China Display (LINLA) 10-Q 2009 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE OF 1934

For the quarterly period ended September 30, 2008

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

For the transition period from _______ to _________

Commission file number: 000-21419

CHINA DISPLAY TECHNOLOGIES, INC.

(Name of Issuer in Its Charter) 

Delaware	23-2753988
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

12A Block, Xinhe Road, Xinqiao No. 3

Industrial Zone, Shajing District, Baoan Town, Shenzen, China 150090

(Address of Principal Executive Offices and Zip Code)

86-0755-29758811

(Issuer's telephone number)

Indicate by a check mark whether the issuer (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  x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes o No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 12,368,435 shares at November 12 , 2008.

 CHINA DISPLAY TECHNOLOGIES, INC. AND SUBSIDIARIES

FORM 10-Q

QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008

INDEX

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements
	Consolidated Balance Sheet (Unaudited) at September 30, 2008 and December 31,2007	2
	Consolidated Statements of Operations (Unaudited)
	For the Three and Nine Months Ended September 30, 2008 and 2007	3
	Consolidated Statements of Cash Flows (Unaudited)
	For the Nine Months Ended September 30, 2008 and 2007	4
	Notes to Unaudited Consolidated Financial Statements	5
Item 2.	Management's Discussion and Analysis or Plan of Operation	19
Item 3.	Quantitative and Qualitative Disclosure About Market Risks	24
Item 4.	Controls and Procedures	24
PART II - OTHER INFORMATION
Item 6.	Exhibits	25

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CHINA DISPLAY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS 

	September 30, 2008		December 31, 2007
	(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	728,835	$	2,949,356
Restricted cash (Note 8 )		1,895,336		2,039,314
Trade receivables, net of allowance for doubtful accounts (Note 4)		6,762,788		5,279,282
Inventories, net (Note 5)		5,374,729		1,692,934
Prepaid expenses and other receivables (Note 10 )		559,249		259,170
Total Current Assets		15,320,937		12,220,056
Property and equipment, net (Note 6)		4,700,539		2,441,264
Other assets (Note 11)		79,795		1,059,222
Advances to suppliers (Note 9 )		2,656,897		5,498,257
Total Assets	$	22,758,168	$	21,218,799
LIABILITIES
Current Liabilities
Accounts payables and accrued liabilities	$	610,203	$	2,132,499
Short term bank loans (Notes 7)		4,407,746		5,600,896
Taxes payable		33,249		383,397
Wages payable		131,718		103,944
Corporate taxes payable		100,925		432,532
Accrued directors compensation		116,591
Total Current Liabilities		5,400,432		8,653,268
Commitments and Contingencies (Note 14)		—		—
Stockholders' Equity (Note 12)
Series A convertible preferred stock, $.001 par value; 20,000,000 shares
authorized; issued and outstanding - 6,860,296 shares at September 30, 2008; 3,703,704 shares at December 31, 2007;
liquidation preference – $7,409,120 at September 30, 2008; $4,000,000 at December 31, 2007		6,861		3,704
Common stock. $.001 par value; 100,000,000 shares authorized;
issued and outstanding – 12,368,435 shares at September 30,2008; 11,600,000 shares at December 31, 2007		12,368		11,600
Additional paid-in capital		6,922,348		6,083,501
Accumulated other comprehensive income		1,574,015		692,625
Statutory reserves		198,550		198,550
Retained earnings		8,643,5934		5,575,551
Total Stockholders' Equity		17,357,736		12,565,531
Total Liabilities and Stockholders' Equity	$	22,758,168	$	21,218,799

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

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China Display Technologies Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited) 

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Total Revenues	$	10,825,979		$	9,175,767		$	27,267,123		$	20,487,682
Cost of Sales		8,407,299			6,985,054			21,128,132			15,705,834
Gross Profit		2,418,680			2,190,713			6,138,991			4,781,848
Operating Expenses:
Selling expenses		396,702			275,439			795,920			415,472
Research and development		442,808			165,957			815,847			391,833
Other general and administrative		378,519			277,229			805,612			569,108
Total Expenses		1,218,029			718,625			2,417,379			1,376,413
Income from Operations		1,200,651			1,472,088			3,721,612			3,405,435
Other Income (Expenses):
Other		(20	)		(475	)		(2,781	)		68
Interest incomes		317			817			15,934			817
Interest expenses		(91,438	)		(81,874	)		(389,152	)		(96,292	)
Total Other Income (Expenses)		(91,141	)		(81,532	)		(375,999	)		(95,407	)
Income Before Income Taxes		1,109,510			1,390,556			3,345,613			3,310,028
Provision for Income Taxes		100,153			112,278			277,570			256,238
Net Income	$	1,009,357		$	1,278,278		$	3,068,043		$	3,053,790
Deemed preferred stock dividend	$			$	(2,177,853	)	$			$	(2,177,853	)
Net Income (loss) available to common shareholders		1,009,357			(899,575	)		3,068,043			875,937
Net earnings per share of common stock, basic	$	0.08		$	(0.08	)	$	0.25		$	0.08
Weighted average number of shares outstanding, basic		12,074,568			11,553,348			12,074,568			11,545,824
Net earnings per share of common stock, diluted	$	0.04		$	(0.08	)	$	0.14		$	0.06
Weighted average number of shares outstanding, diluted		22,679,535			11,553,348			22,679,535			15,249,528

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

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CHINA DISPLAY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) 

	For the Nine Months Ended September 30,
	2008			2007
Cash flows from operating activities
Net income	$	3,068,043		$	3,053,790
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation		488,584			322,494
Changes in operating assets and liabilities:
Decrease (Increase) in assets:
Accounts receivable, net		(1,483,504	)		(1,304,822	)
Advances to suppliers		2,841,360			(2,966,863	)
Inventories, net		(3,681,795	)		(605,438	)
Prepaid expenses and other receivables		(300,079	)		(1,666,988	)
Other assets		979,427			—
Increase (Decrease) in liabilities:
Accounts payables and accrued liabilities		(1,522,296	)		249,430
Various tax payable		(350,148	)		(7,619	)
Wage payable		27,774			18,780
Corporate tax payable		(331,607	)		256,237
Net cash provided by (used in) operating activities		(264,241	)		(2,650,999	)
Cash flows from investing activities
Recapitalization costs		—			(625,000	)
Purchase of property and equipment		(2,747,858	)		(934,319	)
Net cash used in investing activities		(2,747,858	)		(1,559,319	)
Cash flows from financing activities
(Decrease) /Increase in restricted cash		143,978			(779,048	)
Proceeds from loans payable					3,477,734
Net Proceeds from sale of preferred stock and warrants					3,860,993
Repayment of short term loan		(1,193,150	)		—
Net proceeds from warrant exercise		748,595			—
Warrant issued for consultancy fee		94,177
Amount due to director		116,590			—
Repayment of related party loans					5,844
Net cash provided by (used in) financing activities		(89,810	)		6,565,523
Effect of exchange rate changes on cash		881,388			54,648
Net increase (decrease) in cash		(2,220,521	)		2,409,853
Cash, beginning of period		2,949,356			134,991
Cash, end of period	$	728,835		$	2,544,844
Supplemental disclosure information:
Interest expense paid	$	389,152		$	96,292
Income taxes paid	$	531,127		$	256,238
The accompanying notes are an integral part of these consolidated financial statements

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1. Organization

China Display Technologies, Inc. (the “Company”) was incorporated in Delaware on September 29, 2004 under the name Lincoln International Corporation (“Lincoln”). On September 21, 2007, its corporate name was changed to SUNY Display Technologies, Inc., and on October 11, 2007, its corporate name was changed to China Display Technologies, Inc. References to Lincoln relate to the Company prior to the reverse acquisition. At the time of the acquisition, Lincoln was not engaged in any active business.

