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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q /A
(Amendment No. 2)
(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: September 30, 2011
 
[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________

Commission File No. 000-53379

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

         
 
FLORIDA
 
26-1133266
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Tax. I.D. No.)
 
   
Unit 312, 3rd Floor, New East Ocean Centre
9 Science Museum Road
Kowloon, Hong Kong
(Address of Principal Executive Offices)
   
852-2482-5168
(Registrant’s Telephone Number, Including Area Code)
   
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes   þ    No   o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes þ  Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
   
Large accelerated filer. o
Accelerated filer.    o
Non-accelerated filer.   o(Do not check if a smaller reporting company)
 
Smaller reporting company.   þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes   o   No   þ    
 
The number of shares outstanding of each of the issuer’s classes of common stock as of November 21, 2011:  200,000


 
1

 
 
Explanatory Note
 
 
 
We are filing this Amendment No. 2 to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011 (the "Amendment") as originally filed with the Securities and Exchange Commission (the "SEC") on November 21, 2011 (the "Original Filing") as amended on December 9, 2011 (the "First Amendment") to (i) revise our condensed consolidated statements of stockholders equity to remove certain information for the year ended March 31, 2010 which is not required, (ii) to correct certain balances in the condensed consolidated statements of cash flow for the six months ended September 30, 2011 and (iii) to correct the totals of our accounts receivable for the period ended September 30, 2011 set forth in Note 13 to our notes to condensed consolidated financial statements for the six months ended September 30, 2011 and 2010 (unaudited). Except as described above, no other information in the Original Filing and the First Amendment has been updated and this Amendment continues to speak as of the date of the Original Filing and the First Amendment. Other events occurring after the filing of the Original Filing, the First Amendment or other disclosure necessary to reflect subsequent events will be addressed in other reports filed with or furnished to the SEC subsequent to the date of the filing of the Original Filing and the First Amendment.

 
2

 

TABLE OF CONTENTS

 
 
Page
 
PART I
 
Item 1.
Financial Statements
4
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operation
23
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
32
Item 4.
Controls and Procedures
32
 
PART II
 
Item 1.
Legal Proceedings
33
Item 1A.
Risk Factors
34
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
34
Item 3.
Defaults Upon Senior Securities
34
Item 4.
(Removed and Reserved)
34
Item 5.
Other Information
34
Item 6.
Exhibits
34
 SIGNATURES
35

 
3

 

PART I – FINANCIAL INFORMATION
Green Dragon Wood Products, Inc.
 
Condensed Consolidated Balance Sheets
 
As of September 30, 2011 and March 31, 2011
 
(Currency expressed in United States Dollars ("US$"), except for number of shares)
 
             
   
September 30,
   
March 31,
 
   
2011
   
2011
 
   
(Unaudited)
   
(Audited)
 
             
ASSETS
           
CURRENT ASSETS
           
Cash and cash equivalent
  $ 61,163     $ 289,076  
Restricted cash
    650,500       650,103  
Marketable securities
    306,791       323,378  
Accounts receivable, net
    7,121,874       6,236,643  
Inventories
    105,963       72,175  
Prepayments, deposits and other receivables
    231,115       626,537  
TOTAL CURRENT ASSETS
    8,477,406       8,197,912  
                 
Non-current assets:
               
Plant and equipment, net
    10,221       14,183  
Cash surrender value of life insurance, net
    75,845       -  
Non-current portion of prepaid life insurance
    114,900       -  
TOTAL NON-CURRENT ASSETS
    200,966       14,183  
                 
TOTAL ASSETS
  $ 8,678,372     $ 8,212,095  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES
               
Revolving lines of credit
  $ 2,795,645     $ 3,801,067  
Current portion of long-term bank loan
    154,152       154,069  
Accounts payable, trade
    1,717,267       1,046,982  
Accrued liabilities and other payables
    358,197       294,985  
Income tax payable
    128,633       63,323  
Amount due to a director
    523,084       150,212  
TOTAL CURRENT LIABILITIES
    5,676,978       5,510,638  
                 
NON-CURRENT LIABILITIES
               
Long-term bank loan
    385,380       462,208  
TOTAL NON-CURRENT LIABILITIES
    385,380       462,208  
                 
TOTAL LIABILITIES
    6,062,358       5,972,846  
                 
STOCKHOLDERS' EQUITY
               
Preferred stock, $0.001 par value;
               
 50,000,000 preferred shares authorized;
               
 no shares issued and outstanding
    -       -  
Common stock, $0.001 par value;
               
450,000,000 shares authorized;
               
200,000 shares issued and outstanding, respectively
    200       200  
Additional paid-in capital
    644,300       644,300  
Retained earnings
    2,015,907       1,623,456  
Accumulated other comprehensive loss
    (44,393 )     (28,707 )
TOTAL STOCKHOLDERS' EQUITY
    2,616,014       2,239,249  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 8,678,372     $ 8,212,095  
                 
                 
See accompanying notes to condensed consolidated financial statements.
 
 
 
4

 
 
Green Dragon Wood Products, Inc.
 
Condensed Consolidated Statements of Operations and Comprehensive Income
 
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
 
(Currency expressed in United States Dollars ("US$"), except for number of shares)
 
(Unaudited)
 
                         
   
Three months ended September 30,
   
Six months ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Revenues, net
  $ 5,749,232     $ 5,575,111     $ 10,235,801     $ 10,279,087  
                                 
Cost of revenue
    (4,802,306 )     (5,131,952 )     (8,913,621 )     (9,486,169 )
                                 
Gross profit
    946,926       443,159       1,322,180       792,918  
                                 
General and administrative expenses
    385,961       236,875       598,841       484,427  
                                 
Total operating expenses
    385,961       236,875       598,841       484,427  
                                 
INCOME FROM OPERATIONS
    560,965       206,284       723,339       308,491  
                                 
Other income (expenses):
                               
Foreign exchange gain (loss), net
    (75,701 )     (39,632 )     (178,416 )     84,256  
Interest income
    115       129       235       250  
Interest expense
    (43,057 )     (30,780 )     (74,630 )     (77,421 )
Other income
    -       35,030       -       71,602  
                                 
INCOME BEFORE INCOME TAXES
    442,322       171,031       470,528       387,178  
                                 
Income tax expense
    (73,149 )     (28,000 )     (78,077 )     (63,785 )
                                 
NET INCOME
    369,173       143,031       392,451       323,393  
                                 
Other comprehensive income:
                               
- Unrealized holding loss on available-for-sales securities
    (28,221 )     (9,528 )     (19,766 )     (19,808 )
- Foreign currency translation adjustment
    2,037       7,362       4,080       2,326  
                                 
COMPREHENSIVE INCOME
  $ 342,989     $ 140,865     $ 376,765     $ 305,911  
                                 
Net income per share - Basic and diluted
  $ 1.85     $ 0.72     $ 1.96     $ 1.62  
                                 
Weighted average common shares outstanding
                               
during the period - Basic and diluted
    200,000       200,000       200,000       200,000  
                                 
                                 
See accompanying notes to condensed consolidated financial statements.
 
 
 
5

 
 
GREEN DRAGON WOOD PRODUCTS, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2011
 
(Currency expressed in United States Dollars ("US$"), except for number of shares)
 
(Unaudited)
 
                                     
                                     
    Common stock     Additional paid in     Retained    
Accumulated other
   
Total stockholders’
 
   
Shares
 
Amount
    capital     earnings     comprehensive loss     equity  
                                     
Balance as of April 1, 2011
    200,000     $ 200     $ 644,300     $ 1,291,377     $ (23,597 )   $ 1,912,280  
                                                 
Net income for the period
    -       -       -       332,079       -       332,079  
                                                 
Unrealized gain on available-for-sales securities
    -       -       -       -       1,345       1,345  
                                                 
Foreign currency translation adjustment
    -       -       -       -       (6,455 )     (6,455 )
                                                 
Balance as of March 31, 2011
    200,000     $ 200     $ 644,300     $ 1,623,456     $ (28,707 )   $ 2,239,249  
                                                 
Net income for the period
    -       -       -       392,451       -       392,451  
                                                 
Unrealized loss on available-for-sales securities
    -       -       -       -       (19,766 )     (19,766 )
                                                 
Foreign currency translation adjustment
    -       -       -       -       4,080       4,080  
                                                 
Balance as of September 30, 2011
    200,000     $ 200     $ 644,300     $ 2,015,907     $ (44,393 )   $ 2,616,014  
              -       -       -       -       -  
                                                 
See accompanying notes to condensed consolidated financial statements.
 
