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EX-31.1 - EXHIBIT 31.1 - GREEN DRAGON WOOD PRODUCTS, INC.ex311.htm
EX-32.1 - ECHIBIT 32.1 - GREEN DRAGON WOOD PRODUCTS, INC.ex321.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q/A
(Amendment No. 1)
(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 2010

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________

Commission File No. 000-53379

 
GREEN DRAGON WOOD PRODUCTS, INC.
(Exact name of small business issuer as specified in its charter)

       
FLORIDA
 
26-1133266
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Tax. I.D. No.)
 
Unit 312, 3rd Floor, New East Ocean Centre
9 Science Museum Road
Kowloon, Hong Kong
(Address of Principal Executive Offices)
 
852-2482-5168
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
   
Large accelerated filer. o
Accelerated filer.    o
Non-accelerated filer.   o(Do not check if a smaller reporting company)
 
Smaller reporting company.   þ    
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    

 
The number of shares outstanding of each of the issuer’s classes of common stock as of February 18, 2011:  200,000


 
1

 

Explanatory Note
 
We are filing this Amendment No. 1 to our Form 10-Q for the year ended December 31, 2010, initially filed on February 22, 2011, in order to respond to certain comments we received from the Securities and Exchange Commission. This amendment does not reflect events occurring after the initial filing of the Form 10-Q, except as related to any amended disclosures, nor does it modify or update the disclosures and information contained in the Form 10-Q in any way other than described in this paragraph.
 

TABLE OF CONTENTS

 
 
Part I – Financial Information
 
Item 1.Financial Statements
3
Item 2.  Management’s Discussion And Analysis Or Plan Of Operation
19
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
23
Item 4.  Controls And Procedures
24
   
Part II – Other Information 
 
Item 1.  Legal Proceedings
24
Item 1A.Risk Factors
25
Item 2.  Unregistered Shares Of Equity Securities And Use Of Proceeds
25
Item 3.  Defaults Upon Senior Securities.
25
Item 4.  (Removed and Reserved)
25
Item 5.  Other Information
25
Item 6.  Exhibits
25
Signatures
26
   

 
2

 

PART I – FINANCIAL INFORMATION

GREEN DRAGON WOOD PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2010 AND MARCH 31, 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)

   
December 31, 2010
   
March 31, 2010
 
   
(Unaudited)
   
(Audited)
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 272,015     $ 100,512  
Restricted cash
    650,540       605,703  
Marketable securities
    331,722       -  
Accounts receivable, net
    7,244,288       5,354,998  
Inventories
    142,322       213,125  
Income tax recoverable
    -       15,175  
Prepayments, deposits and other receivables
    632,564       754,134  
                 
Total current assets
    9,273,451       7,043,647  
                 
Non-current assets:
               
Plant and equipment, net
    15,677       18,495  
                 
TOTAL ASSETS
  $ 9,289,128     $ 7,062,142  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable, trade
  $ 1,403,170     $ 924,953  
Revolving lines of credit
    3,636,381       2,126,740  
Current portion of long-term bank borrowings
    154,178       154,546  
Amount due to a director
    913,208       183,091  
Income tax payable
    58,825       -  
Accrued liabilities and other payables
    347,614       1,142,350  
                 
Total current liabilities
    6,513,376       4,531,680  
                 
Long-term liabilities:
               
Long-term bank borrowings
    501,079       618,182  
                 
Total liabilities
    7,014,455       5,149,862  
                 
Commitments and contingencies
    -       -  
                 
Stockholders’ equity:
               
Preferred stock, $0.001 par value; 50,000,000 shares authorized; no share issued and outstanding, respectively
    -       -  
Common stock, $0.001 par value; 450,000,000 shares authorized; 200,000 shares issued and outstanding, respectively
    200       200  
Additional paid-in capital
    644,300       644,300  
Accumulated other comprehensive loss
    (36,209 )     (23,597 )
Retained earnings
    1,666,382       1,291,377  
                 
Total stockholders’ equity
    2,274,673       1,912,280  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 9,289,128     $ 7,062,142  
 
See accompanying notes to condensed consolidated financial statements.

 
3

 

GREEN DRAGON WOOD PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)

   
Three months ended December 31,
   
Nine months ended December 31,
 
   
2010
 
2009
   
2010
   
2009
 
                       
Revenues, net
  $ 5,613,059     $ 2,768,964     $ 15,892,146     $ 9,006,218  
                                 
Cost of revenue
    (5,099,098 )     (2,536,550 )     (14,585,267 )     (8,164,370 )
                                 
Gross profit
    513,961       232,414       1,306,879       841,848  
                                 
Operating expenses:
                               
General and administrative
    (312,463 )     (195,722 )     (796,890 )     (620,028 )
                                 
Total operating expenses
    (312,463 )     (195,722 )     (796,890 )     (620,028 )
                                 
INCOME FROM OPERATIONS
    201,498       36,692       509,989       221,820  
                                 
Other income (expense):
                               
Foreign exchange loss, net
    (105,560 )     (40,222 )     (21,304 )     (45,229 )
Interest income
    129       119       379       330  
Interest expense
    (31,509 )     (36,645 )     (108,930 )     (123,825 )
Other income (expense)
    (163 )     5,686       71,439       51,432  
                                 
INCOME (LOSS) BEFORE INCOME TAXES
    64,395       (34,370 )     451,573       104,528  
                                 
Income tax (expense) benefit
    (12,783 )     5,288       (76,568 )     (16,122 )
                                 
NET INCOME (LOSS)
  $ 51,612     $ (29,082 )   $ 375,005     $ 88,406  
                                 
Other comprehensive income (loss):
                               
- Unrealized holding gain (loss)
    12,309       -       (7,499 )     -  
- Foreign currency translation loss
    (7,439 )     (971 )     (5,113 )     (1,146 )
                                 
COMPREHENSIVE INCOME (LOSS)
  $ 56,482     $ (30,053 )   $ 363,393     $ 87,260  
                                 
Net income (loss) per share – Basic and diluted
  $ 0.26     $ (0.15 )   $ 1.88     $ 0.44  
                                 
Weighted average common stock outstanding – Basic and diluted
    200,000       200,000       200,000       200,000  
 
See accompanying notes to condensed consolidated financial statements.