On September 12, 2007, the Company executed a share exchange agreement (“Share Exchange Agreement”) with Lawrence Kwok-Yan Chan, the sole stockholder of Keep On Holdings, Limited, a British Virgin Island corporation incorporated on April 18, 2007 (“Keep On”), whereby the Company acquired all of the outstanding common stock of Keep On in exchange for newly-issued stock of the Company.  

Under the Share Exchange Agreement, on September 12, 2007, the Company issued 11,376,000 shares of common stock to the Keep On Stockholder and his assignees in exchange for 100% of the stock of Keep On. Pursuant to a separate agreement, the Company acquired from the Company’s then principal stockholder and cancelled 290,000 shares of the Company’s common stock he owned immediately prior to the closing for $340,133 and the Company repaid obligations to the then principal stockholder due to him in the aggregate amount of $284,867. After giving effect to the cancellation of shares, the Company had 58,000 shares of common stock outstanding immediately prior to Closing. After the Closing, the Company had a total of 11,600,000 shares of common stock outstanding, with the Keep On stockholder and his assignees owning 98.1% of the total issued and outstanding shares of the Company's common stock.

The Company is the sole stockholder of Keep On and Keep On is the sole stockholder of Suny Electronics (Shenzhen) Company Limited (“Suny”), a corporation organized under the laws of the Peoples’ Republic of China. Suny was organized on November 2, 2004 and commenced operations in 2005. On July 19, 2007, Keep On acquired all of the equity interest in Suny.

The Company’s business is the business of Suny. Suny designs, manufactures and markets small to medium-sized light emitting diode, known as “LEDs,” and cold cathode fluorescent lamp, known as “CCFL,” for various types of displays, such as amorphous silicon thin film liquid crystal displays, low temperature poly-silicon thin film liquid crystal displays, super-twisted liquid crystal display, colored super-twisted liquid crystal display, twisted liquid crystal display, and mono LCDs for liquid crystal displays. Suny’s products are used in a variety of products, such as mobile phones, PDA’s, GPS system, portable DVD/VCD players, MP3 and MP4, medical equipment, household appliances with displays. Its emphasis is on small to medium-size back-light unit manufacturing.

As a result of the Share Exchange Agreement, the acquisition of Keep On by the Company was accounted for as a reverse acquisition because on a post-acquisition basis, the former stockholder of Keep On and his assignees held a majority of the outstanding common stock of the Company on a voting and fully-diluted basis. As a result, Keep On is deemed to be the acquirer for accounting purposes. Accordingly, the consolidated financial statement data presented are those of Keep On and its wholly-owned subsidiary, Suny, for all periods prior to the Company’s acquisition of Keep On on September 12, 2007, and the financial statements of the consolidated companies from the acquisition date forward.

On November 8, 2007, the Company amended its certificate of incorporation which (i) effected a one-for-7.5 reverse split and (ii) changed the authorized capital stock to 20,000,000 shares of preferred stock, par value $.001 per share, and 100,000,000 shares of common stock, par value $.001 per share. All share and per share information in these financial statements give retroactive effect to the reverse split and the change in par value.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Basis of Preparation

Management acknowledges its responsibility for the preparation of the accompanying interim consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the results of its operations for the interim period presented. These consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company’s Form 10-KSB annual report for the year ended December 31, 2007.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results China Display Technologies, Inc. and its subsidiaries for the periods presented. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. The preparation of the financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates.

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b. Basis of consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Keep On and Suny. Intercompany transactions have been eliminated in consolidation.

c. Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as well as the reported amounts of revenues and expenses. Actual results could differ from these estimates.

d. Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, demand deposits with banks and liquid investments with an original maturity of three months or less.

e. Accounts Receivable

Accounts receivables are recognized and carried at original invoiced amount less an allowance for uncollectible accounts, as needed.

The Company uses the aging method to estimate the valuation allowance for anticipated uncollectible receivable balances. Under the aging method, bad debts percentages determined by management based on historical experience as well as current economic climate are applied to customers’ balances categorized by the number of months the underlying invoices have remained outstanding. The valuation allowance balance is adjusted to the amount computed as a result of the aging method. When facts subsequently become available to indicate that the amount provided as the allowance was incorrect, the Company makes an adjustment, which is classified as a change in estimate.

f. Inventories

Inventories are stated at the lower of cost, as determined on a weighted average basis, or market. Costs of inventories include purchase and related costs incurred in bringing the products to their present location and condition. Market value is determined by reference to selling prices after the balance sheet date or to management’s estimates based on prevailing market conditions. The management writes down the inventories to market value if market value is below cost. The management also regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine if a valuation allowance is required.

g. Property and Equipment

Property and equipment are initially recognized recorded at cost. Gains or losses on disposals are reflected as gain or loss in the period of disposal. The cost of improvements that extend the life of plant and equipment are capitalized. These capitalized costs may include structural improvements, equipment and fixtures. All ordinary repairs and maintenance costs are expensed as incurred.

Depreciation for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the assets:

Production machinery and equipment	8 years
Leasehold improvements	10 years
Office and other equipment	5 years
Automobiles	5 years

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h. Impairment of Long-Lived Assets

The Company accounts for impairment of plant and equipment and amortizable intangible assets in accordance with SFAS No. 144, “Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of”, which requires the Group to evaluate a long-lived asset for recoverability when there is event or circumstance that indicate the carrying value of the asset may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset or asset group is not recoverable (when carrying amount exceeds the gross, undiscounted cash flows from use and disposition) and is measured as the excess of the carrying amount over the asset’s (or asset group’s) fair value.

i. Comprehensive income

SFAS No.130, “Reporting Comprehensive Income”, requires disclosure of all components of comprehensive income and loss on an annual and interim basis. Comprehensive income and loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The comprehensive income arose from the effect of foreign currency translation adjustments.

j. Segment information

SFAS No.131, “Disclosures about Segments of an Enterprise and Related Information”, requires certain financial and supplementary information to be disclosed on an annual and interim basis for each reportable segment of an enterprise. The Group believes that it operates in one business segment (research, development, production, marketing and sales of opto electronic products) and in one geographical region (China), as all of the Company’s current operations are carried out in China and most of its sales are made to companies in China.

k. Revenue recognition

The Company generates revenues from the sales of LEDs and CCFLs. Sales are recognized 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 collectability is reasonably assured. Sales are presented net of value added tax (VAT). No return allowance is made as products returns are insignificant based on historical experience.

l. Research and development costs

Research and development costs are expensed to operations as incurred.

m. Income taxes

The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for 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. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Group is able to realize their benefits, or that future deductibility is uncertain.

n. Foreign currency translation

The reporting currency is the U.S. dollar. The functional currency of the Company is the local currency, the Chinese Renminbi (“RMB”). The financial statements of the Company are translated into United States dollars in accordance with Statement of Financial Accounts Standards (“SFAS”) No. 52, “Foreign Currency Translation”, using year-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses and historical rates for the equity. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income. At September 30, 2008, the cumulative translation adjustment of $1,574,015 was classified as an item of other comprehensive income in the stockholders’ equity section of the consolidated balance sheet. For the nine months ended September 30, 2008 and 2007, accumulated other comprehensive income was $1,574,015 and $692,625 respectively.

