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U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Amendment No. 1

 
x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2011

o     TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From ____to _____

000-53272
(Commission File Number)

DÉCOR PRODUCTS INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)

Nevada
20-8211061
(State or other jurisdiction of
(IRS Employer Identification No.)
incorporation or organization)
 

No. 6 Economic Zone, Wushaliwu, Chang’an Town
Dongguan, Guangdong Province, China
 (Address of principal executive offices)

(86) 769-85533948
(Issuer’s telephone number, including area code)

Indicate by check mark whether the registrant (1) 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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted 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 x

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 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
 
Smaller reporting company x
(Do not check if 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 [  ] No [x]

Number of shares of common stock outstanding as of June 30, 2011:   6,866,122




 
 

 
 
Explanatory Note

The purpose of this Amendment No. 1 to the Company's  Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, filed with the Securities and Exchange Commission on August 22, 2011  (the “Form 10-Q”), is  to furnish Exhibit 101 to the Form 10-Q in accordance with Rule 405 of Regulation S-T. Exhibit 101 to this report provides the consolidated financial statements and related notes from the Form 10-Q formatted in XBRL (eXtensible Business Reporting Language).
 
Additionally, the Company is slighty revising its Results of  Operations for the Three and Six Months ended June 30, 2011 and 2010 on page 22 of this Amendment No. 1. No other changes have been made to the Form 10-Q. This Amendment No. 1 to the Form 10-Q speaks as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the original Form 10-Q.
 
Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
 
 
 
 

 
TABLE OF CONTENTS
 

   
 
Page No.
PART I. FINANCIAL INFORMATION
 
 
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3
   
Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010
3
Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months ended June 30, 2011 and 2010
4
Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2011 and 2010
5
Condensed Consolidated Statement of Stockholders’ Equity for the Six Months ended June 30, 2011
6
Notes to Condensed Consolidated Financial Statements
5
   
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
20
   
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
25
   
ITEM 4. CONTROLS AND PROCEDURES
25
   
   
PART II. OTHER INFORMATION
 
   
ITEM 1. LEGAL PROCEEDINGS
26
   
ITEM 1A. RISK FACTORS
26
   
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
26
   
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
26
   
ITEM 4. REMOVED AND RESERVED
26
   
ITEM 5. OTHER INFORMATION
26
   
ITEM 6. EXHIBITS
26
   
SIGNATURES
27
   



 
2

 
 
PART I. FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


DÉCOR PRODUCTS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2011 AND DECEMBER 31, 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)

   
June 30, 2011
   
December 31, 2010
 
   
(Unaudited)
   
(Audited)
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 746,543     $ 972,888  
Restricted cash
    773,515       -  
Accounts receivable, trade
    15,366,016       13,558,147  
Inventories
    413,458       342,015  
Advances to suppliers
    386,757       865,303  
Deposits and prepayments
    13,054       12,762  
 
Total current assets
    17,699,343       15,751,115  
                 
Non-current assets:
               
Plant and equipment, net
    14,701,912       14,150,249  
Construction in progress
    8,040,292       6,172,668  
 
TOTAL ASSETS
  $ 40,441,547     $ 36,074,032  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable, trade
  $ 2,070,618     $ 369,832  
Short-term bank borrowings
    1,547,029       1,512,447  
Current portion of long-term bank borrowings
    82,536       71,673  
Convertible notes
    1,593,367       1,772,254  
Promissory notes
    405,000       405,000  
Amount due to a related party
    107,819       111,599  
Income tax payable
    377,633       382,620  
Accrued liabilities and other payable
    1,394,511       1,182,614  
 
Total current liabilities
    7,578,513       5,808,039  
                 
Long-term liabilities:
               
Long-term bank borrowings
    1,000,385       1,058,713  
                 
Total liabilities
    8,578,898       6,866,752  
                 
Commitments and contingencies
               
                 
Stockholders’ equity:
               
Preferred stock, $0.001 par value; 1,666,667 shares authorized; 0 shares issued and outstanding, respectively
    -       -  
Common stock, $0.001 par value; 33,333,333 shares authorized; 6,866,122 shares issued and outstanding, respectively
    6,866       6,866  
Additional paid-in capital
    2,126,130       2,126,130  
Statutory reserve
    1,393,213       1,393,213  
Accumulated other comprehensive income
    4,772,239       3,833,377  
Retained earnings
    23,564,201       21,847,694  
                 
Total stockholders’ equity
    31,862,649       29,207,280  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 40,441,547     $ 36,074,032  


See accompanying notes to condensed consolidated financial statements.

 
3

 
 

DÉCOR PRODUCTS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)

   
Three months ended June 30,
   
Six months ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Revenues, net
  $ 5,806,130     $ 7,611,445     $ 10,844,058     $ 12,880,324  
                                 
Cost of revenue (inclusive of depreciation)
    (3,797,506 )     (4,442,311 )     (7,303,283 )     (7,623,951 )
                                 
Gross profit
    2,008,624       3,169,134       3,540,775       5,256,373  
                                 
Operating expenses:
                               
Sales and marketing
    (228,961 )     (321,815 )     (524,758 )     (606,029 )
General and administrative
    (223,065 )     (267,481 )     (470,559 )     (544,321 )
 
Total operating expenses
    (452,026 )     (589,296 )     (995,317 )     (1,150,350 )
                                 
Income from operations
    1,556,598       2,579,838       2,545,458       4,106,023  
                                 
Other income (expense):
                               
Interest income
    792       734       1,106       1,405  
Interest expense
    (116,258 )     (330,417 )     (198,285 )     (657,801 )
                                 
