ITEM 1.
BUSINESS
We sell stevioside, a natural sweetener, as well as herbs used in traditional Chinese medicines and veterinary products. Substantially all of our operations are located in the People’s Republic of China (the “PRC”). We have built an integrated company with the sourcing and production capabilities designed to meet the needs of our customers.
During fiscal 2013 and 2012, our operations were organized into two operating segments related to our product lines:
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Stevioside, and
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Chinese medicines.
STEVIOSIDE - A NATURAL SWEETENER
In our Stevioside segment, we produce and sell a variety of purified steviol glycosides with rebaudioside A and stevioside as the principal components, an all natural, low calorie sweetener, and OnlySweet, a stevioside based table top sweetener. In fiscal 2013, our Stevioside segment generated revenues of $7.2 million, representing 73% of our total consolidated revenues.
The steviol glycosides are extracted from the leaves of the stevia rebaudiana plant of the Aster/Chrysanthemum family. The sweetness of the stevia leaves is caused by eight glycosides contained within the leaves including stevioside, rebaudioside A, C, D, E and F, steviolbioside and dulcoside A. Stevioside is the most abundant of these components and the main cause for the sweetness of the stevia leaves. Stevioside, rebaudiosides A and C as well as dulcoside A are known as the four most important steviol glycosides. Rebaudioside A is the sweetest and least bitter ingredient among the four. The higher purity of rebaudioside A brings better sensory attributes of the sweetener products.
The leaves of the stevia rebaudiana plant have been used for centuries to sweeten bitter beverages and to make tea in the plant’s native Paraguay. Stevia is grown commercially in Brazil, Paraguay, Uruguay, Central America, Israel, Thailand and China. The stevia rebaudiana plant was first introduced to China in 1977 and commercial harvesting of stevia started in the mid-1980’s. There are two major species of stevia grown in China; one was cultivated by Chinese researchers and another was introduced from Japan. Most stevioside produced in China is exported throughout Asia, primarily to Japan and South Korea meanwhile Chinese domestic market demand is also gradually building up in recent years.
Worldwide use of Stevioside and Related Approvals
Stevioside is a safe and natural alternative to sugar for people needing low sugar or low calorie diets. Stevioside can be used to replace sugar in beverages and foods, including those that require baking or cooking where man-made chemical based sweetener replacements are not suitable. Stevioside may be used in a wide variety of consumer products including soft drinks, vegetable products, tabletop sweeteners, confectioneries, fruit products and processed seafood products in the United States, Japan, Korea, China, Taiwan, India, Indonesia, Israel, Germany, France, Brazil, Paraguay, Malaysia, Russia, Switzerland Australia and New Zealand.
Concern over rising levels of obesity and diabetes has spurred the development of new sweeteners, and food consultancy Zenith International expects the global market for stevia-derived products to reach $825 million by 2014. In addition, we believe worldwide demand for alternative sweeteners, such as our stevia based products, will increase as more countries permit the use of stevioside as a food additive. Stevioside has been sanctioned by the Ministry of Health of China to be used as a food additive, and is listed in the Sanitation Standard of Food Additives.
The ongoing advocacy to eliminate the European Union's (EU) ban on the consumption of stevia was confirmed by the European Commission in November 2011. The European Stevia Research Center and the European Stevia Association are EU based organizations that focus on stevioside research and the elimination of the EU’s ban on the consumption of stevioside. These organizations have determined that stevia is safe for use in foods. In addition, in June 2007, the Joint Expert Committee on Food Additives concluded that steviol glycoside showed no adverse affects and was stable for use in food and acidic beverages under normal conditions and in June 2008 extended its recommendation for acceptable daily intake of up to 4 mg per kg body weight per day.