 
 
6

 
 
Green Dragon Wood Products, Inc.
 
Condensed Consolidated Statements of Cash Flows
 
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
 
(Currency expressed in United States Dollars ("US$"), except for number of shares)
 
(Unaudited)
 
             
   
Six months ended September 30,
 
   
2011
   
2010
 
Cash flow from operating activities:
           
Net income
  $ 392,451     $ 323,393  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
         
Depreciation
    3,971       3,901  
Amortization on premium charge on life insurance
    8,194       -  
Changes in operating assets and liabilities:
               
Accounts receivable
    (885,231 )     (1,352,950 )
Inventories
    (33,788 )     158,756  
Prepayments, deposits and other receivables
    433,240       (49,036 )
Accounts payable, trade
    670,285       (40,403 )
Accrued liabilities and other payables
    63,212       (479,533 )
Income tax payable
    65,310       63,785  
                 
Net cash provided by (used in) operating activities
    717,644       (1,372,087 )
                 
Cash flows from investing activities:
               
Purchase of life insurance
    (769,713 )     -  
Purchase of marketable securities
    -       (339,555 )
                 
Net cash used in investing activities
    (769,713 )     (339,555 )
                 
Cash flows from financing activities :
               
(Repayment of) proceeds from revolving lines of credit
    (1,005,422 )     834,540  
Change in restricted cash
    (397 )     (46,299 )
Draw down from long-term bank loan
    532,956       -  
Repayment of long-term bank loans
    (76,745 )     (77,165 )
Advances from a director
    372,872       902,668  
                 
Net cash (used in) provided by financing activities
    (176,736 )     1,613,744  
                 
Effect of exchange rate changes on cash and cash equivalents
    892       (138 )
                 
Net change in cash and cash equivalents
    (227,913 )     (98,036 )
Cash and cash equivalents, beginning of period
    289,076       100,512  
Cash and cash equivalents, end of period
  $ 61,163     $ 2,476  
      -          
Supplemental disclosure of cash flow information:
               
Interest paid
  $ 74,630     $ 46,664  
Income tax paid
  $ -     $ -  
                 
See accompanying notes to condensed consolidated financial statements.
 
 
 
7

 
 
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(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 (“GAAP”), and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and note disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.

In the opinion of management, the consolidated balance sheet as of March 31, 2011 which has been derived from audited financial statements and these unaudited condensed consolidated financial statements reflect all normal and recurring adjustments considered necessary to state fairly the results for the periods presented. The results for the period ended September 30, 2011 are not necessarily indicative of the results to be expected for the entire fiscal year ending March 31, 2012 or for any future period.

These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Management’s Discussion and the audited financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended March 31, 2011.
 
NOTE 2                      ORGANIZATION AND BUSINESS BACKGROUND

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

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

Details of the Company’s subsidiaries

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

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

 
 
8

 
 
 
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)
 
NOTE – 3                      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.

·  
Basis of consolidation

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

·  
Use of estimates

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

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

·  
Restricted cash

As of September 30, 2011 and March 31, 2011, the Company maintained minimum cash balances of $650,500 and $650,103 in pledged deposit accounts as collateral for the revolving lines of credit and long-term bank loan provided by financial institutions in Hong Kong.

·  
Accounts receivable and allowance for doubtful accounts

Accounts receivable are recorded at the invoiced amount less an allowance for any uncollectible accounts and do not bear interest, which are due within contractual payment terms, generally 60 to 180 days from shipment. The Company extends unsecured credit to its customers in the ordinary course of business, based on evaluation of a customer’s financial condition, the customer credit-worthiness and their payment history. Accounts receivable outstanding longer than the contractual payment terms are considered past due. Past due balances over 180 days and those over a specified amount are reviewed individually for 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. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
 
 
9

 
 
 
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)

 
·  
Inventories

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

·  
Marketable securities

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

·  
Plant and equipment

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

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

Expenditures for repairs and maintenance are expensed as incurred. When assets are 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 September 30, 2011 and 2010 was $1,999 and $1,951, respectively.

Depreciation expense for the six months ended September 30, 2011 and 2010 was $3,971 and $3,901, respectively.

·  
Cash value of life insurance

The cash value of life insurance relates to the Company-owned life insurance policies on a current executive officer, which is stated at the cash surrender value of the contract, net of policy loans.

·  
Impairment of long-lived assets

In accordance with ASC Topic 360-10-5, “Impairment or Disposal of Long-Lived Assets”, the Company reviews its long-lived assets, including plant and equipment and life insurance policy held by the Company, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable or that useful lives are no longer appropriate. If the total of the expected undiscounted future net cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying amount of the asset. There has been no impairment charge for the periods presented. There has been no impairment as of September 30, 2011.
 
 
 
10

 

 
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)
 
·  
Revenue recognition

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

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

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

·  
Cost of revenue

Cost of revenue includes cost of wood logs, wood lumber and wood veneers for re-sale to customers, purchase returns and sales commissions. Shipping and handling costs associated with the distribution of the products to the customers totaled approximately $66,346 and $25,373 for the six months ended September 30, 2011 and 2010, respectively, which are recorded in cost of revenue.

·  
Comprehensive income

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

The provision for income taxes is determined in accordance with ASC Topic 740, “Income Taxes ” (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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.
 
 
 
11

 
 
 
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(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 September 30, 2011 and 2010, the Company did not have any interest and penalties associated with tax positions. As of September 30, 2011, the Company did not have any significant unrecognized uncertain tax positions.

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

·  
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 computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common stock equivalents had been issued and if the additional common shares were dilutive.

·  
Foreign currencies translation

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

The reporting currency of the Company is the United States Dollars ("US$") and the accompanying condensed consolidated financial statements have been expressed in US$. GDWPCL, the Company’s operating subsidiary in Hong Kong, maintains its books and records in its local currency, the Hong Kong Dollars (“HK$”), which is GDWPCL’s functional currency since it is the primary currency of the economic environment in which their operations are conducted. In general, for consolidation purposes, assets and liabilities of the Company’s subsidiaries whose functional currency is not US$ are translated into US$, in accordance with ASC Topic 830-30, “Translation of Financial Statements”, 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 stockholders’ equity.
 
 
 
 
12

 
 
 
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)
 
Translation of amounts from HK$ into US$1 has been made at the following exchange rates for the six months ended September 30, 2011 and 2010:

   
September 30,
   
September 30,
 
   
2011
   
2010
 
Period-end HK$: US$1 exchange rate
    7.7843       7.7582  
Period average HK$: US$1 exchange rate
    7.7820       7.7756  

·  
Related parties

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

·  
Segment reporting

ASC Topic 280, “Segment Reporting” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in the financial statements. For the three and six months ended September 30, 2011 and 2010, the Company operates one reportable business segment in Hong Kong.

·  
Fair value of financial instruments

The carrying value of the Company’s financial instruments (excluding revolving lines of credit and long-term bank loan), which include cash, restricted cash, accounts receivable, amount due from a director, prepayments, deposits and other receivables, accounts payable, accrued liabilities and other payables, and income tax payable approximate their fair values because of the short-term nature of these financial instruments. The fair value of the marketable securities is based on quoted prices in active exchange-traded or over-the-counter markets.

