that would otherwise be payable without such preferential tax treatments totaled $2.0 million for
the nine months ended March 31, 2010.
As a result of recent changes in the FIE Income Tax Law, we expect that our tax expenses in the
future will be significantly higher. In addition, as explained below, some of the tax preferences
we previously received were granted by local governments and not supported by relevant state laws
and regulations. As a result, our Chinese subsidiaries may be ordered by relevant authorities to
refund these tax benefits. In addition, as a result of the changes in Chinese tax laws, our
historical operating results will not be indicative of our operating results for future periods.
Revenue
Our revenue is reported net of value-added taxes, or VAT, that are levied on our products. As of
March 31, 2010, all of our products were subject to a VAT at a rate of 17% of the gross sales
price. We also offer sales rebates as an incentive for large purchase orders. These sales rebates
are recorded as a reduction of our revenue.
We derive all of our revenue from the sale of our offset printing equipment to distributors in
China. We sell products in the pre-press and press product categories of offset printing equipment.
Substantially all our revenue is derived from the sale of our press printing equipment. Pre-press
printing equipment comprised approximately 4.4% of our revenue and press printing equipment
comprised approximately 95.6% of our revenue for the three months ended March 31, 2010, as adjusted
for sales rebates. For the three months ended March 31, 2010, within the press product category of
printing equipment, we derived 83.9% of our revenue from the sale of our multicolor (small and
large format) presses, before adjustment for sales rebates.
Our multicolor (small and large format) presses were our best selling products for the three months
ended March 31, 2010. For the three months ended March 31, 2010, our multicolor large format
presses accounted for approximately 49.5% of our revenue and our multicolor small format presses
accounted for approximately 34.4% of our revenue, before adjustment for sales rebates. The
following table provides a breakdown of our revenue, by product category:
Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||||||
% of | % of | % of | % of | |||||||||||||||||||||||||||||
$ | revenues | $ | revenues | $ | revenues | $ | revenues | |||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
Pre-press |
||||||||||||||||||||||||||||||||
Computer-to-plate
systems |
1,028 | 4.4 | % | 924 | 5.3 | % | 2,980 | 3.0 | % | 2,771 | 3.4 | % | ||||||||||||||||||||
Press |
||||||||||||||||||||||||||||||||
Single color small
format |
970 | 4.1 | % | 807 | 4.6 | % | 3,763 | 3.8 | % | 3,303 | 4.1 | % | ||||||||||||||||||||
Single color large
format |
1,824 | 7.8 | % | 1,687 | 9.7 | % | 7,524 | 7.6 | % | 8,467 | 10.5 | % | ||||||||||||||||||||
Multicolor small
format |
8,041 | 34.4 | % | 6,020 | 34.6 | % | 31,763 | 32.0 | % | 25,474 | 31.7 | % | ||||||||||||||||||||
Multicolor large
format |
11,587 | 49.5 | % | 8,165 | 46.9 | % | 54,175 | 54.7 | % | 41,269 | 51.3 | % | ||||||||||||||||||||
Adjustments |
(47 | ) | -0.2 | % | (191 | ) | -1.0 | % | (1,099 | ) | -1.1 | % | (855 | ) | -1.1 | % | ||||||||||||||||
Total Revenues |
23,403 | 100.0 | % | 17,412 | 100.0 | % | 99,106 | 100.0 | % | 80,429 | 100.0 | % | ||||||||||||||||||||
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Sales to distributors in China account for all of our revenue. We use an extensive distribution
network to reach a broad end-user customer base. We generally make sales on a purchase order and
short-term agreement basis. We do not have long-term volume purchase contracts with any of our
distributors. No single distributor accounted for more than 4% of our revenue during the three
months ended March 31, 2010.
Adjustments to revenue accounted for 0.2% for the three months ended March 31, 2010, for sales
rebates paid to distributors as part of our incentive program that rewards those distributors who
meet or exceed their sales targets for the three months period. Adjustments also include sales tax
paid to the PRC taxing authorities for the sale of our products. We provide sales rebates, or
discounts of 2% to 4%, to distributors based on purchase orders and cash receipts. The greater the
dollar amount of the purchase order and cash receipts, the higher the percentage rebate we offer to
our distributors. These sales rebates are paid at the end of each quarter. We intend to continue
this incentive program.
Raw Material Costs
Our principal raw materials are steel, iron and electronic components. We produce a substantial
majority of our key components in-house through Hunan Machinery. We purchase all other raw
materials and components from Chinese suppliers. The relatively low operation, labor and raw
material costs in China have historically allowed us to maintain our low cost of revenue. However,
as the global economy continues to recover, we expect our raw material costs will increase.
As we focus on manufacturing more advanced products and new product lines, we may find it necessary
to use more expensive raw materials and components. We plan to mitigate future increases in raw
material and component costs by using more common resources across our product lines, increasing
in-house manufacturing of our key components and adopting more uniform manufacturing and assembly
practices. In addition, to minimize and control raw material waste and increase production
efficiency, we continue to make investments to improve and further automate our manufacturing
process.
Employee Share-Based Compensation Expenses
We account for employee share-based compensation expenses at the fair value of the share awards on
the date of grant and recognized over the service period for awards expected to vest. The fair
value of nonvested stock units is determined based on the number of shares granted and the quoted
price of our common stock.
On November 6, 2009, we granted certain employees, including members of our executive management
team, but excluding our chief executive officer and chief financial
officer, 875,000 nonvested
shares. All of the common shares subject to these grants vested six months following the grant.
The compensation expense was recognized ratably over the vesting period. As a result of these
common share grants to our employees, we incurred employee share-based compensation charges of
$3.7 million during the three months ended March 31, 2010 and $6.0 million during the nine months
ended March 31, 2010, based on the initial public offering price of $8.50 per common share on the
New York Stock Exchange on November 6, 2009.
During the three and nine months ended March 31, 2010, the compensation expense of $3,698,204 and
$5,999,309, respectively, was recorded according to where the grantees regular compensation was
recorded as follows:
Three Months | Nine Months | |||||||
Ended March | Ended March | |||||||
31, 2010 | 31, 2010 | |||||||
Cost of revenues |
$ | 81,994 | $ | 133,013 | ||||
Research and development expense |
154,268 | 250,257 | ||||||
Selling expense |
224,006 | 363,837 | ||||||
General and administrative expense |
3,237,936 | 5,252,202 | ||||||
$ | 3,698,204 | $ | 5,999,309 | |||||
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We currently estimate that we will record compensation expense of $1.4 million during the three
months ended June 30, 2010 in line with the six month vesting schedule as discussed above.
In addition, on November 6, 2009, we granted our chief financial officer an option to purchase up
to 100,000 common shares at the initial public offering price. One quarter of these options vested
on October 1, 2010, with the remainder of the options vesting ratably on a monthly basis through
October 1, 2013. This grant resulted in additional stock-based compensation expense of $0.06
million for the nine months ended March 31, 2010.