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In April 2010, at the request from the European Commission, the European Food Safety Authority’s scientific Panel on additives known as the ANS Panel assessed the safety of steviol glycosides, sweeteners extracted from plant leaves, and established an acceptable daily intake for their safe use. This assessment is being considered by the European Commission in deciding whether or not to authorize the substances in the EU for their proposed use, particularly in sugar free or reduced energy foods such as certain flavored drinks, confectionery with no added sugar or energy reduced soups. The toxicological testing conducted by the ANS Panel showed that the stevia based substances are neither genotoxic nor carcinogenic, nor are they linked to any adverse effects on the human reproductive system or for the developing child. The ANS Panel set an acceptable daily intake of 4 mg per kg body weight per day for steviol glycosides, a level consistent with that already established by the Joint Expert Committee on Food Additives.
In July 2011, the EU Standing Committee on Food Chain and Animal Health announced that steviol glucoside derived from the stevia plant was safe for use in food ingredients throughout the 27 counties of the EU. In November 2011, the European Commission formally authorized the use of steviol glucoside derived from the stevia plant as a non-caloric sweetener for EU-wide use.
On March 23, 2010, we received a “no objection letter” from the U.S. Food and Drug Administration (“FDA”) regarding our request for FDA Generally Recognized As Safe (GRAS) status on five of our stevia extract products, including Rebaudioside A 98, Rebaudioside A 95, Rebaudioside A 80, Rebaudioside A 60, and Stevioside 90 Stevia Extracts. The FDA affirmed GRAS status confirms that these stevia extracts are considered safe for use as a general purpose sweetener in foods, excluding meat and poultry products. This affirmation was based on our conclusion which is supported by the extensive independent review of our production processes and the overall quality of these stevia products by a panel of qualified scientists.
In Feb 2011, we renewed two year Kosher certification for our stevia extract products.
In furtherance of our efforts to move toward production of organic, all natural and low calorie products and to enhance our international position and market penetration as a stevia producer along with our distribution partners around the world, we underwent an extensive audit in 2011 by CERES GmbH, an international organization that specializes in inspection and certification in the areas of organic farming and food processing. Upon completion of their audit in November 2011, CERES GmbH notified us that our stevia extracts production process had been certified organic and free of synthetic chemical inputs and uses clean and sanitized procedures that avoid chemical contamination under standards established by the USDA National Organic Program and European Commission (EC) 834/2007 and EC 889/2008.
Steviosin
Steviosin is a natural low calorie stevia extract for medicinal use, containing stevioside at 90% with the total steviol glycosides meeting or exceeding 95% on a dry weight basis. Steviosin is used as an alternative sweetener in the pharmaceutical production in China.
OnlySweet
OnlySweet is an all natural, zero calorie, tabletop sweetener comprised of three natural ingredients, including stevioside. In June 2008 we began production of a new blend of OnlySweet increasing its sweetness. We believe this new OnlySweet formulation represented a significant advancement in quality resulting in a sweeter and more natural taste compared to other manufacturers of stevioside based sweeteners. We believe consumers are attracted to these improvements in taste, absence of aftertaste and overall mouth feel of this new blend of OnlySweet. OnlySweet is manufactured in the United States at an FDA approved blending facility.
We sell OnlySweet to health food retailers, national and regional grocery chains in boxes of 50 and 100 packets of one gram each. OnlySweet is carried in an estimated 3,000 stores in the U.S. and is generally located in the sweetener aisle with all natural and alternative sweeteners. Natural products are one of the fastest growing segments in the grocery industry.
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Our Customers
The majority of our stevioside is sold on a wholesale basis to domestic food and drug manufacturers and ingredient distributor foreign trade companies. Our top 10 customers accounted for 65.37% of our sales in the Stevioside segment in fiscal 2013. Our biggest customers Qufu Shengwang Import and Export Trade Co., Ltd. accounted for 34.82% of our stevioside sales in fiscal 2013. We do not have long term supply agreements with our customers and sales are generally made under a purchase order arrangement. The payment terms are generally 60 to 90 days after receipt of products. We control the default risk by conducting due diligence on a customers’ credit record before acceptance of a purchase order.
