U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2012

 

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

 

For the transition period from _______________ to _______________

 

Commission File Number

 

Jpak Group, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada		20-1977020
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

 

15 Xinghua Road, Qingdao, Shandong Province

People’s Republic of China 266401

(Address of principal executive offices (zip code))

 

(86-532) 84616387

 (Issuer's telephone number)

 

(Former address)

 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 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 (Sec. 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  þ     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large Accelerated Filer	o	Accelerated Filer	o
Non-accelerated filer	o	Smaller reporting company	þ

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934) Yes  o     No þ

 

 As of May 15, 2012, there were 36,368,344 shares of the issuer's common stock, par value $.001 per share, outstanding. The issuer also has 5,608,564 shares of Series A Preferred Stock, par value $.0001 per share, outstanding, which shares are convertible into on aggregate of 11,217,128  shares of common stock, and 5,000,000  shares of Series B Convertible Preferred Stock, par value $.0001 per share outstanding, which shares are convertible into an aggregate of 8,333,333 shares of common stock, 12,000,000 shares of Series C Convertible Preferred Stock, par value $0.0001 per share outstanding, which shares are convertible into an aggregate of 12,000,000  shares of common stock.

 

 

 

PART I – FINANCIAL INFORMATION

 

JPAK GROUP, INC. 

Consolidated Balance Sheets

			March 31,				June 30,
			2012				2011
Assets			(Unaudited)
Current assets:
Cash and cash equivalents		$	3,319,741			$	5,574,130
Restricted cash			19,937,018				12,904,460
Accounts receivable, net of allowance for doubtful accounts of $201,092			11,209,720				14,369,228
and $1,339,485 at March 31, 2012 and June 30, 2011, respectively
Due from factor			1,777,305				—
Inventory			10,794,164				10,655,991
Trade notes receivable			934,560				30,940
Advance payments			681,385				773,833
Prepaid expenses and other current assets			1,008,456				1,142,673
Total current assets			49,662,349				45,451,255
Property and equipment, net			27,111,860				18,706,975
Other noncurrent assets:
Advance payments – non current			907,059				592,489
Intangible assets, net			3,160,690				3,134,678
Deferred loss on sales of assets			2,713,391				2,302,922
Prepaid expenses			1,129,103				1,111,259
Total assets		$	84,684,452			$	71,299,578
Liabilities
Current liabilities:
Accounts payable and accrued expenses		$	9,625,318			$	5,402,866
Trade notes payable			19,070,529				12,513,972
Short-term bank loans			—				3,094,000
Current portion of long-term debt			3,315,968				3,899,818
Advances from customers			1,853,094				61,405
Income tax payable			270,778				9,986
Other current liabilities			623,851				54,705
Total current liabilities			34,759,538				25,036,752
Long-term debt			11,067,859				9,883,005
Total liabilities			45,827,397				34,919,757
Equity
Stockholders’ equity:
Series A convertible preferred stock, $0.0001 par value, 5,608,564
shares authorized, issued and outstanding			561				561
Series B convertible preferred stock, $0.0001 par value, 5,000,000
shares authorized, issued and outstanding			500				500
Series C convertible preferred stock, $0.0001 par value, 12,000,000
shares authorized, issued and outstanding			1,200				1,200
Common stock, $0.001 par value, 300,000,000 shares authorized,
36,368,334 shares issued and outstanding at March 31, 2012
and June 30, 2011, respectively			36,368				36,368
Series A preferred stock			2,484,226				2,484,226
Series B preferred stock			1,390,853				1,390,853
Additional paid-in capital			23,903,645				23,903,645
Retained earnings			3,665,548				2,252,319
Statutory reserves			1,826,236				1,826,236
Accumulated other comprehensive income			5,435,881				4,374,319
Total stockholders’ equity			38,745,018				36,270,227
Noncontrolling interest			112,037				109,594
Total equity			38,857,055				36,379,821
Total liabilities and equity		$	84,684,452			$	71,299,578

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

JPAK GROUP, INC. 

Consolidated Statements of Operations

(Unaudited)

 

		For the Three Months Ended								For the Nine Months Ended
		March 31,								March 31,
		2012				2011				2012				2011
Sales		$	23,902,337			$	19,705,508			$	67,946,360			$	52,549,376
Cost of sales			19,908,530				16,694,942				58,500,378				43,094,737
Gross profit			3,993,807				3,010,566				9,445,982				9,454,639
Operating expenses
Selling, general and administrative			3,042,738				2,052,282				7,548,857				7,592,038
Income from operations			951,069				958,284				1,897,125				1,862,601
Other income (expenses):
Interest Income			173,511				12,849				389,355				69,113
Interest expense			(260,419	)			(230,117	)			(685,000	)			(592,708	)
Non-operating income, net			(86	)			9,286				223,066				21,627
Total other income (expenses)			(86,994	)			(207,982	)			(72,579	)			(501,968	)
Income before provision for income taxes			864,075				750,302				1,824,546				1,360,633
Provision for income taxes			269,760				165,027				411,508				478,369
Net income			594,315				585,275				1,413,038				882,264
Less: net loss attributable to noncontrolling interest			(62	)			—				(191	)			(81	)
Net income attributable to Jpak Group, Inc.			594,377				585,275				1,413,229				882,345
Undistributed income attributable to preferred
stockholders			(276,106	)			(271,879	)			(656,490	)			(409,878	)
Net income attributable to common
stockholders		$	318,271			$	313,396			$	756,739			$	472,467
Basic earnings per common share		$	0.01			$	0.01			$	0.02			$	0.01
Diluted earnings per common share		$	0.01			$	0.01			$	0.02			$	0.01
Weighted average number of common shares
outstanding
Basic			36,368,334				36,368,334				36,368,334				36,368,334
Diluted			67,918,795				67,918,795				67,918,795				68,287,451

 

 

The accompanying notes are an integral part of these consolidated financial statements.

JPAK GROUP, INC. 

Consolidated Statements of Comprehensive Income

(Unaudited)

 

		For the Three Months Ended								For the Nine Months Ended
		March 31,								March 31,
		2012				2011				2012				2011
Net income		$	594,315			$	585,275			$	1,413,038			$	882,264
Other comprehensive income
Foreign currency translation adjustment			448,191				228,533				1,064,196				1,207,902
Total other comprehensive income			448,191				228,533				1,064,196				1,207,902
Comprehensive income			1,042,506				813,808				2,477,234				2,090,166
Less: comprehensive income attributable to
the noncontrolling interest			661				714				2,443				3,857
Comprehensive income attributable to
Jpak Group, Inc.		$	1,041,845			$	813,094			$	2,474,791			$	2,086,309

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

JPAK GROUP, INC. 