Income before income taxes
    1,441,132       2,250,155       2,348,279       3,449,627  
                                 
Income tax expense
    (375,108 )     (670,864 )     (631,772 )     (1,063,755 )
                                 
NET INCOME
    1,066,024       1,579,291     $ 1,716,507     $ 2,385,872  
                                 
Other comprehensive income:
                               
- Foreign currency translation gain
    685,095       7,444       938,862       156,008  
                                 
COMPREHENSIVE INCOME
  $ 1,751,119     $ 1,586,735     $ 2,655,369     $ 2,541,880  
                                 
Net income per share – Basic
  $ 0.16     $ 0.23     $ 0.25     $ 0.35  
Net income per share – Diluted
  $ 0.13     $ 0.20     $ 0.22     $ 0.30  
                                 
Weighted average common share outstanding – Basic
    6,866,122       6,866,122       6,866,122       6,866,122  
Weighted average common share outstanding – Diluted
    7,914,455       7,914,455       7,914,455       7,914,455  


See accompanying notes to condensed consolidated financial statements.

 
4

 
 

DÉCOR PRODUCTS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
(Unaudited)

   
Six months ended June 30,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net income
  $ 1,716,507     $ 2,385,872  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    1,357,585       625,493  
Loss on disposal of plant and equipment
    2,227       -  
Interest expenses, non-cash
    -       497,864  
Changes in operating assets and liabilities:
               
Accounts receivable, trade
    (1,478,600 )     (259,270 )
Advances to suppliers
    491,923       158,646  
Deposits and prepayments
    -       138,493  
Inventories
    (62,806 )     (578,831 )
Accounts payable, trade
    1,670,569       364,749  
Income tax payable
    (13,559 )     150,203  
Accrued liabilities and other payable
    190,010       402,415  
                 
Net cash provided by operating activities
    3,873,856       3,885,634  
                 
Cash flows from investing activities:
               
Payments on plant and equipment
    (809,209 )     (1,150,512 )
Payments on construction in progress
    (2,480,071 )     (2,367,731 )
                 
Net cash used in investing activities
    (3,289,280 )     (3,518,243 )
                 
Cash flows from financing activities:
               
Change in restricted cash
    (763,569 )     -  
Advance from (repayment to) a related party
    189,880       (314,906 )
Payment on convertible notes
    (186,517 )     -  
Proceeds from long-term bank borrowings
    -       1,024,179  
Payments on short-term bank borrowing
    -       (570,614 )
Payments on long-term bank borrowings
    (72,368 )     (716,647 )
                 
Net cash used in financing activities
    (832,574 )     (577,988 )
                 
Effect of exchange rate changes on cash and cash equivalents
    21,653       2,467  
                 
NET CHANGE IN CASH AND CASH EQUIVALENTS
    (226,345 )     (208,130 )
                 
BEGINNING OF PERIOD
    972,888       777,332  
                 
END OF PERIOD
  $ 746,543     $ (569,202 )
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid for income taxes
  $
645,331
    $
913,552
 
Cash paid for interest
  $
140,418
   
$
159,937  
 




See accompanying notes to condensed consolidated financial statements.

 
5

 
 


DÉCOR PRODUCTS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)

 
   
Common stock
   
 Additional
paid-in
     Statutory    
 Accumulated
other comprehensive
    Retained      
Total
stockholders’
 
   
No. of shares
   
Amount
    capital    
reserve
     income    
earnings
   
equity
 
Balance as of January 1, 2011
    6,866,122     $ 6,866     $ 2,126,130     $ 1,393,213     $ 3,833,377     $ 21,847,694     $ 29,207,280  
                                                         
Net income for the period
    -       -       -       -       -       1,716,507       1,716,507  
                                                         
Foreign currency translation adjustment
    -       -       -       -       938,862       -       938,862  
 
Balance as of June 30, 2011
    6,866,122     $ 6,866     $ 2,126,130     $ 1,393,213     $ 4,772,239     $ 23,564,201     $ 31,862,649  

















See accompanying notes to condensed consolidated financial statements.

 
6

 
DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)


NOTE 1 - 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 of America (“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 December 31, 2010 which has been derived from audited financial statements and these unaudited condensed 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 June 30, 2011 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 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 December 31, 2010.


NOTE 2 - ORGANIZATION AND BUSINESS BACKGROUND

Décor Products International, Inc. (“DCRD” or the “Company”) was organized under the laws of the State of Nevada on January 11, 2007 as Murals by Maurice, Inc. On July 1, 2009, the Company changed to its current name.

The Company, through its subsidiaries, mainly engaged in the manufacture and sales of furniture decorative paper and related products in the People’s Republic of China (the “PRC”). All the customers are located in the PRC.

The Company and its subsidiaries are hereinafter referred to as (the "Company").


NOTE 3 - GOING CONCERN UNCERTAINTIES

The accompanying condensed consolidated financial statements have been prepared using the going concern basis of accounting, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

As of June 30, 2011, the Company defaulted on the repayment of convertible notes and promissory notes with an aggregate amount of $1,998,367, which became immediately due and payable. The continuation of the Company as a going concern through June 30, 2012 is dependent upon the continuing financial support from its stockholders or negotiation of repayment term. Management believes the existing shareholders will provide the additional cash to meet the Company’s obligations as they become due.

These factors raise substantial doubt about the Company’s ability to continue as a going concern. These condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that may result in the Company not being able to continue as a going concern.