On December 2, 2011, we entered into a supplier agreement with Domino Foods, Inc. (“Domino Sugar”) to sell our Reb A 60 and higher grades of stevia. The term of this agreement is renewable thereafter from month to month unless terminated by either party upon 30 days notice. The agreement provides that quantities and prices for the stevia ingredients will be included in purchase orders which will include agreed on pricing. Payments will be made on account on a net 30 days basis. Payment will be made on account on a net 30 days basis. We did not have any sales to Domino Sugar under the agreement.
Sources and Availability of Raw Materials - Stevioside
The Shandong Province is a primary harvesting base of stevia leaves as well as the main region for the production of stevioside in China. We purchase all raw materials directly from local suppliers at market prices and pay for the leaves at the time of purchase. We test stevia leaves prior to purchase in an effort to maintain quality control. Our internal policy is to purchase leaves with stevioside content in excess of 9%.
Manufacturing, Extraction and Packaging
We have been engaged in the continuous production of stevioside since 1998. We use a traditional extraction technology process known as “aqueous extraction” which involves the use of purified water extraction and air dehydration to produce stevioside. The extraction process for stevioside generally takes seven days. The plant leaves are first dried and then inspected to insure quality leaves are used in the extraction process. We then use a combined process involving a solid/liquid extraction procedure, followed by a liquid-purifying step that is traditionally used to extract the stevioside from the stevia leaves. This all natural method results in a pure white stevia crystal, with no brownish coloring. Once the extraction process has been completed, the final product is ready for packaging and shipment to our customers. We bulk package our stevioside in 10 kilogram packages, two per box.
In July 2008, our stevioside manufacturing facility located in the Shuyuan Economic Zone of Qufu City, of the Shandong Province received a Certificate of Good Manufacturing Practices (GMP) from the PRC.
In early 2011, our stevia production facility operated by Qufu Shengren received ISO 22000 and ISO 9001:2008 integrated process and systems certifications, in addition to HACCP (Hazard Analysis and Critical Control Points) certification from SGS S.A. and its country head offices in UK and China for this facility. SGS is one of the world’s leading inspection, verification, testing and certification companies.
The ISO certifications cover all of the processes throughout the production cycle that deal directly or indirectly with the end product being consumed and quality management principles. These certifications together with our comprehensive management system demonstrate the safety of our stevia products and our compliance with the requirements for food safety management systems by incorporating all the elements of GMP and HACCP. HACCP Certification is an international principle defining the requirements for effective control of food safety. HACCP compliance and certification demonstrates our focus on the hazards that affect food safety and hygiene and systematic identification of such by setting up control limits at critical points during the food production process. By achieving these high level certifications, we have further demonstrated our commitment to quality, safety and continuous improvement.
In December 2012, Qufu Shengren finished the construction of a new stevia extraction line in the same location of its current stevioside manufacturing facility. This line facility applies a new stevia extraction technology to produce both high and low grade stevioside. The annual production capacity of this line facility is 500 metric tons including 300 metric tons of high purity rebaudioside A products and 200 metric tons of low purity Rebaudioside A product.
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Since January 2013, our facilities have the capability of producing A3-99 stevia products, which is the highest quality stevioside extracts produced in the world and are used in the pharmaceutical and food industries,
We set our production schedules based on the market demand and our capacity. Our stevioside production capacity is approximately 800 metric tons annually which we believe is sufficient to meet demand. In fiscal 2013, we manufactured approximately 232 metric tons of stevioside, an decrease of 34 metric tons from the prior year, mainly due to a decrease in stevia sales.
CHINESE MEDICINE SEGMENT
In our Chinese medicine segment, we manufacture and sell traditional Chinese medicine formula extracts which are used in products made for use by both humans and animals. In fiscal 2013 this segment generated revenues of $2.6 million, representing 27% of our total consolidated revenues.
Chinese herbal medicine has been applied as a means of both the prevention and treatment of illness and disease. We believe many modern chemical medicines contain high toxicities and present numerous side effects. Purely chemical based medicines are difficult, time consuming and expensive to develop. We believe natural Chinese traditional medicines represent an alternative approach offering advantages over a variety of chemical medicines and the process of combining herbal extraction and chemical medicines is becoming a popular alternative, following the current trends of “natural” and “green” products in a variety of industries.