Consolidated Statements of Cash Flows

(Unaudited)

 

		For the Nine Months Ended March 31,
		2012				2011
Cash flows from operating activities:
Net income		$	1,413,038			$	882,264
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization			1,494,207				1,039,053
Share-based payment			—				719,439
Loss on disposal of fixed assets			105,758				9,557
Deferred tax assets			(25,507	)			—
Gain on acquisition of a subsidiary - Jiexin			(207,968	)			—
Changes in assets and liabilities:
Accounts receivable			4,034,121				(5,031,544	)
Inventory			962,665				(312,274	)
Trade notes receivable			(897,465	)			(93,531	)
Advance payments			180,762				1,558,161
Prepaid expenses and other current assets			(25,741	)			(266,542	)
Accounts payable and accrued expenses			4,156,799				1,854,723
Income tax payable			258,991				60,678
Advances from customers			1,775,043				(44,047	)
Other current liabilities			145,240				(994	)
Total adjustments			11,956,905				(507,321	)
Net cash provided by operating activities			13,369,943				374,943
Cash flows from investing activities:
Advance payments for fixed assets			(304,038	)			24,772
Additions to property and equipment			(9,812,528	)			(3,795,651	)
Proceeds from disposal of fixed assets			47,100				5,892
Acquisition of intangible assets – land use rights			(764,051	)			(3,080,127	)
Net cash used in investing activities			(10,833,517	)			(6,845,114	)
Cash flows from financing activities:
Restricted cash			(6,683,593	)			(4,455,568	)
Due from factor			(1,766,646	)			—
Issuance of trade notes payable			6,219,730				4,147,413
Proceeds from short-term bank loans			(3,149,000	)			—
Proceeds from long-term debt			1,128,285				2,371,110
Repayment of long-term debt			(858,557	)			(465,732	)
Additional paid-in capital			—				—
Net cash provided by (used in) financing activities			(5,109,781	)			1,597,223
Effect of foreign currency translation on cash			318,966				99,877
Net decrease in cash and cash equivalents			(2,254,389	)			(4,773,071	)
Cash and cash equivalents – beginning			5,574,130				6,221,273
Cash and cash equivalents – ending		$	3,319,741			$	1,448,202
Supplemental schedule of non-cash activities
Deferred loss—sale leaseback		$	733,179			$	217,740

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

  

JPAK GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

  

Note 1 – Organization and Nature of Business

 

Jpak Group, Inc. (Formerly Rx Staffing Inc.), a public shell company as defined in Rule 12b-2 of the Exchange Act of 1934, was established under the laws of Nevada on December 6, 2004. The accompanying consolidated financial statements include the financial statements of Jpak Group, Inc. and its subsidiaries (the “Company”). The Company’s primary business is to print and produce packaging products for sale to the beverage and other industries.

 

On August 9, 2007, Rx Staffing Inc. (“Rx Staffing”) completed a reverse acquisition of Jpak Group Co., Ltd., (“Jpak Ltd.”) which was incorporated in the Cayman Islands on June 22, 2006. To accomplish the exchange of shares Rx Staffing issued 23,005,000 shares of common stock on a one to one ratio for a 100% equity interest in Jpak Ltd., per the terms of the Share Exchange and Bill of Sale of assets of Rx Staffing and Shaun Jones. Rx Staffing was delivered with zero assets and zero liabilities at time of closing. Following the reverse acquisition, Rx Staffing changed the name to Jpak Group, Inc. (“Jpak”). The transaction was regarded as a reverse merger whereby Jpak Ltd. was considered to be the accounting acquirer as its shareholders retained control of RX Staffing after the exchange. Although the Company is the legal parent company, the share exchange was treated as a recapitalization of Jpak Ltd. Thus, Jpak Ltd. is the continuing entity for financial reporting purposes. The financial statements have been prepared as if Jpak Co. had always been the reporting company and then on the share exchange date, had changed its name and reorganized its capital stock.

 

In September 2006, Jpak Ltd. acquired 100% interest in Grand International Industrial Ltd. which was incorporated on August 4, 2006, Hong Kong Special Administrative Region, the People’s Republic of China (“PRC”). In August 2006, Grand International acquired 88.23% interest in Qingdao Renmin, which was incorporated in May 2001 in the city of Qingdao, the People’s Republic of China. On July 3, 2007, Grand International acquired the remaining 11.77% interest in Qingdao Renmin. The consolidated financial statements reflect all predecessor statements of income and cash flows from the inception of Qingdao Renmin in August 2006. In October 2007, Qingdao Renmin invested in Qingdao Delikang Packing Machinery Co., Ltd., (“Qingdao Delikang”), a joint venture with Xi’an Heiniu Machinery, Co. Qingdao Renmin acquired 51% interest of Qingdao Delikang.

 

On January 11, 2010, Qingdao Likang Packaging Co. Ltd (Qingdao Likang), a wholly-owned subsidiary of Grand International, was registered in Qingdao with a capital commitment of $13.5 million. As of December 31, 2010, approximately $7.1 million or 52.6% of total registered capital has been invested and the remaining $6.4 million of the registered capital will be invested within two years since the registration. Grand International is allowed to use the capital raised or the profit generated by Qingdao Renmin for this capital investment.

 

Qingdao Jiexin Recycling Resources Technological Development Co., Ltd. (“Qingdao Jiexin”) was established on August 29, 2008, in the city of Qingdao, PRC. On July 20, 2011, Qingdao Renmin contributed RMB 5,000,000 (approximately $773,500) and acquired 100% interest in Qingdao Jiexin. As a result, Qingdao Jiexin became a wholly-owned subsidiary of Qingdao Renmin. The fair value of the identifiable assets acquired and liabilities assumed of $979,791 exceeded the fair value of the purchase price of the business of $773,500. As a result, the Company reassessed the recognition and measurement of identifiable assets acquired and liabilities assumed and concluded that the valuation procedures and resulting measures were appropriate. Accordingly, the Company recognized a gain of $207,083 associated with the acquisition. The gain is included in the line item “Non-operating income” in the Consolidated Statements of Operations for the six months ended December 31, 2011. For the six months ended December 31, 2011, the Company consolidated the financial statements of Qingdao Jiexin and eliminated the intercompany transactions, including the RMB 5,000,000 (approximately $773,500) investment in Qingdao Jiexin.

 

Substantially all of the Company’s business is conducted through Qingdao Renmin, an operating subsidiary established in the Peoples Republic of China, in which the Company indirectly holds a 100% interest.

 

 

JPAK GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

 Note 2 – Summary of Significant Accounting Policies

 

Basis Of Presentation

 

The Company’s consolidated financial statements include the accounts of its controlled subsidiaries. All intercompany balances and transactions are eliminated in consolidation. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) applicable to interim financial information and the requirements of Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included.

 

In preparing the accompanying unaudited consolidated financial statements, we evaluated the period from March 31, 2012 through the date the financial statements were issued, for material subsequent events requiring recognition or disclosure.

 

Interim Financial Statements

 

These interim financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 2011, as not all disclosures required by generally accepted accounting principles for annual financial statements are presented. The interim financial statements follow the same accounting policies and methods of computations as the audited financial statements for the year ended June 30, 2011.

 

Reclassification

 

Certain amounts as of June 30, 2011 and March 31, 2011 were reclassified for presentation purposes.

 

Note 3– Restricted Cash

 

As of March 31, 2012 and June 30, 2011, the Company had restricted cash of $19,937,018 and $12,904,460, respectively. These restricted cash balances are reserved for settlement of trade notes payable and open letter of credit in connection with inventory purchases. The cash held in custody by bank issuing the trade notes payable and letter of credit is restricted as to withdrawal or use, and is currently earning interest.

 

Note 4– Accounts Receivable

 

Trade accounts receivable are stated at original invoice amount less allowance for doubtful receivables based on management’s periodic review of aging of outstanding balances and customer credit history. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

 

The balance of allowance for doubtful accounts amounted to $201,092 and $1,339,485 as of March 31, 2012 and June 30, 2011, respectively. Hunan Zhuzhou Intermediate People's Court approved Hunan Taizinai Group Bio-Tech Co., Ltd., one of the Company’s customers, to go through the restructuring procedures. According to the Written Ruling from the Civil Court and in debt covenant, $1,170,430 of the allowance was written off this quarter.

 

Note 5– Due from Factor

 

Due from factor as of March 31, 2012 and June 30, 2011 consist of the following:

 

		March 31, 2012				June 30, 2011
Receivables assigned to factor		$	7,796,505			$	—
Advance from factor			(6,019,200	)			—
Amounts due from factor		$	1,777,305			$	—

 

 

 

JPAK GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 5– Due From Factor (continued)

 

Pursuant to the factoring agreement with recourse against the Company in the event of a loss, Industrial and Commercial Bank of China acts as its factor for some of its receivables, which are assigned on a pre-approved basis. The advances for factored receivables are made pursuant to a revolving credit and security agreement, which expires on September 30, 2012 and January 31,2013 respectively.