 
4

 

GREEN DRAGON WOOD PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009
(Currency expressed in United States Dollars (“US$”))
(Unaudited)

   
Nine months ended December 31,
 
   
2010
   
2009
 
Cash flows from operating activities:
           
Net income
  $ 375,005     $ 88,406  
Adjustments to reconcile net income to net cash used in operating  activities:
               
Depreciation
    6,285       5,982  
Changes in operating assets and liabilities:
               
Accounts receivable, trade
    (1,904,916 )     (298,141 )
Inventories
    70,404       (177,567 )
Income tax payable
    74,076       (91,923 )
Prepayments, deposits and other receivables
    119,962       7,298  
Accounts payable, trade
    481,148       24,602  
Accrued liabilities and other payables
    (793,226 )     (139,965 )
 
Net cash used in operating activities
    (1,571,262 )     (581,308 )
                 
Cash flows from investing activities:
               
Purchase of marketable securities
    (339,738 )     -  
Purchase of plant and equipment
    (3,506 )     (11,865 )
 
Net cash used in investing activities
    (343,244 )     (11,865 )
                 
Cash flows from financing activities:
               
Repayment of long-term bank borrowings
    (115,810 )     -  
Advances from a director
    731,666       307,468  
Proceeds from revolving lines of credit
    1,517,004       313,474  
Change in restricted cash
    (46,347 )     -  
 
Net cash provided by financing activities
    2,086,513       620,942  
                 
Effect of exchange rate changes on cash and cash equivalents
    (504 )     (41 )
                 
NET CHANGE IN CASH AND CASH EQUIVALENTS
    171,503       27,728  
                 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    100,512       45,511  
                 
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 272,015     $ 73,239  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
         
Cash paid for income taxes
  $ 2,492     $ 108,045  
Cash paid for interest
  $ 100,585     $ 96,088  

See accompanying notes to condensed consolidated financial statements.
 

 
5

 

GREEN DRAGON WOOD PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)

   
Common stock
   
Additional
paid-in
   
Retained
   
Accumulated
other
comprehensive
   
Total
stockholders’
 
   
No. of share
   
Amount
   
capital
   
earnings
   
loss
   
equity
 
                                     
Balance as of April 1, 2010
    200,000     $ 200     $ 644,300     $ 1,291,377     $ (23,597 )   $ 1,912,280  
                                                 
Net income for the period
    -       -       -       375,005       -       375,005  
                                                 
Unrealized holding loss on available-for-sales securities
    -       -       -       -       (7,499 )     (7,499 )
                                                 
Foreign currency translation adjustment
    -       -       -       -       (5,113 )     (5,113 )
                                                 
Balance as of December 31, 2010
    200,000     $ 200     $ 644,300     $ 1,666,382     $ (36,209 )   $ 2,274,673  




See accompanying notes to condensed consolidated financial statements.
 

 
6

 
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009
(Currency expressed in United States Dollars (“US$”))
(Unaudited)


NOTE1
BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by management in accordance with both accounting principles generally accepted in the United States (“GAAP”), and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and note disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.

In the opinion of management, the consolidated balance sheet as of March 31, 2010 which has been derived from audited financial statements and these unaudited condensed consolidated financial statements reflect all normal and recurring adjustments considered necessary to state fairly the results for the periods presented. The results for the period ended December 31, 2010 are not necessarily indicative of the results to be expected for the entire fiscal year ending March 31, 2011 or for any future period.

These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Management’s Discussion and the audited financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended March 31, 2010.
 
NOTE2                      ORGANIZATION AND BUSINESS BACKGROUND

Green Dragon Wood Products, Inc., (the “Company” or “GDWP”) was incorporated under the laws of the State of Florida on September 26, 2007.

The Company, through its subsidiaries, mainly engages in re-sale and trading of wood logs, wood lumber, wood veneer and other wood products in Hong Kong.

Details of the Company’s subsidiaries

   
Company name
 
Place/date of incorporation
 
Particulars of issued share capital
 
Principal activities
 
Effective interest held
                     
1
 
Green Dragon Industrial Inc. (“GDII”)
 
British Virgin Islands,
May 30, 2007
 
37,500 issued shares of common stock of US$1 each
 
Holds 100% equity interest in GDWPCL
 
100%
                     
2
 
Green Dragon Wood Products Company Limited (“GDWPCL”)
 
Hong Kong, March 14, 2000
 
5,000,000 issued shares of ordinary shares of HK$1 each
 
Re-sale and trading of wood logs, wood lumber, wood veneer and other wood products
 
100%

GDWP and its subsidiaries are hereinafter referred to as the “Company”.

 
7

 
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009
(Currency expressed in United States Dollars (“US$”))
(Unaudited)


NOTE3                   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying condensed consolidated financial statements reflect the application of certain significant accounting policies as described in this note and elsewhere in the accompanying condensed consolidated financial statements and notes.

l  
Basis of consolidation

The condensed consolidated financial statements include the financial statements of GDWP and its subsidiaries. All significant inter-company balances and transactions within the Company have been eliminated upon consolidation.

l  
Use of estimates

In preparing these condensed consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the periods reported. Actual results may differ from these estimates.

l  
Cash and cash equivalents

Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.

l  
Restricted cash

As of December 31, 2010 and March 31, 2010, the Company maintained minimum cash balances of $650,540 and $605,703 in a pledged deposit account as collateral for the available revolving lines of credit provided by the financial institutions in Hong Kong.

l  
Accounts receivable and allowance for doubtful accounts

Accounts receivable are recorded at the invoiced amount less an allowance for any uncollectible accounts and do not bear interest. The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

l  
Inventories

Inventories mainly include wood veneers for re-sale and are stated at lower of cost or market value using weighted average method.

l  
Marketable securities

The Company classifies marketable securities as “available-for-sale”, which are stated at fair value, with the unrealized holding gains and losses, reported in accumulated other comprehensive income. The Company uses quoted prices in active markets for identical assets (consistent with the Level 1 definition in the fair value hierarchy) to measure the fair value of its investments on a recurring basis pursuant to Accounting Standards Codification ("ASC") Topic 820.

l  
Plant and equipment

Plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational:

   
Expected useful lives
Computer equipment
 
3-5 years
Office equipment
 
5 years

 
8

 
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009
(Currency expressed in United States Dollars (“US$”))
(Unaudited)


Expenditure for repairs and maintenance is expensed as incurred. When assets have retired or sold, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the results of operations.

Depreciation expense for the three months ended December 31, 2010 and 2009 was $2,384 and $1,994, respectively.

Depreciation expense for the nine months ended December 31, 2010 and 2009 was $6,285 and $5,982, respectively.

l  
Impairment of long-lived assets

In accordance with the ASC Topic 360-10-5, “Impairment or Disposal of Long-Lived Assets”, the Company reviews its long-lived assets on plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. If the total of the expected undiscounted future net cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying amount of the asset. There has been no impairment charge for the periods presented.

l  
Revenue recognition

In accordance with the ASC Topic 605, “Revenue Recognition”, the Company recognizes revenue when the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectibility is reasonably assured.