 
7

 
DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)


NOTE 4 – 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  
Use of estimates

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

l  
Basis of consolidation

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

l  
Cash and cash equivalents

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

l  
Restricted cash

The Company maintains certain amount of cash balance held by a financial institution in the PRC as collateral for banking facilities.

l  
Accounts receivable

Accounts receivable are recorded at the invoiced amount and do not bear interest, which are due within contractual payment terms, generally 90 to 180 days. Credit is extended based on evaluation of a customer's financial condition. Accounts receivable outstanding longer than the contractual payment terms are considered past due. Past due balances over 180 days and over a specified amount are reviewed individually for collectibility. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history and the current economic conditions to make adjustments in the allowance when it is considered necessary. When receivable balances are determined to be uncollectible, these balances are written off. The Company does not have any off-balance-sheet credit exposure related to its customers.


 
8

 
DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)

As of June 30, 2011 and December 31, 2010, the Company did not record an allowance for doubtful accounts.

l  
Inventories

Inventories consist of raw papers, painting materials and components used in the manufacture of the Company’s products and the related parts and supplies. Inventories are stated at the lower of cost or net realizable value, with cost being determined on a weighted average basis. Costs include purchased cost of papers and painting inks, direct labor and manufacturing overhead costs. The Company periodically reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand.

As of June 30, 2011 and December 31, 2010, there was no allowance for obsolete inventories, nor have there been any write-offs.

l  
Advances to suppliers

The Company makes advances to certain vendors for purchase of its inventory items or material. The advances to suppliers are interest free and unsecured. Advances to suppliers are recorded when payment is made by the Company and relieved against inventory when goods are received. All inventory items or raw materials relating to these advances are subsequently made delivery to the Company.

l  
Plant and equipment

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

 
Expected useful lives
 
Residual value
Plant and machinery
3-10 years
 
3%
Leasehold improvement
Shorter of 10 years or lease term
 
0%
Motor vehicles
3-5 years
 
3%
Office equipment
3-5 years
 
3%

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 June 30, 2011 and 2010 were $676,219 and $331,332, which included $645,595 and $369,494 in cost of revenue, respectively.

Depreciation expense for the six months ended June 30, 2011 and 2010 were $1,357,585 and $625,493, which included $1,324,764 and $619,816 in cost of revenue, respectively.

l  
Construction in progress

Construction in progress is stated at cost and represents the cost of acquiring contracts to build the now printing lines and prepayments paid to equipment vendors or builders during the construction of the new manufacturing facility (until it is substantially complete and ready for its intended use). No provision for depreciation is made on construction in progress until such time as the relevant assets are completed and put into operational use. No capitalized interest was incurred during the period of construction. The Company is anticipating a new manufacturing facility for the production of laminated boards, in an area of 100,000 square feet, adjacent to the existing facility, which is scheduled to be completed in the fourth quarter of 2011.

 
9

 
DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)


l  
Valuation of long-lived assets

In accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 360-10-5, “Impairment or Disposal of Long-Lived Assets”, all long-lived assets such as plant and equipment and construction in progress held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of assets to estimated discounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. There has been no impairment charge for the periods presented.

l  
Revenue recognition

In accordance with ASC Topic 605, “Revenue Recognition”, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectibility is reasonably assured.

The Company derives revenues from the sales of furniture decorative paper and related products. The Company recognizes its revenues net of value-added taxes ("VAT"). The Company is subject to VAT which is levied on the majority of the products at the standard rate of 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales. The Company experienced no material product returns and recorded no reserve for sales returns for the three and six months ended June 30, 2011 and 2010.

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

l  
Comprehensive income

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

l  
Income taxes

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

 
10

 
DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(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 three and six months ended June 30, 2011 and 2010, the Company did not have any interest and penalties associated with tax positions. As of June 30, 2011, the Company did not have any significant unrecognized uncertain tax positions.

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

l  
Net income per share

The Company calculates net income per share in accordance with ASC Topic 260, Earnings per Share.” Basic income per share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period. Diluted income per share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options. In periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion will be anti-dilutive.

As of June 30, 2011, the Company has 1,048,333 shares of outstanding warrants at the weighted-average exercise price of $3.15. There was no movement during the six months ended June 30, 2011.

l  
Foreign currencies translation

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

The reporting currency of the Company is the United States Dollars ("US$"). The Company's subsidiary in the PRC maintain its books and records in its local currency, Renminbi Yuan ("RMB"), which is functional currency as being the primary currency of the economic environment in which the entity operates.

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

 
11

 
DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)


Translation of amounts from RMB into US$1 has been made at the following exchange rates for the respective period:
   
June 30, 2011
   
June 30, 2010
 
Period-end RMB:US$1 exchange rate
    6.4640       6.8086  
Period average RMB:US$1 exchange rate
    6.5482       6.8348  

l  
Related parties

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

l  
Segment reporting

ASC Topic 280, “Segment Reporting” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in financial statements. The Company operates in one reportable operating segment in the PRC.

l  
Fair value of financial instruments

The carrying value of the Company’s financial instruments: cash, accounts receivable, advances to suppliers, deposits and prepayments, accounts payable, income tax payable, amount due to a related party, accrued liabilities and other payables approximate at their fair values because of the short-term nature of these financial instruments.

Management believes, based on the current market prices or interest rates for similar debt instruments, the fair value of short-term and long-term bank borrowings approximate at their carrying amounts. The fair value of convertible notes and promissory notes approximate at their carrying amounts.