We manufactured and sold approximately 189 different extracts in fiscal 2013, compared to 354 different extracts in fiscal 2012. These extracts, can be divided into the following three general categories:
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single traditional Chinese medicine extracts;
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compound traditional Chinese medicine extracts; and
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purified extracts, including active parts and monomer compounds such as soy isoflavone.
Our Customers
We sell our traditional Chinese medicine formula extracts on a wholesale basis to domestic traditional Chinese medicine manufacturers and animal pharmaceutical manufacturers primarily located in China. In fiscal 2013, no single customer represented more than 10% of our total revenues from this segment. We do not have contracts with our customers and sales are made under a purchase order arrangement. We deliver upon the acceptance of a purchase order with no deposit required. The payment terms are generally 60 to 90 days after receipt of products. We control the default risk by conducting due diligence on a customers’ credit record before acceptance of a purchase order.
Sources and Availability of Raw Materials - Chinese Medicines
We purchase raw materials for our traditional Chinese medicine formula extracts on the open market at market prices. The prices of raw materials for Chinese medicines fell back to and steadily stay on the downward track during fiscal 2012 due to effective measures by Chinese governments to tame speculations on raw materials and the increase of market supply from harvest season.
In fiscal 2013, our top five suppliers represented approximately 48.78% of our purchases of raw materials used in our Chinese medicine segment, including Shandong Heze Zhongshun Pharmaceutical Co., Ltd. and Qufu Longheng Fuel Material Co., Ltd. respectively accounting for 16.63% and 14.87%.
Formulation, Manufacturing and Packaging
The extract formulas used in our manufacturing are either commonly used formulas published in the National Medicine Dictionary or industry standard formulas which may have been developed by university research scientists or internally developed by our research and development personnel. Internally developed formulas must be approved by the Shandong Bureau of Quality and Technical Supervision prior to public use.
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NEW PRODUCT DEVELOPMENT
We engage in new product development both through our internal research facilities, industry consultants and specialists and in partnership with a number of research facilities in the PRC including:
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Tianfulai Bio-Tech Technology Co., Ltd. (Beijing) where we are seeking to develop the traditional Chinese medicine polysaccharide anthone extract powder for forage; and
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Beijing Medical University and China Agriculture University.
We pay for the use of these facilities on an as needed basis and the costs are included in our research and development expenses. In fiscal 2013 and fiscal 2012 we spent $0.12 million and $0.2 million, respectively, on research and development.
In addition, as part of WILD Flavors’ investment in our company, WILD Flavors provided product development services as part of a broader services agreement with Sunwin USA LLC as discussed later in this section.
Competition
Our subsidiaries and the business segments they operate in face unique challenges and extensive competition.
Stevioside. There are approximately 30 stevioside manufacturers operating on a continuing basis in China. Our primary competitors in the stevioside market are Ganzhou Julong High Technology Food Industry Co., Ltd., GLG Live Tech Corp. and PureCircle Limited. While these competitors have production capacity similar to ours, we believe we compete effectively with them based on our production capabilities and product quality. In addition, other companies periodically enter the market depending upon demand. These intermittent producers may choose to stop production when raw materials are not readily available in the marketplace. The sporadic oversupply of product from these competitors can adversely affect our market share. Furthermore, if demand wanes these competitors may reduce the price of their products, which can adversely affect market prices. In addition to competing with other Chinese companies, we also compete with foreign growers and processors.
We are one of the few steviosin manufacturers that are GMP certified and granted with drug approval number. We believe that the combination of eligibility to supply pharmaceutical ingredients and capability for stevia extraction provides us with a competitive advantage compared to our competitors, most of whom are either not eligible to supply pharmaceutical ingredients or not experienced in large-scale stevia extraction.