Revenue from re-sale and trading of wood logs, wood lumber, wood veneer and other wood products is recognized upon shipment to the customer when title and risk of loss are transferred and there are no continuing obligations to the customer. Title and the risks and rewards of ownership transfer to the customer at varying points, which is determined based on shipping terms. Revenue is recorded net of sales discounts, returns, allowances, customer rebates and other adjustments that are based upon management’s best estimates and historical experience and are provided for in the same period as the related revenues are recorded. Based on historical experience, management estimates that sales returns are immaterial and has not made allowance for estimated sales returns.

Interest income is recognized on a time apportionment basis, taking into account the principal amounts outstanding and the interest rates applicable.

l  
Cost of revenue

Cost of revenue includes cost of wood logs, wood lumber and wood veneers for re-sale to the customers, purchase returns and sales commission. Shipping and handling costs associated with the distribution of the products to the customers are recorded in cost of revenue.

l  
Comprehensive income

ASC Topic 220, “Comprehensive Income”, establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as defined includes all changes in equity during a period from non-owner sources. Accumulated other comprehensive income, as presented in the accompanying condensed consolidated statement of stockholders’ equity, consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit.

l  
Income taxes

Income taxes are determined with the provisions of ASC Topic 740, “Income Taxes” (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 
9

 
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009
(Currency expressed in United States Dollars (“US$”))
(Unaudited)

 
ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.

For the nine months ended December 31, 2010 and 2009, the Company did not have any interest and penalties associated with tax positions. As of December 31, 2010, the Company did not have any significant unrecognized uncertain tax positions.

The Company conducts major businesses in Hong Kong and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that are subject to examination by the foreign tax authority.

l  
Net income per share

The Company calculates net income per share in accordance with ASC Topic 260, “Earnings per Share.” Basic income per share is computed by dividing the net income by the weighted-average number of common stock outstanding during the period. Diluted income per share is computed similar to basic income per share except that the denominator is increased to include the number of additional common stock that would have been outstanding if the potential common stock equivalents had been issued and if the additional common shares were dilutive.

l  
Foreign currencies translation

Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the consolidated statement of operations.

The reporting currency of the Company is United States Dollar ("US$"). The Company's subsidiaries operating in Hong Kong maintained its books and records in its local currency, Hong Kong Dollars ("HK$"), which is a functional currency as being the primary currency of the economic environment in which the entity operates.

In general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not US$ are translated into US$, in accordance with ASC Topic 830-30, “Translation of Financial Statement”, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.

Translation of amounts from HK$ into US$1 has been made at the following exchange rates for the respective period:

   
December 31, 2010
   
December 31, 2009
 
Period-end HK$:US$1 exchange rate
    7.7832       7.7551  
Period average HK$: US$1 exchange rate
    7.7714       7.7551  

l  
Related parties

Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence.

 
10

 
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009
(Currency expressed in United States Dollars (“US$”))
(Unaudited)

 
l  
Segment reporting

ASC Topic 280, “Segment Reporting” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in the financial statements. For the nine months ended December 31, 2010 and 2009, the Company operates one reportable business segment in Hong Kong.

l  
Fair value measurement

ASC Topic 820-10, “Fair Value Measurements and Disclosures” ("ASC 820-10") establishes a new framework for measuring fair value and expands related disclosures. Broadly, ASC 820-10 framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. ASC 820-10 establishes a three-level valuation hierarchy based upon observable and non-observable inputs. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

For financial assets and liabilities, fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date.

l  
Fair value of financial instruments

The carrying value of the Company’s financial instruments include cash and cash equivalents, accounts receivable, prepayments, deposits and other receivables, accounts payable, amount due to a director, income tax payable, accrued liabilities and other payables. Fair values were assumed to approximate carrying values for these financial instruments because they are short term in nature and their carrying amounts approximate fair values. The carrying value of the Company’s revolving lines of credit and long-term bank borrowings approximated its fair value based on the current market prices or interest rates for similar debt instruments. The fair value of the marketable securities is based on quoted prices in active exchange-traded or over-the-counter markets.

l  
Economic and political risk

The Company’s major operations are conducted in Hong Kong. Accordingly, the political, economic, and legal environments in Hong Kong, as well as the general state of Hong Kong’s economy may influence the Company’s business, financial condition, and results of operations.

The Company’s major operations in Hong Kong are subject to considerations and significant risks typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic, and legal environment. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, and rates and methods of taxation, among other things.

l  
Recent accounting pronouncements

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.

In September 2009, the Financial Accounting Standard Board (“FASB”) issued certain amendments as codified in ASC Topic 605-25, “Revenue Recognition; Multiple-Element Arrangements. These amendments provide clarification on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. An entity is required to allocate revenue in an arrangement using estimated selling prices of deliverables in the absence of vendor-specific objective evidence or third-party evidence of selling price. These amendments also eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. The amendments significantly expand the disclosure requirements for multiple-deliverable revenue arrangements. These provisions are to be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. The Company will adopt the provisions of these amendments in its fiscal year 2011 and is currently evaluating the impact of these amendments to its consolidated financial statements.

In July 2010, the FASB issued an accounting standards update to require further disaggregated disclosures that improve financial statement users’ understanding of (1) the nature of an entity’s credit risk associated with its financing receivables and (2) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. This update will be effective for the Company in the second quarter of fiscal 2011, except for the disclosures relating to activity that occurred during a reporting period which is effective for the Company in the third quarter of fiscal 2011. Since this update addresses only disclosures related to credit quality of financing receivables and the allowance for credit losses, it is not expected that the adoption of this update will have a material impact on the Company’s financial position, results of operations or cash flows.

NOTE4                   MARKETABLE SECURITIES

   
December 31, 2010
   
March 31, 2010
 
   
(Unaudited)
   
(Audited)
 
Investment in unit trusts fund
           
At original cost
  $ 339,221     $ -  
Less: Unrealized holding loss
    (7,499 )     -  
Fair value
  $ 331,722     $ -  

Marketable securities consist of investments in unit trust fund of Franklin Templeton Global Total Return Fund. Such mutual fund investments are stated at fair market value and are classified as available-for-sale, with the corresponding unrealized holding gains or losses, recorded as a separate component of other comprehensive income within stockholders’ equity. The fair value of marketable security is determined based on quoted market prices at the balance sheet date. Realized gains and losses are determined by the difference between historical purchase price and gross proceeds received when the marketable securities are sold.

 
11

 
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009
(Currency expressed in United States Dollars (“US$”))
(Unaudited)

 
These marketable securities are pledged as collateral to the revolving line of credit in the Hongkong and Shanghai Banking Corporation Limited (the “Bank”) (see note 7). The eligibility of these marketable securities as collateral to the revolving line of credit is determined by the Bank from time to time. The Bank also reserves the right to call for additional security when the market value of these marketable securities falls below an acceptable level as determined by the Bank.