The Company also follows the guidance of ASC Topic 820-10, “Fair Value Measurements and Disclosures” ("ASC 820-10"), with respect to financial assets and liabilities that are measured at fair value. ASC 820-10 establishes a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:

·
Level 1 : Inputs are based upon unadjusted quoted prices for identical instruments traded in active markets;

·
Level 2 : Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and; and

·
Level 3 : Inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models.


 
12

 
DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)


l  
Recent accounting pronouncements

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

In May 2011, the Financial Accounting Standard Board (“FASB”) issued ASU 2011-04, which is an update to Topic 820, “Fair Value Measurement”. This update establishes common requirements for measuring fair value and related disclosures in accordance with accounting principles generally accepted in the United Sates and international financial reporting standards. This amendment did not require additional fair value measurements. ASU 2011-04 is effective for all interim and annual reporting periods beginning after December 15, 2011. The Company does not expect the adoption of this guidance to have a material impact on its financial position or results of operations.

In June 2011, the FASB issued ASU 2011-05, which is an update to Topic 220, “Comprehensive Income”. This update eliminates the option of presenting the components of other comprehensive income as part of the statement of changes in stockholders’ equity, requires consecutive presentation of the statement of net income and other comprehensive income and requires reclassification adjustments from other comprehensive income to net income to be shown on the financial statements. ASU 2011-05 is effective for all interim and annual reporting periods beginning after December 15, 2011. The Company does not expect the adoption of this guidance to have a material impact on its financial position or results of operations.


NOTE 5 – CONVERTIBLE NOTES

At June 30, 2011 and December 31, 2010, the carrying value of the convertible notes payable was $1,593,367 and $1,772,254, respectively and the debt discount was fully amortized.

During the six months ended June 30, 2011, the Company made the partial repayment of $186,517 to Mr. Zhuang. The unpaid portion of convertible notes was matured and became overdue. In the event that the Company cannot pay the convertible note when due, an event of default would occur. The default interest shall be subject to 16%, if the Company has failed to make payments of interest and principal on the maturity date. Ms. Shi and Mr. Zhuang shall have rights to keep the proceeds from the sales of the pledge and the Shares to the extent of the unpaid interest and principal of the convertible notes. Ms. Shi and Mr. Zhuang shall have recourse for the outstanding balance.

As of June 30, 2011, the convertible notes became immediately due and the Company has been in negotiations with the holders of the convertible notes, but has not yet reached an agreement as to repayment schedule.


NOTE 6 – CONVERTIBLE PROMISSORY NOTES

As of June 30, 2011, the promissory notes became immediately due and the Company has been in negotiations with the holders of the promissory notes, but has not yet reached an agreement as to repayment schedule.

 
13

 
DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)


In accordance with the terms and conditions in promissory notes, if the Company defaults in the payment of principal or interest due on the Promissory Notes, the holder of Promissory Notes (the “holder”) shall be entitled to receive and the Company agreed to pay all reasonable costs of collection incurred by holder, including, without limitation, reasonable attorney’s fees for consultation and suit. If any payment due is not made and remains unpaid for ten (10) days, it is in default hereof. Any such payment in default shall bear interest at 18% per annum. Should any payment not be made when due, there shall also be a late charge equal to 5% of the amount of the installment of principal or interest which is paid after the due date. In the event of default hereunder, the entire unpaid balance hereof shall, at the option of the holder, become due and payable upon demand. All costs and fees (including reasonable fees and disbursements of legal counsel) incurred by the holder as the result of any default by anyone liable hereunder or as the result of any collection effort by the holder shall also be due and owing to the holder. Failure to exercise any right shall not be deemed a waiver of the right to exercise the same at any subsequent date, or event.

 NOTE 7 - AMOUNT DUE TO A RELATED PARTY

As of June 30, 2011 and December 31, 2010, amount due to a related party represented temporary advances made by Mr. Liu, the director of the Company, which was unsecured, interest-free with no fixed repayment term.


NOTE 8 - ACCRUED LIABILITIES AND OTHER PAYABLE

   
June 30, 2011
   
December 31, 2010
 
             
VAT payable
  $ 198,982     $ 77,782  
Accrued payroll and benefit costs
    651,002       541,454  
Accrued operating expenses
    521,922       554,613  
Other payable
    22,605       8,765  
    $ 1,394,511     $ 1,182,614  


NOTE 9  - LONG-TERM BANK BORROWINGS

Long-term bank borrowings consisted of the following:

   
June 30, 2011
   
December 31, 2010
 
             
Bank loans, payable to financial institutions in the PRC:
           
             
Equivalent to RMB0 (2010: RMB297,197) with effective interest rate ranging from 7.02% to 9.83% per annum, payable monthly, due January 16, 2011, collateralized by certain plant and machinery
  $ -     $ 44,950  
                 
Equivalent to RMB0 (2010: RMB176,685) with effective interest rate ranging from 7.02% to 9.83% per annum, payable monthly, due January 17, 2011, collateralized by certain plant and machinery
    -       26,723  
                 
Equivalent to RMB7,000,000 with effective interest rate at 5.85% per annum, payable monthly, due March 8, 2015, guaranteed and secured by the director, Mr. Liu and restricted cash
    1,082,921       1,058,713  
                 
Total long-term bank borrowings
    1,082,921       1,130,386  
                 
Less: current portion
    (82,536 )     (71,673 )
                 
Total long-term bank borrowings
  $ 1,000,385     $ 1,058,713  


 
14

 
DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)


As of June 30, 2011, the minimum future payments of the aggregate bank borrowings in the next five years are as follows:

Year ending June 30:
     
2012
  $ 82,536  
2013
    343,633  
2014
    366,282  
2015
    290,470  
         
Total borrowings
  $ 1,082,921  


 
NOTE 10 – INCOME TAXES

For the six months ended June 30, 2011 and 2010, the local (United States) and foreign components of income before income taxes were comprised of the following:

   
Six months ended June 30,
 
   
2011
   
2010
 
Tax jurisdictions from:
           
- Local
  $ (18,426 )   $ (516,864 )
- Foreign
    2,366,705       3,966,491  
 
Income before income taxes
  $ 2,348,279     $ 3,449,627  

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

United States of America

The Company is registered in the State of Nevada and is subject to the tax laws of the United States of America.