 

Note 6– Inventory

 

Inventory, which includes material, labor, and manufacturing overhead, as of March 31, 2012 and June 30, 2011, consists of the following:

 

			March 31, 2012				June 30, 2011
Raw materials		$	7,030,648			$	8,423,431
Work in process			845,602				675,738
Finished goods			2,593,647				1,296,126
Parts and supplies			324,267				260,696
Total		$	10,794,164			$	10,655,991

 

Note 7 – Advance Payments

 

Advance payments as of March 31, 2012 and June 30, 2011 consist of the following:

 

			March 31, 2012				June 30, 2011
Advance payments for inventory		$	681,385			$	773,833
Advance payments for equipment			907,059				592,489
Total		$	1,588,444			$	1,366,322

 

Note 8 – Property and Equipment

 

Property and equipment as of March 31, 2012 and June 30, 2011 consist of the following:

			March 31, 2012				June 30, 2011
Buildings		$	5,064,256			$	4,928,620
Machinery and equipment			15,656,065				14,435,629
Machinery—capital lease			3,080,800				3,370,395
Subtotal			23,801,121				22,734,644
Less: Accumulated depreciation			12,791,961				11,040,592
			11,009,160				11,694,052
Add: Construction in progress			16,102,700				7,012,923
Total		$	27,111,860			$	18,706,975

 

Depreciation expenses for the three months ended March 31, 2012 and 2011 were $617,996 and $433,302 respectively. Depreciation expenses for the nine months ended March 31, 2012 and 2011 were $1,445,540 and $1,002,944, respectively. For the nine months ended March 31, 2012 and 2011, amortization of machinery and equipment under capital lease included in depreciation expense was $194,137 and $136,434, respectively.

 

 

 

JPAK GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

  

Note 9 – Intangible Assets

 

Intangible assets as of March 31, 2012 and June 30, 2011 consist of the following:

			March 31, 2012				June 30, 2011
Land use rights		$	3,264,052			$	3,187,808
Less: accumulated amortization			103,362				53,130
Total		$	3,160,690			$	3,134,678

 

The intangible assets represent consideration payment and other expenditures for land use right of Qingdao Likang for a parcel of land with an area of approximately 65,064 square meters. The total cost is amortized over 50 years. Amortization expense for the three months ended March 31, 2012 and 2011 was $16,360 and $15,618, respectively. Amortization expense for the nine months ended March 31, 2012 and 2011 was $48,667and $36,109, respectively.

 

Note 10 – Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses as of March 31, 2012 and June 30, 2011 consist of the following:

 

		March 31, 2012				June 30, 2011
Accounts payable		$	8,483,241			$	4,745,322
Accrued expenses			1,142,077				657,544
Total		$	9,625,318			$	5,402,866

 

The carrying values of accounts payable and accrued expenses approximate their fair values due to the short-term nature of these obligations.

 

Note 11 – Trade Notes Payable

 

Trade notes payable consist of non-collateralized non-interest bearing promissory notes issued in connection with the acquisition of certain inventory and equipment. Balances outstanding under the notes as of March 31, 2012 and June 30, 2011 were $19,070,529 and $12,513,972, respectively.

 

Note 12 – Long-Term Debt

 

Long term debt as of March 31, 2012 and June 30, 2011, consists of the following:

 

 

			March 31,				June 30,
			2012				2011
Loans from employees, interest is paid at an annual fixed rate of 10%.
Interest payments are made semi-annually with no principal payments
due until April 1, 2012, as per the terms of the loan agreement.		$	5,830,704			$	5,385,107
On November 27, 2009, the Company entered into a sale-leaseback
transaction with International Fareastern Leasing Co., Ltd.  The transaction
was accounted for as a financing arrangement in the amount of
approximately $1.4 million. The annual principal and interest payment is
$441,048, and the term of the arrangement is four years. The agreement was terminated before the prescribed time. Refer to Note 18.		$	—			$	843,561
In December 2010, two other sale-leaseback agreements established on November 27, 2009 went into effect, which represents financing arrangement in the total amount of approximately $1.65 million, received in two allotments. The annual principal and interest payment is $501,561 and the term of the arrangement is four years. Refer to Note 18.		$	1,046,209			$	1,366,155

 

 

 

 

JPAK GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 12 – Long-Term Debt (continued)

			March 31,				June 30,
			2012				2011
February 1, 2012, the Company entered into two sale-leaseback transaction with International Fareastern Leasing Co., Ltd., which was account for as a financing arrangement in the amount of approximately $1.36 million. The annual principal and interest payment is $ 420,932 and the term of the arrangement is four years. Refer to Note 18.		$	1,170,914			$	—
On April 28, 2011, the Company obtained a loan from Bank of Qingdao. The Principle is to be paid in full by April 28, 2016. The interest rate is a variable rate equal to 15% per annum above the floating base interest for loans of the same term promulgated by the PRC’s central bank, China People’s bank. The average interest rate for the six month ended December 31, 2011 was approximately 7.6475%. Interest is paid monthly. The loan was designated to finance the construction of Qingdao Likang. The loan was secured by the Company’s construction in progress and guaranteed by the Company’s subsidiary-Qingdao Renmin.		$	6,336,000			$	6,188,000
Total		$	14,383,827			$	13,782,823
Less: Current portion of loans			2,399,760				2,688,686
Current portion of obligation under capital lease			916,208				1,211,132
Total current portion			3,315,968				3,899,818
Total long-term portion		$	11,067,859			$	9,883,005

 

Note 13 – Stockholders’ Equity and Related Financing Agreements

 

On August 9, 2007, the shareholders of Jpak were issued 23,005,000 shares of Rx Staffing’s common stock, which represented 64.4% of all the issued and outstanding shares of Jpak’s common stock, under a Securities Exchange Agreement (the “SEA”), pursuant to which all the shares of Rx Staffing were transferred and Jpak became a wholly-owned subsidiary of Rx Staffing. In connection with the Share Exchange, the company changed its name to Jpak Group, Inc.

 

On August 9, 2007, Jpak became a party to the Note Purchase Agreement dated May 17, 2007 (“NPA”). Pursuant to the NPA, Jpak issued Convertible Promissory Notes in the aggregate principal amount of $5.5 million to the Investors. As a result of the Share Exchange, and under the terms of the Notes and the NPA, the notes converted to the following: (i) 5,608,564 shares of the Company’s Series A Convertible Preferred Stock, par value $.0001 per share, convertible into an aggregate of 11,217,128 shares of common stock, par value $0.001 per share (the “Common Stock”), (ii) Series A Warrants to purchase an aggregate of 5,500,000 shares of Common Stock (subject to adjustment) at an exercise price of $.60 per share until August 2011 (the “Series A Warrants”), (iii) Series B Warrants to purchase an aggregate of 5,500,000 shares of Common Stock (subject to adjustment) at an exercise price of $.70 per share until August 2011 (the “Series B Warrants”) and (iv) Series J Warrants to purchase (a) an aggregate of 5,000,000 shares of Series B Preferred Stock, which shall contain the same terms as the Series A Preferred Stock (other than conversion price), and will be convertible into 8,333,333 shares of the Company’s Common Stock, (b) Series C Warrants to purchase an aggregate of 4,166,667 shares of Common Stock (subject to adjustment) at an exercise price of $.72 per share (the “Series C Warrants”) and (c) Series D Warrants to purchase an aggregate of 4,166,667 shares of Common Stock (subject to adjustment) at an exercise price of $.84 per share (the “Series D Warrants” and together with the Series A Warrants, Series B Warrants and Series C Warrants, the “Warrants”). The Series J Warrants were exercisable until 90 days following the effective date of a registration statement registering for sale of shares of common stock underlying the securities issued in the financing. Finally, the Company also granted warrants to purchase 990,000 shares of common stock at an exercise price of $.50 per share and 750,000 shares of common stock at an exercise price of $.60 per share to the placement agent in the financing transaction. These warrants have the same terms as the Series A and Series B Warrants, except that they contain a “cashless” exercise provision.