NOTE – 5                   ACCOUNTS RECEIVABLE, NET

The majority of the Company’s sales are on open credit terms and in accordance with terms specified in the contracts governing the relevant transactions. The Company evaluates the need of an allowance for doubtful accounts based on specifically identified amounts that management believes to be uncollectible. If actual collections experience changes, revisions to the allowance may be required. Based upon the aforementioned criteria, the Company has determined that no adjustment to the allowance for doubtful accounts is required for the nine months ended December 31, 2010 and 2009.

   
December 31, 2010
   
March 31, 2010
 
   
(Unaudited)
   
(Audited)
 
             
Accounts receivable, trade
  $ 7,359,312     $ 5,470,297  
Less: allowance for doubtful accounts
    (115,024 )     (115,299 )
Accounts receivable, net
  $ 7,244,288     $ 5,354,998  
 
NOTE6                   PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

Prepayments, deposits and other receivables consisted of:

   
December 31, 2010
   
March 31, 2010
 
   
(Unaudited)
   
(Audited)
 
             
Purchase deposits to vendors
  $ 578,805     $ 662,935  
Rental and utilities deposits
    46,885       51,148  
Other receivables
    6,874       40,051  
    $ 632,564     $ 754,134  

Purchase deposits represent deposit payments made to vendors for procurement, which are interest-free, unsecured and relieved against accounts payable when goods are received by the Company.
 
NOTE7                   REVOLVING LINES OF CREDIT

   
December 31, 2010
   
March 31, 2010
 
   
(Unaudited)
   
(Audited)
 
Payable to financial institutions in Hong Kong:
           
Shanghai Commercial Bank Limited
  $ 325,186     $ 351,471  
The Hongkong and Shanghai Banking Corporation Limited
    1,679,119       454,707  
      2,004,305       806,178  
                 
Payable to Tai Wah Timber Factory Limited and Glory Idea Investment Limited
    1,632,076       1,320,562  
Total:
  $ 3,636,381     $ 2,126,740  
 

 
12

 
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009
(Currency expressed in United States Dollars (“US$”))
(Unaudited)

 
The credit facility with Shanghai Commercial Bank Limited provides the available limit of $449,686 (equivalent to HK$3,500,000), which bears interest at a rate of 0.25% per annum over Hong Kong prime for HK dollars facilities and at a rate of 0.25% per annum over US prime for US dollars facilities and is personally guaranteed by Mr. Lee, the director of the Company. The Company also is required to maintain a minimum cash deposit not less than $264,500 that is considered restricted as compensating balances to the extent the Company borrows against this line of credit. In addition, the Company is subject to the settlement of accounts due and payable to the restricted vendors under the line of credit at the bank’s discretion. The line will be extended or renewed on a regular basis at the option of the bank. Weighted average interest rate approximates 6.1% and 3.5% per annum for the nine months ended December 31, 2010 and 2009, payable monthly.

The credit facility with the Hongkong and Shanghai Banking Corporation Limited provides the available limit of $1,027,855 (equivalent to HK$8,000,000), which bears interest at a rate of 2% per annum over Hong Kong Interbank Offered Rate (“HIBOR”) for HK dollars facilities and at a rate of 2% per annum over London Interbank Offered Rate (“LIBOR”) for foreign currency facilities and is personally guaranteed by Mr. Lee, the director of the Company. The Company also is required to maintain a minimum cash deposit of approximately $385,445 (equivalent to HK$3,000,000) and to pledge the marketable securities (see note 4) as collateral. In addition, the Company is subject to the settlement of accounts due and payable to the restricted vendors under the line of credit at the bank’s discretion. The line will be extended or renewed on a regular basis at the option of the bank. Weighted average interest rate approximates 2.65% per annum for the nine months ended December 31, 2010, payable monthly.

The financing arrangement with Tai Wah Timber Factory Limited and its related company, Glory Idea Investment Limited provides the borrowings for trade payable financing with the maturities of 2 to 3 months, which is charged with a commission fee of 5% on each amount drawn from the line, payable monthly. An additional interest will be charged on overdue balance, if any.

NOTE8
AMOUNT DUE TO A DIRECTOR

 
The amount due to a director represented temporary advances made by Mr. Lee, the director, to the Company, which was unsecured, interest-free with no fixed terms of repayment.


NOTE9
ACCRUED LIABILITIES AND OTHER PAYABLES

Accrued liabilities and other payables consist of the followings:

   
December 31, 2010
   
March 31, 2010
 
   
(Unaudited)
   
(Audited)
 
             
Customers’ deposits
  $ 129,598     $ 561,594  
Accrued operating expenses
    218,016       245,116  
Advances from third parties
    -       335,640  
    $ 347,614     $ 1,142,350  
 
NOTE10                      LONG-TERM BANK BORROWINGS

The Company obtained an installment loan totaling $770,891 (equivalent to HK$6,000,000) from the Hongkong Shanghai Banking Corporation Limited, which bears interest at a rate of 2% per annum over 1 month HIBOR in a term of 60 months, with a monthly installment of $12,848 (equivalent to HK$100,000) payable and will mature on March 14, 2015 for the working capital purpose. The installment loan is personally guaranteed by Mr. Lee, the director of the Company.

Maturities of long-term bank borrowings for each of the five years following December 31, 2010 are as follows:

Year ending December 31:
     
2011
  $ 154,178  
2012
    154,178  
2013
    154,178  
2014
    154,178  
2015
    38,545  
         
Total:
  $ 655,257  

 
13

 
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009
(Currency expressed in United States Dollars (“US$”))
(Unaudited)

 
NOTE11                      INCOME TAXES

For the nine months ended December 31, 2010 and 2009, the local (United States) and foreign components of income from operations before income taxes were comprised of the following:

   
Nine months ended December 31,
 
   
2010
   
2009
 
Tax jurisdictions from:
           
– Local
  $ -     $ -  
– Foreign
    451,573       104,528  
Income before income taxes
  $ 451,573     $ 104,528  

Provision for income taxes consisted of the following:

   
Nine months ended December 31,
 
   
2010
   
2009
 
Current:
           
– Local
  $ -     $ -  
– Foreign
    76,568       16,122  
                 
Deferred:
               
– Local
    -       -  
– Foreign
    -       -  
                 
Income tax expense
  $ 76,568     $ 16,122  

The effective tax rate in the periods presented is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. The Company has subsidiaries that operate in various countries: United States of America, BVI and Hong Kong that are subject to tax in the jurisdictions in which they operate, as follows:

United States of America

The Company is registered in the State of Florida and is subject to the tax laws of the United States of America. For the nine months ended December 31, 2010 and 2009, there was no operation in the United States of America.