British Virgin Island

Under the current BVI law, Wide Broad is not subject to tax on its income or profits. For the six months ended June 30, 2011 and 2010, Wide Broad suffered from an operating loss of $151,047 and $171,856, respectively.

 
15

 
DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)


The PRC

The Company generated its income from a subsidiary operating in the PRC for the six months ended June 30, 2011 and 2010, which is subject to the Corporate Income Tax Law of the People’s Republic of China (the “New CIT Law”) at a unified income tax rate of 25%.

A reconciliation of income tax rate to the effective income tax rate for the six months ended June 30, 2011 and 2010 is as follows:

   
Six months ended June 30,
 
   
2011
   
2010
 
             
Income before income taxes
  $ 2,517,752     $ 4,138,347  
Statutory income tax rate
    25 %     25 %
Income tax expense at statutory tax rate
    629,438       1,034,587  
                 
Tax effect of non-taxable items
    2,334       29,168  
 
Income tax expense
  $ 631,772     $ 1,063,755  

No provision for deferred tax assets or liabilities has been made, since the Company has no material temporary difference between the tax bases of assets and liabilities and their carrying amounts.

 
NOTE 11 - CONCENTRATIONS OF RISK

The Company is exposed to the following concentrations of risk:

(a)         Major customers

For the three and six months ended June 30, 2011 and 2010, there was no single customer who accounted for 10% or more of the Company’s revenues.

(b)         Major vendors

For the three and six months ended June 30, 2011, the vendor who accounted for 10% or more of the Company’s purchases and its outstanding balance at period-end date, are presented as follows:

 
   
Three months ended June 30, 2011
   
June 30, 2011
 
Vendor
  Purchases    
  Percentage of
purchases
   
Accounts
payable, trade
 
Vendor A
  $ 675,758       27%     $ 163,047  
Vendor B
    376,469       15%       -  
Vendor C
    367,001       15%       -  
Vendor D
    360,395       14%       93,506  
                         
  Total:    $ 1,779,623       71%     $ 256,553  


 
16

 
DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)


 
   
Six months ended June 30, 2011
     
June 30, 2011
 
Vendor     
Purchases
   
Percentage
of purchases
   
Accounts
payable, trade
 
Vendor A
  $ 2,206,713       40%     $ 163,047  
Vendor B
    751,058       14%       -  
Vendor C
    592,865       11%       -  
Vendor D
    607,788       11%       93,506  
Vendor E
    555,579       10%       -  
                         
   Total:  $ 4,714,003       86%     $ 256,553  

For the three and six months ended June 30, 2010, the vendor who accounted for 10% or more of the Company’s purchases and its outstanding balance at period-end date, are presented as follows:

 
   
Three months ended June 30, 2010
   
June 30, 2010
 
Vendor
 
Purchases
   
Percentage
of purchases
   
Accounts
payable, trade
 
Vendor C
  $ 930,245       23%     $ -  
Vendor D
    634,481       16%       -  
Vendor F
    518,203       13%       294,746  
Vendor G
    395,369       10%       -  
                         
  Total: $ 2,478,298       62%     $ 294,746  

 
   
Six months ended June 30, 2010
    June 30, 2010  
Vendor  
Purchases
   
Percentage
of purchases
   
Accounts
payable, trade
 
Vendor C
  $ 1,499,754       22%     $ -  
Vendor D
    1,090,414       16%       -  
Vendor F
    805,382       12%       294,746  
                         
  Tota;: $ 3,395,550       50%     $ 294,746  

(c)         Credit risk

Financial instruments that are potentially subject to credit risk consist principally of accounts receivable. The Company believes the concentration of credit risk in its accounts and retention receivables is substantially mitigated by its ongoing credit evaluation process and relatively short collection terms. The Company does not generally require collateral from customers. Credit is extended based on evaluation of a customer's financial condition. The Company evaluates the need for an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.

 
17

 
DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)


(d)         Exchange rate risk

The reporting currency of the Company is US$, to date the majority of the revenues and costs are denominated in RMB and a significant portion of the assets and liabilities are denominated in RMB. As a result, the Company is exposed to foreign exchange risk as its revenues and results of operations may be affected by fluctuations in the exchange rate between US$ and RMB. If RMB depreciates against US$, the value of RMB revenues and assets as expressed in US$ financial statements will decline. The Company does not hold any derivative or other financial instruments that expose to substantial market risk.

(e)         Interest rate risk

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

The Company’s interest-rate risk arises from bank borrowings, convertible notes and promissory notes. Borrowings issued at variable rates expose the Company to cash flow interest-rate risk. Borrowings issued at fixed rates expose the Company to fair value interest-rate risk. Company policy is to maintain approximately all of its borrowings in fixed rate instruments. At the period-end, the bank borrowings were both at fixed and floating rates.

(f)         Economic and political risks

The Company's operations are conducted in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.

The Company's operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company's results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation.