Management believes, based on the current market prices or interest rates for similar debt instruments, the fair value of its revolving lines of credit and long-term bank loan approximate their carrying amounts.
 
 
 
13

 
 
 
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)
 
 
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:

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

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

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

Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

·  
Economic and political risk

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

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

·  
Recent accounting pronouncements

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.
 
NOTE – 4                      MARKETABLE SECURITIES
 
Marketable securities consist of:
 
 
September 30,
 
March 31
 
 
2011
 
2011
 
 
(Unaudited)
 
(Audited)
 
13,127.21 shares, Franklin Templeton Global Total Return Fund (A-EUR):
       
At original cost
$ 322,033   $ 322,033  
Unrealized holding (loss) gain
  (15,415 )   1,345  
Add: foreign currency translation adjustment
  173     -  
Fair value
$ 306,791   $ 323,378  

The above marketable securities are stated at fair market value and are classified as available-for-sale, with the corresponding unrealized holding gains or losses, recorded as a separate component of other comprehensive income within stockholders’ equity. The fair value of the marketable securities is determined based on quoted market prices at the balance sheet date. Realized gains and losses are determined by the difference between historical purchase price and gross proceeds received when the marketable securities are sold. These marketable securities are pledged as collateral against the revolving line of credit with the Hongkong and Shanghai Banking Corporation Limited.
 
 
14

 
 
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)

 
NOTE – 5                      LIFE INSURANCE

The Company has purchased insurance on the life of a key executive officer, Mr. Kwok Leung Lee, the stockholder and director of the Company. As beneficiary, the Company receives the cash surrender value if the policy is terminated and, upon death of the insured, receives all benefits payable. Cash value of this life insurance is presented in the accompanying financial statement, net of policy loans. The loans carry interest at an effective rate of 1% per annum over 1 or 3 months Hong Kong Interbank Offered Rate (“HIBOR”), payable monthly and mature in July 2018, which are secured by the cash value of the life insurance policy.

A summary of net cash value of life insurance as of September 30, 2011 is reported as below:

Cash surrender value of life insurance
  $ 608,801  
Less: policy loans balances outstanding
    (532,956 )
         
Cash value of life insurance, net
    75,845  

As of September 30, 2011, the maturities of the policy loans for the next five years and thereafter are as follows:

Years ending September 30:
     
2012
  $ 77,995  
2013
    77,995  
2014
    77,995  
2015
    77,995  
2016
    77,995  
Thereafter
    142,981  
         
Total policy loans balances
  $ 532,956  

For the six months ended September 30, 2011, the HIBOR is 1.2% per annum.
 
 
 
15

 
 
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)

 
NOTE – 6                      ACCOUNTS RECEIVABLE, NET

Accounts receivable, net, consist of:
 
September 30,
 
March 31,
 
 
2011
 
2011
 
 
(Unaudited)
 
(Audited)
 
         
Accounts receivable, trade
$ 7,135,591   $ 6,250,353  
Less: allowance for doubtful accounts
  (13,717 )   (13,710 )
Accounts receivable, net
$ 7,121,874   $ 6,236,643  
 
The majority of the Company’s sales are on open credit terms and in accordance with terms specified in the contracts governing the relevant transactions. The Company evaluates the need for an allowance for doubtful accounts based on specifically identified amounts that management believes to be uncollectible. If actual collections experience changes, revisions to the allowance may be required.

For the three and six months ended September 30, 2011 and 2010, there was no provision for doubtful accounts charged to operations.
 
NOTE – 7                      PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

Prepayments, deposits and other receivables consist of:

   
September 30,
   
March 31,
 
   
2011
   
2011
 
   
(Unaudited)
   
(Audited)
 
             
Purchase deposits to vendors
  $ 136,555     $ 570,281  
Rental and utilities deposits
    50,373       50,346  
Current portion of prepaid life insurance expense
    37,818       -  
Other receivables
    6,369       5,910  
Total
  $ 231,115     $ 626,537  

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

Prepaid life insurance expense represents the premium charge on the life insurance policy and amortize over the next twelve months.
 
 
 
16

 

GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)

NOTE – 8                      REVOLVING LINES OF CREDIT

Revolving lines of credit consist of:

   
September 30,
   
March 31,
 
   
2011
   
2011
 
   
(Unaudited)
   
(Audited)
 
Payable to financial institutions in Hong Kong:
           
The Hongkong and Shanghai Banking Corporation Limited
  $ 1,217,700     $ 2,001,391  
Shanghai Commercial Bank Limited
    333,077       345,309  
      1,550,777       2,346,700  
Payable to Tai Wah Timber Factory Limited and Glory Idea Investment Limited (under supplier agreements)
    1,244,868       1,454,367  
                 
Total
  $ 2,795,645     $ 3,801,067  

The credit facility with The Hongkong and Shanghai Banking Corporation Limited provides for borrowings up to HK$15,000,000 (approximately $1,926,900), which bears interest at a rate of 2% per annum over Hong Kong Interbank Offered Rate (“HIBOR”) for HK dollars facilities and at a rate of 2% per annum over London Interbank Offered Rate (“LIBOR”) for foreign currency facilities and is personally guaranteed by Mr. Lee, director of the Company. The Company also is required to maintain a minimum cash deposit of approximately $400,000 or its equivalent in other foreign currencies and has pledged the marketable securities (see note 4) as collateral. In the event the value of the foreign currency deposit and marketable securities fall below the respective required amount, additional security will be required. In addition, the Company is subject to the settlement of accounts due and payable to the restricted vendors under the line of credit at the bank’s discretion. The line will be extended or renewed on a regular basis at the option of the bank. Weighted average interest rate approximates 2.21% and 2.21% per annum for the six months ended September 30, 2011 and 2010, payable monthly.

The credit facility with Shanghai Commercial Bank Limited provides for borrowings up to HK$ 3,500,000 (approximately $449,796), which bears interest at a rate of 0.25% per annum over Hong Kong prime for HK dollars facilities and at a rate of 0.25% per annum over US prime for US dollars facilities and is personally guaranteed by Mr. Lee, director of the Company. The Company also is required to maintain a minimum cash deposit not less than $264,500 that is considered restricted as compensating balances to the extent the Company borrows against this line of credit. In addition, the Company is subject to the settlement of accounts due and payable to the restricted vendors under the line of credit at the bank’s discretion. The line will be extended or renewed on a regular basis at the option of the bank. Weighted average interest rate approximates 3.50% and 5.25% per annum for the six months ended September 30, 2011 and 2010, payable monthly.

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

 
17

 
 
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)

NOTE – 9                      LONG-TERM BANK LOAN

In March 2010, the Company received an installment loan of HK$6,000,000 (approximately $770,760) from The Hongkong and Shanghai Banking Corporation Limited for working capital purposes. The loan bears interest at a rate of 2% per annum over 1 month HIBOR with 60 monthly installments of HK$100,000 (approximately $12,846) each and will mature on March 14, 2015. The installment loan is personally guaranteed by Mr. Lee, director of the Company.

Maturities of the long-term bank loan for each of the four years following September 30, 2011 are as follows:

Year ending September 30:
 
2012
  $ 154,152  
2013
    154,152  
2014
    154,152  
2015
    77,076  
Total
  $ 539,532  


NOTE – 10                      AMOUNT DUE TO A DIRECTOR

As of September 30, 2011 and March 31, 2011, the balance represented temporary advances made to the Company by Mr. Lee, the director, which was unsecured, interest-free with no fixed terms of repayment.
 