 

 

  

JPAK GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

  

Note 13 – Stockholders’ Equity and Related Financing Agreements (continued)

 

On December 28, 2007, the holders of the Jpak’s outstanding Series J Warrants exercised in full such warrants for aggregate gross proceeds of $5.0 million to The Company. Upon exercise of the Series J Warrants and pursuant to their stated terms, the Company issued to the holders of the Series J Warrants (a) an aggregate of 5,000,000 shares of the Company’s Series B Convertible Preferred Stock, which are convertible into an aggregate of 8,333,333 shares of the Company’s common stock, (b) Series C Warrants to purchase an aggregate of 4,166,667 shares of the Company’s common stock at an exercise price of $0.72 per share and (c) Series D Warrants to purchase an aggregate of 4,166,667 shares of the Company’s common stock (subject to adjustment) at an exercise price of $0.84 per share. The Series C Warrants and Series D Warrants have a term of six years from the date of issuance.

 

In connection with the exercise of the Series J Warrants, the term of Series A and Series B Warrants was extended from four years to six years, so that such warrants shall now expire on August 9, 2013. The extension of the term of the Series A and Series B Warrants was a condition of the exercise of the Series J Warrants and the subsequent issuance of the Series B Preferred stock (the “Series B financing”). In this way, the conversion of Series A and Series B convertible Preferred Stock is deemed as “in the money” and therefore contain a beneficial conversion feature which amounted to $2,484,226 and $1,390,853, respectively, after allocation.

 

On April 1, 2008, Jpak entered into a consulting agreement with Tripoint Capital advisors, LLC to provide consulting services for one year. As a result, Jpak agreed to issue to Tripoint and/or its affiliates 300,000 shares of its capital stock on July 1, 2008. The shares were issued on July 1, 2008. 150,000 shares were vested immediately and the remaining 150,000 were to be vested in equal installments in the next two quarters. The fair value on April 1, 2008 was $404,700 based on the quoted price of the Company’s common stock.

 

On April 1, 2009, the board of directors approved to issue 200,000 shares of the Company’s common stock to Mr. Dongliang (Frank) Su, the acting CFO of the Company and the shares were vested on July 1, 2009. The fair value on April 1, 2009 was $20,000 based on the quoted price of the Company’s common stock on that day.

 

On November 3, 2009, Jpak completed a financing with one accredited investor. The financing raised gross proceeds of $6.0 million with net proceeds to Jpak of $5,916,500. As a result of the financing, Jpak issued 12,000,000 units of securities at a price of $0.50 per unit. Each unit consists of (i) one (1) share of the Company’s Series C Convertible Preferred Stock, par value $0.0001 per share (the “Preferred Shares”), convertible into one share of the Company’s Common Stock, and (ii) a one-half Series E Warrant (the “Series E Warrant”) and one-half Series F Warrant (the “Series F Warrant”, collectively the “Warrants”).  Each whole Series E Warrant may be exercised to purchase one share of Common Stock at an exercise price of $0.60 per share and each whole Series F Warrant may be exercised to purchase one share of Common Stock at an exercise price of $0.70 per share.  The Warrants are exercisable for a period of five years from the date of issuance. In connection with the financing, the Company paid the fee of $30,000 to Tripoint Global Equities, LLC, who acted as placement agent.

 

On December 16, 2009, Jpak entered into an Exchange Agreement with each of the holders of the warrants that were issued pursuant to the private financings which closed in August 2007, December 2007 and November 2009.  Pursuant to the Exchange Agreement the Company issued an aggregate of 11,363,334 shares of our common stock in exchange for 5,500,000 Series A Warrants; 5,500,000 Series B Warrants; 4,166,667 Series C Warrants; 4,166,667 Series D Warrants; 6,000,000 Series E Warrants; and 6,000,000 Series F Warrants.  The warrant exchange took the form of a cashless transaction.  As a result, Jpak does not have any warrants outstanding other than those issued to the placement agent of the above mentioned private financings.

 

On December 15, 2010, JPAK granted five year options to purchase up to 3,600,000 shares of the common stock of the Company at the exercise price of $0.20 per share to four of its key employees in accordance with the 2010 Equity Incentive Plan. All the options vested immediately upon issuance. The fair value of each option grant is estimated on the granted date using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the period ended December 31, 2010: expected volatility of 299.23 percent and risk-free interest rate of 2.11 percent.

 

 

JPAK GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 14– Income Taxes

 

Jpak Group Co., Ltd. was incorporated in the Cayman Islands. Under the laws of Cayman Islands, the Company is not subject to tax on income or capital gain.

 

The operating subsidiary Qingdao Renmin is a wholly foreign-owned enterprise incorporated in the PRC and subject to PRC Foreign Enterprise Income Tax (“FEIT”) Law. Pursuant to FEIT Law, foreign invested enterprises (“FIEs”) are subject to FEIT at a state tax rate of 30% plus a local tax rate of 3% on PRC taxable income. FIEs are also entitled to be exempted from FEIT for a 2-year period starting from their first profit-making year followed by a 50% reduction of FEIT payable for the subsequent three years, if they fall into the category of production-oriented enterprises with an operational period of more than 10 years in China. Qingdao Renmin started its tax holiday period on January 1, 2007, which will end on December 31, 2011.

 

On March 16, 2007, the National People’s Congress of China enacted a new Corporate Income Tax (“CIT”) law, under which FIEs and domestic companies would be subject to CIT at a uniform rate of 25%. The new CIT law became effective on January 1, 2008. The grandfathering treatments for unutilized tax holiday are provided for certain qualified FIEs. For those FIEs which have already commenced their qualified tax holidays before 2008, they can continue to enjoy the remaining unutilized tax holidays until expiry. For those qualified old FIEs which have not commenced their tax holidays before 2008 due to cumulative losses, their tax holidays will be deemed to commence in 2008 and can be utilized until expiry. Currently, the Company does not believe that the new CIT law will affect the preferential tax treatments (i.e. the unutilized tax holiday) that it is entitled to. Accordingly, since January 1, 2009, the Company has commenced the 3-year period of tax holidays by a 50% reduction of FEIT with an effective tax rate of 12.5%, and for the nine months ended March 31, 2012 and 2011, the income tax expense was $411,508 and $478,369, respectively.

 

On February 22, 2008, the Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”) jointly issued Cai Shui [2008] Circular 1 (“Circular 1”). According to Article 4 of Circular 1, distributions of accumulated profits earned by a FIE prior to January 1, 2008 to foreign investor(s) in 2008 or after will be exempt from withholding tax (“WHT”) while distribution of the profit earned by an FIE after January 1, 2008 to its foreign investor(s) shall be subject to WHT. Since the Company intends to reinvest its earnings to further expand its businesses in mainland China, its foreign invested enterprises do not intend to declare dividends to their immediate foreign holding companies in the foreseeable future.

 

Note 15– Employee Welfare Plan

 

The Company has established an employee welfare plan in accordance with Chinese laws and regulations. Full-time employees of the Company in the PRC participate in a government-mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. PRC labor regulations require the Company to accrue for these benefits based on a certain percentage of the employees’ salaries. The total contribution for such employee benefits was $755,391 and $350,489 for the nine months ended March 31, 2012 and 2011, respectively.

 

Note 16– Risk Factors

 

The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC as well as by the general state of the PRC’s economy. The Company's business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

 

Note 17 - Risk of Concentrations and Credit Risk

 

For the nine months ended March 31, 2012 and 2011, five vendors accounted for approximately 81% and 74% of the Company’s purchases, respectively. Total purchases from these vendors were $58,148,769 and $38,825,494 for the nine months ended March 31, 2012 and 2011, respectively.