NOTE 12 - COMMITMENTS AND CONTINGENCIES

(a)  
Operating lease commitments

The Company’s subsidiary in the PRC is committed under several non-cancelable operating leases of office premises and manufacturing facility with a term of 10 years with fixed monthly rentals, due through December 31, 2020. Total rent expense for the six months ended June 30, 2011 and 2010 was $83,308 and $105,728, respectively.

As of June 30, 2011, the Company has future minimum rental payments due under non-cancelable operating leases in the next five years and thereafter, as follows:

 
18

 
DÉCOR PRODUCTS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)


Year ending June 30:
     
2012
  $ 222,772  
2013
    222,772  
2014
    236,696  
2015
    250,619  
2016
    250,619  
Thereafter
    723,082  
         
Total
  $ 1,906,560  

(b)  Capital commitment

The Company is committed under a number of agreements with an independent contractors or suppliers in relation to the construction of the new manufacturing facility for the production of laminated boards. The construction is expected to be completed in the fourth quarter of 2011. As of June 30, 2011, the Company has the aggregate contingent payments of approximately $0.2 million to the third party contractors and equipment vendors in the next twelve months.

(c)  Guarantees

As of June 30, 2011, the Company, through its subsidiary is contingently liable as guarantor with respect to the maximum exposure of $4,537,342 (equivalent to RMB30,000,000) to a unrelated third party, Dongguan XiaoYuanDing Technology Co., Ltd (“DXT”) on a cross-guarantee basis. The term of these guarantees are commenced for 2 years, expiry in October 2012. At any time from the date of guarantees, should DXT fail to make its due debt payments, the Company will be obligated to perform under the guarantees by primarily making the required payments, including late fees and penalties.

In accordance with ASC 460-10, “Guarantees”, a guarantor must recognize a liability for the fair value of the obligations it assumes under certain guarantees. The Company did not receive any consideration for the guarantee and has determined the indemnification fair value to be insignificant. As of June 30, 2011, the Company has not recorded any liabilities under these guarantees.

(d)  Unused available line of credit

The Company has a credit facility with Industrial Bank Co., Ltd totaling $4,537,342 (equivalent to RMB30 million), including short-term bank borrowings and bills payable, under which the Company may borrow on an unsecured and cross-guarantee basis in a term of 2 years, expiry in October 2012. As of June 30, 2011, the Company has the unused available line of credit totaling $1,522,047 on a cross-guarantee basis.


NOTE 13 - SUBSEQUENT EVENTS

In accordance with ASC Topic 855, “Subsequent Events”, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued, the Company has evaluated all events or transactions that occurred after June 30, 2011 through the date of the condensed financial statements were issued and filed with this Form 10-Q. There were no subsequent events that required recognition or disclosure.
 

 
19

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements regarding future events and our future results within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are based on current expectations, estimates, forecasts and projections about us, our future performance and the industries in which we operate as well as our management’s assumptions and beliefs.  Statements that contain words like “believe”, “expect”, “anticipate”, “optimistic”, “intend”, “will”, or variations of such words and similar expressions are forward-looking statements.  In addition, any statements that refer to trends in our businesses, future financial results, and our liquidity and business plans are forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements.  There can be no assurance that forward-looking statements will be achieved, and actual results could differ materially from those expressed or implied by forward-looking statements.  Important factors that could cause actual results to differ materially include those discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010.  We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-Q.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Estimates are based on historical experience, knowledge of economic and market factors and various other assumptions that management believes to be reasonable under the circumstances. Actual results may differ from those estimates.

On a regular basis we evaluate our estimates, assumptions and judgments and make changes accordingly. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. We believe that the estimates, assumptions and judgments involved in revenue recognition, receivables and allowances for doubtful accounts, accruals, stock-based compensation, , inventories, deferred costs, income taxes, impairment of long-lived assets, and valuation and impairment of investments have the greatest potential impact on our condensed consolidated financial statements, so we consider these to be our critical accounting policies.

RECENT ACCOUNTING PRONOUNCEMENTS

For a description of the new accounting standards that affect us, see Note 4 of notes to our condensed consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q.


 
20

 

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010

   
For the three months ended June 30,
   
For the six months ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Revenues, net
  $ 5,806,130     $ 7,611,445     $ 10,844,058     $ 12,880,324  
Cost of Revenue:
  $ 3,797,506     $ 4,442,311     $ 7,303,283     $ 7,623,951  
Operating Expenses:
  $ 452,026     $ 589,296     $ 995,317     $ 1,150,350  
Income from Operations:
  $ 1,556,598     $ 2,579,838     $ 2,545,458     $ 4,106,023  
Interest Expenses:
  $ 116,258     $ 330,417     $ 198,285     $ 657,801  
Income Taxes:
  $ 375,108     $ 670,864     $ 631,772     $ 1,063,755  
Net Income:
  $ 1,066,024     $ 1,579,291     $ 1,716,507     $ 2,385,872  
Other Comprehensive Income:
  $ 685,095     $ 7,444     $ 938,862     $ 156,008  
Total Comprehensive Income:
  $ 1,751,119     $ 1,586,735     $ 2,655,369     $ 2,541,880  

Revenues

We generated net revenues of $5,806,130 and $10,844,058 for the three and six months ended June 30, 2011, respectively, compared to net revenues of $7,611,445 and $12,880,324 for the same periods ended June 30, 2010, respectively. The decreases in sales revenues by $1,805,315 and 2,036,266 in the second quarter and first six months of 2011 respectively, compared to the same periods in 2010, were due primarily to the decline in sales of our décor paper.