Results of Operations
The following table sets forth selected data from our consolidated statements of income for the
periods indicated as a percentage of revenue:
Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||||||
$ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
Revenue, net |
23,403 | 100 | % | 17,412 | 100 | % | 99,106 | 100 | % | 80,429 | 100 | % | ||||||||||||||||||||
Cost of revenue |
11,100 | 47 | % | 8,354 | 48 | % | 46,453 | 47 | % | 37,294 | 46 | % | ||||||||||||||||||||
Gross profit |
12,303 | 53 | % | 9,058 | 52 | % | 52,653 | 53 | % | 43,135 | 54 | % | ||||||||||||||||||||
Research and development |
461 | 2 | % | 286 | 2 | % | 1,454 | 1 | % | 1,471 | 2 | % | ||||||||||||||||||||
Selling expenses |
2,051 | 9 | % | 1,476 | 8 | % | 9,116 | 9 | % | 6,975 | 9 | % | ||||||||||||||||||||
General and
administrative expenses |
3,680 | 16 | % | 1,057 | 6 | % | 8,799 | 9 | % | 3,333 | 4 | % | ||||||||||||||||||||
Income from operations |
6,111 | 26 | % | 6,239 | 36 | % | 33,284 | 34 | % | 31,356 | 39 | % | ||||||||||||||||||||
Change of the fair value
of warrants |
(2,452 | ) | -11 | % | 30 | 0 | % | (5,686 | ) | -6 | % | 194 | 0 | % | ||||||||||||||||||
Other expenses |
| | | | | | (957 | ) | -1 | % | ||||||||||||||||||||||
Interest expense and
other charges |
(213 | ) | -1 | % | (211 | ) | -1 | % | (661 | ) | -1 | % | (637 | ) | -1 | % | ||||||||||||||||
Interest income |
55 | 0 | % | 105 | 0 | % | 129 | 0 | % | 174 | 0 | % | ||||||||||||||||||||
Other expense, Net |
(158 | ) | -1 | % | (106 | ) | -1 | % | (532 | ) | -1 | % | (1,420 | ) | -2 | % | ||||||||||||||||
Income before provision
for income taxes and
noncontrolling interest |
3,501 | 15 | % | 6,163 | 35 | % | 27,066 | 27 | % | 30,130 | 37 | % | ||||||||||||||||||||
Provision for income taxes |
2,295 | -10 | % | 1,181 | 7 | % | 7,553 | 8 | % | 3,712 | 4 | % | ||||||||||||||||||||
Net income |
1,206 | 5 | % | 4,982 | 28 | % | 19,513 | 19 | % | 26,418 | 33 | % | ||||||||||||||||||||
Less: Net income
attributable to
noncontrolling interest |
100 | 0 | % | 71 | 0 | % | 482 | 0 | % | 350 | 0 | % | ||||||||||||||||||||
Net income attributable
to Duoyuan Printing,
Inc. |
1,106 | 5 | % | 4,911 | 28 | % | 19,031 | 19 | % | 26,068 | 33 | % | ||||||||||||||||||||
22
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Comparison of Three Months Ended March 31, 2010 and March 31, 2009
Revenue
Our revenue increased by $6.0 million, or 34.4%, from $17.4 million for the three months ended
March 31, 2009 to $23.4 million for the three months ended March 31, 2010, primarily as a result
of an increase in sale of our higher priced and higher margin multicolor presses during this
period. Revenue for our pre-press printing equipment for the three months ended March 31, 2010
increased by $0.1 million, or 11.2%, when compared to the three months ended March 31, 2009. Also,
revenue for our press printing equipment for the three months ended March 31, 2010 increased by
$5.7 million, or 34.4%, when compared to the three months ended March 31, 2009.
Pre-press Printing Equipment. Revenue from our CTP system equipment increased by $0.1 million, or
11.2%, from $0.9 million during the three months ended March 31, 2009 to $1.0 million for the three
months ended March 31, 2010. We increased our sales by showcasing our CTP system in one additional
exhibition and trade show during the three months ended March 31, 2010, compared to the three
months ended March 31, 2009.
Press Printing Equipment.
Revenue from the sale of our press printing equipment increased by $5.7 million, or 34.4%, from
$16.7 million during the three months ended March 31, 2009 to $22.4 million for the three months
ended March 31, 2010, before adjustment for sales rebates. This increase was primarily due to an
increase in sales of our multicolor (small and large format) presses.
Single color small format press. Revenue for our single color small format presses increased by
$0.2 million, or 20.2%, from $0.8 million during the three months ended March 31, 2009 to $1.0
million during the three months ended March 31, 2010, before adjustment for sales rebates. Overall,
we sold more single color small format presses during the three months ended March 31, 2010 when
compared to the three months ended March 31, 2009 as we increased promotion of our newest single
color small format press, Model DY56T, which was introduced in April 2009. In addition, the demand
for our other single color small format presses increased as we promoted our single color small
format presses in three additional exhibitions and trade shows during the three months ended March
31, 2010, compared to the three months ended March 31, 2009. During the three months ended March
31, 2010, we attended more exhibitions and trade shows in the second tier cities to increase the
demand of our single color presses.
Single color large format press. Revenue for our single color large format presses increased by
$0.1 million, or 8.1%, from $1.7 million during the three months ended March 31, 2009 to $1.8
million during the three months ended March 31, 2010, before adjustment for sales rebates. Our
revenue increased as we introduced a new single color large format press, Model DY 104, in March
2010. In addition, sale of our other single color large format presses increased during the three
months ended March 31, 2010, compared to the three months ended March 31, 2009, as we participated
in three additional exhibitions and trade shows. During the three months ended March 31, 2010, we
attended more exhibitions and trade shows in the second tier cities to increase the demand of our
single color presses.
Multicolor small format press. Revenue for our multicolor small format presses increased by $2.0
million, or 33.6%, from $6.0 million during the three months ended March 31, 2009 to $8.0 million
during the three months ended March 31, 2010, before adjustment for sales rebates. We believe the
increased sales of our multicolor small format press were partially a result of our increased
marketing activities. We promoted our multicolor small format press through ten additional
exhibitions and trade shows during the three months ended March 31, 2010 when compared to three
months ended March 31, 2009. Furthermore, we introduced a new model, DY552, in September 2009,
which generated additional revenue of $1.2 million for us during the three months ended March 31,
2010.
Multicolor large format press. Revenue for our multicolor large format presses increased by $3.4
million, or 41.9%, from $8.2 million during the three months ended March 31, 2009 to $11.6 million
during the three months ended March 31, 2010, before adjustment for sales rebates. We believe the
increased sales of our multicolor large format presses were partially a result of our increased
marketing activities. In the three months ended March 31, 2010, we promoted our multicolor presses
in 13 additional exhibitions and trade shows when compared with the three months ended March 31,
2009. Revenue from our new multicolor large format presses, Model DY474II and Model PZ-4660AL,
which were introduced in November 2008 and February 2009, respectively, continued to be strong as
we increased the promotion of these new models through exhibitions and trade shows. Also, we
believe sales of these products continued to increase as the customers became more familiar with
the functionality of these products. The overall increase in revenue from these two models was $2.5
million. Furthermore, combined sale of our other multicolor large format presses increased during
the three months ended March 31, 2010 compared to the three months ended March 31, 2009.
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Table of Contents
Cost of Revenue
Our cost of revenue can vary significantly from quarter to quarter, but generally it is in
proportion to the number of products we sell in any given quarter. We typically incur higher costs
in the first and second quarters of each fiscal year primarily due to the increase in the volume of
our products sold.
Our cost of revenue increased by $2.7 million, or 32.9%, from $8.4 million for the three months
ended March 31, 2009 to $11.1 million for the three months ended March 31, 2010. This increase was
primarily due to an increase in the volume of our products sold during this period, particularly
sales of our multicolor presses. This increase in sales contributed to the increase in consumption
of raw materials and components across our pre-press and press product categories as our revenue
increased by 34.4% from the three months ended March 31, 2009 to the three months ended March 31,
2010. As a percentage of revenue, our cost of revenue decreased 0.6% from 48.0% for the three
months ended March 31, 2009 to 47.4% for the three months ended March 31, 2010.
Gross Profit
As a result of the factors above, our gross profit increased by $3.2 million, or 35.8%, from $9.1
million for the three months ended March 31, 2009 to $12.3 million for the three months ended March
31, 2010. The increase in our gross profit during this period was due to the increase in our revenues by 34.4%. Our gross profit
margins increased 0.6% from 52.0% for the three months ended March 31, 2009 to 52.6% for the three
months ended March 31, 2010. Our gross profit percentage increased because of increased sales of
higher margin multicolor presses.
Selling Expenses
Our selling expenses increased by $0.6 million, or 39.0%, from $1.5 million for the three months
ended March 31, 2009 to $2.1 million for the three months ended March 31, 2010. This increase was
primarily due to an increase in salary expense to our sales professionals and in shipping expenses
for delivery of our products. Our salary expense increased as we paid more commissions due to the
increase in sales. Our shipping expenses increased because we sold more units during the three
months ended March 31, 2010 compared to the three months ended March 31, 2009.
As a percentage of revenue, our selling expenses increased 0.3% from 8.5% for the three months
ended March 31, 2009 to 8.8% for the three months ended March 31, 2010. This increase was mainly
because our shipping expenses increased as we shipped a higher number of units of multicolor
presses during the three months ended March 31, 2010 compared to the three months ended March 31,
2009. Per unit shipping cost of multicolor presses are higher than the single color presses due to
their size and weight.