 

 

JPAK GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 17 - Risk of Concentrations and Credit Risk (continued)

 

For the nine months ended March 31, 2012 and 2011, five customers accounted for approximately 64.6% and 68.3% of the Company’s revenue, respectively. Total sales to these customers were $43,856,804 and $35,896,674 for the nine months ended March 31, 2012 and 2011, respectively.

 

Financial instruments which potentially subject the Company to credit risk consist principally of cash on deposit with financial institutions. Management believes that the financial institutions that hold the Company’s cash and cash equivalents are financially sound and minimal credit risk exists with respect to these investments.

 

Note 18 – Sale-Leaseback Transaction Accounted for as a Financing Arrangement

 

On November 27, 2009, the Company entered into three sale-leaseback arrangements with International Fareastern Leasing Co., Ltd and completed one to refinance its printing equipment. One of the equipments, with a book value of approximately $3.4 million was sold for approximately $1.4 million. The remaining two went into effect in December 2010, after which the equipment valued at approximately $2.4 million was sold for approximately $1.65 million. The company prematurely ended a $1.5 million financial lease obligation in February 2012 by paying the full balance due. The company also entered into two other sale-leaseback arrangements with international Fareastern leasing Co., Ltd. The equipment with a book value of approximately $3.97 million was sold for approximately $1.36 million. The cash received was used towards the original invoice amount. The transaction was accounted for as a financing arrangement, wherein the equipment remains on the Company’s books and will continue to be depreciated.

 

The loss on the sale of the equipment was deferred and amortized over the remaining useful life of the leased assets as an increase of depreciation expense. For the nine months ended March 31, 2012, the Company amortized $185,986 and $140,448 of the deferred loss into depreciation expense. A financing obligation in the amount of $2.34 million, representing the proceeds, has been recorded under long-term debt in the Company’s balance sheet, and is being reduced based on payments under the lease.

 

The lease has a term of four years and requires minimum annual lease payments as follows:

 

		Year Ending June 30				Amount
		2012			$	229,052
		2013				916,208
		2014				916,208
		2015				789,738
		2016				245,544
		Total			$	3,096,750

 

The Company has the option to purchase the equipment at the end of the lease term.

 

Note 19 – Earnings Per Share

 

The Company presents earnings per share (“EPS”) on a basic and diluted basis. Basic earnings per share have been computed by dividing income available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share have been computed by dividing income available to common shareholders by the weighted average number of shares outstanding including the dilutive effect of equity securities. All share and per share data have been adjusted retroactively to reflect the recapitalization of the Company pursuant to the Securities Exchange Agreement with Rx Staffing.

 

The Company uses two-class method to calculate the basic earnings per share. Under the two class method, net income is allocated between ordinary shares and other participating securities based on their respective participating rights. The Company’s Series A, Series B and Series C preferred shares are participating securities. In the event that any dividends are paid on our common stock, the holders of Series A, Series B and Series C preferred stock shall share with the holders of common stock on an as converted basis in such dividends. The 5,608,564 shares of Series A Preferred Stock are convertible into an aggregate of 11,217,128 shares of common stock. The 5,000,000 shares of Series B Preferred Stock are convertible into an aggregate of 8,333,333 shares of common stock. The 12,000,000 shares of Series C Preferred Stock are convertible into an aggregate of 12,000,000 shares of common stock.

 

 

JPAK GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 19 – Earnings Per Share (continued)

 

Basic EPS for the three months ended March 31, 2012 was computed as follows:

 

Net income attributable to Jpak Group, Inc.		$	594,377
Less dividends paid to:
Common shareholders			—
Series A convertible preferred shareholders			—
Series B convertible preferred shareholders			—
Series C convertible preferred shareholders			—
Undistributed income		$	594,377

 

Basic earnings per share amounts:
							Series A				Series B				Series C
			Common				convertible				convertible				convertible
			Common				preferred				preferred				preferred
			Stock				stock				stock				stock
Distributed earnings		$	0.00			$	0.00			$	0.00			$	0.00
Undistributed earnings			0.01				0.02				0.01				0.01
Totals		$	0.01			$	0.02			$	0.01			$	0.01

 

Diluted EPS for the three months ended March 31, 2012 was computed as follows using the If-Converted Method:

 

			Distributed &
			Undistributed
			earnings to
			Common				Common				Earnings
			Stock				Shares				Per Share
As reported - Basic		$	318,271				36,368,334			$	0.01
Warrants			—				—				—
			318,271				36,368,334			$	0.01
Series A preferred stock conversion			98,164				11,217,128				—
Series B preferred stock conversion			72,927				8,333,333				—
Series C preferred stock conversion			105,015				12,000,000				—
Diluted earnings for common stock		$	594,377				67,918,795			$	0.01

 

Basic EPS for the three months ended March 31, 2011 was computed as follows:

 

Net income attributable to Jpak Group, Inc.		$	585,275
Less dividends paid to:
Common shareholders			—
Series A convertible preferred shareholders			—
Series B convertible preferred shareholders			—
Series C convertible preferred shareholders			—
Undistributed income		$	585,275

 

Basic earnings per share amounts:
							Series A				Series B				Series C
			Common				convertible				convertible				convertible
			Stock				preferred stock				preferred stock				preferred stock
Distributed earnings		$	0.00			$	0.00			$	0.00			$	0.00
Undistributed earnings			0.01				0.02				0.01				0.01
Totals		$	0.01			$	0.02			$	0.01			$	0.01

  

JPAK GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 19 – Earnings Per Share (continued)

 

Diluted EPS for the three months ended March 31, 2011 was computed as follows using the If-Converted Method:

 

			Distributed &
			Undistributed
			earnings to
			Common				Common				Earnings
			Stock				Shares				Per Share
As reported - Basic		$	313,396				36,368,334			$	0.01
Warrants			—				—				—
			313,396				36,368,334			$	0.01
Series A preferred stock conversion			96,661				11,217,128				—
Series B preferred stock conversion			71,811				8,333,333				—
Series C preferred stock conversion			103,407				12,000,000				—
Diluted earnings for common stock		$	585,275				67,918,795			$	0.01

 

Basic EPS for the nine months ended March 31, 2012 was computed as follows:

 

Net income attributable to Jpak Group, Inc.														$	1,412,229
Less dividends paid to:
Common shareholders															—
Series A convertible preferred shareholders															—
Series B convertible preferred shareholders															—
Undistributed earnings														$	1,413,229
Basic earnings per share amounts:
							Series A				Series B				Series C
			Common				convertible				convertible				Convertible
			Stock				preferred stock				preferred stock				preferred stock
Distributed earnings		$	0.00			$	0.00			$	0.00			$	0.00
Undistributed earnings			0.01				0.03				0.03				0.02
Totals		$	0.01			$	0.03			$	0.03			$	0.02

 

Diluted EPS for the nine months ended March 31, 2012 was computed as follows using the If-Converted Method:

 

			Distributed &
			Undistributed
			earnings to
			Common				Common				Earnings
			Stock				Shares				Per Share
As reported - Basic		$	756,739				36,368,334			$	0.02
Options			—				—				—
			756,739				36,368,334			$	0.02
Series A preferred stock conversion			233,402				11,217,128				—
Series B preferred stock conversion			173,397				8,333,333				—
Series C preferred stock conversion			249,691				12,000,000				—
Diluted earnings for common stock		$	1,413,229				67,918,795			$	0.02

 

 

 

JPAK GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

Note 19 – Earnings Per Share (continued)

 

Basic EPS for the nine months ended March 31, 2011 was computed as follows:

 