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The exchange rates used to translate amounts in RMB into U.S. Dollars for the purposes of preparing the consolidated financial statements were as follows: As of September 30, 2008, the Company used the period-end rates of exchange for assets and liabilities of $0.14588 to RMB1.00. For the nine months ended September 30, 2008 and 2007, the Company used the period’s average rate of exchange to convert revenues, costs, and expenses of $0.14288 to RMB1.00 and $0.13028to RMB1.00, respectively, and the Company used historical rates for equity.

o. Related parties

A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company or one of its subsidiaries. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company or its subsidiaries may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.

p. Basic earnings per share is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. Diluted income per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive shares of common stock consist of the common stock issuable upon the exercise of stock warrants (using the treasury stock method) and upon the conversion of convertible preferred stock (using the if-converted method). A reconciliation of the denominator used in the calculation of basic and diluted net income (loss) per share is as follows:

	For the Three Months Ended					For the Nine Months Ended
	September 30,					September 30,
	2008		2007			2008		2007
Numerator:
Net income (loss) available to common shareholders	$	1,009,357	$	(899,575	)	$	3,068,043	$	875,937
Denominator:
Weighted-average shares outstanding for basic earnings per share		12,074,568		11,553,348			12,074,568		11,545,824
Effect of dilutive securities:
Series A convertible preferred stock		6,860,296					6,860,296		3,703,704
Common stock purchase warrants		3,744,671					3,744,671
Weighted-average shares outstanding for diluted earnings (loss) per share		22,679,535		11,553,348			22,679,535		15,249,528

The following were excluded from the computation of diluted shares outstanding as they would have had an anti-dilutive impact.

	For the three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
Common stock purchase warrants		—		11,500,000		—		11,500,000
Series A convertible preferred stock		—		3,703,704		—		—

q. Recently issued accounting pronouncements

In June  2008, the Financial Accounting Standards Board (“FASB”) issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1 concludes that unvested share-based payment awards that contain rights to receive nonforfeitable dividends or dividend equivalents are participating securities, and thus, should be included in the two-class method of computing earnings per share (“EPS”). FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. Early application of EITF 03-6-1 is prohibited. It also requires that all prior-period EPS data be adjusted retrospectively. We have not yet determined the effect, if any, of the adoption of this statement on our financial condition or results of operations.

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In April 2008, the FASB issued Staff Position FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”) which amends the factors an entity should consider in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS No. 142, Goodwill and Other Intangible Assets (“FAS No. 142”). FSP FAS 142-3 applies to intangible assets that are acquired individually or with a group of assets and intangible assets acquired in both business combinations and asset acquisitions. It removes a provision under FAS No. 142, requiring an entity to consider whether a contractual renewal or extension clause can be accomplished without substantial cost or material modifications of the existing terms and conditions associated with the asset. Instead, FSP FAS 142-3 requires that an entity consider its own experience in renewing similar arrangements. An entity would consider market participant assumptions regarding renewal if no such relevant experience exists. FSP FAS 142-3 is effective for year ends beginning after December 15, 2008 with early adoption prohibited. We have not yet determined the effect, if any, of the adoption of this statement on our financial condition or results of operations.

In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities”. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company is currently evaluating the impact of adopting SFAS 161 on its consolidated financial statements.

On December 4, 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 160, Noncontrolling interest in Consolidated Financial Statements (SFAS No. 160). SFAS No. 160 requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. The statement establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation and expands disclosures in the consolidated financial statements. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. We have not yet determined the impact of the adoption of SFAS No. 160 on our consolidated financial statements and footnote disclosures.

On December 4, 2007, the FASB issued SFAS No.141R, Business Combinations (SFAS No. 141R). SFAS No. 141R requires the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed, establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires the acquirer to expand disclosures about the nature and financial effect of the business combination. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We have not yet determined the impact of the adoption of SFAS No. 141R on our consolidated financial statements and footnote disclosures.

r. Recently adopted accounting pronouncements

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13" ("FSP 157-1") and FASB Staff Position 157-2, "Effective Date of FASB Statement No. 157" ("FSP 157-2"). FSP 157-1 amends SFAS 157 to remove certain leasing transactions from its scope. FSP 157-2 delays the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company adopted SFAS 157 effective January 1, 2008 for all financial assets and liabilities as required. The adoption of SFAS 157 was not material to the Company's financial statements or results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115,” (“SFAS 159”) which is effective for fiscal years beginning after November 15, 2007. SFAS 159 is an elective standard which permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The Company has not elected the fair value option for any assets or liabilities under SFAS 159.

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3. CONCENTRATION OF CREDIT RISK

Financial instruments which potentially expose the Company to concentrations of credit risk, consist of cash, accounts and other receivables as of September 30, 2008 and 2007. The Company performs ongoing evaluations of its cash position and credit evaluations to ensure collections and minimize losses.

As of September 30, 2008, all of the Company’s bank deposits were placed with banks in the PRC where there is no insurance to cover bank deposits in the event of bank failure.

For the nine months ended September 30, 2008, approximately 90% of the Company’s sales were made to customers located in the PRC.In addition, approximately 90%of accounts receivables as of September 30, 2008 also arose from customers located in the PRC.

The largest two customers accounted for approximately 11% and 10% of the Company’s total revenue for the three months ended September 30, 2008 and approximately 11% and 19% of the Company’s total revenue for the nine months ended September 30, 2008, respectively.

4. ACCOUNTS RECEIVABLE

Accounts receivable consists of the following: 

	September 30 2008			December 31, 2007
Accounts receivable	$	6,939,324		$	5,445,193
Less: Allowance for doubtful accounts		(176,536	)		(165,911	)
Accounts receivable, net	$	6,762,788		$	5,279,282

The provision for bad debts increased by $10,625 and $31,740 in the nine months ended September 30, 2008 and the year ended December 31, 2007 as follows: 

	September 30, 2008		December 31. 2007
Beginning of period	$	165,911	$	134,171
Additions		10,625		31,740
End of period	$	176,536	$	165,911

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5. INVENTORIES

Inventories consist of the following: 

	September 30, 2008			December 31, 2007
Raw materials	$	5,024,217		$	1,821,884
Work-in-progress		652,386			155,880
Finished goods		-			-
Consumables		6,543			32,559
		5,683,146			2,010,323
Less: Allowance for obsolescence		(308,417	)		(317,389	)
Total	$	5,374,729		$	1,692,934

At September 30, 2008, all finished goods had been shipped to customers.

The allowance for obsolescence decreased by $8,972 in the nine months ended September 30, 2008 and increased by $169,743 for the year ended December 31, 2007 as follows:

	September 30			December 31
Beginning of period	$	317,389		$	147,646
Additions		(8,972	)		169,743
End of period	$	308,417		$	317,389

6. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

	September 30, 2008			December 31, 2007
Production machinery and equipment	$	5,033,890		$	2,680,413
Leasehold improvements		356,702			329,812
Office and other equipment		484,847			67,375
Automobiles		315,679			296,680
		6,191,118			3,374,280
Less: Accumulated depreciation		(1,490,579	)		(933,016	)
Total	$	4,700,539		$	2,441,264

Depreciation expense was $488,584 and $322,494 for the nine months ended September 30, 2008 and 2007, and is broken down as follows:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
Cost of sales	$	147,910	$	84,375		411,615	$	284,908
Operating expense		37,029		16,721		76,969		37,586
Total	$	184,939	$	101,096		488,584	$	322,494

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7. SHORT-TERM BANK LOANS

Short-term bank loans consist of the following:

		September 30,		December 31,
		2008		2007
Revolving loans with ABN Amro, renewable on 90-days terms, interest at 6.44%- 8.2125% per annum due January to March 2008 and secured by restricted cash of approximately $822,582.			$	$4,005,240
Revolving loans with ABN Amro, renewable on 90-days terms, interest at 6.58% - 8.2125% per annum due in November 2008 and secured by restricted cash of approximately $875,260.		1,918,338
Revolving loans with Public Bank (Hong Kong) Limited, renewable on 90-day terms, interest rates ranging from 8.75% - 9.5%, due in February 2008 and secured by restricted cash of approximately $137,097.				273,968
Revolving loans with DBS Bank, renewable on 90-days terms, interest at 7.5% -9% per annum, due in July 2008 and secured by restricted cash of approximately $253,707.		—		636,202
China Construction Bank, interest at 7.5% - 8.424% per annum, due in January 2009 and secured by a personal guarantee of the Company’s chief executive officer and restricted cash of approximately $145,877.		303,911		685,486
NanYang Commercial Bank, renewable on 120 days terms, interest at 7%-8% per annum, due in Nov 2008 and secured by restricted cash of approximately $874,199.		2,185,497
Total short-term loans	$	4,407,746	$	5,600,896

Interest expense from these loans for the nine months ended September 30, 2008 and 2007 amounted to $389,152 and $96,292 respectively.