NOTE – 11                      INCOME TAXES

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

   
Six months ended September 30,
 
   
2011
   
2010
 
Tax jurisdictions from:
           
- Local
  $ -     $ -  
- Foreign
    470,528       387,178  
Income before income taxes
  $ 470,528     $ 387,178  

Provision for income taxes consisted of the following:

   
Six months ended September 30,
 
   
2011
   
2010
 
Current:
           
- Local
  $ -     $ -  
- Foreign
    78,077       63,785  
                 
Deferred:
               
- Local
    -       -  
- Foreign
    -       -  
Income tax expenses
  $ 78,077     $ 63,785  
 
 
 
 
18

 

GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)
 
 
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 and its subsidiaries are mainly operated in the United States of America, BVI and Hong Kong that are subject to taxes in the jurisdictions in which they operate, as follows:

United States of America

GDWP is registered in the State of Florida and is subject to the tax laws of the United States of America. For the six months ended September 30, 2011 and 2010, the Company had no operations in the United States of America.
 
British Virgin Island

Under the current BVI law, GDI is not subject to tax on income or profit. For the six months ended September 30, 2011 and 2010, GDI had no operations in the BVI.

Hong Kong

The Company’s major operating subsidiary is subject to Hong Kong Profits Tax, which is charged at the statutory income tax rate of 16.5% on its assessable income.

The reconciliation of the statutory income tax rate to the effective income tax rate based on income before income taxes from foreign operations for the six months ended September 30, 2011 and 2010 are as follows:

   
Six months ended September 30,
 
   
2011
   
2010
 
             
Income before income taxes
  $ 470,528     $ 387,178  
Statutory income tax rate
    16.5 %     16.5 %
 
Income tax at Hong Kong statutory income tax rate
    77,637       63,884  
Tax effect of non-deductible expenses
    655       102  
Tax effect of depreciation allowances
    (215 )     (201 )
Income tax expenses
  $ 78,077     $ 63,785  

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. There were no significant temporary differences as of September 30, 2011 and no deferred tax assets or liabilities have been recognized.
 
 
 
19

 
 
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)
 
NOTE  -12                      SEGMENT INFORMATION

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

   
Six months ended September 30,
 
   
2011
   
2010
 
Revenue, net:
           
- The PRC (including Hong Kong)
  $ 7,794,006     $ 8,090,126  
- Middle East and India
    1,228,101       1,237,849  
- Europe
    661,302       235,476  
- Others
    552,392       715,636  
Total
  $ 10,235,801     $ 10,279,087  

All of the Company’s long-lived assets are located in Hong Kong.
 
NOTE – 13                      CONCENTRATIONS OF RISK

The Company is exposed to the following concentrations of risk:

(a)             Major customers

For the three and six months ended September 30, 2011 and 2010, customers accounting for 10% or more of the Company's revenues and their outstanding accounts receivable balances at period-end date, are presented as follows:

   
Three months ended September 30, 2011
   
September 30, 2011
 
   
Revenues
   
Percentage of revenues
   
Accounts receivable
 
                   
Customer A
  $ 2,414,039       42 %   $ 1,055,730  
Customer B (Vendor A)
    1,777,476       31 %     5,507,029  
Total
  $ 4,191,515       73 %   $ 6,562,759  

   
Six months ended September 30, 2011
   
September 30, 2011
 
   
Revenues
   
Percentage of revenues
   
Accounts receivable
 
                   
Customer A
  $ 5,288,668       52 %   $ 1,055,730  
Customer B (Vendor A)
    2,505,338       24 %     5,507,029  
Total
  $ 7,794,006       76 %   $ 6,562,759  
 
 
 
20

 
 
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)

   
Three months ended September 30, 2010
   
September 30, 2010
 
   
Revenues
   
Percentage of revenues
   
Accounts receivable
 
                   
Customer A
  $ 3,378,696       61 %   $ 630,358  
Customer B (Vendor A)
    877,540       16 %     5,149,492  
Total
  $ 4,256,236       77 %   $ 5,779,850  

   
Six months ended September 30, 2010
   
September 30, 2010
 
   
Revenues
   
Percentage of revenues
   
Accounts receivable
 
                   
Customer A
  $ 6,488,483       63 %   $ 630,358  
Customer B (Vendor A)
    1,356,145       13 %     5,149,492  
Total
  $ 7,884,628       76 %   $ 5,779,850  

(b)             Major vendors

For the three months ended September 30, 2011 and 2010, vendors accounting for 10% or more of the Company’s purchases and their outstanding accounts payable balances at period-end date, are presented as follows:

   
Three months ended September 30, 2011
   
September 30, 2011
 
   
Purchases
   
Percentage of purchases
   
Accounts payable
 
                   
Vendor A (Customer B)
  $ 1,267,445       27 %   $ -  
Vendor B
    576,475       12 %     -  
Total
  $ 1,843,920       39 %   $ -  

For the six months ended September 30, 2011, one single vendor represented more than 10% of the Company’s purchases. This vendor accounted for 23% of purchases amounting to $2,038,175 with $0 of accounts payable as of September 30, 2011.

For the three months ended September 30, 2010, one single vendor represented more than 10% of the Company’s purchases. This vendor accounted for 17% of purchases amounting to $825,915 with $0 of accounts payable as of September 30, 2010.

   
Six months ended September 30, 2010
   
September 30, 2010
 
   
Purchases
   
Percentage of purchases
   
Accounts payable
 
                   
Vendor A (Customer B)
  $ 1,781,588       20 %   $ -  
Vendor B
    998,302       11 %     -  
Total
  $ 2,779,890       31 %   $ -  
 
 
 
21

 
 
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)

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

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

The Company’s interest-rate risk arises from revolving lines of credit and other borrowings. Borrowings issued at variable rates expose the Company to cash flow interest rate risk. The Company manages interest rate risk by varying the issuance and maturity dates of its variable rate debt, limiting the amount of variable rate debt, and continually monitoring the effects of market changes in interest rates. As of September 30, 2011, most of the Company’s borrowings were at variable rates. The interest rates and terms of repayment of the borrowings are disclosed in Notes 7 and 8.

(e)             Exchange rate risk

The Company cannot guarantee that the current exchange rate will remain steady; therefore there is a possibility that the Company could post the same amount of profit for two comparable periods and because of the fluctuating exchange rate actually post higher or lower profit depending on the exchange rate of HK$ converted to US$ on that date. The exchange rate could fluctuate depending on changes in political and economic environments without notice.
 
NOTE – 14                      COMMITMENTS AND CONTINGENCIES

(a)             Operating lease commitments

The Company’s subsidiary in Hong Kong is committed under several non-cancelable operating leases with fixed monthly rentals, due through February 2013. Total rent expense for the six months ended September 30, 2011 and 2010 was $56,725 and $52,745, respectively.

As of September 30, 2011, the Company has future minimum rental payments under various non-cancelable operating leases in the next two years, as follows:

Year ending September 30:
 
2012
  $ 113,583  
2013
    8,067  
Total
  $ 121,650  
 
 
 
22

 
 
GREEN DRAGON WOOD PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)

 (b)             Legal proceedings

On February 12, 2009, a claim was filed by Chi Yim Yip, Roger (“Mr. Yip”) and Characters Capital Group Limited (“CCGL”) against Mr. Kwok Leung Lee (“Mr. Lee”), a director of the Company, and GDWPCL alleging (i) breach of contract by GDWP concerning the engagement of CCGL to assist GDWPCL in securing GDWP’s listing on the OTC Bulletin Board and (ii) defamation by Mr. Lee related to the contract dispute. Damages being sought include $31,287 in liquidated damages from GDWPCL, aggravated/exemplary damages and injunction from further defamation. The claim was filed with the High Court of the Hong Kong Special Administrative Region, Court of First Instance.
 