Net income attributable to Jpak Group, Inc.														$	882,345
Less dividends paid to:
Common shareholders															—
Series A convertible preferred shareholders															—
Series B convertible preferred shareholders															—
Undistributed earnings														$	882,345
Basic earnings per share amounts:
							Series A				Series B				Series C
			Common				convertible				convertible				convertible
			Stock				preferred stock				preferred stock				preferred stock
Distributed earnings		$	0.00			$	0.00			$	0.00			$	0.00
Undistributed earnings			0.02				0.03				0.02				0.01
Totals		$	0.02			$	0.03			$	0.02			$	0.01

 

Diluted EPS for the nine months ended March 31, 2011 was computed as follows using the If-Converted Method:

 

			Distributed &
			Undistributed
			earnings to
			Common				Common				Earnings
			Stock				Shares				Per Share
As reported - Basic		$	472,467				36,368,334			$	0.01
Options			—				368,656				—
			472,467				36,736,990			$	0.01
Series A preferred stock conversion			145,724				11,217,128				—
Series B preferred stock conversion			108,260				8,333,333				—
Series C preferred stock conversion			155,894				12,000,000				—
Diluted earnings for common stock		$	882,345				68,287,451			$	0.01

 

Note 20– Supplemental Cash Flow Information

 

		Nine Months Ended March 31,
		2012				2011
Cash paid for interest		$	626,203			$	413,035
Cash paid for income taxes		$	214,047			$	387,019

 

 

 

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

 

The following discussion and analysis of our financial condition and result of operations contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section of the other reports we file with the Securities and Exchange Commission. Actual results may differ materially from those contained in any forward-looking statements.

 

The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the financial statements of Jpak for the three and nine months ended March 31, 2012 and 2011 and should be read in conjunction with such financial statements and related notes included in this report and the Company’s Annual Report on Form 10-K for the year ended June 30, 2011.

 

Overview

 

We are engaged primarily in the development, manufacture and distribution of aseptic liquid food and beverage cartons for milk, fruit juices, soy milk, yogurt drinks, iced tea, wine, sauces and other liquid foods and beverages in China. Since 2004, we have focused on research and development and we believe we are one of the largest and leading domestic suppliers of aseptic liquid food and beverage cartons in China. Our business is primarily focused in China, but we have begun exporting our manufacturing products to several foreign countries.

 

Company History

 

Our operations are conducted in China through Qingdao Renmin. Qingdao Renmin commenced operations in China in 1958 as a state-owned, traditional printing and packaging company. Management completed the buyout of 88.23% of the state-owned equity interest in 2004, and in the same year started the development of aseptic liquid food and beverage cartons which was launched in the China market in 2005.

 

On June 22, 2006, Jpak Group Co., Ltd (“Jpak Ltd.”) was incorporated in the Cayman Islands In September 2006, Jpak Ltd. completed the acquisition of 88.23% of the equity interest in Qingdao Renmin through Grand International, the 100% owned subsidiary of Jpak Ltd.. In July 2007, Grand International completed the acquisition of the remaining 11.77% of the state-owned equity interest and now owns 100% of the equity interest of Qingdao Renmin.

 

On August 9, 2007, Rx Staffing completed a reverse acquisition of Jpak Ltd. and issued 23,005,000 shares of common stock on a one to one ratio for a 100% equity interest in Jpak Ltd., whereby Jpak Ltd. becomes a subsidiary of Rx Staffing. On the same day, Rx Staffing changed its corporate name to Jpak Group, Inc. (“Jpak”).

 

On January 11, 2010, Qingdao Likang Packaging Co. Ltd (“Qingdao Likang”), a wholly-owned subsidiary of Grand International, was registered in Qingdao with a capital commitment of $13.5 million. As of December 31, 2010, approximately $7.1 million or 52.6% of total registered capital has been invested and the rest will be invested within two years since the registration. Grand International is allowed to use the capital raised or the profit generated by Qingdao Renmin for this capital injection.

 

Qingdao Jiexin Recycling Resources Technological Development Co., Ltd. (“Qingdao Jiexin”) was established on August 29, 2008, in the city of Qingdao, PRC. On July 20, 2011, Qingdao Renmin contributed RMB 5,000,000 (approximately $773,500) and acquired 100% interest in Qingdao Jiexin. As a result, Qingdao Jiexin became a wholly-owned subsidiary of Qingdao Renmin. The fair value of the identifiable assets acquired and liabilities assumed of $979,791 exceeded the fair value of the purchase price of the business of $773,500. As a result, the Company reassessed the recognition and measurement of identifiable assets acquired and liabilities assumed and concluded that the valuation procedure and resulting measures were appropriate. Accordingly, the Company recognized a gain of $207,083 associated with the acquisition. The gain is included in the line item “Non-operating income” in the Consolidated Statements of Operations for the nine months ended March 31, 2012, the Company consolidated the financial statements of Qingdao Jiexin and eliminated the intercompany transactions, including the RMB 5,000,000 (approximately $773,500) investment in Qingdao Renmin.

 

Competitive environment

 

The market for packaging products is competitive. Our operations may be affected by technological advances of competitors, industry consolidation, competitive combination products and new information of marketed products or post-marketing surveillance.

 

Due to China’s new anti-monopoly laws, some of our larger competitors decreased the amounts of bundled products they offer, which may cause them to lower their prices. Recently we have seen more and more competition from the new entry of local suppliers as they are attracted by the relatively higher margin of this sector. As a result of intensifying competition, our sales price and gross margin have been affected.

 

 

Strategy

 

Our growth strategy consists of consolidating our market leader position among domestic liquid food and beverage aseptic carton suppliers and pursuing expansion in the China market as well as selective Asian and Middle Eastern markets. We intend to achieve our goal by implementing the following strategies:

 

·	Increasing output to further penetrate the China market;
·	Developing bundled packaging materials and liquid filling machines;
·	Increasing sales to selective Asian and other markets;
·	Partnering with top milk producers;
·	Establishing brand names and brand awareness; and
·	Enhancing the Company’s competitive advantages through R&D.

 

Research and Development

 

To maintain and expand our market share, our top priority is to achieve technology breakthroughs on SIG packages and self-developed filling equipment.

 

In October 2006, Qingdao Renmin invested in Qingdao Delikang Packing Machinery Co., Ltd., (“Qingdao Delikang”), a joint venture with Xi’an Heiniu Machinery, Co.. Qingdao Renmin is the 51% owner of Qingdao Delikang. The main business of this joint venture is to research and develop filling machines. Our first filling machine can run at approximately 12,000 packages output per hour. As disclosed in our Annual Report on Form 10K/A for the year ended June 30, 2011, we finished testing this machine with one of our customers; however, the test results were unsatisfactory and we may need to send the machine back to the Xi’an machinery for adjusting. As this is our first filing machine, the testing and adjustments are necessary; therefore, it may take longer than we originally expected for the machines to run as we planned. The second filing machine was installed and we are negotiating with our customers for testing.

 

In addition, we are dedicated to developing packaging materials that can be used in the filling machines created by SIG. We have achieved technology breakthroughs with our first SIG packaging line, which can produce packages for small customers. In order to use SIG packaging lines to produce for big customers, we have been continuing on improving both quality and stability of these two new lines. We plan to add up to eight additional lines by 2014. Management believes that these new SIG packaging lines will significantly increase our revenue and also provide relatively higher gross margins in the next several years.

 

Manufacturing, Sales and Marketing

 

We support commercialized products with manufacturing, sales and marketing efforts. We are also moving forward with additional investments to enhance our infrastructure and business, including capital expenditures for the new production machinery. Our current annual capacity is approximately 4.5 billion packs for normal packaging. Once SIG packaging passes tests proving its ability to produce packages in large batches, assuming funding is available, management plans to introduce up to eight more production lines with anticipated annual capacity of 80 million packs per line.