The Company is required to hold a portion of the loans as partial security for the loans. See Note 8.

8. RESTRICTED CASH

The Company is required to hold a portion of borrowed money as security for payment of the loans (See Note 7). These amounts are reflected as restricted cash. Restricted cash consists of following:

	September 30,		December 31,
	2008		2007
ABN Amro	$	875,260	$	822,582
Public Bank (Hong Kong) Limited				137,097
DBS Bank		—		257,052
China Construction Bank		145,877		137,097
East Asia Bank		—		685,486
NanYang Commercial Bank		874,199		—
Total	$	1,895,336	$	2,039,314

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9. ADVANCE TO SUPPLIERS

The following table sets forth information as to advances to supplier at September 30,2008 and December 31, 2007, based on the number of days the advances were outstanding as of the respective balance sheet dates.

	September 30,		December 31,
	2008		2007
0-90 days	$	2,420,782	$	4,068,704
90-120 days		236,115		1,392,674
120-360 days		—		36,879
	$	2,656,897	$	5,498,257

Advance to suppliers represents primarily deposit for purchase of raw materials. No formal contract was signed. The raw materials are scheduled for delivery during the fourth quarter of 2008. Since there is no formal contracted delivery schedule, the advance is classified as non current.

10. PREPAID EXPENSES AND OTHER RECEIVABLES

Prepaid expenses and other receivables at September 30, 2008 and December 31, 2007 consisted of the following:

	September 30,		December 31,
	2008		2007
Prepaid expense	$	10,301	$	129,498
Customs duty deposit		548,773		125,403
Other		175		4,269
	$	559,249	$	259,170

11. OTHER ASSETS

Other assets at September 30, 2008 and December 31, 2007 consisted of the following;

	September 30		December 31,
	2008		2007
Deposits	$	—	$	959,680
Other		79,795		99,542
	$	79,795	$	1,059,222

12. STOCKHOLDERS’ EQUITY

Reverse Split

See Note 1 for information concerning a one-for-7.5 shares reverse split of the common stock. All stock and per share information has been retroactively restated to reflect the reverse split.

Series A Convertible Preferred Stock

On September 12, 2007, the Company entered into a securities purchase agreement with Barron Partners LP and EOS Holdings LLC pursuant to which the investors purchased, for $4,000,000, an aggregate of (i) 3,703,704 shares of series A convertible preferred stock, with each share of series A preferred stock being initially convertible into one of a share of common stock, (ii) warrants to purchase 5,500,000 shares of common stock at $1.30 per share, and (iii) warrants to purchase 6,000,000 shares of common stock at $1.50 per share.

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Additionally, the Company entered into a registration rights agreement pursuant to which the Company agreed to register the shares of Common Stock issuable upon conversion of the series A preferred stock and exercise of the warrants and an escrow agreement pursuant to which the Company placed 3,700,000 shares of series A preferred stock in escrow. These shares are in addition to the 3,703,704 shares of series A preferred stock that were issued in the private placement. If the Company’s consolidated net income, as defined, for 2007 and 2008 do not reach the target numbers, on a per share, fully diluted basis, some or all of these shares are to be delivered to the investors and if the targets are met, the shares are to be returned to the Company and cancelled. The target number is stated in RMB. There was no adjustment for 2007. The target number for 2008 is approximately RMB1.569 (approximately $0.2223) per share. All of the shares held in escrow are delivered to the investors if the net income for 2008 is 50% or less than the target number for that year. If the shortfall is less than 50%, a ratable portion of the shares are delivered to the Investors. The dollar equivalents to referred to in this paragraph are based on the conversion rates on September 11, 2007, and are subject to change. On September 11, 2007, the exchange rate was RMB   7.5247 for $1.00. On September 30, 2008, the exchange rate was RMB  7.0502  for $1.00.

Net income, for the purposes of determining whether any shares are to be delivered to the investors, is defined to mean net income determined in accordance with GAAP plus (a) any charges relating to the transaction contemplated by the Purchase Agreement and the registration rights agreement, minus (b) the amount, if any, by which all non-recurring losses or expenses exceed all non-recurring items or income or gain. Net Income shall not be adjusted if all non-recurring items of income or gain exceed all non-recurring losses or expenses. Items shall be deemed to be non-recurring only if they qualify as non-recurring pursuant to GAAP. For determining net income per share, all shares which are outstanding or which may be issuable upon exercise or conversion of options, warrants and other convertible securities are deemed to be outstanding, regardless of whether the shares would be counted for purposes of computing diluted earnings per shares under GAAP.

The warrants have a term of five years, and expire on September 12, 2012. The warrants provide a cashless exercise feature which permits the conversion of the warrants into shares of Common Stock or Series A Preferred Stock if the underlying shares are not covered by an effective registration statement. As of November 1, 2008, none of the shares of common stock issuable upon exercise of warrants was covered by an effective registration statement.

The warrants provide that the exercise price of the warrants may be reduced by up to 50% in each of 2007 and 2008 if the Company’s net income, as defined, per share of common stock, on a fully-diluted basis, is less than the Target Numbers described above for 2007 and 2008. An adjustment in the warrant exercise price does not affect the number of shares issuable upon exercise of the warrants. There was no adjustment for 2007.

In accordance with Emerging Issues Task Force (‘‘EITF’’) 98-5 and EITF 00-27, the Series A convertible preferred stock (“Series A Preferred”) were considered to have an embedded beneficial conversion feature (BCF) because the effective conversion price was less than the fair value of the Company’s common stock. This convertible preferred stock was fully convertible at the issuance date, therefore the portion of proceeds allocated to the Series A preferred of $1,088,927 was determined to be the value of the beneficial conversion feature and was recorded as a deemed preferred stock dividend.

The investors received warrants to purchase up to 5,500,000 shares of common stock of the Company at an exercise price of $1.30 per share and up to 6,000,000 shares of common stock of the Company at an exercise price of $1.50 per share. The fair market value of each stock warrant was estimated on the date of grant using the Black-Scholes option-pricing model in accordance with SFAS No. 123R using the following weighted-average assumptions: expected dividend yield 0%; risk-free interest rate of 4.50%; volatility of 15% and an expected term of five years. The portion of proceeds allocated to the warrants of $1,088,926 was determined to be the value of the warrants and was recorded as a deemed preferred stock dividend.

The Purchase Agreement, the certificate of designation and the Warrants provide that those securities may not be exercised or converted if such conversion or exercise would result in the holder and its affiliates having beneficial ownership of more than 4.9% of the Company’s outstanding common stock. Beneficial ownership is determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Rule 13d-3 thereunder. This limitation may not be waived.