General and Administrative Expenses
General and administrative expenses increased by $2.6 million, or 248.4%, from $1.1 million for the
three months ended March 31, 2009 to $3.7 million for the three months ended March 31, 2010. This
increase was mainly due to $3.3 million share-based compensation expense related to our grant of
restricted share awards to certain employees in our management and administration division and
share options to our CFO in November 2009. However, this increase was offset by the reduction of
our allowance for doubtful accounts by $1.1 million.
As a percentage of revenue, general and administrative expenses increased 9.6% from 6.1% for the
three months ended March 31, 2009 to 15.7% for the three months ended March 31, 2010. This increase
was mainly due to our share-based compensation expense for nonvested stock and stock options
granted in November 2009.
Research and Development Expenses
Our research and development expenses increased by $0.2 million, or 61.3%, from $0.3 million for
the three months ended March 31, 2009 to $0.5 million for the three months ended March 31, 2010.
For the three months ended March 31, 2010, our research and development efforts were mainly focused
on developing two new products (a new CTP system and a new multicolor large format press) as well
as the planned packaging equipment product, our cold-set corrugated paper machine, which are
scheduled to be released in calendar 2010. In addition, we introduced a new single color large
format press, Model DY104, in March 2010. During the three months ended March 31, 2009, our
research and development efforts were focused on developing or enhancing two new and existing press
products, Model PZ 4660-AL, which was introduced in February 2009 and Model DY 552, which was
introduced in September 2009.
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Table of Contents
As a percentage of revenue, research and development expenses increased 0.4% from 1.6% for the
three months ended March 31, 2009 to 2.0% for the three months ended March 31, 2010.
Income from Operations
Income from operations decreased by $0.1 million, or 2.1%, from $6.2 million for the three months
ended March 31, 2009 to $6.1 million for the three months ended March 31, 2010.
The
decrease was due to our share-based compensation expense of
$3.7 million from nonvested stock
and stock options granted in November, 2009. Excluding the impact of this expense, our income from
operations for the three months ended March 31, 2010 would have been $9.8 million.
We believe excluding the impact of our share-based compensation expense on our income from
operations is a non-GAAP financial measure as contemplated by SEC Regulation G, Rule 100. This
non-GAAP measure is discussed further, and reconciled to their applicable U.S. GAAP-based measures,
on page 33.
Change in Fair Value of Warrants
Loss from change in fair value of warrants increased by $2.5 million from gain of $0.03 million for
the three months ended March 31, 2009 to a loss of $2.5 million for the three months ended March
31, 2010. Financial instruments represent warrants issued to unrelated investors in our 2006 private placement offering as well as
warrants issued to the private placement offering agent and investment relations firm for their
services.
The warrants are recorded as a liability on the balance sheet. The fair value of the warrants
changes depending on the market price of underlying common stock, the exercise period, volatility
and the risk-free interest rate. Any increase or decrease in the liability is recorded as income
or loss in the income statement. We will experience some uncertainty in our income statement as we
are subject to these increases or decreases until either all warrants are exercised or the exercise
period has expired.
Other Expense
Our other expenses increased by $0.1 million, or 48.5%, from $0.1 million for the three months
ended March 31, 2009 to $0.2 million for the three months ended March 31, 2010. We had interest
expense of $0.2 million from our short-term borrowing during the three months ended March 31, 2010
as well as during the three months ended March 31, 2009. The interest expense is offset by
interest income.
Net Income Attributable to Noncontrolling Interest
Our noncontrolling interest stayed constant at $0.1 million for the three months ended March 31,
2009 and 2010, respectively.
Provision for Income Taxes
Our provision for income taxes increased by $1.1 million, or 94.4%, from $1.2 million for the three
months ended March 31, 2009 to $2.3 million for the three months ended March 31, 2010. This
increase was primarily due to the increase in our revenue by 34.4% over the same period and an
increase in the income tax rate applicable to Hunan Duoyuan, which was tax exempted in 2009.
Beginning on January 1, 2010, the income tax rate for Hunan Duoyuan increased to 25.0% as a result
of the expiration of preferential tax treatments granted to Hunan Duoyuan in prior years. Our
effective tax rates were 19.4% for the three months ended March 31, 2009 and 25.0% for the three
months ended March 31, 2010.
Duoyuan China began paying income tax in January 1, 2006. The income tax rate for Duoyuan China
prior to January 1, 2008 was 16.5% and the income tax rate for Duoyuan China from January 1, 2008
to December 31, 2008 was 12.5%. Beginning January 1, 2009, the income tax rate for Duoyuan China
increased to 25.0%. Langfang Duoyuan began paying income tax in January 1, 2008 at a rate of 25.0%.
Hunan Machinery was subject to an income tax rate of 25.0% upon its inception on January 8, 2010.
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Net Income Attributable to Duoyuan Printing, Inc.
As a result of the foregoing, our net income attributable to Duoyuan Printing, Inc. decreased by
$3.8 million, or 77.5%, from $4.9 million for the three months ended March 31, 2009 to $1.1 million
for the three months ended March 31, 2010. This decrease was mainly due to our share-based
compensation expense of $3.7 million for nonvested stock and stock options granted in November
2009 and change in fair value of warrants of $2.5 million. Excluding the impact of these expenses,
our net income in the three months ended March 31, 2010 would have been $7.3 million.
As a percentage of revenue, our net income attributable to Duoyuan Printing, Inc. decreased 23.5%
from 28.2% for the three months ended March 31, 2009 to 4.7% for the three months ended March 31,
2010. This decrease was mainly due to our share-based compensation
expense for nonvested stock
and stock options granted in November 2009 and change in fair value of warrants. Excluding the
impact of these expenses, as a percentage of revenue, our net income in the three months ended
March 31, 2010 would have been 31.2%.
We believe excluding the impact of our share-based compensation expense and change in fair value of
warrants on our net income are non-GAAP financial measures as contemplated by SEC Regulation G,
Rule 100. These non-GAAP measures are discussed further, and reconciled to their applicable U.S.
GAAP-based measures, on page 33.
Comparison of Nine Months Ended March 31, 2010 and March 31, 2009
Revenue
Our revenue increased by $18.7 million, or 23.2%, from $80.4 million for the nine months ended
March 31, 2009 to $99.1 million for the nine months ended March 31, 2010, primarily as a result of
an increase in volume of products sold during this period. Revenue for our pre-press printing
equipment increased by $0.2 million, or 7.5%, from $2.8 million for the nine months ended March 31,
2009 to $3.0 million for the nine months ended March 31, 2010. In addition, revenue for our press
printing equipment for the nine months ended March 31, 2009 increased by $18.7 million, or 23.8%,
when compared to the nine months ended March 31, 2010. This increase in revenue was mainly
attributable to an increase in the volume of our higher price, higher margin multicolor presses
sold during this period.
Pre-press Printing Equipment. Revenue of our CTP system equipment increased by $0.2 million, or
7.5%, from $2.8 million during the nine months ended March 31, 2009 to $3.0 million for the nine
months ended March 31, 2010. We increased our sale by showcasing our CTP system in two additional
exhibition and trade show during the nine months ended March 31, 2010 compared to the nine months
ended March 31, 2009.
Press Printing Equipment.
Revenue from the sale of our press printing equipment increased by $18.7 million, or 23.8%, from
$78.5 million during the nine months ended March 31, 2009 to $97.2 million for the nine months
ended March 31, 2010, before adjustment for sales rebates. This increase was primarily due to an
increase in demand for our multicolor (small and large format) presses.
Single color small format press. Revenue for our single color small format presses increased by
$0.5 million, or 13.9%, from $3.3 million during the nine months ended March 31, 2009 to $3.8
million during the nine months ended March 31, 2010, before adjustment for sales rebates. Overall,
we sold more single color small format presses during the nine months ended March 31, 2010 when
compared to the nine months ended March 31, 2009 as we increased promotion of our newest single
color small format press, Model DY56T, which was introduced in April 2009. However, the increase
from the sale of this new model was offset by the decrease in sale of our other single color small
format presses. Sales of our other single color small format presses decreased as we promoted
these other models in fewer exhibitions and tradeshows during the nine months ended March 31, 2010
compared to the nine months ended March 31, 2009. During the nine months ended March 31, 2010, our
promotional efforts were primarily focused on multicolor (small and large formats) presses.