On April 9, 2009, Mr. Lee and GDWPCL filed a Defense and Counterclaim. GDWPCL asserted a breach of contract claim against CCGL, alleging that CCGL failed to fulfill its obligations pursuant to the CCGL agreement to effect the listing of GDWP through a reverse merger by the use of a company that was listed on the Pink Sheets. Mr. Lee additionally asserted a breach of contract claim against Mr.Yip for the Stock Purchase Agreement dated March 31, 2007, for failing to deliver a shell company, Tabatha V, Inc., that was listed on the Pink Sheets, which, pursuant to the Stock Purchase Agreement, was to be purchased by Mr. Lee. Both Mr. Lee and GDWPCL also claimed damages for fraudulent misrepresentation related to the failure to deliver the Pink Sheet shell company. On May 22, 2009, Mr.Yip and CCGL replied to the counterclaim.

On January 26, 2011, the High Court of the Hong Kong Special Administrative Region granted leave to Mr. Yip and CCGL to set the case down for a 7-day trial. However, Mr. Yip and CCGL have not yet set the case down for trial for reasons unknown. GDWPCL will file an additional witness statement and thereafter the case shall be set down for trial.

On June 18, 2011, GDWPCL through its local attorney put forward a sanctioned offer to CCGL and Mr. Yip that GDWPCL and Mr. Lee would accept a payment of approximately $644,000 (equivalent to HK$5,000,000) (inclusive of interest) plus costs of the action and the counterclaim in full and final settlement of the main action.

The Company is currently unable to assess the likelihood of a favorable or unfavorable outcome for this litigation.
 
NOTE – 15                      SUBSEQUENT EVENTS

The Company has evaluated the subsequent events through the filing date of this Form 10-Q and has determined that there were no subsequent events to recognize or disclose in these financial statements.

 
 
 
 
23

 

ITEM 2.                      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
Cautionary Note Regarding Forward-Looking Statements
 
We make certain forward-looking statements in this report. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings), demand for our services, and other statements of our plans, beliefs, or expectations, including the statements contained under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” as well as captions elsewhere in this document, are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can”, “could,” “may,” “should,” “will,” “would,” and similar expressions. The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. You are cautioned not to place undue reliance on such forward-looking statements. These risks and uncertainties, together with the other risks described from time to time in reports and documents that we file with the SEC should be considered in evaluating forward-looking statements.
 
The nature of our business makes predicting the future trends of our revenue, expenses, and net income difficult. Thus, our ability to predict results or the actual effect of our future plans or strategies is inherently uncertain. The risks and uncertainties involved in our business could affect the matters referred to in any forward-looking statements and it is possible that our actual results may differ materially from the anticipated results indicated in these forward-looking statements. Important factors that could cause actual results to differ from those in the forward-looking statements include, without limitation, the following:
 
·  
the effect of political, economic, and market conditions and geopolitical events;
·  
legislative and regulatory changes that affect our business;
·  
the availability of funds and working capital;
·  
the actions and initiatives of current and potential competitors;
·  
investor sentiment; and
·  
our reputation.
 
We do not undertake any responsibility to publicly release any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this report, except as required by law.
 
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes thereto as filed with the SEC and other financial information contained elsewhere in this report.
 
Except as otherwise indicated by the context, references in this Form 10-Q to “we,” “us,” “our,” “the Registrant”, “Green Dragon”, “our Company,” or “the Company” are to Green Dragon Wood Products, Inc., a Florida corporation and its consolidated subsidiaries. Unless the context otherwise requires, all references to (i) “BVI” are to British Virgin Islands; (ii) “PRC” and “China” are to the People’s Republic of China; (iii) “U.S. dollar,” “$” and “US$” are to United States dollars; (iv) “RMB” are to Yuan Renminbi of China; (v) “Securities Act” are to the Securities Act of 1933, as amended; and (vi) “Exchange Act” are to the Securities Exchange Act of 1934, as amended.
 
Critical Accounting Policies and Estimates
 
Our condensed consolidated financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States ("US GAAP"). US GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expenses amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of condensed consolidated our financial statements.
 
 
 
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 We believe the following is among the most critical accounting policies that impact our condensed consolidated financial statements. We suggest that our significant accounting policies, as described in our condensed consolidated financial statements in the Summary of Significant Accounting Policies, be read in conjunction with this Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
Accounts receivable and allowance for doubtful accounts
 
Accounts receivable are recorded at the invoiced amount and do not bear interest, which are due within contractual payment terms, generally 60 to 180 days from shipment. The Company extends unsecured credit to its customers in the ordinary course of business, based on evaluation of a customer's financial condition, the customer credit-worthiness and their payment history. Accounts receivable outstanding longer than the contractual payment terms are considered past due. Past due balances over 180 days and those over a specified amount are reviewed individually for collectability. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
 
The credit terms of our two major customers are summarized as below:
 
Major Customers
Contractual Credit Term
Repayment Term #
     
Customer A
60 to 90 days
Accounts receivable are repaid on a regular basis to the Company and the cash receipt is made to Customer B upon the instruction of the Company.
     
Customer B (also a major supplier)
90 to 180 days
Customer B receives the cash settlement from Customer A and the aggregate receivable will offset against its trade payable.
 
In March 2010, the Company entered into a tri-parties settlement arrangement among Customer A and Customer B. Under such arrangement, Customer A agreed to transfer its accounts receivable balance to Customer B and Customer B agreed to receive such accounts receivable balance from Customer A, on behalf of the Company, to offset against its trade payable due to the Company.
 
Accounting Standard Codification ("ASC") Topic 605
 
We recognize revenue in accordance with ASC Topic 605, “Revenue Recognition” when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectibility is reasonably assured.
 
The majority of the Company's revenue results from sales contracts with direct customers and revenues are generated upon the shipment of goods. The Company's pricing structure is fixed and there are no rebate or discount programs. Management conducts credit background checks for new customers as a means to reduce the subjectivity of assuring collectability. Based on these factors, the Company believes that it can apply the provisions of ASC Topic 605 with minimal subjectivity.
 
 
 
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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.
 
Results of Operations
 
Three Months Ended September 30, 2011 as Compared to Three Months Ended September 30, 2010
 
The following table summarizes the results of our operations during the three months ended September 30, 2011 and 2010, and provides information regarding the dollar and percentage increase or (decrease) from the three months ended September 30, 2011 to the three months ended September 30, 2010.
 
                         
   
Three Months Ended September 30,
   
$ Increase /
   
% Increase /
 
   
2011
   
2010
   
(Decrease)
   
(Decrease)
 
Revenue, net
  $ 5,749,232     $ 5,575,111     $ 174,121     $ 3.1 %
Cost of Revenue
    (4,802,306 )     (5,131,952 )     (329,646 )     (6.4 %)
Gross Profit
    946,926       443,159       503,767       113.7 %
General and Administrative Expenses
    (385,961 )     (236,875 )     149,086       62.9 %
Total Operating Expenses
    (385,961 )     (236,875 )     149,086       62.9 %
Income from Operations
    560,965       206,284       354,681       171.9 %
Other (Expenses)
    (118,643 )     (35,253 )     83,390       236.5 %
Income before Income Tax
    442,322       171,031       271,291       158.6 %
Income Tax Expense
    (73,149 )     (28,000 )     45,149       161.2 %
Net  Income
  $ 369,173     $ 143,031     $ 226,142     $ 158.1 %
 
Revenue
 
Revenue for the three months ended September 30, 2011 was $5,749,232, an increase of $174,121 or 3.1% from $5,575,111 for the comparable period in 2010.
 
Cost of revenue and gross profit
 
 Cost of revenue for the three months ended September 30, 2011 was $4,802,306, a decrease of $329,646 or 6.4% from $5,131,952 for the comparable period in 2010. This decrease was primarily attributable to a decrease in purchase cost. The gross profit margin for the three months ended September 30, 2011 also increased to 16.47% from 7.95% for the comparable period in 2010. The increase was primarily attributable to a decrease in purchase cost.
 
Gross profit for the three months ended September 30, 2011 was $946,926, an increase of $503,767 or 113.7% from $443,159 for the comparable period in 2010.  The increase was primarily attributable to increase in sales and decrease in decrease in purchase cost.
 