The Purchase Agreement, the certificate of designation for the series A preferred stock and the Warrants also provide that, with certain exceptions, if the Company issues common stock at a price, or other warrants or other convertible securities with an exercise or conversion price which is less than the conversion price of the series A preferred stock or the exercise price of the warrants, as the case may be, the conversion price of the warrants or the exercise price of the warrants will be reduced to the sales price, exercise price or conversion price, as the case may be, of such other securities, except that, the exercise price of the $1.30 warrants has a formula adjustment.

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Pursuant to the purchase agreement, in addition to the foregoing:

·   The Company agreed to have appointed such number of independent directors that would result in a majority of its directors being independent directors, that the audit committee would be composed solely of independent directors and the compensation committee would have a majority of independent directors within 90 days after the closing. Failure to meet this date will result in liquidated damages commencing 90 days after the closing from the period from the end of the 90 day period until the date on which the requirement is satisfied. Thereafter, if the Company does not meet these requirements for a period of 60 days for an excused reason, as defined in the Purchase Agreement, or 75 days for a reason which is not an excused reason, this would result in the imposition of liquidated damages. On October 29, 2008, one of the Company’s independent directors resigned. As a result, the Company does not have a majority of independent directors. If the Company does not have a majority of independent directors by January 12, 2009, which is 75 days after the resignation of an independent director, the Company will be subject to liquidated damages.

·   The Company agreed to hire a full-time qualified chief financial officer within 60 days after the closing date. Failure to meet this covenant would result in the imposition of liquidated damage.

·   Liquidated damages for failure to comply with the preceding two covenants are computed in an amount equal to 12% per annum of the Purchase Price, up to a maximum of 15% of the Purchase Price, which is $600,000, which is payable in cash or series A preferred stock, at the election of the investors.

·   The Company and the investors entered into a registration rights agreement pursuant to which the Company agreed to file, within 60 days after the closing, a registration statement covering the common stock issuable upon conversion of the series A preferred stock and exercise of the warrants. The failure of the Company to meet this schedule and other timetables provided in the registration rights agreement would result in the imposition of liquidated damages, which are payable through the issuance of additional shares of series A preferred stock at the rate of 1,217 shares of series A preferred stock for each day, based on the proposed registration of all of the underlying shares of common stock, with a maximum of 550,000 shares. The registration rights agreement also provides for additional demand registration rights in the event that the investors are not able to register all of the shares in the initial registration statement.

·   The investors have a right of first refusal on future financings.

·   The Company is restricted from issuing convertible debt or preferred stock or from having debt in an amount greater than twice the Company’s earnings before interest, taxes, depreciation and amortization.

·   The Company’s debt cannot exceed twice the preceding four quarters earnings before interest, taxes, depreciation and amortization.

·   The Company’s officers and directors agreed, with certain limited exceptions, not to publicly sell shares of common stock for 27 months or such earlier date as all of the convertible securities and warrants have been converted or exercised and the underlying shares of common stock have been sold.

·   The Company paid Barron Partners $50,000 for its due diligence expenses.

On March 28, 2008, the Company entered into an agreement with the investors in the September 2007 private placement pursuant to which:

·   The Company issued a total of 3,349,185 shares of series A preferred stock in exchange for warrants to purchase a total of 7,179,487 shares of common stock that had been issued in the September 2007 private placement. The warrants were cancelled.

·   The 3,700,000 shares of series A preferred stock held in escrow pursuant to the securities purchase agreement were returned to the Company and cancelled. These shares had been held in escrow, with all or a portion of the shares to be delivered to the Investors if certain earnings targets were not met for 2007 and 2008 and all of the shares to be delivered to the Company for cancellation if the earnings targets are met.

·   The remaining warrants, pursuant to which a total of 4,070,200 shares of common stock are issuable as of March 31, 2008, were amended to eliminate the provisions which provided for a reduction in the warrant exercise price if the earnings targets were not met for 2007 and 2008.

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Common Stock

On September 12, 2007, in connection with Purchase Agreement, the Company issued 166,000 shares of its common stock as professional fees.

During the nine months ended September 30, 2008, the Company issued 575,842 shares of common stock upon exercise of warrants, and 192,593 shares of common stock upon conversion of series A preferred stock.

During the three months ended September 30, 2008, the Company issued 52,029 shares of common stock upon exercise of warrants

Warrants and Options 

A summary of the status of the Company's outstanding stock warrants as of September 30, 2008 and changes during the periods then ended is as follows:

				Weighted
	Number of			Average
	Warrants			Exercise Price
Balance at December 31, 2007		11,500,000		$	1.40
Exercised 1.30 Warrants		(575,842	)		1.30
Cancelled $1.30 Warrants		(1,179,487	)		1.30
Cancelled $1.50 Warrants		(6,000,000	)		1.50
Balance at September 30, 2008		3,744,671		$	1.30

	Warrants Outstanding						Warrants Exercisable
			Weighted
			Average		Weighted				Weighted
			Remaining		Average				Average
			Contractual		Exercise				Exercise
Range of Exercise Prices	Shares		Life (Years)		Price		Shares		Price
$1.30		3,744,671		4.	$	1.30		3,744,671	$	1.30
		3,744,671			$	1.30		3,744,671	$	1.30

Following the Model of EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” the Warrants, are considered freestanding instruments and are classified as equity instruments and included in additional paid-in capital.

As of September 30, 2008, the Company did not have an equity-based incentive plan and no options were outstanding.

13. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS

The Company’s operations are all carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC’s economy.

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

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14. COMMITMENTS AND CONTINGENCIES

(a) Operating lease commitments

The Company has entered into five-year leases for factory premises and staff dorms. These leases can be renewed for an additional five-year term. The Company’s commitments for minimum lease payments under these non-cancelable operating leases for the next five years and thereafter are as follows: Rent expense for the nine months ended September 30, 2008 and 2007 was $229,992 and $137,769, respectively.

The following table sets for our minimum lease commitments through 2010:

Three months ended December 31, 2008	$	74,958
Year ended December 31, 2009		299,833
Year ended December 31, 2010		80,343
	$	455,134

(b) Social insurances of Suny’s employees

According to the laws and regulations of the PRC, Suny is required to cover its employees with medical, retirement and unemployment insurance programs. Management believes that due to the transient nature of its employees, Suny does not need to provide all employees with such social insurances, and has paid the social insurances for those of its employees who have completed three months’ continuous employment.

In the event that any current or former employee files a complaint with the PRC government and the complaint is upheld, Suny may be subject to making up the social insurances as well as administrative fines. The Company does not believe that any liability it may incur if it is held to be in violation of these laws would be material, and, accordingly, no provision has been made for any possible liability.

(c) Statutory Reserves

Based on the legal formation of the entities, Suny is required to set aside 10% of its net income as reported in its statutory accounts on an annual basis to the Statutory Surplus Reserve Fund. Once the total Statutory Surplus Reserve reaches 50% of the registered capital of Suny, further appropriations are discretionary. The Statutory Surplus Reserve can be used to increase the registered capital and eliminate future losses of the respective companies under PRC GAAP. The Statutory Surplus Reserve is not distributable to shareholders except in the event of liquidation.

Before January 1, 2006, Suny was also required on an annual basis to set aside at least 5% of after-tax profit, calculated in accordance with PRC accounting standards and regulations, to the Statutory Surplus Welfare Fund, which can be used for staff welfare.

Effective from January 1, 2006, the appropriation to the Statutory Surplus Welfare Fund is no longer required. If Suny provide the Statutory Surplus Welfare Fund, such amount shall be determined at the discretion of its board of directors.

The Reserve Fund can be used to increase the registered capital upon approval by relevant government authorities and eliminate future losses of the respective companies upon a resolution by the board of directors.