Single color large format press. Revenue for our single color large format presses decreased by
$1.0 million, or 11.1%, from $8.5 million during the nine months ended March 31, 2009 to $7.5
million during the nine months ended March 31, 2010, before adjustment for sales rebates. Although
we participated in more exhibitions and trade shows during the nine months ended March 31, 2010
when compared to the nine months ended March 31, 2009, we decreased the promotion of single color
large format presses in these events. Our promotional efforts were more focused on multicolor
presses during the nine months ended March 31, 2010. In addition, revenue decreased because the
sale of a model with lower sales price (but higher gross profit margin) increased and the sale
of a model with higher sales price (but lower gross profit margin) decreased during the nine months
ended March 31, 2010 when compared to the nine months ended March 31, 2009.
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Multicolor small format press. Revenue for our multicolor small format presses increased by $6.3
million, or 24.7%, from $25.5 million during the nine months ended March 31, 2009 to $31.8 million
during the nine months ended March 31, 2010, before adjustment for sales rebates. We believe the
increased demand for our multicolor small format press was partially a result of our increased
marketing activities. We promoted our multicolor small format press through 23 additional
exhibitions and trade shows during the nine months ended March 31, 2010 when compared to the nine
months ended March 31, 2009. Specifically, we increased promotion of Model DY456, mostly used by
commercial printers that print books, magazines, corporate brochures, product catalogues, labels
and small packages. Furthermore, we introduced a new model, DY552, in September 2009 which
generated additional revenue of $5.7 million for us.
Multicolor large format press. Revenue for our multicolor large format presses increased by $12.9
million, or 31.3%, from $41.3 million during the nine months ended March 31, 2009 to $54.2 million
during the nine months ended March 31, 2010, before adjustment for sales rebates. We believe the
increased demand for our multicolor large format presses was partially a result of our increased
marketing activities. In the nine months ended March 31, 2010, we participated in 69 exhibitions
and trade shows, an increase of 31 exhibitions and trade shows when compared with the nine months
ended March 31, 2009. We increased the sale of our new multicolor large format presses, Model
DY474II and Model PZ-4660AL, which were introduced in November 2008 and February 2009,
respectively. We increased the promotion of these new models through exhibitions and trade shows.
Also, demand for these products increased as the customers became more familiar with the
functionality of our products. The overall increase in revenue from these two models was $23.8
million. Revenue from the sale of these models was offset by the decrease in revenue from the sale
of our existing models, DY474 and PZ-4660.
Cost of Revenue
Our cost of revenue can vary significantly from quarter to quarter, but generally it is in
proportion to the number of products we sell in any given quarter. We typically incur higher costs
in the first and second quarters of each fiscal year primarily due to the increase in the volume of
our products sold.
Our cost of revenue increased by $9.2 million, or 24.6%, from $37.3 million for the nine months
ended March 31, 2009 to $46.5 million for the nine months ended March 31, 2010. This increase was
primarily due to an increase in the volume of our products sold during this period, particularly
sales of our multicolor presses. This increase in sales contributed to the increase in consumption
of raw materials and components across our pre-press and press product categories as our revenue
increased by 23.2% from the nine months ended March 31, 2009 to the nine months ended March 31,
2010. As a percentage of revenue, our cost of revenue increased 0.5% from 46.4% for the nine months
ended March 31, 2009 to 46.9% for the nine months ended March 31, 2010. The increase was mainly due
to the increase in our depreciation expense as we have invested substantial amount of capital
expenditures in the prior years.
Gross Profit
As a
result of the factors above, our gross profit increased by $9.6 million, or 22.1%, from $43.1
million for the nine months ended March 31, 2009 to $52.7 million for the nine months ended March
31, 2010. However, our gross profit margins decreased 0.5% from 53.6% for the nine months ended
March 31, 2009 to 53.1% for the nine months ended March 31, 2010. The decrease in our gross profit
margins during this period was due to the increase in our depreciation expense as we have expended
substantial amounts of capital expenditures in the prior years.
Selling Expenses
Our selling expenses increased by $2.1 million, or 30.7%, from $7.0 million for the nine months
ended March 31, 2009 to $9.1 million for the nine months ended March 31, 2010. This increase was
primarily due to an increase in salary expense to our sales professionals and in expenses related
to advertising and exhibitions and trade shows as we participated in more number of exhibitions and
trade shows during the nine months ended March 31, 2010 compared to the nine months ended March 31,
2009. In addition, our shipping expenses increased as we sold more units during the nine months
ended March 31, 2010 compared to the nine months ended March 31, 2009.
As a percentage of revenue, our selling expenses increased 0.5% from 8.7% for the nine months ended
March 31, 2009 to 9.2% for the nine months ended March 31, 2010. This increase was mainly due to
the general increase of advertising rates by 20% to 120%. Also,
we participated in more numbers of exhibitions and trade shows during the nine months ended March
31, 2010 compared to the nine months ended March 31, 2009 in an effort to expand our brand
recognition and strengthen customer loyalty.
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General and Administrative Expenses
General and administrative expenses increased by $5.5 million, or 164.0%, from $3.3 million for the
nine months ended March 31, 2009 to $8.8 million for the nine months ended March 31, 2010. This
increase was mainly due to $5.3 million share-based compensation expense related to our grant of
nonvested share awards to certain employees in our management and administration division and
share options to our CFO in November, 2009. In addition, our general and administrative expenses
increased due to increases in professional fees. Our professional fees increased mainly due to
engagement of an outside consultant for our Sarbanes-Oxley (SOX) Section 404 compliance. However,
these increases were offset by the reduction of our allowance for doubtful accounts of $0.9
million.
As a percentage of revenue, general and administrative expenses increased 4.8% from 4.1% for the
nine months ended March 31, 2009 to 8.9% for the nine months ended March 31, 2010. This increase
was mainly due to our share-based compensation expense for restricted stock and stock options
granted in November 2009.
Research and Development Expenses
Our research and development expenses stayed constant at $1.5 million for the nine months ended
March 31, 2009 and 2010. For the nine months ended March 31, 2010, our research and development
efforts were mainly focused on developing new press products as well as our planned packaging
equipment, cold-set corrugated paper machine. We introduced a new multicolor small format press,
Model DY 552, in September 2009 and a new single color large format press, Model DY 104, in March
2010. We are also in the process of developing two new products, a CTP system and a multicolor
large format press. For the nine months ended March 31, 2009, our research and development
efforts were focused on developing or enhancing several new and existing press products, which were
all introduced to the market during the fiscal year ended June 30, 2009.
As a percentage of revenue, research and development expenses decreased 0.3% from 1.8% for the nine
months ended March 31, 2009 to 1.5% for the nine months ended March 31, 2010.
Income from Operations
Income from operations increased by $1.9 million, or 6.1%, from $31.4 million for the nine months
ended March 31, 2009 to $33.3 million for the nine months ended March 31, 2010. Excluding the
impact of the share-based compensation expense of $6.1 million, our income from operations in the
nine months ended March 31, 2010 would have been $39.3 million. We believe excluding the impact of
our share-based compensation expense from our income from operations is non-GAAP financial measures
as contemplated by SEC Regulation G, Rule 100. This non-GAAP measure is discussed further, and
reconciled to their applicable U.S. GAAP-based measures, on page 33.
The increase in income from operations was due to the increased multicolor press sales, which
generated higher revenue for us.
Change in Fair Value of Warrants
Loss from change in fair value of warrants increased by $5.9 million from gain of $0.2 million for
the nine months ended March 31, 2009 to a loss of $5.7 million for the nine months ended March 31,
2010. Financial instruments represent warrants issued to unrelated investors from the 2006 private
placement offering as well as warrants issued to the private placement offering agent and
investment relations firm for their services.
The warrants are recorded as a liability on the balance sheet. The fair value of the warrants
changes depending on the market price of the underlying common stock, exercise period, volatility
and risk free rate. Any increase or decrease in the liability is recorded as income or loss in the
income statement. We are subject to these increases or decreases until either all warrants are
exercised or the exercise period has expired.
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Other Expense
Our other expenses decreased by $0.9 million, or 62.6%, from $1.4 million for the nine months ended
March 31, 2009 to $0.5 million for the nine months ended March 31, 2010. We had interest expense of
$0.7 million from our short-term borrowing during the nine months ended March 31, 2010 as well as
during the nine months ended March 31, 2009. Also, during the nine months ended March 31, 2009 in
accordance with SEC Staff Accounting Bulletin, Topic 5A, we expensed certain expenses incurred in
connection with our proposed initial public offering in the amount of $1.0 million due to market
uncertainty. We did not have such expense during the nine months ended March 31, 2010 as we
successfully completed our initial public offering in November, 2009.