Chinese medicine. The market in the PRC for traditional Chinese medicine extracts is extremely competitive. We believe there are more than 500 companies engaged in herb extraction in the PRC. Companies in many different industries, including pharmaceutical companies, chemical companies, health products companies, herb extraction companies, biological engineering companies and research and development institutions, are now engaged in herb extraction. Our major competitors include Anhui Xuancheng Baicao Plants Industry & Trade Co., Ltd., Sichuan Shifangkangyuan Medicine Materials Co., Ltd. and Lanzhou Lantai Bio-Engineering Tech Co., Ltd. Most products from these companies are exported to overseas markets. Competitive factors primarily include price and quality. We believe our ability to compete is related to our product quality and reputation in the market place. Globally, we believe we will be able to effectively compete against similar companies from other countries as a result of our lower labor costs and China’s soil and growing conditions, which enable us to produce higher quality products.
WILD Flavors and Sunwin USA
On February 5, 2009, we entered into a securities purchase agreement with WILD Flavors to purchase 20,000,000 shares of our common stock at $0.15 per share together with five year warrants to purchase 26,666,666 shares of our common stock with an exercise price of $0.35 per share. In connection with the securities purchase agreement we paid fees of $100,000 in cash and 1,000,000 shares of our common stock and paid legal fees of $10,000. We used the net proceeds from this transaction for expansion of our production facilities in China and general corporate purposes.
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Pursuant to the terms of the securities purchase agreement, we converted our Sunwin Stevia International subsidiary into a limited liability company called Sunwin USA. In exchange for our contribution of Sunwin Stevia International‘s capital, we received 5,500 membership units in Sunwin USA, representing a 55% interest after giving effect to the issuance of 4,500 membership units to WILD Flavors. In addition, WILD Flavors provided sales, marketing, logistics and supply chain management, product development and regulatory services to Sunwin USA over a period of two years beginning on February 5, 2009. We valued the services at $1,000,000 over the two year period. WILD Flavors agreed to act as the sole manager of Sunwin USA and is responsible for all of its business and affairs. WILD Flavors has the right of first refusal to purchase additional membership units in Sunwin USA at $222.22 per unit to provide any additional capital required by Sunwin USA as mutually determined by us and WILD Flavors.
Under the terms of the securities purchase agreement, WILD Flavors had the option to exchange its 45% interest in Sunwin USA into 6,666,666 shares of our common stock at any time until December 31, 2010. This exchange option expired unexercised. WILD Flavors is also entitled to a bonus option which would entitle it to receive the greater of:
• 6% of the issued and outstanding membership units of Sunwin USA or
• the number of membership units of Sunwin USA necessary to increase WILD Flavor’s ownership interest to 51% if
Sunwin USA achieved cumulative pre-tax profits of $3,000,000 on or before December 31, 2011 computed in accordance with U.S. GAAP exclusive of the cost of product liability insurance.
The bonus option expired unexercised as the threshold profit criteria was not reached.
On February 5, 2009 as part of the transactions we entered into a distributorship agreement with WILD Flavors for the worldwide distribution of our stevioside products. The distributorship agreement is for an initial term of 60 months with automatic renewal terms of 12 successive 36 month renewal periods.
On August 8, 2012 we entered into an Exchange Agreement with WILD Flavors pursuant to which we purchased its 45% membership interest in Sunwin USA for an aggregate consideration of approximately $1,625,874, which includes the issuance of 7,666,666 shares of our common stock valued at approximately $1,533,333 and a cash payment of $92,541. The transaction closed on August 20, 2012. On August 22, 2012, we issued 7,666,666 shares of our common stock and paid $92,541 cash to WILD Flavors. The $92,541 cash payment was paid by China Direct Investment, Inc. (“CDI”), our corporate management services provider, and reimbursed by us to CDI through the issuance of our common shares as part of the terms of the consulting agreement with CDI dated May 1, 2012. The net tangible assets of Sunwin USA were reduced from $1,825,804 to $1,625,874 as a result of the application of generally accepted accounting principles (“U.S. GAAP”) which requires elimination of the difference between the purchase price of the 45% membership interest in Sunwin USA and cost basis of the intangible assets recorded by Sunwin USA. Intangible assets include the product development and supply chain for OnlySweet.