British Virgin Island

Under the current BVI law, the Company’s subsidiary in the BVI is not subject to tax on income.

 
14

 
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009
(Currency expressed in United States Dollars (“US$”))
(Unaudited)

 
Hong Kong

 
The Company’s major operating subsidiary is subject to Hong Kong Profits Tax, which is charged at the statutory income tax rate of 16.5% on its assessable income. For the nine months ended December 31, 2010 and 2009, GDWPCL generated an operating income of $451,573 and $104,528 for income tax purposes.

The reconciliation of income tax rate to the effective income tax rate based on income before income taxes from foreign operation for the nine months ended December 31, 2010 and 2009 are as follows:

   
Nine months ended December 31,
 
   
2010
   
2009
 
             
Income before income taxes
  $ 451,573     $ 104,528  
Statutory income tax rate
    16.5 %     16.5 %
Income tax expense at statutory tax rate
    74,509       17,247  
Tax effect of non-deductible expenses
    1,037       1,041  
Tax effect of allowances
    (486 )     (2,166 )
Under provision for prior years
    1,508       -  
 
Income tax expense
  $ 76,568     $ 16,122  

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. There was no significant temporary difference as of December 31, 2010, no deferred tax assets or liabilities have been recognized.

NOTE12                      SEGMENT INFORMATION

The Company considers its business activities to constitute one single reportable segment. The Company’s chief operating decision makers use consolidated results to make operating and strategic decisions. The geographic distribution analysis of the Company’s revenues by region is as follows:

   
Three months ended December 31,
 
   
2010
   
2009
 
Revenue, net:
           
- The PRC (including Hong Kong)
  $ 3,708,403     $ 2,318,050  
- Europe
    412,585       156,908  
- Others
    1,492,071       294,006  
                 
    $ 5,613,059     $ 2,768,964  

   
Nine months ended December 31,
 
   
2010
   
2009
 
Revenue, net:
           
- The PRC (including Hong Kong)
  $ 11,798,529     $ 6,797,243  
- Europe
    666,061       668,717  
- Others
    3,427,556       1,540,258  
                 
    $ 15,892,146     $ 9,006,218  

All of the Company’s long-lived assets are located in Hong Kong.
 

 
15

 
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009
(Currency expressed in United States Dollars (“US$”))
(Unaudited)


NOTE13                      CONCENTRATIONS OF RISK

The Company is exposed to the following concentrations of risk:

(a)         Major customers

For the three and nine months ended December 31, 2010 and 2009, the customers who account for 10% or more of the Company’s revenues and its outstanding balance at period-end date, are presented as follows:

 
Three months ended December 31, 2010
 
December 31, 2010
 
 
Revenues
   
Percentage
of revenues
 
Accounts
receivable
 
               
Customer A
  $ 2,473,231       44 %   $ 982,650  
Customer B
    1,192,495       21 %     5,841,410  
 
Total:
  $ 3,665,726       65 %   $ 6,824,060  

 
Nine months ended December 31, 2010
 
December 31, 2010
 
 
Revenues
   
Percentage
of revenues
 
Accounts
receivable
 
               
Customer A
  $ 8,961,714       56 %   $ 982,650  
Customer B
    2,548,640       16 %     5,841,410  
 
Total:
  $ 11,510,354       72 %   $ 6,824,060  

 
Three months ended December 31, 2009
 
December 31, 2009
 
 
Revenues
   
Percentage
of revenues
 
Accounts
receivable
 
               
Customer A
  $ 1,710,088       62 %   $ 6,047,183  
Customer B
    608,481       22 %     -  
 
Total:
  $ 2,318,569       84 %   $ 6,047,183  

 
Nine months ended December 31, 2009
 
December 31, 2009
 
 
Revenues
   
Percentage
of revenues
 
Accounts
receivable
 
               
Customer A
  $ 4,508,739       50 %   $ 6,047,183  
Customer B
    1,842,328       20 %     -  
 
Total:
  $ 6,351,067       70 %   $ 6,047,183  
 
 
16

 
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009
(Currency expressed in United States Dollars (“US$”))
(Unaudited)

 
(b)
Major vendors

For the three months ended December 31, 2010, one vendor represented more than 10% of the Company’s purchases. This vendor accounted for 23% of purchases amounting to $1,187,984 with $0 of accounts payable as of December 31, 2010.

For the nine months ended December 31, 2010, one vendor represented more than 10% of the Company’s purchases. This vendor accounted for 21% of purchases amounting to $2,969,572 with $0 of accounts payable as of December 31, 2010.

For the three months ended December 31, 2009, one vendor represented more than 10% of the Company’s purchases. This vendor accounted for 16% of purchases amounting to $393,680 with $2,421,603 of accounts payable as of December 31, 2009.

For the nine months ended December 31, 2009, one vendor represented more than 10% of the Company’s purchases. This vendor accounted for 23% of purchases amounting to $1,893,377 with $2,421,603 of accounts payable as of December 31, 2009.

(c) 
Credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and trade accounts receivable. The Company performs ongoing credit evaluations of its customers' financial condition, but does not require collateral to support such receivables.

(d)
Interest rate risk

As the Company has no significant interest-bearing assets, the Company’s income and operating cash flows are substantially independent of changes in market interest rates.

The Company’s interest-rate risk arises from bank borrowings and lines of credits. Borrowings issued at variable rates expose the Company to cash flow interest rate risk. The Company manages interest rate risk by varying the issuance and maturity dates variable rate debt, limiting the amount of variable rate debt, and continually monitoring the effects of market changes in interest rates. As of December 31, 2010, all of borrowings were at variable rates.
 
NOTE14                      COMMITMENTS AND CONTINGENTS

(a)         Operating lease commitment

The Company’s subsidiary in Hong Kong is committed under several non-cancelable operating leases with fixed monthly rentals and renewal option, due through February 2013. Total rent expenses for the nine months ended December 31, 2010 and 2009 was $77,682 and $31,585 respectively.

As of December 31, 2010, the Company has the future minimum rental payments under various non-cancelable operating leases in the next three years, as follows:

Year ending December 31,
     
2011
  $ 111,919  
2012
    91,421  
2013
    4,651  
Total
  $ 207,991  
 
 
17

 
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009
(Currency expressed in United States Dollars (“US$”))
(Unaudited)

 
(b)         Contingencies

On December 28, 2010, the Inland Revenue Department of Hong Kong (“HKIRD”) finalized the Company’s tax assessment for tax years 2001 to 2006 with an additional tax charge of $2,492 (equivalent to HK$19,363). The Company accepted the final tax assessment and made the tax payment on December 31, 2010.