Net Income Attributable to Noncontrolling Interest
Our noncontrolling interest increased by $0.1 million, or 37.5%, from $0.4 million for the nine
months ended March 31, 2009 to $0.5 million for the nine months ended March 31, 2010. The increase
in noncontrolling interest is mainly due to the increase of net income in Langfang Duoyuan and
Hunan Duoyuan.
Provision for Income Taxes
Our provision for income taxes increased by $3.8 million, or 103.5%, from $3.7 million for the nine
months ended March 31, 2009 to $7.5 million for the nine months ended March 31, 2010. This increase
was primarily due to the increase in our revenue by 23.2% over the same period and the increase in
income tax rate for Duoyuan China and Hunan Duoyuan. The income tax rate for Duoyuan China in 2008
was 12.5%. Beginning on January 1, 2009, the income tax rate for Duoyuan China increased to 25.0%
as a result of the expiration of preferential tax treatments granted to Duoyuan China in prior
years. Hunan Duoyuan was tax exempted in 2009. Beginning on January 1, 2010, the income tax rate
for Hunan Duoyuan increased to 25.0% as a result of the expiration of preferential tax treatments
granted to Hunan Duoyuan in prior years. Our effective tax rates were 12.4% for the nine months
ended March 31, 2009 and 19.8% for the nine months ended March 31, 2010. Langfang Duoyuan began
paying income tax in January 1, 2008 at a rate of 25.0%. Hunan Machinery was subject to an income
tax rate of 25.0% upon its inception on January 8, 2010.
Net Income Attributable to Duoyuan Printing, Inc.
As a result of the foregoing, our net income attributable to Duoyuan Printing, Inc. decreased by
$7.1 million, or 27.0%, from $26.1 million for the nine months ended March 31, 2009 to $19.0
million for the nine months ended March 31, 2010. This decrease was mainly due to our share-based
compensation expense of $6.1 million for nonvested stock and stock options granted on November
2009 and change in fair value of warrants of $5.7 million. Excluding the impact of these expenses,
our net income in the nine months ended March 31, 2010 would have been $30.8 million.
As a percentage of revenue, our net income attributable to Duoyuan Printing, Inc. decreased 13.2%
from 32.4% for the nine months ended March 31, 2009 to 19.2% for the nine months ended March 31,
2010. This decrease was mainly due to our share-based compensation
expense for nonvested stock and
stock options granted in November 2009 and change in fair value of warrants. Excluding the impact
of these expenses, as a percentage of revenue, our net income in the nine months ended March 31,
2010 would have been 31.1%.
We believe excluding the impact of our share-based compensation expense and change in fair value of
warrants on our net income are non-GAAP financial measures as contemplated by SEC Regulation G,
Rule 100. These non-GAAP measures are discussed further, and reconciled to their applicable U.S.
GAAP-based measures, on page 33.
Liquidity and Capital Resources
As of March 31, 2010, we had cash and cash equivalents of $91.2 million, accounts receivable of
$49.1 million and inventories of $29.5 million. Our working capital was approximately $150.3
million with a current ratio of 8.64 to 1 and our equity was $193.2 million, as of March 31, 2010.
We relied primarily on cash flow from operating activities and our bank loans for our capital
requirements for the nine months ended March 31, 2010. We also raised $41.9 million from our
initial public offering on November 6, 2009. We believe that our existing cash, cash flow from
operating activities and our bank loans will be sufficient to meet our presently anticipated cash
needs for at least the next 12 months.
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Sources and Uses of Cash
The following table sets forth cash flow data for the periods indicated:
Nine Months Ended March 31, | ||||||||
2009 | 2010 | |||||||
(dollars in thousands) | ||||||||
Net cash provided by operating activities |
$ | 19,972 | $ | 19,358 | ||||
Net cash used in investing activities |
$ | (16,090 | ) | $ | (1,155 | ) | ||
Net cash provided by financing activities |
$ | 2,929 | $ | 41,915 |
Net cash provided by operating activities. Net cash provided by operating activities decreased by
$0.6 million, or 3.1%, from $20.0 million for the nine months ended March 31, 2009 to $19.4 million
for the nine months ended March 31, 2010. The decrease in operating cash flow was mainly due to the
increase in accounts receivable of $10.9 million and increase in inventory of $3.6 million during
the nine months ended March 31, 2010. This decrease in cash flow was offset by an increase in cash
flow from $17.9 million in net income during the nine months ended March 31, 2010, as well as
adding back non-cash expenses, including share-based compensation, of $6.1 million, and a change in
fair value of warrants of $5.7 million.
Our accounts receivable increased mainly due to our increased sales, and in particular, increased
sale of our multicolor (small and large formats) presses. The inventory increased because we
bought more raw materials for the future production of our products. During the nine months ended
March 31, 2010, we recorded share-based compensation of $6.1 million and change in fair value of
derivative instruments of $5.7 million. These expenses are added back because they both are
non-cash transactions.
Net cash used in investing activities. Net cash used in investing activities decreased by $14.9
million, or 92.8%, from $16.1 million for the nine months ended March 31, 2009 to $1.2 million for
the nine months ended March 31, 2010. The main uses of our cash in investing included payment of
$0.3 million for purchase of testing equipment for our press products and $0.2 million for vehicles
for our increased sales and marketing activities including meetings with our distributors as well
as participation in exhibits and trade shows. In addition, we spent $0.7 million to make various
improvements to our offices.
In connection with our entry into the cold-set corrugated paper machine business and efforts to
upgrade our existing facilities, we expect to increase net cash used in investing activities. We
began building a new factory in Langfang to manufacture cold-set corrugated paper machines. In
addition, we plan to make additional capital expenditures during the remainder of 2010 to improve
our manufacturing facility in our Hunan Duoyuan facility. We also plan to improve our foundry and
our surface treatment workshop to realize additional manufacturing efficiencies.
Net cash provided by financing activities. Net cash provided by financing activities increased by
$39.0 million, or 1,331.1%, from $2.9 million for the nine months ended March 31, 2009 to $41.9
million for the nine months ended March 31, 2010. On a net basis, we did not borrow any additional
funds during this period. Also, in November 2009, we completed an initial public offering of
5,500,000 common shares at a price of $8.50 per common shares. The net proceeds from the IPO
totaled $41.9 million.
As of March 31, 2010 and June 30, 2009, the carrying amounts for our bank loans were as follows:
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March 31, 2010 | June 30, 2009 | |||||||
Loan from Bank of Agriculture, due March
11, 2011, interest rate of 5.841% per
annum, interest only paid quarterly,
secured by land use rights and buildings |
$ | 1,467,000 | $ | 1,465,000 | ||||
Loan from Bank of Agriculture, due July
2, 2010, interest rate of 5.841% per
annum, interest only paid quarterly,
secured by land use rights and buildings |
2,934,000 | 2,930,000 | ||||||
Loan from Bank of Agriculture, due July
9, 2010, interest rate of 5.841% per
annum, interest only paid quarterly,
secured by land use rights and buildings |
2,934,000 | 2,930,000 | ||||||
Loan from Bank of Agriculture, due July
16, 2010, interest rate of 5.841% per
annum, interest only paid quarterly,
secured by land use rights and buildings |
4,107,600 | 4,102,000 | ||||||
Loan from Bank of Agriculture, due July
23, 2010, interest rate of 5.841% per
annum, interest only paid quarterly,
secured by land use rights and buildings |
2,934,000 | 2,930,000 | ||||||
Total |
$ | 14,376,600 | $ | 14,357,000 | ||||
As of March 31, 2010, we had five short-term loans in the aggregate amount of $14.4 million
pursuant to our line of credit with Bank of Agriculture, Chongwen branch, in China. Each loan has
an expiration date of no longer than one year. The aggregate loan amount of $14.4 million has an
interest rate of 5.841%. Interest on our loans is paid quarterly. The loans outstanding as of March
31, 2010 are secured by our plant and land use rights for our Hunan facility. We plan to either
repay the debt as it matures or refinance the debt. These loans were made under our RMB100.0
million ($14.6 million) revolving credit line. We are allowed to refinance these loans by entering
into new short-term loan agreements.