General and Administrative Expenses
 
 General and administrative expenses for the three months ended September 30, 2011 were $385,961, an increase of $149,086 or 62.9% from $236,875 for the comparable period in 2010. 
 
 
 
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 Other Expenses
 
The increase was primarily attributable to increase of foreign exchange loss. Foreign exchange loss, net, for the three months ended September 30, 2011 was $75,701, an increase of $36,069 or 91% from $39,632 for the comparable period in 2010.  The loss in 2011 resulted primarily from the effect of increases in the Euro exchange rate (versus the Hong Kong dollar) on GDWPLC liabilities denominated in Euros.
 
Income before income tax and income tax expense
 
Income before income tax for the three months ended September 30, 2011was $442,322, an increase of $271,291 or 158.6% from $171,031 for the comparable period in 2010. The increase was in line with the overall increase in sales and decrease in cost of revenue.
 
Income tax expense
 
Provision for income tax for the three months ended September 30, 20110 was $73,149, an increase of $45,149 or 161.2% from $28,000 for the comparable period in 2010. The increase was primarily attributable to the increase in income from operations.
 
Net Income
 
Net income for the three months ended September 30, 2011 was $369,173, an increase of $226,142 or 158.1% from $143,031 for the comparable period in 2010. The increase was primarily attributable to the increase in sales and decrease in cost of revenue.
 
Comparison of the Six Months Ended September 30, 2011 and 2010
 
 The following table summarizes the results of our operations during the six months ended September 30, 2011 and 2010, and provides information regarding the dollar and percentage increase or (decrease) from the six months ended September 30, 2011 to the six months ended September 30, 2010.
 
                         
   
Six Months Ended September 30,
   
$ Increase /
   
% Increase /
 
   
2011
   
2010
   
(Decrease)
   
(Decrease)
 
Revenue, net
  $ 10,235,801     $ 10,279,087     $ (43,286 )   $ (0.4 %)
Cost of Revenue
    (8,913,621 )     (9,486,169 )     (572,548 )     (6.0 %)
Gross Profit
    1,322,180       792,918       529,262       66.7 %
General and Administrative Expenses
    (598,841 )     (484,427 )     114,414       23.6 %
Total Operating Expenses
    (588,841 )     (484,427 )     114,414       23.6 %
Income from Operations
    723,339       308,491       414,848       134.5 %
Other (Expenses) / Income
    (252,811 )     78,687       (331,498 )     (421.3 %)
Income before Income Tax
    470,528       387,178       83,350       21.5 %
Income Tax Expense
    (78,077 )     (63,785 )     (14,292 )     22.4 %
Net  Income
  $ 392,451     $ 323,393     $ 69,058     $ 21.4 %
 
Revenue
 
Revenue for the six months ended September 30, 2011 was $10,235,801, a decrease of $43,286 or 0.4% from $10,279,087 for the comparable period in 2010. This decrease was primarily attributable to general market conditions during the three months ended September 30, 2011.
 
 
 
 
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Cost of revenue and gross profit
 
Cost of revenue for the six months ended September 30, 2011 was $8,913,621, a decrease of $ 572,548 or 6.0% from $9,486,169 for the comparable period in 2010. This decrease was primarily attributable to a decrease in sales.
 
Gross profit for the six months ended September 30, 2011 was $1,322,180, an increase of $529,262 or 66.7% from $792,918 for the comparable period in 2010. This increase was primarily attributable to a decrease in purchase cost. The gross profit margin for the six months ended September 30, 2011 also increased to 12.92% from 7.71% for the comparable period in 2010. The increase was primarily attributable to a decrease in purchase cost.
 
General and Administrative
 
General and administrative expenses for the six months ended September 30, 2011 was $598,841, an increase of $114,414 or  23.6% from $484,427 for the comparable period in 2010. This increase was primarily attributable to an increase of travelling expenses and professional fees.
 
Other Expenses
 
The increase was primarily attributable to increase of foreign exchange loss. Foreign exchange loss, net, for the six months ended September 30, 2011 was $178,416 a decrease of $262,672 or 311.8% from a foreign exchange gain, net, of $84,256 for the comparable period in 2010.  The loss in 2011 resulted primarily from the effect of increases in the Euro exchange rate (versus the Hong Kong dollar) on GDWPLC liabilities denominated in Euros.
 
Income before income tax
 
Income before income tax for the six months ended September 30, 2011 was $470,528, an increase of $83,350 or 21.5% compared to income of $387,178 for the comparable year in 2010. The increase was primarily attributable to a decrease in purchase cost offsetting negative swing in foreign exchange loss discussed above. For the six months ended September 30, 2011, the provision for income taxes was $78,077, an increase of $14,292 or 22.4% compared to $63,785 for the comparable year in 2010.
 
Net income
 
Net income for the six months ended September 30, 2011 was $392,451, an increase of $69,058 or 21.4% from net income of $323,393 for the comparable period in 2010. The increase was primarily attributable to a decrease in purchase cost offsetting negative swing in foreign exchange loss discussed above.
 
Liquidity and Capital Resources
 
Cash and Cash Equivalents
 
Our cash and cash equivalents as at the beginning of the six months ended September 30, 2011 was $289,076 and decreased to $61,163 by the end of the period, a decrease of $227,913 or 78.8%. The decrease was primarily attributable to repayment of revolving lines of credit and purchase of life insurance policy on a current executive officer of the Company.
 
Net cash provided by operating activities
 
Net cash provided by operating activities for the six months ended September 30, 2011 was $717,644, an increase of $2,089,731 or 152.3% from $1,372,087 net cash used in operating activities for the comparable period in 2010.  The increase was primarily attributable to $69,058 increase in net income, the $710,688 positive swing ($670,285 and ($40,403) for the six months ended September 30, 2011 and 2010, respectively) in change in accounts payable, the $542,745 positive swing ($63,212 and ($479,533) for the six months ended September 30, 2011 and 2010, respectively) in change in accrued liabilities and other payables, and the $482,276 positive swing ($433,240 and ($49,036) for the six months ended September 30, 2011 and 2010, respectively) in change in prepayments, deposits and other receivables, offset by the $192,544 negative swing (($33,788) and $158,756 for the six months ended September 30, 2011 and 2010, respectively) in change in inventories.

 
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Net cash used in investing activities
 
Net cash used in investing activities for the six months ended September 30, 2011 was $769,713, a decrease of $430,158 or 126.7% from $339,555 for the comparable period in 2010. The decrease was majorly attributable to the purchase of life insurance policy on a current executive officer of the Company and no further investment in marketable securities in the six months ended September 30, 2011.
 
Net cash (used in) provided by financing activities
 
Net cash used in financing activities for the six months ended September 30, 2011 was $176,736, a decrease of $1,790,480 or 111% from cash provided by financing activities of $1,613,744 for the comparable period in 2010.  The decrease was attributable to the $1,839,962 negative swing (($1,005,422) and $834,540 for the six months ended September 30, 2011 and 2010, respectively) with regards to the repayment of revolving lines of credit and the $529,796 decrease ($372,872 and $902,668 for the six months ended September 30, 2011 and 2010, respectively) in less advances from a director offset by the $420 increase (($76,745) and ($77,165) for the six months ended September 30, 2011 and 2010, respectively) in repayment of long-term bank loan, draw down from long-term bank loan of $532,956 and the $45,902 increase (($397) and ($46,299) for the six months ended September 30, 2011 and 2010, respectively) on the change in restricted cash.
 
Non-cash transaction
 
In March 2010, the Company entered into a tri-parties settlement arrangement among two major customers, Customer A and Party B. Under such arrangement, Customer A agreed to transfer its accounts receivable balance to Party B and Party B agreed to receive such accounts receivable balance from Customer A, on behalf of the Company, to offset against its trade payable due to the Company.
 