Appropriations to the above statutory reserves are accounted for as a transfer from retained earnings to statutory reserves and are performed once a year at the fiscal year-end.

There are no legal requirements in the PRC to fund these statutory reserves by transfer of cash to any restricted accounts, and the Group does not do so. These reserves are not distributable as cash dividends.

15. INCOME TAXES

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The Company is registered in the PRC as a wholly-foreign owned enterprise. Under the tax laws of the PRC, the Company is entitled to a preferential Enterprise Income Tax (“EIT”) rate of 15%, which a full exemption for the first two profitable years, followed by a 50% reduction on EIT for the following three consecutive years.

The provision for taxes on earnings consisted of:

	September 30,
	2008		2007
Current income tax expenses:
PRC Enterprise Income Tax	$	277,570	$	256,238
United States Federal Income Tax		—		—
Total	$	277,570	$	256,238

A reconciliation between the income tax computed at the U.S. statutory rate and The Group’s provision for income tax is as follows:

	September 30,
	2008			2007
U.S. statutory rate		34	%		34	%
Foreign income not recognized in the U.S.		(34	%)		(34	%)
PRC preferential Enterprise Income Tax rate		15	%		0	%
Tax holiday and relief granted to the Subsidiary		(7.5	%)		(0	%)
Provision for income tax		7.5	%		0	%

No material deferred tax liabilities or assets existed as of either September 30, 2008 or 2007.

The tax authority of the PRC Government conducts periodic and ad hoc tax filing reviews on business enterprises operating in the PRC after those enterprises had completed their relevant tax filings, hence the Company’s tax filings may not be finalized. It is therefore uncertain as to whether the PRC tax authority may take different views about the Company’s tax filings which may lead to additional tax liabilities.

The Company has no United States corporate income tax liability for 2008 or 2007.

16. RELATED PARTY TRANSACTION

The Company rents office space in Hong Kong from a director’s wife .  The relevant rent expenses consist of following for the nine months ended:

		September 30,
Location	Landlord	2008	2007
No. 10, 6 /F., Hewlett Centre, No. 52-54 Hoi Yuen Road , Kwun Tong, Hong Kong	Mdm Ting Yuen Chung	8,077	—

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

Forward Looking Statements

Statements contained in this Form 10-Q include forward-looking statements that are subject to risks and uncertainties. In particular, statements in this Form 10-Q that state our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions are “forward-looking statements.” Forward-looking statements are subject to risks, uncertainties and other factors, including, but not limited to, those identified under “Risk Factors,” in our Form 10-KSB for the year ended December 31, 2007 and those described in “Management's Discussion and Analysis of Financial Conditions and Results of Operations” in the Form 10-KSB and this Form 10-Q, and those described in any other filings by us with the Securities and Exchange Commission, as well as general economic conditions and economic conditions affecting the electronics and consumer electronics industry, any one or more of which could cause actual results to differ materially from those stated in such statements. In addition, such statements could be affected by risks and uncertainties related to the ability to conduct business in China, product demand, the costs of raw materials, our ability to develop products using the most current technology, our ability to raise any financing which we may require for our operations, competition, government regulations and requirements, pricing and development difficulties, our ability to make acquisitions and successfully integrate those acquisitions with our business, as well as general industry and market conditions and growth rates, and general economic conditions. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q.

Overview

When used in this quarterly report, the terms "we," and "us" and words of like import refer to China Display Technologies, Inc. and our wholly-owned subsidiaries.

The financial statements reflect the operations of Suny prior to September 12, 1007, the date of the reverse acquisition, and the consolidated operations of the Company and its subsidiaries subsequent to September 12, 2007.

We design, manufacture and market small to medium-sized LEDs and cold cathode fluorescent lamp for various types of displays. Our emphasis is on small to medium-size back lighting unit manufacturing, and we are now developing the large size back lighting unit.

We sell our products to manufacturers of electronic products and not to end users. Our customers generally do not provide us with any long-term commitments. As a result it is necessary for us to estimate the requirements for our products based in part on non-binding estimates by our customers and potential customers rather than firm orders. In addition, in some instances, we develop products based on anticipated customer demand with no assurance that we will get the anticipated orders. To the extent that we do not receive the anticipated orders or that our customers require products in greater quantities than we anticipated or require products other than those we anticipated, our revenue and margins will be affected.

A small number of customers account for a very significant percentage of our revenue. During the nine months ended September 30, 2008, we had two customers that generated revenue of more than 10%. These customers accounted for 11% and 10% of our revenue during the nine months ended September 30, 2008. For the year ended December 31, 2007, we had two customers that generated revenue of more than 10% These customers accounted for 19% and 11% of our revenue during the year ended December 30, 2007. The 10% customers for the nine months ended September 30, 2008 and the year ended December 31, 2007 are different customers. Unless we replace a customer, the loss of any of these customers could have a material adverse effect upon our revenue and net income. Although we market to customers both within China and outside of China, our largest customers are Chinese manufacturers, many of whom manufacture products for sale in the international market. As a result, we are dependent upon the international market acceptance of Chinese made products, and the market for our products is dependent upon the global demand for products which use components manufactured by us. The international economy has recently experienced a significant downturn. Although this downturn did not have an effect on our sales, margins and net income for the three and nine months ended September 30, 2008, it is possible that our business may be impacted by any downturn in the market consumer market for the products which use light-emitting devices. To the extent that the economic slowdown affects our customers and their customers, we anticipate that our operations would be affected as well.

We do not have long term supply contracts. While this practice reduces our risk, it also subjects us to price changes and, if our suppliers have a larger than anticipated demand for its products, our allocation may be reduced. We may not be able to obtain the components from alternate suppliers in a timely manner if at all, which would affect our relationship with our customers.

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Prior to September 2007, we were a privately-owned company and we did not have the legal, accounting and other expenses that are associated with our being a public company. Commencing in the third quarter of 2007, our general and administrative expenses have increased as a result of these factors.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based upon our financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities. On an on-going basis, we evaluate our estimates including the allowance for doubtful accounts, the salability and recoverability of inventory, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that we believes to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

In estimating the collectability of accounts receivable we analyze historical write-offs, changes in our internal credit policies and customer concentrations when evaluating the adequacy of our allowance for doubtful accounts. Differences may result in the amount and timing of expenses for any period if we make different judgments or uses difference estimates. Our accounts receivable represent a significant portion of our current assets and total assets. Our realization on accounts receivable, expressed in terms of United States dollars may be affected by fluctuations in currency rates since the customer’s currency is frequently a currency other than United States dollars.

Inventories comprise raw materials work on process, finished goods and low value consumable articles are stated at the lower of cost or market. Substantially all inventory costs are determined using the weighted average basis. Costs of finished goods include direct labor, direct materials, and production overhead before the goods are ready for sale. Inventory costs do not exceed net realizable value.

Property, equipment are stated at cost. Depreciation is provided principally by use of the straight-line method over the useful lives of the related assets. Expenditures for maintenance and repairs, which do not improve or extend the expected useful life of the assets, are expensed to operations while major repairs are capitalized. The gain or loss on disposal of property, plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets, and, if any, is recognized in the statements of operations.

Under the tax laws of the PRC, we received a 100% tax holiday for 2005 and 2006 for the enterprise income tax. For 2007, 2008 and 2009, under present law, we will be entitled to a 50% tax holiday from this tax. As a result, we did not pay income tax for 2005 and 2006. The tax provision for 2007 and 2008 is 7.5% of taxable income.

We cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary.

We recognize product sales generally at the time the product is shipped. Shipping and handling costs are included in cost of goods sold. Revenue is presented net of any sales tax and value added tax.