In 2011 and beyond, after the commencement of our new production line for laminated boards which is expected to be completed in the fourth quarter of 2011, we expect that our net sale revenues will grow steadily from fourth quarter of 2011 due to our core production switching from the decor paper to laminated board, which we believe is considerably more profitable.

Cost of Revenue

Cost of revenue primarily includes cost of supplies to manufacture our décor paper. We had $3,797,506 and $4,442,311 in cost of revenue, or 65.4% and 58.4% of revenues, during the three months ended June 30, 2011 and 2010, respectively. The cost of revenue as a percentage of revenues increased during the second quarter of 2011 mainly due to increase in purchase price of raw materials, ink and paper.

During the six months ended June 30, 2011 and 2010, we had $7,303,283 and $7,623,951 in cost of revenue, or 67.3% and 59.2% of revenues, respectively. The cost of revenue as a percentage of revenues increased due to due to increase in purchase price of raw materials, ink and paper.

Operating Expenses

The following table summarizes our operating expenses:
 
   
Three months ended June 30,
   
Six months ended June 30,
 
   
2011
   
% of net sales
   
2010
   
% of net sales
   
2011
   
% of net sales
   
2010
   
% of net sales
 
   
(in thousands)
   
(in thousands)
 
Sales and marketing
  $ 228.96       4.0%     $ 321.82       4.2%     $ 524.76       4.9%     $ 606.03       4.7%  
General and Administrative
    223.07       3.8 %       267.48       3.5%       470.56       4.3%       544.32       4.2%  
Total net operating expenses
  $ 452.03       7.8 %     $ 589.30       7.7%     $ 995.32       9.2%     $ 1,150.35       8.9%  


 
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We had operating expenses of $452,026 and $995,317 for the three and six months ended June 30, 2011, respectively, compared to the operating expenses of $589,296 and $1,150,350 for the same periods ended June 30, 2010, respectively. The slight decrease in operating expenses during the second quarter of 2011 was primary due to decrease in sales and marketing expenses, which decrease was  in line with decline in sales. The decrease in operating expenses during the six months ended June 30, 2011 was due primarily to decrease in sales and marketing expenses, which decrease was  in line with decline in sales and a consulting fee of $62,766 incurred in the first quarter of 2010 in connection with investor relationship did not recur in the same period in 2011.
 
Interest Expense

We had interest expenses of $116,258 and $198,285 for the three and six months ended June 30, 2011, respectively, compared to the interest expenses of $330,417 and $657,801 for the same periods ended June 30, 2010, respectively. The significant decrease in interest expenses was primary due to amortization of debt discount arising from convertible notes payable in the first and second quarter of 2010, but no such amortization was incurred in the same periods of 2011.

Income Tax Expense

We had income taxes of $375,108 and $631,772 for the three and six months ended June 30, 2011, respectively, compared to the income taxes of $670,864 and $1,063,755 for the same periods ended June 30, 2010, respectively. The decrease in income tax expense in the second quarter compared and first six months of 2011, as compared with the same periods of 2010 was primarily due to decrease an in taxable income.

Net Income

We generated net income of $1,066,024 and $1,716,507 for the three and six months ended June 30, 2011, respectively, compared to the net income of $1,579,291 and $2,385,872 for the same periods ended June 30, 2010, respectively.

The decrease in net income in the second quarter and first six months of 2011 compared to the same periods in 2010 was due primarily due to a decline in income from operations, which was caused by a decline in our sales of our décor paper and an increase in our cost of revenue in the first quarter and first six months of 2011 compared to the same periods of 2010.

Liquidity and Capital Resources

Balance Sheet and Cash Flows

Cash flows provided by operating activities were $3,873,856 and $3,885,634 for the six months ended June 30, 2011 and 2010, respectively. Positive cash flows from operations for the six months ended June 30, 2011 resulted primarily from our net income of $1,716,507,  a decrease in advances to suppliers, and increases in  accounts payable, accrued liabilities and other payables by $491,923, $1,670,569 and $190,010, respectively, partially offset by increases in accounts receivable and inventories of $1,478,600 and $62,806 respectively, plus a decrease in income tax payable by $13,559. Positive cash flows from operations for the six months ended June 30, 2010 resulted primarily from our net income of $2,385,872, a decrease in advances to suppliers, and increases in accounts payable, income tax payable and accrued liabilities of $158,646, $364,749, $150,203, $402,415 respectively, a decrease in deposits and prepayments by $138,493, partially offset by the increases in accounts receivable and inventories by $259,270 and $578,831 respectively.

 
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Cash flows used in investing activities were $3,289,280 and $3,518,243 for the six months ended June 30, 2011 and 2010, respectively. The cash flows used in investments for the six months ended June 30, 2011 was due to the payments of $809,209 to acquire plant and equipment and $2,480,071 to construction in progress. The cash flows used in investments for the six months ended June 30, 2010 was primary due to the payment of $1,150,512 to acquire plant and equipment and $ 2,367,731 to construction in progress.

Cash flows used in financing activities were $832,574 and $577,988 during the six months ended June 30, 2011 and 2010, respectively. Cash outflows during the six months ended June 30, 2011 were due primarily to an increase in restricted cash of $763,569, the payments on convertible notes and bank borrowings of $186,517 and 72,368 respectively, offset by an advance from a related party of $189,880. Cash outflows during the six months ended June 30, 2010 were due primarily to the proceeds from bank borrowing $1,024,179, offset by payments on bank borrowings of $1,287,261 and repayment to a related party of $314,906.