Banks in China are subject to national banking regulations and may withdraw the credit line if
regulations change. If the bank were to withdraw our credit line, we would use cash on hand or
external financing to repay amounts outstanding. We provide our financial information as well as
other documentation required by the bank on a quarterly basis. We have not had any indication from
the bank that it intends to not renew the short-term loan agreements. We are continually monitoring
our relationship with the Bank of Agriculture in light of the economic conditions and the recent
changes in the government policies.
Capital Expenditures
Our capital expenditures for the nine months ended March 31, 2010 were $1.2 million. Our capital
expenditures for the nine months ended March 31, 2010 were used primarily for purchase of testing
equipment for our press products, vehicles for our increased sales and marketing and improvements
to our offices. Our current planned capital expenditures are in connection with the launch of the
proposed cold-set corrugated paper machine business. We began building a new factory in Langfang to
manufacture cold-set corrugated paper machines. In addition, we plan to make additional capital
expenditures during the remainder of 2010 for improvement of our manufacturing facility in our
Hunan Duoyuan facility. We plan to improve our foundry and our surface treatment workshop to
realize additional manufacturing efficiencies.
Our future capital requirements will depend on many factors including our rate of revenue growth,
the timing and extent of spending to support research and development efforts, the expansion of
manufacturing and sales activities and the introduction of new products. As we have in connection
with our anticipated launch of our cold-set corrugated paper machine, we may enter into agreements
or letters of intent with respect to potential investments in, or acquisitions of, complementary
businesses, products or technologies, which may require us to seek additional equity or debt
financing. The sale of additional equity securities or convertible debt securities would result in
additional dilution to our shareholders. Additional debt would result in increased interest expense
and could result in covenants that would restrict our operations. We have not made arrangements to
obtain additional financing and additional financing, if required, may be unavailable in amounts or
on terms acceptable to us, if at all.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements.
Contractual Obligations
The contractual obligations presented in the table below represent our estimates of future payments
under fixed contractual obligations and commitments as of March 31, 2010. Changes in our business
needs or interest rates, as well as actions by third parties and other
factors, may cause these estimates to change. Because these estimates are complex and necessarily
subjective, our actual payments in future periods are likely to vary from those presented in the
table.
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Less than 1 | 3-5 | More than 5 | ||||||||||||||||||
Obligations | Total | Year | 1-3 Years | Years | Years | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Long Term Debt Obligations |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Capital Lease Obligations |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Operating Lease Obligations |
$ | 990 | $ | 413 | $ | 577 | $ | | $ | | ||||||||||
Purchase Obligations |
$ | 15,379 | $ | 15,379 | $ | | $ | | $ | | ||||||||||
Repayment Obligations under Line of Credit |
$ | 14,377 | $ | 14,377 | $ | | $ | | $ | | ||||||||||
Total |
$ | 30,746 | $ | 30,169 | $ | 577 | $ | | $ | | ||||||||||
We had an office lease agreement with Duoyuan Information Terminal Manufacture (Langfang) Co.,
Ltd., a related party. This lease expired on December 31, 2009. We renewed our lease with Duoyuan
Information Terminal Manufacture (Langfang) Co., Ltd., a related party. The new lease commences on
January 1, 2010 and will expire on December 31, 2012. The rent commitment on the new lease is $0.9
million. In addition, we lease sales offices in sixteen Chinese provinces, with the latest lease to
expire on December 2010. The remaining rent commitment was $0.1 million as of March 31, 2010.
In August 2008, Langfang Duoyuan entered into a packing material equipment purchase agreement with
Beijing Jingneng Mechanical & Electrical Equipments Ltd. and agreed to pay the remaining 40% upon
completion. As of March 31, 2010, $0.4 million, or 5% of the total commitment, remains on this
agreement.
In February, 2010, the Company entered into a construction agreement with China Construction Sixth
Engineering Bureau Civil Engineering Co. Ltd. to build a new manufacturing facility in Langfang.
As of March 31, 2010, approximately $15 million remains outstanding on this agreement.
We plan to finance our contractual obligations with cash from our operations and from our short
term borrowing.
Other than the contractual obligations set forth and described above, we do not have any other
operating lease obligations, purchase obligations, or repayment obligations under line of credit.
Critical Accounting Policies
Our critical accounting principles remain consistent with those reported in our annual report on
Form 10-K for the year ended June 30, 2009, as filed with the SEC and as amended.
Recently Issued Accounting Pronouncements
See Note 2 to our Notes to Condensed Consolidated Financial Statements for the period ended March
31, 2010 (Unaudited) for discussion of recent accounting pronouncements.
Non-GAAP Financial Measures
In addition to the results reported in accordance with U.S. GAAP, we have included in this filing
certain non-GAAP financial measures, including non-GAAP operating income and non-GAAP net income
attributable to Duoyuan Printing, Inc. These financial measures are not consistent with U.S. GAAP
because they do not reflect certain share-based compensation expenses and changes in fair value of
warrants. We provide reconciliations of these non-GAAP financial measures to their
most directly comparable financial measures as calculated and presented in accordance with U.S.
GAAP.
We believe that these non-GAAP measures provide useful information to management and investors
regarding financial and business trends relating to our financial condition and results of
operations. We believe that these non-GAAP measures, in combination with our financial results
calculated in accordance with U.S. GAAP, provide investors with additional perspective regarding
the impact of certain share-based compensation expenses and changes in fair value of derivative
instruments. We further believe that these excluded items do not accurately reflect the underlying performance of our continuing operations for the
periods in which they are incurred, even though some of these excluded items may be incurred and
reflected in our U.S. GAAP financial results in the foreseeable future.
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In order to provide a better understanding of the impact that certain specified items had on our
operations, the analysis that follows reports non-GAAP operating income and non-GAAP net income
attributable to Duoyuan Printing, Inc. for the periods indicated, excluding certain share-based
compensation expenses and changes in fair value of derivative instruments. We believe these
financial measures are non-GAAP financial information as contemplated by SEC Regulation G, Rule
100, and the accompanying table reconciles these measures to the corresponding U.S. GAAP-based
measures presented in our consolidated statements of operations.
DUOYUAN PRINTING, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS ASIAN FINANCIAL, INC.)
RECONCILIATION OF GAAP TO NON-GAAP RESULTS OF OPERATIONS (unaudited)
FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2010 AND 2009
(FORMERLY KNOWN AS ASIAN FINANCIAL, INC.)
RECONCILIATION OF GAAP TO NON-GAAP RESULTS OF OPERATIONS (unaudited)
FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2010 AND 2009
Three months ended | Nine months ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Operating income |
$ | 6,110,607 | $ | 6,239,462 | $ | 33,284,171 | $ | 31,356,463 | ||||||||
Adjustments: |
||||||||||||||||
Stock-based
compensation |
3,732,955 | | 6,057,064 | | ||||||||||||
Non-GAAP operating
income |
$ | 9,843,562 | $ | 6,239,462 | $ | 39,341,235 | $ | 31,356,463 | ||||||||
Net Income
attributable to
Duoyuan Printing,
Inc. |
$ | 1,105,853 | $ | 4,910,981 | $ | 19,030,840 | $ | 26,067,717 | ||||||||
Adjustments: |
||||||||||||||||
Change in fair
value of
warrants |
2,452,121 | (30,271 | ) | 5,686,118 | (194,347 | ) | ||||||||||
Stock-based
compensation |
3,732,955 | | 6,057,064 | | ||||||||||||
Non-GAAP net
income
attributable to
Duoyuan Printing,
Inc. |
$ | 7,290,929 | $ | 4,880,710 | $ | 30,774,022 | $ | 25,873,370 | ||||||||
As noted above, these non-GAAP financial measures are not consistent with U.S. GAAP because they do
not reflect certain share-based compensation expenses and changes in fair value of derivative
instruments. We believe investors will benefit from greater transparency in referring to these
non-GAAP financial measures when assessing our operating results, as well as when forecasting and
analyzing future periods. However, we recognize that:
| these non-GAAP financial measures are limited in their usefulness and should be considered only as a supplement to our U.S. GAAP financial measures; | ||
| these non-GAAP financial measures should not be considered in isolation from, or as a substitute for, our U.S. GAAP financial measures; | ||
| these non-GAAP financial measures should not be considered to be superior to our U.S. GAAP financial measures; and |
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| these non-GAAP financial measures were not prepared in accordance with U.S. GAAP and investors should not assume that the non-GAAP financial measures presented in this earnings release were prepared under a comprehensive set of rules or principles. |
Further, these non-GAAP financial measures may be unique to us, as they may be different from
non-GAAP financial measures used by other companies. As such, this presentation of non-GAAP
financial measures may not enhance the comparability of our results to the results of other
companies.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Exchange Rate Risk
Although we maintain our books and records in Renminbi, the functional currency of the PRC, we use
the U.S. dollar as the reporting currency of our financial statements. The exchange rate between
the U.S. dollar and the Renminbi is subject to the foreign exchange quotation publicized by the
Peoples Bank of China daily. Results of operations and cash flows are translated at average
exchange rates during the period, assets and liabilities are translated at the unified exchange
rate as quoted by the Peoples Bank of China at the end of the period and equity is translated at
historical exchange rates.