Our functional currency is the RMB, which is the currency of the PRC, and our reporting currency is United States dollars. Our balance sheet accounts are translated into United States dollars at the year-end exchange rates prevailing during the periods in which these items arise. Translation gains and losses are deferred and accumulated as a component of other comprehensive income in owners’ equity. Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the statement of operations as incurred. The translation and transaction gains and losses were immaterial in the statement of operations as incurred. The translation and transaction gains and losses were immaterial for the three months ended September 30, 2008 and 2007.

The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a material impact on our operations because we have not previously engaged in any significant transactions that are subject to the restrictions.

Reverse Acquisition

On September 12, 2007, we acquired Keep On Holdings and its wholly-owned subsidiary, Suny, in a transaction which is accounted for as a reverse acquisition. Although we are the company that made the acquisition, for accounting purposes, Suny is treated as the acquiring company. As a result our financial statements reflect the financial position, results of operations and cash flows of Suny prior to September 12, 2007 and the consolidated operations of the Company its subsidiaries, including Suny, from and after September 12, 2007. From Suny’s organization until the completion of the reverse acquisition, Lawrence Kwok-Yan Chan, was Suny’s sole stockholder. The 11,376,000 shares issued to Mr. Chan and his designees are deemed to have been outstanding for all periods prior to September 12, 2007.

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Convertible Preferred Stock and Warrants

In accordance with EITF 00-19, we determined that the convertible preferred stock and the accompanying warrants were equity instruments under SFAS 150 and 133. Although we had unconditional obligation to issue additional shares of common stock upon conversion of the series A preferred stock if our fully-diluted EBITDA per share were below the targeted levels, the certificate of designation relating to the series A preferred stock did not provide that we must issue shares that are registered pursuant to the Securities Act of 1933, with the result, pursuant to the certificate of designation, the additional shares need not be registered shares. Our series A preferred stock also met all other conditions for the classification as equity instruments. We had a sufficient number of authorized shares, the agreement contained an explicit limit on the number of shares to be delivered on conversion of the series A preferred stock unless we issue shares at a price below the conversion price of the series A preferred stock, there is no required cash payment or net cash settlement requirement, and the holders of the series A preferred stock had no right higher than the holders of the common stock.

Our warrants were excluded from derivative accounting because they were indexed to our common stock and were classified in stockholders’ equity section according to SFAS 133 paragraph 11(a).

Results of Operations

Three Months ended September 30, 2008 and 2007

The following table sets forth information from our statements of operations for the three months ended September 30, 2008 and 2007, in dollars and as a percentage of revenue (dollars in thousands): 

	Three Months Ended September 30,
	2008				2007
Sales	$	10,826	100.0	%	$	9,175		100.0	%
Cost of sales		8,407	77.7	%		6,985		76.1	%
Gross profit		2,419	22.3	%		2,191		23.8	%
Selling		397	3.7	%		275		3.0	%
Research and development		443	4.1	%		166		1.8	%
General and administrative		379	3.5	%		277		3.0	%
Income from operations		1,201	11.1	%		1,472		16.0	%
Interest expense, net		91	0.8	%		81		0.9	%
Income before income taxes		1,110	10.3	%		1,391		15.2	%
Provision for (benefit from) income taxes		100	0.9	%		112		1.2	%
Deemed preferred stock dividend		—	—			2,178		23.7	%
Net income		1,010	9.3	%		(900	)	(9.8	%)

Sales were $10.83 million for the three months ended September 30, 2008 (the “September 2008 Quarter”), an increase of $1.6 million, or 18%, from $9.18 million for three months ended September 30, 2007 (the “September 2008 Quarter”). The increase in revenue reflects an increase demand for our products from small screen liquid crystal display and LED manufacturers.

Cost of sales was $8.41 million for the September 2008 Quarter, an increase of $1.4 million, or 20%, compared to $6.99 million for the September 2007 Quarter. The gross profit for the September 2008 Quarter was $2.42 million, an increase of $0.23 million, or 10.4%, from $2.19 million for the September 2007 Quarter. In general, the increase in cost of goods sold and gross profit resulted from and reflected the increase in revenue, although the gross margin for the September 2008 Quarter was 22.3%, compared with 23.8% for the September 2007 Quarter.

Selling expenses were $397,000 for September 2008 Quarter, an increase of $122,000, or 44%, compared with $275,000 during the September 2007 Quarter. The increase was primarily attributed to our heightened efforts to expand our market share and promote our new products. 

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Research and development expenses were $443,000 for the September 2008 Quarter, an increase of $277,000, or 167%, from $166,000 for the September 2007 Quarter, as a result of research and development relating to large size BLU products.

General and administrative expenses were $379,000 for the September 2008 Quarter, an increase of $102,000, or 37%, from $277,000 for the September 2007 Quarter. The increase was in line with the increase in our scales of operation, and the additional legal, accounting, financial public relations and other costs that we incurred as a public company.

Income from operations was approximately $1.20 million for the September 2008 Quarter, compared with approximately $1.47 million for the September 2007 Quarter. The increase was primarily the result of factors described above.

Income tax provision for the September 2008 Quarter was approximately $100,000, compared with approximately $112,000 for the September 2007 Quarter. The effective tax rate for both the September 2008 Quarter and the September 2007 Quarter was 7.5%, as a result of the 50% tax holiday that, under current law, applies to 2007, 2008 and 2009.

The beneficial effect of the conversion price is reflected as a deemed dividend of approximately $2.2 million to the holders of the series A preferred stock in the September 2007 Quarter. This deemed dividend is a non-cash transaction.

As a result of the foregoing, net income for the September 2008 Quarter was $1.01 million, or $0.08 per share (basic) and $0.04 per share (diluted), as compared with net income of $1.28 million for the September 2007 Quarter. As a result of the deemed preferred stock dividend in the September 2007 quarter, net loss available to common stockholders for the September 2007 quarter was $0.9 million, or $(0.08) per share (basic and diluted).

Nine Months ended September 30, 2008 and 2007

The following table sets forth information from our statements of operations for the Nine months ended September 30, 2008 and 2007, in dollars and as a percentage of revenue (dollars in thousands):

	Nine Months Ended September 30,
	2008					2007
Sales	$	27,267		100.0	%	$	20,488		100.0	%
Cost of sales		21,128		77.4	%		15,706		76.7	%
Gross profit		6,139		22.6	%		4,782		23.3	%
Selling		796		2.4	%		415		2.0	%
Research and developments		816		2.3	%		392		1.9	%
General and administrative		806		2.6	%		569		2.8	%
Income from operations		3,722		15.3	%		3,405		16.6	%
Interest expense, net		373		1.7	%		95		0.5	%
Other income (expenses)		(3	)	0.0	%		0		0.0	%
Income before income taxes		3,346		13.6	%		3,310		16.2	%
Provision for (benefit from) income taxes		278		1.1	%		256		1.2	%
Deemed preferred stock dividend		—		—			(2178	)	10.6	%
Net income		3,068		12.5	%		876		4.3	%

Sales were $27.7 million for the nine months ended September 30, 2008 (the “September 2008 Period”), an increase of $6.8 million, or 33%, from $20.5 million for nine months ended September 30, 2007 (the “September 2007 Period”). The increase in revenue reflects an increased demand for our BLU products from small screen LCD manufacturers and the expansion of our market.

Cost of sales was $21.1 million for the September 2008 Period, an increase of $5.4 million, or 35%, compared to $15.7 million for the September 2007 Period. The gross profit for the September 2008 Period was $6.1 million, an increase of $1.4 million, or 28%, from $4.8 million for the September 2007 Period. In general, the increase in cost of goods sold and gross profit resulted from and reflected the increase in revenue, although the gross margin for the September 2008 Period was 22.6%, compared with 23.3% for the September 2007 Period.