(c)           Legal proceedings

On February 12, 2009, a claim was filed by Chi Yim Yip, Roger and Characters Capital Group Limited (“CCGL”) against Mr. Kwok Leung Lee, a director of the Company, and GDWPCL alleging (i) breach of contract by GDWP concerning the engagement of CCGL to assist GDWPCL in securing GDWP’s listing on the OTC Bulletin Board and (ii) defamation by Mr. Kwok Leung Lee related to the contract dispute. Damages being sought include $31,287 in liquidated damages from GDWPCL, aggravated/exemplary damages and injunction from further defamation. The claim was filed with the High Court of the Hong Kong Special Administrative Region, Court of First Instance.

On April 9, 2009, Mr. Kwok Leung Lee and GDWPCL filed a Defense and Counterclaim. GDWPCL asserted a breach of contract claim against CCGL, alleging that CCGL failed to fulfill its obligations pursuant to the CCGL agreement to effect the listing of GDWP through a reverse merger by the use of a company that was listed on the Pink Sheets. Mr. Kwok Leung Lee additionally asserted a breach of contract claim against Chi Yim Yip, Roger for the Stock Purchase Agreement dated March 31, 2007, for failing to deliver a shell company, Tabatha V, Inc., that was listed on the Pink Sheets, which, pursuant to the Stock Purchase Agreement, was to be purchased by Mr. Kwok Leung Lee. Both Mr. Kwok Leung Lee and GDWPCL also claimed damages for fraudulent misrepresentation related to the failure to deliver the Pink Sheet shell company. On May 22, 2009, Chi Yim Yip, Roger and CCGL replied to the counterclaim. The Company is currently unable to assess the likelihood of a favorable or unfavorable outcome for this litigation.


 
 
 

 

 
18

 


ITEM 2.                      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.


Cautionary Note Regarding Forward-Looking Statements

We make certain forward-looking statements in this report. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings), demand for our services, and other statements of our plans, beliefs, or expectations, including the statements contained under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” as well as captions elsewhere in this document, are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can”, “could,” “may,” “should,” “will,” “would,” and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. You are cautioned not to place undue reliance on such forward-looking statements. These risks and uncertainties, together with the other risks described from time to time in reports and documents that we file with the SEC should be considered in evaluating forward-looking statements.

The nature of our business makes predicting the future trends of our revenue, expenses, and net income difficult. Thus, our ability to predict results or the actual effect of our future plans or strategies is inherently uncertain. The risks and uncertainties involved in our business could affect the matters referred to in any forward-looking statements and it is possible that our actual results may differ materially from the anticipated results indicated in these forward-looking statements. Important factors that could cause actual results to differ from those in the forward-looking statements include, without limitation, the following:


the effect of political, economic, and market conditions and geopolitical events;

legislative and regulatory changes that affect our business;


the availability of funds and working capital;

the actions and initiatives of current and potential competitors;


investor sentiment; and

our reputation.

We do not undertake any responsibility to publicly release any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this report. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by any forward-looking statements.
 
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto as filed with the SEC and other financial information contained elsewhere in this Report.

Except as otherwise indicated by the context, references in this Form 10-Q to “we,” “us,” “our,” “the Registrant”, “Green Dragon”, “our Company,” or “the Company” are to Green Dragon Wood Products, Inc., a Florida corporation and its consolidated subsidiaries. Unless the context otherwise requires, all references to (i) “BVI” are to British Virgin Islands; (ii) “PRC” and “China” are to the People’s Republic of China; (iii) “U.S. dollar,” “$” and “US$” are to United States dollars; (iv) “RMB” are to Yuan Renminbi of China; (v) “Securities Act” are to the Securities Act of 1933, as amended; and (vi) “Exchange Act” are to the Securities Exchange Act of 1934, as amended.
 
 
19

 

Critical Accounting Policies and Estimates
Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States ("US GAAP"). US GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expenses amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.

We believe the following is among the most critical accounting policies that impact our consolidated financial statements. We suggest that our significant accounting policies, as described in our condensed consolidated financial statements in the Summary of Significant Accounting Policies, be read in conjunction with this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Accounting Standards Codification Topic 605 ("ASC Topic 605")

We recognize revenue in accordance with the ASC Topic 605 “Revenue Recognition”, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured.

The majority of the Company's revenue results from sales contracts with direct customers in the trading of wood logs, wood lumber, wood veneers and other wood products and revenues are recognized upon shipment to the customer when title and risk of loss are transferred and there are no continuing obligations to the customer. Title and the risks and rewards of ownership transfer to the customer at varying points, which is determined based on shipping terms. Revenue is recorded net of sales discounts, returns, allowances, customer rebates and other adjustments that are based upon management’s best estimates and historical experience and are provided for in the same period as the related revenues are recorded. Management conducts credit background checks for new customers as a means to reduce the subjectivity of assuring collectibility. Based on these factors, the Company believes that it can apply the provisions of ASC Topic 605 with minimal subjectivity.

Recent Accounting Pronouncements

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.

In September 2009, the Financial Accounting Standard Board (“FASB”) issued certain amendments as codified in ASC Topic 605-25, “Revenue Recognition; Multiple-Element Arrangements”. These amendments provide clarification on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. An entity is required to allocate revenue in an arrangement using estimated selling prices of deliverables in the absence of vendor-specific objective evidence or third-party evidence of selling price. These amendments also eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. The amendments significantly expand the disclosure requirements for multiple-deliverable revenue arrangements. These provisions are to be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. The Company will adopt the provisions of these amendments in its fiscal year 2011 and is currently evaluating the impact of these amendments to its consolidated financial statements.

In July 2010, the FASB issued an accounting standards update to require further disaggregated disclosures that improve financial statement users’ understanding of (1) the nature of an entity’s credit risk associated with its financing receivables and (2) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. This update will be effective for the Company in the second quarter of fiscal 2011, except for the disclosures relating to activity that occurred during a reporting period which is effective for the Company in the third quarter of fiscal 2011. Since this update addresses only disclosures related to credit quality of financing receivables and the allowance for credit losses, it is not expected that the adoption of this update will have a material impact on the Company’s financial position, results of operations or cash flows.
 
 
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Results of Operations

Comparison of the Three Months Ended December 31, 2010 and 2009
 
Revenue and Net Income (Loss)
 
For the three months ended December 31, 2010, there was $5,613,059 for sales revenue and a net income of $51,612. For the three months ended December 31, 2009, there was $2,768,964 for sales revenue and a net loss of $29,082. This increased net income from the net loss of $80,694 or 277% resulted primarily from increase in overall sales to customers at a slight increase in gross profit from 8.4% to 9.2%.
 