 

Management continually reviews the business, including manufacturing operations, to identify actions that will enhance long-term competitiveness. By continuously streamlining the management of the production processes and improving production efficiency, we decreased the scrap percentage and lowered our costs. However, because of rising raw material prices, we were unable to lower our prices further, which may have resulted in a slower pace of growth than we might have experienced had we lowered our prices.

 

With the planning and construction of our new plant of Qingdao Likang, we anticipate that a new line for normal pack would be put into production in July 2011. As our finances permit, further expansion will be continued in the following two or three years which may increase our annual capacity to 8.0 billion packs per annum in total.

 

Results of Operations

 

The following table shows the results of operations of our business.

 

Comparison of the three months ended March 31, 2012 and 2011

 

Three Months Ended March 31		2012			2011
Sales		$	23,902,337		$	19,705,508
Cost of sales		$	19,908,530		$	16,694,942
Gross profit		$	3,993,807		$	3,010,566
Selling, general and administrative expenses		$	3,042,738		$	2,052,282
Other income (expense)		$	(86,994)		$	(207,982)
Income taxes		$	269,760		$	165,027
Non-controlling interest		$	(62)		$	-
Net income		$	594,315		$	585,275
Foreign currency translation adjustment		$	448,191		$	228,533
Comprehensive income		$	1,042,506		$	813,808

 

 

Sales. Total sales were approximately $23.9 million for the three months ended March 31, 2012 as compared with approximately $19.7 million for the three months ended March 31, 2011, an increase of approximately $4.2 million, or 21.3%. The increase of sales was mainly due to our continued sales and marketing efforts, which have enabled us to locate new customers. With our competitive pricing advantage, we have added 2 new domestic customers in this quarter which accounted for 0.35% of total revenue.

 

Cost of Sales. Cost of sales for the three months ended March 31, 2012 was approximately $19.9 million, or 83.3% of sales, as compared with $16.7 million, or 84.8% of sales, for the three months ended March 31, 2011, an increase of approximately $3.2million or 19.3%. Our cost of sales is primarily composed of the costs of raw materials (mainly paper materials, polyethylene materials, aluminum materials, printing materials), labor, depreciation and amortization of manufacturing equipment and facilities, and other overhead. The decrease of cost of sales as a percentage of sales by 1.5% was due to the decreased prices of plastic particles.

 

Gross profit. As a result of the decrease in the percentage of cost of sales, the gross profit margin for the three months ended March 31, 2012 was approximately 16.7% as compared with 15.3% for the three months ended March 31, 2011, an increase of 1.4%.

 

Selling, general and administrative expenses. Selling, general and administrative expenses were approximately $3.0 million for the three months ended March 31, 2012 as compared with approximately $2.1 million for the three months ended March 31, 2011, an increase of approximately $0.9 million, or 48.3%. The large increase was mainly due to the growing freight, wages and social welfare expenses, and research and development expenses.

 

Income tax. Income tax was approximately $0.27 million for the three months ended March 31, 2012 as compared with approximately $0.17 million for the three months ended March 31, 2011, an increase of approximately $0.4million or 2.35 times in accordance with the change of profit before tax and the income tax rate is 25% from January 2012 .

 

Net income. Net income was approximately $0.594 million for the three months ended March 31, 2012 as compared with net income$0.585 million for the three months ended March 31, 2011. The small increase in net income was primarily due to the increase of gross profit, which offset the rise of general and administrative expenses and the increase in income tax.

 

Foreign currency translation adjustment. Our reporting currency is the US dollar. Our local currency, Renminbi (RMB), is our functional currency. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

 

Currency translation adjustments resulting from this process are included in accumulated other comprehensive income in the consolidated statement of shareholders' equity and was a gain of $448,191 for the three months ended March 31, 2012 compared with $228,533 for the three months ended March 31, 2011. The balance sheet amounts with the exception of equity at March 31, 2012 were translated at RMB6.31313 to US$1.00 as compared with RMB6.54879 to US$1.00 at March 31, 2011. The equity accounts were stated at their historical rate. The average translation rates applied to income statement accounts for the three months ended March 31, 2012 and 2011 were RMB6.29723 and RMB6.58940 to US$1.00.

 

Comprehensive income. The comprehensive income, which adds the currency adjustment to net income, was $1.0 million for the three months ended March 31, 2012 as compared with comprehensive income$0.81 million for the three months ended March 31, 2011. The large amount of foreign currency translation adjustment was due to appreciation of RMB and the increase of our net income.

 

Comparison of the nine months ended March 31, 2012 and 2011

 

Nine Months Ended March 31		2012			2011
Sales		$	67,946,360		$	52,549,376
Cost of sales		$	58,500,378		$	43,094,737
Gross profit		$	9,445,982		$	9,454,639
Selling, general and administrative expenses		$	7,548,857		$	7,592,038
Other income (expense)		$	(72,579)		$	(501,968)
Income taxes		$	411,508		$	478,369
Non-controlling interest		$	(191)		$	(81)
Net income (loss)		$	1,413,038		$	882,264
Foreign currency translation adjustment		$	1,064,196		$	1,207,902
Comprehensive income (loss)		$	2,477,234		$	2,090,166

 

 

Sales. Total sales were approximately $67.9 million for the nine months ended March 31, 2012 as compared with approximately $52.5 million for the nine months ended March 31, 2011, an increase of approximately $15.4 million, or 29.3%. The increase of sales was mainly due to our continued sales and marketing efforts to locate new customers. With our competitive pricing advantage, we have added 10 new domestic customers during the nine months ended March 31, 2012, which accounted for 5.9% of total revenue.

 

Cost of Sales. Cost of sales for the nine months ended March 31, 2012 was approximately $58.5million, or 86.1% of sales, as compared with $43.1 million, or 82% of sales, for the nine months ended March 31, 2011, an increase of approximately $15.4 million or 35.7%. Our cost of sales is primarily composed of the costs of raw materials (mainly paper materials, polyethylene materials, aluminum materials, printing materials), labor, depreciation and amortization of manufacturing equipment and facilities, and other overhead. Although the raw material prices plateaued in the first quarter of 2012, the rise in the purchase price of major raw materials, such as paper and plastic particles, over the last two quarters of 2011 was the main reason for the increased cost of sales. Although we try to use material-saving techniques to cut down the portion of cost of sales, our efforts may be limited compared with the price increase of certain raw materials.

 

Gross profit. As a result of the increase in the percentage of cost of sales, the gross profit margin for the nine months ended March 31, 2012 was approximately 13.9% as compared with 18% for the nine months ended March 31, 2011, a decrease of 4.1%.

 

Selling, general and administrative expenses. Selling, general and administrative expenses were approximately $7.54 million for the nine months ended March 31, 2012 as compared with approximately $7.59 million for the nine months ended March 31, 2011, a decrease of approximately $0.05million, or 0.57%. Although the sales increased by 29.3%, the expenses have not changed much.

 

Income tax. Income tax was approximately $0.41 million for the nine months ended March 31, 2012 as compared with approximately $0.48 million for the nine months ended March 31, 2011, a decrease of approximately $0.07 million or 14.0% in accordance with the change of profit before tax.

 

Net income. Net income was approximately $1.41 million for the nine months ended March 31, 2012 as compared with net income of $0.88 million for the nine months ended March 31, 2011, an increase of approximately $0.53 million, or 60.2%. The increase in net income was primarily due to the increased other income.

 

Foreign currency translation adjustment. Our reporting currency is the US dollar. Our local currency, Renminbi (RMB), is our functional currency. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

 

Currency translation adjustments resulting from this process are included in accumulated other comprehensive income in the consolidated statement of shareholders' equity and was a gain of $1,064,196 for the nine months ended March 31, 2012 compared with a gain of $1,207,902 for the nine months ended March 31, 2011. The balance sheet amounts with the exception of equity at March 31, 2012 were translated at RMB6.31313 to US$1.00 as compared with RMB6.54879 to US$1.00 at March 31, 2011. The equity accounts were stated at their historical rate. The average translation rates applied to income statement accounts for the nine months ended March 31, 2012 and 2011 were RMB6.35122 and RMB6.65779 to US$1.00.