Selling expenses were $796,000 for September 2008 Period, an increase of $381,000, or 92%, compared with $415,000 during the September 2007 Period. The increase was attributable to the increase in sales commissions and marketing expenses as a result of and also in line with increase in our revenue.

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Research and development expenses were $816,000 for the September 2008 Period, an increase of $424,000, or 108%, from $392,000 for the September 2007 Period, as a result of research and development relating to new projects including large BLU products.

General and administrative expenses were $806,000 for the September 2008 Period, an increase of $237,000, or 42% from $569,000 for the September 2007 Period. The increase was in line with the increase in our scales of operation, and the additional legal, accounting, financial public relations and other costs that we incurred as a public company.

Income from operations was approximately $3.7 million for the September 2008 Period, compared with approximately $3.4 million for the September 2007 Period. The increase was primarily the result of factors described above.

Income tax provision for the September 2008 Period was approximately $278,000, an increase of $22,000, or 8.6% from $256,000 for the September 2007 Period. The effective tax rate for the both the September 2008 Period and the September 2007 Period was 7.5%, as a result of the 50% tax holiday that, under current law, applies to 2007, 2008 and 2009.

For the September 2008 Period, we had net income of $3.07 million, or $ 0.25 per share (basic) and $0.14 per share (diluted), a modest increase from net income of $3.05 million for the September 2007 Period. As a result of the deemed preferred stock dividend in the third quarter of 2007, the net income available to common stockholders for the September 2007 Period was $0.87 million, or $ 0.08 per share (basic) and $0.06 per share (diluted).

Liquidity and Capital Resources

At September 30, 2008, we had a cash balance of $729,000. These funds are major located in financial institutions located in China. We also had restricted cash on $1.9 million, which was being held as security for short-term bank loans.

We are subject to the regulations of the PRC which restricts the transfer of cash from that country, except under certain specific circumstances. Accordingly, such funds may not be readily available to us to satisfy obligations which have been incurred outside the PRC.

As of September 30, 2008, we had working capital of approximately $9.9 million, compared to $8.0 million at September 30, 2007, of which cash and cash equivalents amounted to $729,000 million, compared to $2.5 million at September 30, 2007. Our accounts receivable has been a significant portion of our current assets having increased by $1.5 million in the September 2008 Period. Accounts receivable at September 30, 2008 were $6.7 million, or 44% of current assets, compared to $5.3 million, or 43% of current assets at December 31, 2007. Inventories increased $3.7 million during the September 2008 Period, increasing to $5.4 million, compared to $1.7 million at December 31, 2007. The increase in inventories was substantially offset by a decrease of advance to suppliers $2.8 million in the September 2008 Period, decreasing from $5.5 million at December 31, 2007 to $2.7 million at September 30, 2008. Principally as a result of these factors, our cash flow used in operations amounted $264,000 in the September 2008 Period, compared to net cash provided in operating activities of $2.65 million in the September 2007 Period. As a result of the large percentage of our current assets that are reflected as accounts receivable, we require significant additional financing in order to expand our business. Our business may be impaired to the extent that we are not able obtain necessary financing, as well as by any effects on the current international economic condition. Furthermore, as described below, all of financing is short-term financing, and we cannot assure you that our lenders will continue to renew their loans as they mature. We have no financing commitments which may hinder our ability to generate new business.

For the September 2008 Period, we used cash for investing activities of $2.7 million as compared to $1.6 million for the September 2007 Period. For the September 2008 Period, we used cash for the purchase of property and equipment of $2.7 million. For the September 2007 Period, we used cash for the purchase of property and equipment of $0.9 million.

We have entered into short-term revolving loan facilities, typically for 90-120day periods, with several banks pursuant which we have borrowed $4.4 million. At the end of each period, we are to repay these loans if they are not renewed. At September 30, 2008, there was $4,407,746 outstanding, all of which were due in the third quarter of 2008. These loans bear interest at rates ranging from 6.58% to 9.50% and are secured by restricted cash of $1,895,336. In the past, these notes have been renewed for additional 90-day periods. Additionally, at September 30, 2008, we have a loan payable with a bank of $303,911 which is due on January 22, 2009 and is personally guarantee by our chief executive officer.  During the September 2008 Period, we received gross proceeds of $748,595 from the exercise of warrants and repayment of loan of $1.2m. During the September 2007 Period, our cash from financing activities consisted primarily from net proceed from preferred stock offering and from a loan of $6.5 million, which was offset by a decrease of restricted cash.

As we seek to expand our business, we require additional cash. This requirement is reflected in the $264,241 of cash used on our operations even though we increased revenue of $6.8 million, or 33%, from in the September 2008 Period from the September 2007 Period, and an increase in net income of $2.23 million, or 256%. The average ageing of our accounts receivables at September 30, 2008 was 90 days at September 30, 2008, and 60 days at December 31, 2007. Historically, we have relied upon short term bank loans. We have registered shares of common stock for issuance upon exercise of outstanding warrants. As of September 30, 2008, we received $748,595 from the exercise of warrants. The warrants have an exercise price of $1.30. If all of the remaining warrants are exercised, we will receive proceeds of $4.9 million. However, we do not have a current registration statement covering any additional shares of common stock issuable upon exercise of the warrants have been registered under the Securities Act of 1933 and the market price of our common stock at November 7 was less than the exercise price of the warrants. As a result, we cannot assure you that any significant number of warrants will be exercised. We have no commitments from any source to provide financing. If the banks do not continue to extend the loans or if we are unable to obtain financing from other sources, including the exercise of warrants, our ability to continue our growth may be impaired.

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Off-balance Sheet Arrangements

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder's equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing or hedging services with us.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 

Foreign Currency Exchange Rate Risk

We produce all our products in China and sell 90% of our products to companies in the PRC, many of which export our products in the international market. Our functional currency is RMB, and our financial statements are translated into United States dollars. Translation adjustments resulting from the translation of local currency financial statements into United States dollars are included in determining comprehensive income. Our financial statements are expressed in dollars. At September 30, 2008, the cumulative translation adjustment of $1,574,015 was classified as an item of other comprehensive income in the stockholders’ equity section of the consolidated balance sheet.

Most of our customers pay in a currency other than United States dollars. Our accounts receivable represent a significant portion of our current assets and total assets. As a result, our realization on accounts receivable, expressed in terms of United States dollars, may be affected by fluctuations in currency rates since the customer’s currency is frequently a currency other than United States dollars.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), within 90 days of the filing date of this report. In designing and evaluating the Company’s disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that as of September 30, 2008, the Company’s disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company’s chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed summarized and reported within the time periods specified in the SEC’s rules and forms.

Limitations on the Effectiveness of Internal Controls

Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material errors. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations on all internal control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of internal control is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in circumstances, and/or the degree of compliance with the policies and procedures may deteriorate. Because of the inherent limitations in a cost effective internal control system, financial reporting misstatements due to error or fraud may occur and not be detected on a timely basis.

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There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in the above paragraph.

PART II - OTHER INFORMATION

Item 6.     Exhibits

31.1   Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer

31.2   Rule 13a-14(a)/15d-14(a) certificate of Chief Financial Officer

32.1   Section 1350 certification of Chief Executive and Chief Financial Officers

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SIGNATURES

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

	China Display Technologies, Inc.
Date: November 13, 2008	By:	/s/ Lawrence Kwok-Yan Chan
		Lawrence Kwok-Yan Chan Chief Executive Officer, Principal Executive Officer

Date: November 13, 2008	By:	/s/ Jason Ye
		Jason Ye Chief Financial Officer, Principal Financial Officer

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