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated
in a currency other than Renminbi are included in the results of operations as incurred. Gains and
losses from foreign currency transactions are included in the results of operations. There were no
material transaction gains or losses for the three months ended March 31, 2010.
Although the conversion of the Renminbi is highly regulated in China, the value of the Renminbi
against the U.S. dollar fluctuates and is affected by, among other things, changes in Chinas
political and economic conditions. Under the current policy in effect in China today, the Renminbi
is permitted to fluctuate in value within a narrow band against a basket of certain foreign
currencies. China in currently under significant international pressure to liberalize this currency
policy, and if such liberalization occurs, the value of the Renminbi could appreciate or depreciate
against the U.S. dollar. The exchange rate of the Renminbi as of March 31, 2010 was RMB6.82 to
$1.00 USD. This floating exchange rate, and any appreciation of the Renminbi that may result from
such rate, could have various adverse effects on our business, as described in the Risk Factors
section in Item 1A of Part II of this quarterly report on Form 10-Q.
Our exposure to foreign exchange risk primarily relates to cash and cash equivalents denominated in
U.S. dollars as a result of our past issuance of common shares through a private placement and an
initial public offering. For example, to the extent that we need to convert U.S. dollars received
in the private placement into Renminbi for our operations, appreciation of the Renminbi against the
U.S. dollar would have an adverse effect on the Renminbi amount that we receive from the
conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of
making dividend payments on our common shares or for other business purposes, appreciation of the
U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available
to us. In addition, fluctuations in the exchange rate would affect our financial results reported
in U.S. dollar terms without giving effect to any underlying change in our business or results of
operations.
At March 31, 2010, our outstanding common shares with foreign currency exchange rate risk exposure
had an aggregate fair value of approximately $65.4 million (including our non-U.S.
dollar-denominated fixed rate debt). The potential increase in the fair values of these common
shares resulting from a 10% adverse change in quoted foreign currency exchange rates would be
approximately $6.5 million at March 31, 2010. We have not entered into any foreign currency
instruments for trading purposes at March 31, 2010.
We currently do not hedge our exposure to fluctuations in the Renminbi to U.S. dollar exchange
rate. In the future, we may choose to reduce our exposures through financial instruments (hedges)
that provide offsets or limits to our exposures when considered appropriate.
Exchange Controls
Chinese law allows enterprises owned by foreign investors to remit their profits, dividends and
bonuses earned in China to other countries, and the remittance does not require prior approval by
the State Administration of Foreign Exchange, or SAFE, regulations formerly required extensive
documentation and reporting, some of which was burdensome and delayed payments. If there is a
return to payment restrictions and reporting, the ability of a Chinese company to attract investors
will be reduced. Also, current investors may not be able to obtain the profits of the business
which they own as a result of other restrictions that the Chinese government may impose. Relevant
Chinese law and regulation permit payment of dividends only from retained earnings, if any,
determined in accordance with Chinese accounting standards and regulations. It is possible that the
Chinese tax authorities may require changes in
our reported income that would limit our ability to pay dividends and other distributions. Chinese
law requires companies to set aside a portion of net income to fund certain reserves which amounts
are to distributable as dividends. These rules and possible changes could restrict a company in
China from repatriating funds to us and our shareholders as dividends.
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Interest Rate Risk
We are exposed to interest rate risk due primarily to our short-term loans. Although the interest
rates on our short-term loans are fixed during their respective terms, the terms are typically 12
months or less and interest rates are subject to change upon renewal. The interest rates on our
short-term loans are determined by reference to the benchmark interest rates set by the Peoples
Bank of China. Any change in the Peoples Bank of Chinas benchmark interest rate will result in a
change in our interest expenses.
As of March 31, 2010, our short-term loans with exposure to interest rate risk had an aggregate
fair value of approximately $14.4 million. The potential change in fair market value for these
financial instruments from an adverse 10% change in quoted interest rates across all maturities,
often referred to as a parallel shift in the yield curve, would be approximately $1.4 million at
March 31, 2010. We have not hedged our exposure to interest rate risk and have not entered into any
interest rate sensitive instruments for trading purposes at March 31, 2010. We monitor interest
rate in conjunction with our cash requirements to determine the appropriate level of debt balances
relative to other sources of funds.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the
end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and procedures are effective.
(b) Changes in Internal Controls
There were no changes in our internal control over financial reporting during the three months
ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect
our internal control over financial reporting, except those disclosed above.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Neither we nor any of our subsidiaries is a party to, nor is any of our property the subject of,
any legal proceedings other than ordinary routine litigation incidental to our business. There are
no proceedings pending in which any of our officers, directors, or control persons are adverse to
us or any of our subsidiaries in which they are taking a position or have a material interest that
is adverse to us. There are no proceedings pending in which any of the officers, directors, or
control persons of ours are adverse to us.
We are not a party to any administrative or judicial proceeding arising under federal, state or
local environmental laws or their Chinese counterparts.
Item 1A. Risk Factors
In addition to other information set forth in this report, you should carefully consider the Risk
Factors discussed in our Annual Report on Form 10-K for our 2009 fiscal year filed on September
14, 2009, as amended. Except as set forth below, there have been no material changes to the risk
factors disclosed in such Form 10-K filing.
Other factors may also exist that we cannot anticipate or that we currently do not consider to be
significant based on information that is currently available. These risks and uncertainties have
the potential to materially affect our business, financial condition, results of operations, cash
flows and future results. In assessing these risks, you should also refer to the other information
included in this quarterly report on Form 10-Q, including our consolidated financial statements and
the accompanying notes. You should pay particular attention to the fact that we are a holding
company with substantial operations in China and are subject to legal and
regulatory environments that in many respects differ from that of the United States. Our business,
financial condition or results of operations could be affected materially and adversely by any of
these risks and any others that are not presently foreseeable to us.
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Risks Related to Our Business
We face risks and difficulties due to our recent growth, and may be unable to sustain our recent
profitability and growth rates.
Our revenue grew from $67.8 million for the year ended June 30, 2007 to $89.6 million for the year
ended June 30, 2008 and to $106.6 million for the year ended June 30, 2009. Our revenue increased
by $6.0 million, or 34.4%, from $17.4 million for the three months ended March 31, 2009 to $23.4
million for the three months ended March 31, 2010. We will continue to encounter risks and
difficulties in connection with our significant growth, including our potential failure to:
| implement, adapt or modify our business model and strategy; | |
| manage our investments in new businesses and facility expansion or construction, including the cold-set corrugated paper machine factory at Langfang Duoyuan that we intend to build; | |
| maintain our current and develop new relationships with distributors; | |
| manage our expanding operations and product offerings; | |
| maintain adequate control of expenses, inventory and receivables; | |
| attract, retain and motivate qualified personnel; | |
| protect our reputation and enhance customer loyalty; | |
| implement additional and improve existing administrative, financial and operations systems, procedures and controls; and | |
| anticipate and adapt to changes in the offset printing industry, government regulations, technology and other competitive and market dynamics. |
If we fail to successfully deal with these risks and difficulties due to our recent growth, we
could experience disruptions in our business, any of which could materially affect our business,
financial condition and results of operations.