General and Administrative Expenses
 
General and administrative expenses for the three months ended December 31, 2010 were $312.463, an increase of $116,741 or 60% compared to $195,722 for the comparable period in 2009. The increase was primarily in line with the increase in overall sales.
 
Interest Expenses
 
Interest expense for the three months ended December 31, 2010 was $31,509 compared to $36,645 for the comparable period in 2009, a decrease of $5,136 or 14%. The decrease was primarily attributable to a slight decrease in interest rates.
 
Income Tax Expenses
 
Income tax for the three months ended December 31, 2010 was $12,783 compared to an income tax benefit of $5,288 for the comparable period in 2009, an increase of $18,071 or 342%. The increase was primarily attributable to an overall increase in increase in income before income taxes.

Comparison of the Nine Months Ended December 31, 2010 and 2009
 
Revenue and Net Income (Loss)
 
For the nine months ended December 31, 2010, there was $15,892,146 for sales revenue and a net income of $375,005. For the nine months ended December 31, 2009, there was $9,006,218 for sales revenue and a net income of $88,406. This increased net income of $286,599 or 324% resulted primarily from increase in overall sales to customers.
 
General and Administrative Expenses
 
General and administrative expenses for the nine months ended December 31, 2010 were $796,890, an increase of $176,862 or 28.5% compared to $620,028 for the comparable period in 2009. The increase was in line with the increase in overall sales to customers.
 
Interest Expenses
 
Interest expense for the nine months ended December 31, 2010 was $108,930 compared to $123,825 for the comparable period in 2009, a decrease of $14,895 or 12%. The decrease was primarily attributable to a slight decrease in interest rates.
 
Income Tax Expenses
 
Income tax for the nine months ended December 31, 2010 was $76,568 compared to $16,122 for the comparable period in 2009, an increase of $60,446 or 375%. The increase was primarily attributable to an overall increase in increase in income before income taxes.
 
 
 
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Liquidity and Capital Resources

Cash and Cash Equivalents

Our cash and cash equivalents as at the beginning of the nine months ended December 31, 2010 was $100,512 and increased to $272,015 by the end of the period, an increase of $171,503 or 171%. The increase was primarily attributable to the overall net cash flows from financing activities.
Our cash and cash equivalents as at the beginning of the nine months ended December 31, 2009 was $45,511 and increased to $73,239 by the end of the period, an increase of $27,728 or 61%. The increase was primarily attributable to the overall net cash flows from financing activities.

Net cash used in operating activities

Net cash outflow from operating activities for the nine months ended December 31, 2010 was $1,571,262, primarily attributable to the increase in accounts receivable of $1,904,916, decrease in accrued liabilities and other payables of $793,226 and net off with net income of $375,005, decrease in prepayment, deposits and other receivables of $119,962 and increase in accounts payable of $481,148.

Net cash outflow from operating activities for the nine months ended December 31, 2009 was $581,308, primarily attributable to the increase in accounts receivable and inventories of $298,141 and $177,567 respectively, decrease in income tax payable and accrued liabilities and other payables of $91,923 and $139,965 respectively and net off with net income of $88,406 and increase in accounts payable of $24,602.

Net cash used in investing activities

Net cash used in investing activities for the nine months ended December 31, 2010 was $343,244 primarily attributable to the purchase of marketable securities and plant and equipment of $339,738 and $3,506 respectively.

Net cash used in investing activities for the nine months ended December 31, 2009 was $11,865 primarily attributable to the purchase of plant and equipment.

Net cash provided by financing activities

Net cash provided by financing activities for the nine months ended December 31, 2010 was $2,086,513 primarily attributable to the proceeds from revolving lines of credit of $1,517,004, advances from a director of $731,666 and net off with repayment of long-term bank borrowings of $115,810.

Net cash provided by financing activities for the nine months ended December 31, 2009 was $620,942 primarily attributable to the proceeds from revolving lines of credit of $313,474 and advances from a director of $307,468.

Trends

We are not aware of any trends, events or uncertainties that have or are reasonably likely to have a material impact on our short-term or long-term liquidity.

Inflation

We believe that inflation has not had a material or significant impact on our revenue or our results of operations.

Working Capital

Our working capital was $9,273,451 at December 31, 2010.

We currently generate our cash flow through our operations. We believe that our cash flow generated from operations will be sufficient to sustain operations for at least the next 12 months. There is no identifiable expansion plan as of December 31, 2010, but from time to time, we may identify new business opportunities to improve the profitability and working capital from operations.

Capital Resources

As of December 31, 2010, the Company has a revolving line of credit with Shanghai Commercial Bank with an outstanding balance of $325,186, a revolving line of credit with the Hongkong and Shanghai Banking Corporation Limited with an outstanding balance of $1,679,119, and a trade financing payable to Tai Wah Timber Factory Limited and its related company, Glory Idea Investment Limited in an aggregate amount of $1,632,076. If we are to acquire another business or further expand our operations, we will need additional capital.

Bank Credit Facilities

As of September 30, 2010, the Company has an renewed open line of credit with Shanghai Commercial Bank Limited with the available limit of $449,686 (equivalent to HK$3,500,000). The line of credit bears interest at a rate of 0.25% per annum over Hong Kong prime for HK dollars facilities and at a rate of 0.25% per annum over US prime for US dollars facilities. Mr. Kwok Leung Lee, our President and Chairman, serves as personal guarantor for up to HKD7,500,000, or approximately US$963,614, plus interest, fees, costs and expenses. The Company also is required to maintain a minimum cash deposit not less than $264,500 that is considered restricted as compensating balances to the extent the Company borrows against this line of credit. In addition, the Company is subject to the settlement of accounts due and payable to certain identified vendors under the line of credit at the bank’s discretion. The line will be extended or renewed on a regular basis at the option of the bank.
 
 
 
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Pursuant to the revised Banking Facilities Agreement (the “Agreement”) dated September 6, 2010, the Company has a revolving lines of credit with the Hongkong and Shanghai Banking Corporation Limited with the available limit of $1,027,855 (equivalent to HK$8,000,000). The lines of credit bears interest at a rate of 2% per annum over Hong Kong Interbank Offered Rate (“HIBOR”) for HK dollars facilities and at a rate of 2% per annum over London Interbank Offered Rate (“LIBOR”) for foreign currency facilities. The Company is required to maintain a minimum cash deposits of approximately $385,445 (equivalent to HK$3,000,000) that is considered restricted as compensating balances to the extent the Company borrows against this line or credit. Weighted average interest rate approximates 2.65% per annum for the nine months ended December 31, 2010, payable monthly. Pursuant to the Agreements, the lines of credit are personally guaranteed by Mr. Lee, the director of the Company. In addition, the Company is subject to the settlement of accounts due and payable to certain identified vendors under the line of credit at the bank’s discretion. The line will be extended or renewed on a regular basis at the option of the bank.  A charge on the Company’s marketable securities with fair value of $331,722 has been imposed by the Hongkong and Shanghai Banking Corporation Limited to secure the revolving lines of credit.
 