Pursuant to the terms of the Tri-parties Settlement Arrangement among Customer A, Party B and us;
 
1.
Customer A agrees to make cash payments directly to the designated bank accounts of Party B, per our monthly instruction;
2.
We and Party B agree to offset the cash proceeds against the accounts payable which we owe to Party B, and;
3.
In any event if Party B is not reimbursed by Customer A, we are responsible to chase Customer A for the settlement under obligation among the sales contracts.  Meanwhile, we are legally liable to repay the accounts payable to Party B under the purchase contract.
 
Under this arrangement, we can assure the collection from Customer A to meet with the purchase payable due to Party B on a timely basis. We also can reduce the time and costs to handle the fund remittance among Customer A, Party B and ourselves. As we continue to make the purchase orders to Party B, the accounts receivable originally due from Customer A will be gradually eliminated and offset by our future accounts payable due to Party B.
 
We have developed a prolonged business relationship with Party “B” in the sale and purchase of wood veneer and the related products with a history of 10 years. In the normal course of business, Party B is acting as a “customer” or a “vendor”, who generally sells and buys different types of wood products to and from us on an arm-length basis. These sale and purchases transactions are independent.
 
We expect to sustain and continue this prolonged business relationship with Party B, because;
 
1.
Party B has a long-term commercial history and experience in sale and procurement of wood products in China;
2.
Party B has developed an extensive marketing and sourcing network in China, and;
3.
We have built up a prolonged trust and confidence in doing business with each other.
 
We believe that there is no collectability concern with regard to the accounts receivable balance due from Party B, which will be recoverable by our future purchase orders.
 
 
 
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As of September 30, 2011 and March 31, 2011, the accounts receivable balance transferred from Customer A to Party B was $559,749 and $8,469,215, respectively. The accounts receivable balances of Customer A and Party B under the tri-parties settlement arrangement is presented as follows:
 
   
As of September 30, 2011
 
   
Customer A
   
Party B
 
Accounts receivable
  $ 1,615,479     $ 4,947,280  
Accounts payable
    -       -  
Add (less): Transfer of accounts receivable from Customer A to Party B
    (559,749 )     559,749  
Accounts receivable, net
  $ 1,055,730     $ 5,507,029  
 
   
As of March 31, 2011
 
   
Customer A
   
Party B
 
Accounts receivable
  $ 9,488,528     $ 2,820,304  
Accounts payable
    -       (6,400,919 )
Add (less): Transfer of accounts receivable from Customer A to Party B
    (8,469,215 )     8,469,215  
Accounts receivable, net
  $ 1,019,313     $ 4,888,600  
 
As of September 30, 2011 and March 31, 2011, the aging analysis of Party B is as follow:
 
   
As of
 
   
September 30, 2011
   
March 31, 2011
 
0-90 days
  $ 2,072,695     $ 1,302,674  
91-180 days
    769,066       1,756,474  
181-270 days
    1,162,525       1,343,477  
271-360 days
    1,482,555       485,975  
Over 360 days
    20,188       -  
Total
  $ 5,507,029     $ 4,888,600  
 
We have also received cash settlement of approximately $0 and recognized purchases of approximately $457,987 due to Party B in October 2011.
 

 
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Trends
 
We are not aware of any trends, events or uncertainties that have or are reasonably likely to have a material impact on our short-term or long-term liquidity.
 
Inflation
 
We believe that inflation has not had a material or significant impact on our revenue or our results of operations.
 
Working Capital
 
Our working capital was $2,800,428 and $2,687,274 at September 30, 2011 and March 31, 2011, respectively.
 
We currently generate our cash flow through our operations. We believe that our cash flow generated from operations will be sufficient to sustain operations for at least the next 12 months. There is no identifiable expansion plan as of September 30, 2010, but from time to time, we may identify new business opportunities to improve the profitability and working capital from operations.
 
Capital Resources
 
As of September 30, 2011, the Company has a revolving line of credit with Shanghai Commercial Bank with an outstanding balance of $333,077, a revolving line of credit with Hongkong and Shanghai Banking Corporation Limited with an outstanding balance of $1,217,700, and a trade financing payable to Tai Wah Timber Factory Limited and its related company, Glory Idea Investment Limited in an aggregate of $1,244,868. If we are to acquire another business or further expand our operations, we will need additional capital.
 
Bank Credit Facilities
 
The credit facility with The Hongkong and Shanghai Banking Corporation Limited provides for borrowings up to HK$15,000,000 (approximately $1,926,900), which bears interest at a rate of 2% per annum over Hong Kong Interbank Offered Rate (“HIBOR”) for HK dollars facilities and at a rate of 2% per annum over London Interbank Offered Rate (“LIBOR”) for foreign currency facilities and is personally guaranteed by Mr. Lee, director of the Company. The Company also is required to maintain a minimum cash deposit of approximately $400,000 or its equivalent in other foreign currencies and has pledged the marketable securities as collateral. In the event the value of the foreign currency deposit and marketable securities fall below the respective required amount, additional security will be required. In addition, the Company is subject to the settlement of accounts due and payable to the restricted vendors under the line of credit at the bank’s discretion. The line will be extended or renewed on a regular basis at the option of the bank. Weighted average interest rate approximates 2.21% and 2.21% per annum for the six months ended September 30, 2011 and 2010, payable monthly.
 
The credit facility with Shanghai Commercial Bank Limited provides for borrowings up to HK$3,500,000 (approximately $449,796), which bears interest at a rate of 0.25% per annum over Hong Kong prime for HK dollars facilities and at a rate of 0.25% per annum over US prime for US dollars facilities and is personally guaranteed by Mr. Lee, director of the Company. The Company also is required to maintain a minimum cash deposit not less than $264,500 that is considered restricted as compensating balances to the extent the Company borrows against this line of credit. In addition, the Company is subject to the settlement of accounts due and payable to the restricted vendors under the line of credit at the bank’s discretion. The line will be extended or renewed on a regular basis at the option of the bank. Weighted average interest rate approximates 3.50% and 5.25% per annum for the six months ended September 30, 2011 and 2010, payable monthly.
 
From time to time, the Company receives advances from Mr. Kwok Leung Lee, the Company’s chairman of the board of directors, and his affiliates. The related liability balances ($523,084 and $150,212 at September 30, 2011 and March 31, 2011, respectively) are unsecured, interest-free, and have no fixed terms of payment.
 
On July 27, 2011, the Company purchased a single premium universal life insurance policy on the life of its president for $766,870. The policy provides for $4,000,000 coverage, a guaranteed minimum interest rate of 3% (4.8 % for the first year), an initial policy charge of 6% ($46,012), policy expense charge (approximately $970 per month for the first year), and surrender charges ranging from $114,900 in the first year to $7,660 in the 15th year. The policy secures the Company’s indebtness of $532,956 to The HongKong and Shanghai Banking Corporation Limited
 

 
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Financing Arrangement
 
The Company has a financing arrangement with Tai Wah Timber Factory Limited and its related company, Glory Idea Investment Limited, which provides borrowings for trade payable financing. Under the terms of this arrangement, the Company received the revolving line of credit with the maturities of 2 to 3 months and charged with a commission fee of 5% on each amount drawn from the line, payable monthly. An additional interest will be charged on overdue balance, if any.
 
As of September 30, 2011 and March 31, 2011, the outstanding balance was $1,244,868 and $1,454,367.
 
While the capital resources of the Company are stable from a cash perspective, the credit of the Company for debt financing if necessary is extremely strong due to our strong banking relations and the credit facilities provided for our veneer products.  From time to time we do have a need to exercise our credit options on a short term basis due to the nature of our business as importers/exporters. The company has established lines of credit with banks and management maintains very strong relations with these banks.  Management believes that its current lines of credit are more than sufficient to cover any short and long term liquidity needs.  Our historical financial liquidity needs have been shown to be more than adequately covered by our credit facilities.  We believe that the strength of our management team to maintain strict internal control of its cash flow and liquidity that the current credit facilities are adequate for our needs.
 