In addition, although our sales have increased rapidly in recent years, we expect that our
operating expenses will increase as we expand, and we may not maintain or increase our
profitability. Some of the factors which may contribute to our inability to sustain our recent
profitability and growth include:
| competitors offering comparable products at lower prices; | |
| decreases in the average selling prices of our products, particularly our single color presses; | |
| superior product innovations by competitors; | |
| rising raw materials and manufacturing costs; | |
| changes in our management and key personnel; and | |
| increased operating expenses relating to research and development, sales and marketing efforts and general and administrative expenses as we seek to grow our business. |
As a result of these and additional factors, we may experience lower revenue and higher expenses
and we may therefore fail to maintain our recent profitability and growth rates, achieve our
revenue targets, limit our operating expenses and/or remain profitable in the future.
If we cannot obtain sufficient raw materials and components that meet our production demand and
standards at a reasonable cost, or at all, our business may be materially and adversely affected.
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The key raw materials and components used in the manufacturing of our products are steel, iron and
electronic components. We produce a substantial majority of our key components in-house at our
Hunan Machinery facility. We purchase all other raw materials and components from Chinese
suppliers.
For fiscal 2007, 2008 and 2009, purchases from our largest supplier accounted for 9.5%, 8.8% and
10.7% of our total raw materials and components purchases, respectively. For the same periods, our
ten largest suppliers combined accounted for 54.6%, 55.7% and 57.4% of our total raw materials and
components purchases, respectively. For the three months ended March 31, 2010, purchases from our
largest supplier and from our ten largest suppliers accounted for 7.4% and 59.6% of our total raw
materials and component purchases, respectively. If any supplier is unwilling or unable to provide
us with raw materials and components in the required quantities and at acceptable costs and
quality, we may not be able to find alternative sources on satisfactory terms in a timely manner,
or at all. In addition, some of our suppliers may fail to meet qualifications and standards
required by our end-user customers, which could impact our ability to purchase raw materials and
components.
Our inability to find or develop alternative supply sources for raw materials or components that
meet our production demand and standards could result in production delays or reductions as well as
shipment delays. The prices of our raw materials and components could also increase, and we may not
be able to pass these price increases on to our end-user consumers. For example, steel prices in
China decreased during the year ended June 30, 2006 but, increased significantly during fiscal 2007
and fiscal 2008. Should any of these events occur, our business may be materially and adversely
affected.
Risk Related to Doing Business in China
We rely principally on dividends and other distributions paid by our Chinese subsidiaries.
Limitations on the ability of our Chinese subsidiaries to pay dividends to us could have a material
adverse effect on our business.
We are a holding company and we rely principally on dividends and other distributions paid by our
Chinese subsidiaries for our cash and financing requirements, including the funds necessary to pay
dividends and other cash distributions to our shareholders, service any debt we may incur and pay
our operating expenses. If our Chinese subsidiaries incur debt on their own behalf, the instruments
governing the debt may restrict their ability to pay dividends or make other distributions to us.
Furthermore, relevant Chinese laws and regulations permit payments of dividends by our Chinese
subsidiaries only out of their respective retained earnings after tax, if any, determined in
accordance with Chinese accounting standards and regulations.
Under Chinese laws and regulations, each of our operating subsidiaries is required to set aside a
portion of its net income each year to fund certain statutory reserves. These reserves, together
with the registered equity, are not distributable as cash dividends. As of March 31, 2010, we had
statutory reserves of $11.7 million and total shareholders equity of $193.2 million. As a result
of these Chinese laws and regulations, each of our Chinese subsidiaries is restricted in its
ability to transfer a portion of its net assets to us, including in the form of dividends, loans or
advances. Limitations on the ability of our Chinese subsidiaries to pay dividends to us could
adversely limit our ability to grow, make investments or acquisitions that could be beneficial to
our businesses, pay dividends or otherwise fund and conduct our business.
We may be exposed to monetary fines by the local housing authority and claims from our employees in
connection with Hunan Duoyuans non-compliance with regulations with respect to contribution of
housing provident funds for employees.
According to the relevant PRC regulations on housing provident funds, PRC enterprises are required
to contribute housing provident funds for their employees. The monthly contributions must be at
least 5% of each employees average monthly income in the previous year. Our subsidiaries in the
PRC, other than Hunan Duoyuan, have complied with the housing provident funds regulations. Hunan
Duoyuan has not paid such funds for its employees since its establishment and the accumulated
unpaid amount is approximately RMB 2.5 million. Under local regulations on collection of housing
provident funds in Shaoyang City where Hunan Duoyuan is located, the local housing authority may
require Hunan Duoyuan to rectify its non-compliance by setting up bank accounts and making payment
and relevant filings for the unpaid housing funds for its employees within a specified time period.
If Hunan Duoyuan fails to do so within the specified time period, the local housing authority may
impose a monetary fine of RMB 10,000 to RMB 50,000 on it and may also apply to the local peoples
court for enforcement. Hunan Duoyuan employees may also be entitled to claim payment of such funds
individually. So far, we have not received any notice from the local housing authority or any claim
from our current and former employees regarding Hunan Duoyuans non-compliance with the
regulations. If any of the foregoing happens, our reputation, financial condition and results of
operations could be materially and adversely affected.
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Risks Associated with Our Common Shares
Wenhua Guo, the chairman of our board of directors and beneficial owner of approximately 56% of our
common shares, has substantial influence over us, and his interests may not be aligned with the
interests of our other shareholders.
Wenhua Guo, the chairman of our board of directors, beneficially owns approximately 56% of our
outstanding common shares. As a result, he has significant influence over our business, including
decisions regarding mergers, consolidations, the sale of all or substantially all of our assets,
election of directors, and other significant corporate actions, which may at times conflict with
the interests of our other shareholders. This concentration of ownership may also have the effect
of discouraging, delaying or preventing a future change of control, which in turn could prevent our
shareholders from recognizing a gain in the event that a favorable offer is extended.
We have the right to issue additional common shares and preferred shares without the consent of
our shareholders. This would have the effect of diluting our shareholders ownership in us and
could decrease the value of our shares.
As of the date of this report, we have 100,000,000 shares authorized for issuance, of which
30,563,217 common shares are issued and outstanding, with 69,436,783 authorized common shares
available for issuance for any purpose without shareholder approval. The issuance of additional
shares would dilute shareholders percentage ownership of us. We have outstanding warrants to
acquire 1,012,252 common shares, with exercise price of $4.21 to $5.76 per share.
In addition, our articles of incorporation authorize the issuance of preferred shares, the rights,
preferences, designations and limitations of which may be set by our board of directors. While no
preferred shares are currently outstanding, our articles of incorporation authorize the issuance of
up to 1,000,000 preferred shares at the discretion of our board of directors. Preferred shares may
be issued upon the filing of amended articles of incorporation and the payment of required fees,
requiring no further shareholder action. If issued, the rights, preferences, designations and
limitations of the preferred shares would be set by our board of directors and could operate to the
disadvantage of our outstanding common shares. These terms could include, among others, preferences
as to dividends and distributions on liquidation.
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Item 6. Exhibits
Index to Exhibits
The following exhibits are filed as a part of this Report.
Incorporated by Reference | ||||||||||||||||
Exhibit | Filed | Exhibit | File | Filing | ||||||||||||
No | Exhibit Title | Herewith | Form | No. | No. | Date | ||||||||||
31.1 | Certification of
Chief Executive
Officer pursuant to
Rules 13a-14 and
15d-14, as adopted
pursuant to Section
302 of the
Sarbanes-Oxley Act
of 2002
|
X | 31.1 | |||||||||||||
31.2 | Certification of
Chief Financial
Officer pursuant to
Rules 13a-14 and
15d-14, as adopted
pursuant to Section
302 of the
Sarbanes-Oxley Act
of 2002
|
X | 31.2 | |||||||||||||
32.1 | Certification of
Chief Executive
Officer and Chief
Financial Officer
Pursuant to 18
U.S.C. Section 1350
as Adopted Pursuant
to Section 906 of
the Sarbanes-Oxley
Act of 2002
|
X | 32.1 |
* | Management contract, or compensatory plan or arrangement. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
DUOYUAN PRINTING, INC. (Registrant) |
||||
Date: May 11, 2010 | By: | /s/ CHRISTOPHER P. HOLBERT | ||
Christopher P. Holbert | ||||
Chief Executive Officer | ||||
Date: May 11, 2010 | By: | /s/ WILLIAM D. SUH | ||
William D. Suh | ||||
Chief Financial Officer |
40