Pursuant to the same agreement dated December 21, 2009, the Company also received an installment loan of $770,891 (equivalent to HK$6,000,000) from the Hongkong Shanghai Banking Corporation Limited for the working capital purpose. The loan bears interest at a rate of 2% per annum over 1 month HIBOR with 60 monthly installments each of $12,848 (equivalent to HK$100,000) and will mature on March 14, 2015. The installment loan of HKD6,000,000 is personally guaranteed by Mr. Lee, our President and Chairman.

As of the nine months ended December 31, 2010, Mr. Lee, our President and Chairman, had advanced a total of $913,208 to the Company as temporary advance.. The amount owed bears no interest and has no fixed repayment term.

Financing Arrangement

The Company has a financing arrangement with Tai Wah Timber Factory Limited and its related company, Glory Idea Investment Limited, which provides the borrowings for trade payable financing. Under the terms of this arrangement, the Company received the revolving line of credit with the maturities of 2 to 3 months and charged with a commission fee of 5% on each amount drawn from the line, payable monthly. An additional interest will be charged on overdue balance, if any.

As of December 31, 2010 and March 31, 2010, the outstanding balance was $1,632,076 and $1,320,562 along with accrued interest and commission charge in the amount of $8,332 and $93,085, respectively.

While the capital resources of the Company are stable from a cash perspective, the credit of the Company for debt financing if necessary is extremely strong due to our strong banking relations and the credit facilities provided for our veneer products.  From time to time we do have a need to exercise our credit options on a short term basis due to the nature of our business as importers/exporters. The company has established lines of credit with banks and management maintains very strong relations with these banks.  Management believes that its current lines of credit are more than sufficient to cover any short and long term liquidity needs.  Our historical financial liquidity needs have been shown to be more than adequately covered by our credit facilities.  We believe that the strength of our management team to maintain strict internal control of its cash flow and liquidity that the current credit facilities are adequate for our needs.
 
Our accounts receivable represent approximately 46% of our revenue.  Our accounts receivable are not considered by management to be high due to the nature of payment for our products.  Our clients are required to provide credit facilities for their product by a Letter of Credit or other negotiable method of payment for the amount owed.  We draw off of the Letter of Credit prior to delivery only in the event that it is needed to maintain sufficient cash flow to cover our operations.  We do pay the cost of drawing on any Letter of Credit.  Because our cash flow is typically sufficient to cover our operations we do not carry accounts receivable unless prior arrangements have been made.  It is company policy to recognize revenue when the product is shipped to our customers.

In the event we are unable to generate sufficient funds to continue our business efforts or if the company is pursued by a larger company for a business combination, we will analyze all strategies to continue the company and increase shareholder value.  Only under these circumstances would we consider a merger, acquisition, joint venture, strategic alliance, a roll-up, or other business combination to increase business and potentially increase the shareholder value of the Company.  Management believes its responsibility to increase shareholder value is of paramount importance, which means the Company should consider the aforementioned alternatives in the event funding is not available on favorable terms to the Company when and if needed.
 
Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.


ITEM 3.                      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
N/A
 
 
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ITEM 4.                      CONTROLS AND PROCEDURES.

Evaluation of our Disclosure Controls

As of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer has evaluated the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”). Disclosure Controls, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including our President, Kwok Leung Lee, as appropriate to allow timely decisions regarding required disclosure. Our management does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based upon their controls evaluation, our President has concluded that our Disclosure Controls are effective to ensure that information required to be included in the Company's periodic SEC filings is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms. Our president also concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports required to be filed or submitted under the Exchange Act is accumulated and communicated to the our management, including our President,  to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting

There have been no changes in our internal controls over financial reporting during our third fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.                      LEGAL PROCEEDINGS.
 
On February 12, 2009, a claim was filed by Chi Yim (Roger) Yip and Characters Capital Group Limited (“CCGL”) against Kwok Leung Lee, our President, and GDWPCL alleging (i) breach of contract by GDWPCL concerning the engagement of CCGL to assist GDWPCL in securing GDWPCL’s listing on the OTC Bulletin Board and (ii) defamation by Kwok Leung Lee related to the contract dispute.  Damages being sought include $31,287 in liquidated damages from GDWPCL, aggravated/exemplary damages and injunction from further defamation. The claim was filed with the High Court of the Hong Kong Special Administrative Region, Court of First Instance.

On April 9, 2009, Kwok Leung Lee and GDWPCL filed a Defense and Counterclaim.  GDWPCL asserted a breach of contract claim against CCGL, alleging that CCGL failed to fulfill its obligations pursuant to the CCGL agreement to effect the listing of GDWPCL through a reverse merger by the use of a company that was listed on the Pink Sheets. Kwok Leung Lee additionally asserted a breach of contract claim against Chi Yim (Roger) Yip for the Stock Purchase Agreement dated March 31, 2007, for failing to deliver a shell company, Tabatha V, Inc., that was listed on the Pink Sheets, which, pursuant to the Stock Purchase Agreement, was to be purchased by Kwok Leung Lee.  Both Kwok Leung Lee and GDWPCL also claimed damages for fraudulent misrepresentation related to the failure to deliver the Pink Sheets shell company. On May 22, 2009, Chi Yim (Roger) Yip and CCGL replied to the counterclaim.  The Company is currently unable to assess the likelihood of a favorable or unfavorable outcome for this litigation. Parties are due to report to court for a status update on the matter on January 26, 2011. Other than as disclosed above, we know of no material, active, pending or threatened proceeding against us or our subsidiaries, nor are we, or any subsidiary, involved as a plaintiff or defendant in any material proceeding or pending litigation.
 
 
 
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ITEM 1A.                      RISK FACTORS.

Not Applicable.

ITEM 2.                      UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
None.

ITEM 3.                      DEFAULTS UPON SENIOR SECURITIES.
 
None.

ITEM 4.                      REMOVED AND RESERVED
 
None.

ITEM 5.                      OTHER INFORMATION.
 
None.

ITEM 6.                      EXHIBITS.

Copies of the following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.
  
Exhibit No. 
SEC Ref.
No.
Title of Document
     
1
31.1
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
2
32.1
Certification of the Principal Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     



 
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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

   
   
 
GREEN DRAGON WOOD PRODUCTS, INC.
   
   
Dated:   May 27, 2011
/s/Kwok Leung Lee
 
Kwok Leung Lee
 
President
 
 (principal executive officer, principal financial officer, and principal accounting officer )
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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