Liquidity

We project that we will need additional capital to fund operations over the next 6 months. We anticipate we will need an additional $2,000,000 per year in 2011 and 2012.

Overall, we have funded our cash needs from inception through June 30, 2011 with a series of debt and equity transactions, primarily with related parties. If we are unable to receive additional cash from our related parties, we may need to rely on financing from outside sources through debt or equity transactions. Our related parties are under no legal obligation to provide us with capital infusions. Failure to obtain such financing could have a material adverse effect on operations and financial condition.

We had cash of $746,543 on hand as of June 30, 2011. Currently, we have enough cash to fund our operations for about six months. This is based on an assumed continuation of our current cash flows from operating activities and financing activities, positive working capital and projected revenues and a favorable outcome of our ongoing negotiations with the holders of our outstanding convertible notes which have matured.   However, if our actual revenues fall short of needed capital or we are unable to resolve our negotiations with our note holders with either a conversion into shares or extension of the terms of the convertible notes, we may not be able to sustain our capital needs. We will then need to obtain additional capital through equity or debt financing to sustain operations for an additional year. Our current level of operations would require capital of approximately $2,000,000 per year starting in 2011. Modifications to our business plans may require additional capital for us to operate. For example, if we are unable to raise additional capital in the future we may need to curtail our number of product offers or limit our marketing efforts to the most profitable geographical areas. This may result in lower revenues and market share for us.

On a long-term basis, liquidity is dependent on continuation and expansion of operations, receipt of revenues, additional infusions of capital and debt financing. However, there can be no assurance that we will be able to obtain additional equity or debt financing in the future, if at all. If we are unable to raise additional capital, our growth potential will be adversely affected. Additionally, we will have to significantly modify our business plan.

Demand for products and services will depend on, among other things, market acceptance of our products, the décor paper market and laminated board market in general, and general economic conditions, which are cyclical in nature. Inasmuch as a major portion of our activities is the receipt of revenues from the sales of our products, our business operations may be adversely affected by our competitors and prolonged recession periods.

 
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Off-balance sheet arrangements

At June 30, 2011, we had no off-balance sheet arrangements.

Contractual obligations and other commitments

Our obligations under contractual obligations and commercial commitments at June 30, 2011 were as follows:

   
Payments Due by Period
 
   
Total
   
Less than
1 year
   
1-3
years
   
3-5
years
   
More Than
5 years
 
       
Operating leases
  $ 1,906,560     $ 222,772     $ 459,468     $ 501,238     $ 723,082  
Purchase commitments
    200,000       200,000       -       -       -  
Total
  $ 2,106,560     $ 422,772     $ 459,468     $ 501,238     $ 723,082  

Operating leases

We lease certain facilities under non-cancelable operating leases that expire at various dates beyond 2015.

Purchase commitments

The Company is committed under a number of agreements with independent contractors or suppliers in relation to the construction of the new manufacturing facility for the production of laminated boards. The construction is expected to be completed in the fourth quarter of 2011. As of June 30, 2011, the Company has aggregate contingent payments of approximately $0.2 million to the third party contractors and equipment vendors in the next twelve months.
 
 
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.


ITEM 4. CONTROLS AND PROCEDURES.

(a)           Evaluation of disclosure controls and procedures.

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, as appropriate to allow timely decisions regarding required disclosure.

(b)           Changes in internal control over financial reporting.

There were no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



 
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PART II. OTHER INFORMATION

ITEM 1.      LEGAL PROCEEDINGS

The Company previously reported a lawsuit filed against the Company and its subsidiary CHDITN on or about January 5, 2011 by Greentree Financial Group Inc. (“Greentree”) in the Circuit Court of Broward County, Florida, Case No. 11-000245-09, seeking repayment of the principal of a $140,000 promissory note plus unpaid interest, late charges, attorneys’ fees and court costs.  There have been no material developments involving this litigation.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2010. The risks discussed in our Annual Report on Form 10-K could materially affect our business, financial condition and future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Two convertible notes issued by the Company with a principal amount of $2,340,000 matured and became due on November 10, 2010.  We are currently negotiating with the holders of these notes, including a possible conversion of the notes into shares of stock or extension of the terms of the convertible notes.

ITEM 4. REMOVED AND RESERVED

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

31.1
Certification of Chief Executive Officer
   
31.2
Certification of Chief Financial Officer
   
32.1
Statement required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2
Statement required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

101.INS
XBRL Instance Document
   
101.SCH
XBRL Schema Document
   
101.CAL
XBRL Calculation Linkbase Document
   
101.DEF
XBRL Definition Linkbase Document
   
101.LAB
XBRL Label Linkbase Document
   
101.PRE
XBRL Presentation Linkbase Document
 
 
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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, there unto duly authorized.


 
DÉCOR PRODUCTS INTERNATIONAL, INC.
 
     
Date: September 14, 2011
By:  
/s/ Rui Sheng Liu
 
Rui Sheng Liu
President and Chief Executive Officer
 

 
 
 
 
 
 
 
 
 
 
 
 
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INDEX TO EXHIBITS

Exhibit No.
 
Description
     
31.1
 
Certification of Chief Executive Officer
     
31.2
 
Certification of Chief Financial Officer
     
32.1
 
Statement required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Statement required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
 
101.INS
 
XBRL Instance Document
     
101.SCH
 
XBRL Schema Document
     
101.CAL
 
XBRL Calculation Linkbase Document
     
101.DEF
 
XBRL Definition Linkbase Document
     
101.LAB
 
XBRL Label Linkbase Document
     
101.PRE
 
XBRL Presentation Linkbase Document
 
 
28