 

Comprehensive income. The comprehensive income, which adds the currency adjustment to net income, was $2.5 million for the nine months ended March 31, 2012 as compared with $2.1million for the nine months ended March 31, 2011. The large amount of foreign currency translation adjustment was due to rapid appreciation of RMB.

 

 

 

Liquidity and Capital Resources

 

		For the nine months ended March 31,
		2012				2011
Cash flow from operating activities		$	13,369,943			$	374,943
Cash flow from investing activities			(10,833,517	)			(6,845,114	)
Cash flow from financing activities			(5,109,781	)			1,597,223

 

As of March 31, 2012, we had working capital totaling approximately $14.9 million, including cash and cash equivalents of $3.3 million.

 

Net cash generated in operating activities was approximately $13.4 million for the nine months ended March 31, 2012. This net cash generated was primarily due to the increase of income, and the decrease of account receivable balances by approximately $4 million, and increase of accounts payable balances by approximately$4.1 million. Net cash generated in operating activities was $0.37 million for the nine months ended March 31, 2011. This net cash used was primarily due to the increase of net income, and increased account receivable and inventory balances by approximately $5.3 million offset the increase of advanced payment and accounts payable by approximately 1.56 million and 1.85 million respectively.

 

Net cash used in investing activities for the nine months ended March 31, 2012 totaled $10.8 million primarily due to the purchase and advanced payments for property and equipment and the consideration paid for acquisition of Qingdao Jiexin. Net cash used in investing activities for the nine months ended March 31, 2011 totaled $6.8 million primarily due to the purchase of property and equipment, and acquisition of land use rights for Qingdao Likang as well.

 

Net cash used in financing activities for the nine months ended March 31, 2012 was $5.1 million primarily due to the increase of restricted cash and due from factor. Net cash generated in financing activities for the nine months ended March 31, 2011 was $1.6 million primarily due to the issuance of trade notes payable and the two new sale-leaseback transactions in this period.

 

 Borrowings and Credit Facilities

 

On November 27, 2009, the Company entered into three sale-leaseback arrangements with International Fareastern Leasing Co., Ltd and completed one to refinance its printing equipment. One piece of the equipment, with a book value of approximately $3.4 million was sold for approximately $1.4 million. The company prematurely ended a $1.5 million financial lease obligation in February 2012 by paying the full balance due. The remaining two went into effect in December 2010, after which the equipment valued at approximately $2.4 million was sold for approximately $1.65 million. The company also entered into two other sale-leaseback arrangements with International Fareastern Leasing Co ., Ltd. The equipment with a book value of approximately $3.97 million was sold for approximately $1.36 million. The cash received was used towards the original invoice amount. The transaction was accounted for as a financing arrangement, wherein the equipment remains on the Company’s books and will continue to be depreciated. The annual principal and interest payment is $916,208 and the term of the arrangement is four years

 

On April 28, 2011, the subsidiary of the company, Qingdao Likang entered into one long-term loan with the Bank of Qingdao for approximately $6.2 million with an average interest 7.6475% in the first year. The loan agreement has a 5-year term, contains customary affirmative and negative covenants and will expire in April 28, 2016.

 

Capital Commitment

 

On August 12, 2010, Qingdao Likang, our indirectly owned subsidiary, entered into a land use right transfer agreement with Qingdao Territories and House Administration Bureau, pursuant to which, Qingdao Likang was granted a 50-year use right for a parcel of land in Qingdao with an area of approximately 65,064 square meters. Qingdao Likang has paid the consideration and started building a new plant on the land and the construction is estimated to be completed by June 2012 .

 

The agreement also included provisions that require total investment for the project no less than RMB242.1 million (US$35.66 million) before August 12, 2013 with a conditional one-year extension. The amount of total investment refers to the amount of capital that will be spent in the construction and operations of the plant. It includes not only the registered capital, but also future borrowings such as bank loans and funds from the potential investors.

 

Critical Accounting Policies and Estimates

 

Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Jpak’s Annual Report on Form 10-K for the year ended June 30, 2011 for disclosures regarding Jpak’s critical accounting policies and estimates. The interim financial statements follow the same accounting policies and methods of computations as those for the year ended June 30, 2011.

 

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

(a)	Evaluation of disclosure controls and procedures

 

We maintain disclosure controls and procedures designed to provide reasonable assurance that material information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that the information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We performed an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report.  Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission, and are effective in providing reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.  

 

We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on 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. 

 

(b)	Changes in internal control over financial reporting

 

Since April 2009, we have been working diligently on the evaluation of internal controls based on COSO framework. The evaluation covers all the major financial reporting processes, including procurement, revenue, inventory, fixed assets, tax, treasury and financial reporting. As a result, we had identified a number of material weaknesses. We have subsequently implemented remediation measures to correct these weaknesses.  We believe that these corrective steps have remediated the material weaknesses disclosed in our annual report on Form 10-K for the year ended June 30, 2011 and our internal controls are now effective.

 

Nevertheless, we would like to draw your attention to a number of remaining significant deficiencies with our internal controls, as described in our Form 10-K for the year ended June 30, 2011.  A significant deficiency is a deficiency, or a combination of deficiencies, that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting. After the evaluation, we believe these deficiencies are significant, but not material after taking into account our risk assessment and existing controls both at the entity and process levels.  The significant deficiencies identified in the Form 10-K for the year ended June 30, 2011, which have been partially remediated, are as follows:

 

1.

Currently we do not have sufficient in-house expertise in US GAAP reporting. Although we have not identified any material errors with our financial reporting or any material weaknesses with our internal controls, no assurances can be given that there are no such material errors or weaknesses existing.  To remediate this situation, we are seeking to recruit experienced professionals to augment and upgrade our financial staff to address issues of timeliness and completeness in US GAAP financial reporting.

 

2.

Although the Company does not have a Board with a majority of independent members and does not have an audit committee, it hired Mr. Wenjie Li as its independent director in July 2010.  The Company is also seeking additional independent members, including a qualified financial expert to fulfill the role of audit committee chairman.  Nevertheless, the Company cannot assure you of when it will identify a qualified candidate or when it will be able to form an independent audit committee.

3.

For the remediation measures that have recently been implemented, they are relatively new and their operating effectiveness still needs to be monitored carefully.

 

Except as described above, there have been no changes in our internal controls over financial reporting that occurred during our last fiscal quarter to which this Quarterly Report on Form 10-Q relates that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

 

 

 

 

PART II - OTHER INFORMATION

 

ITEM 1.   LEGAL PROCEEDINGS

 

None.

 

ITEM 1A. RISK FACTORS

 

Not applicable to smaller reporting companies.

 

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

 

(a)             Not Applicable.

 

(b)             Not Applicable.

 

(c)             Not Applicable

             

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

(a)             Not Applicable.

 

(b)             Not Applicable.

 

 

ITEM 5. OTHER INFORMATION

 

(a)             Not applicable.

 

(b)             Not applicable.

 

ITEM 6.  EXHIBITS

 

(a) The following exhibits are filed as part of this report.

           

Exhibit No.		Description
3.1		Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 to our Annual Report on Form 10-K filed on September 29, 2008)
3.2		Bylaws (Incorporated by reference to Exhibit 3.2 to our Annual Report on Form 10-K filed on September 29, 2008)
31.1		Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Acting Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of the Acting Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	JPAK GROUP, INC.
	By:	/s/ Yijun Wang
		Yijun Wang Chief Executive Officer,
		President & Director
	By:	/s/ Yongbo Wang
		Yongbo (Esther) Wang Chief Financial Officer

 

Date: May 15, 2012