Our accounts receivable represents approximately 69.6% of our revenue.  Our accounts receivable are not considered by management to be high due to the nature of payment for our products.  Our clients are required to provide credit facilities for their product by a Letter of Credit or other negotiable method of payment for the amount owed.  We draw off of the Letter of Credit prior to delivery only in the event that it is needed to maintain sufficient cash flow to cover our operations.  We do pay the cost of drawing on any Letter of Credit.  Because our cash flow is typically sufficient to cover our operations we do not carry accounts receivable unless prior arrangements have been made.  It is company policy to recognize revenue when the product is shipped to our customers.
 
In the event we are unable to generate sufficient funds to continue our business efforts or if the company is pursued by a larger company for a business combination, we will analyze all strategies to continue the company and increase shareholder value.  Only under these circumstances would we consider a merger, acquisition, joint venture, strategic alliance, a roll-up, or other business combination to increase business and potentially increase the shareholder value of the Company.  Management believes its responsibility to increase shareholder value is of paramount importance, which means the Company should consider the aforementioned alternatives in the event funding is not available on favorable terms to the Company when and if needed.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements.
 
ITEM 3.                      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Not Applicable.
 
ITEM 4.                      CONTROLS AND PROCEDURES.
 
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
 
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), our management carried out an evaluation, with the participation of our Chief Executive Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) of the Exchange Act), as of the period covered by this report. Disclosure controls and procedures are defined as controls and other procedures that are designed to ensure that information required to be disclosed by us in reports filed with the SEC under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based upon their evaluation, our management (including our Chief Executive Officer) concluded that our disclosure controls and procedures were not effective as of September 30, 2011 based on the material weaknesses defined below.
 

 
32

 
 
 
The Company did not implement proper segregation of duties due to the Company’s small size and only one executive officer. In certain instances, persons responsible to review transactions for validity, completeness and accuracy were also responsible for preparation.
 
Due to the Company’s limited resources, the Company does not have accounting personnel with extensive experience in maintaining books and records and preparing financial statements in accordance with US GAAP which could lead to untimely identification and resolution of accounting matters inherent in the Company’s financial transactions in accordance with US GAAP. Additionally, the Company does not have a formal audit committee, and the Board does not have a financial expert, thus the Company lacks the board oversight role within the financial reporting process.
 
MANAGEMENT’S REMEDIATION PLAN
 
While management believes that the Company’s condensed consolidated financial statements previously filed in the Company’s SEC reports have been properly recorded and disclosed in accordance with US  GAAP, based on the control deficiencies identified above, we have designed and plan to implement, or in some cases have already implemented, the specific remediation initiatives described below:
 
 
·
The Company is currently looking for an outside consultant with considerable public company reporting experience and breadth of knowledge of US GAAP to assist it with the preparation and review of its condensed consolidated financial statements.  The Company is committed to establishing procedures and utilizing experienced individuals with professional supervision to properly segregate duties, prepare and approve the condensed consolidated financial statements and footnote disclosures in accordance with US GAAP.
 
·
The Board of Directors will be more actively involved in providing additional oversight of the Company’s internal controls, formal review of our condensed consolidated financial statements,  and more detailed review of the periodic reports we anticipate filing with the SEC.
 
·
The Company has initiated efforts to ensure our employees understand the importance of internal controls and compliance with corporate policies and procedures.
 
·
The Company may retain third party specialists to assist us in the design, implementation and testing of our internal controls as necessary.
 
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
 
No changes in the Company's internal control over financial reporting have come to management's attention during the Company's last fiscal quarter that have materially affected, or are likely to materially affect, the Company's internal control over financial reporting.
 
 PART II – OTHER INFORMATION
 
ITEM 1.                      LEGALPROCEEDINGS.
 
On February 12, 2009, a claim was filed by Chi Yim (Roger) Yip and Characters Capital Group Limited (“CCGL”) against Kwok Leung Lee, our President, and GDWPCL alleging (i) breach of contract by GDWPCL concerning the engagement of CCGL to assist GDWPCL in securing GDWPCL’s listing on the OTC Bulletin Board and (ii) defamation by Kwok Leung Lee related to the contract dispute.  Damages being sought include $31,287 in liquidated damages from GDWPCL, aggravated/exemplary damages and injunction from further defamation. The claim was filed with the High Court of the Hong Kong Special Administrative Region, Court of First Instance.
 
 
 
 
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On April 9, 2009, Kwok Leung Lee and GDWPCL filed a Defense and Counterclaim.  GDWPCL asserted a breach of contract claim against CCGL, alleging that CCGL failed to fulfill its obligations pursuant to the CCGL agreement to effect the listing of GDWPCL through a reverse merger by the use of a company that was listed on the Pink Sheets. Kwok Leung Lee additionally asserted a breach of contract claim against Chi Yim (Roger) Yip for the Stock Purchase Agreement dated March 31, 2007, for failing to deliver a shell company, Tabatha V, Inc., that was listed on the Pink Sheets, which, pursuant to the Stock Purchase Agreement, was to be purchased by Kwok Leung Lee.  Both Kwok Leung Lee and GDWPCL also claimed damages for fraudulent misrepresentation related to the failure to deliver the Pink Sheets shell company. On May 22, 2009, Chi Yim (Roger) Yip and CCGL replied to the counterclaim.
 
On January 26, 2011, the High Court of the Hong Kong Special Administrative Region granted leave to Mr. Yip and CCGL to set the case down for a 7-day trial. However, Mr. Yip and CCGL have not yet set the case down for trial for reasons unknown. GDWPCL will file an additional witness statement and thereafter the case shall be set down for trial.
 
On June 18, 2011, GDWPCL put forward a sanctioned offer to CCGL and Mr. Yip whereby GDWPCL and Mr. Lee would accept a settlement of approximately $644,000 (equivalent to HK$5,000,000) (inclusive of interest) plus costs of the action and the counterclaim to be taxed if not agreed in full and final settlement of the main action. The due date for CCGL and Mr. Yip to reply will be on July 15, 2011.
 
The case will go to the High Court on Wednesday, 3rd day of October 2012 at 10:00 a.m. (Hearing dates of 3rd to 11th October 2012 is reserved) and the pre-trial review is scheduled to be heard on Thursday, 5th day of July 2012 at 9:30 a.m. (with 30 minutes reserved) by Deputy High Court Judge Mimmie Chan.
 
The Company is currently unable to assess the likelihood of a favorable or unfavorable outcome for this litigation.
 
Other than as disclosed above, we know of no material, active, pending or threatened proceeding against us or our subsidiaries, nor are we, or any subsidiary, involved as a plaintiff or defendant in any material proceeding or pending litigation.
 
ITEM 1A.                      RISK FACTORS.
 
Not Applicable.
 
ITEM 2.                      UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
None.
 
ITEM 3.                      DEFAULTS UPON SENIOR SECURITIES.
 
None.
 
ITEM 4.                      (REMOVED AND RESERVED).
 
ITEM 5.                      OTHER INFORMATION.
 
None.
 
ITEM 6.                      EXHIBITS.

EXHIBIT NO.
 
DESCRIPTION
31.1
 
Certificate of Principal Executive Officer and Principal Financial Pursuant to Section 302 of the Sarbanes-Oxley Act.
     
32.1
 
Certificate of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.
     
101.INS
 
XBRL Instance Document*
     
101.SCH
 
XBRL Taxonomy Extension Schema Document*
     
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document*
     
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document*
     
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document*
———————
*
The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

 
 

 
34

 

SIGNATURES

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

   
   
 
GREEN DRAGON WOOD PRODUCTS, INC.
   
   
Dated:   December 19, 2011
/s/Kwok Leung Lee
 
 
Kwok Leung Lee
 
President
 
 (principal executive officer, principal financial officer, and principal accounting officer )
 
 
 
 
 
 
 
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