Under the terms of the agreement, WILD Flavors assumed certain pre-closing obligations of Sunwin USA totaling approximately $694,000, including trade accounts receivable, loans, health care and monthly expenses of an employee, potential chargebacks, bank fees and broker commissions incurred prior to the closing date. The agreement also contained customary joint indemnification and general releases. As a result of this transaction, we began consolidating the operations of Sunwin USA from the date of acquisition (August 20, 2012).
In addition to the Exchange Agreement, on August 8, 2012 we entered into the following additional agreements with WILD Flavors or its affiliate:
• We entered into an Amendment to Operating Agreement with WILD Flavors pursuant to which we are now the sole manager of Sunwin USA and certain sections of the original agreement dated April 29, 2009 were cancelled as they were no longer relevant following our purchase of the minority interest in Sunwin USA described above;
• We entered into a Termination of Distribution Agreement with WILD Flavors and Sunwin USA pursuant to which the Distribution Agreement dated February 5, 2009 was terminated; and
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• We entered into a Distributorship Agreement with WILD Procurement Gmbh, a Swiss corporation (“WILD Procurement”) which is an affiliate of WILD Flavors. Under the terms of this agreement, we appointed WILD Procurement as a non-exclusive world-wide distributor for the resale of our stevia products. There are no minimum purchase quantities under the agreement, and the pricing and terms of each order will be negotiated by the parties at the time each purchase order is placed. The agreement restricts WILD Procurement from purchasing steviosides or other forms of stevia that are included in our products from sources other than our company under certain circumstances. In addition, at such time as we desire to offer new products, we must first offer WILD Procurement the non-exclusive right to distribute those products and the parties will have 60 days to reach mutually agreeable terms. The agreement contains certain representations by us as to the quality of the products we may sell WILD Procurement and the products’ compliance with applicable laws and good manufacturing practices, as well as customary confidentiality and indemnification provisions.
In the event WILD Procurement should fund research on stevia used in food, beverage or dietary supplement applications, and as a result of this research it develops new intellectual property, such intellectual property shall be the sole property of WILD Procurement. In the event we should jointly fund research, any new intellectual property developed from this effort will be jointly owned and each party will have the right to use the developed intellectual property in stevia-based products.
The agreement is for an initial term of 12 months and will automatically renew for successive 12 month terms unless the agreement has been terminated by either party upon 45 days prior written notice. There are no assurances any purchase orders will be placed under the terms of the Distribution Agreement. The agreement may also be terminated by either party upon a material breach by the other party, or upon the filing of a bankruptcy petition, both subject to certain cure periods. In the event the agreement is terminated, WILD Procurement has the right to continue to distribute our products on a non-exclusive basis for 24 months upon terms and conditions to be negotiated by the parties.
INTELLECTUAL PROPERTY
Our success depends in part on our ability to protect our intellectual property which includes various raw materials purification technologies used in our products. We have received a trademark from the U.S. Patent and Trademark Office covering the trade name “Only Sweet”, which we are using for the North American distribution of our stevia based tabletop sweetener product.
To protect our proprietary rights outside the PRC we generally rely on confidentiality agreements with employees and third parties, and agreements with consultants, vendors and customers, although we have not signed such agreements in every case. We do not have any similar agreements with any of our employees or consultants in the PRC. Despite such protections, a third party could, without authorization, utilize our propriety technologies without our consent. In the past three of our traditional Chinese medicine products have been copied by our competitors. We can give no assurance that our agreements with employees, consultants and others who participate in the production of our products will not be breached, or that we will have adequate remedies for any breach, or that our proprietary technologies will not otherwise become known or independently developed by competitors.
GOVERNMENT REGULATION
Our business and operations are primarily located in the PRC. We are subject to state and local environmental laws related to certification of water release. We are subject to registration and inspection by the State Food and Drug Administration of China (“SFDA”) with respect to the manufacturing and distribution of traditional Chinese medicine extracts and steviosides. In addition, we are licensed by the Shandong Provincial Government to manufacture stevioside. We believe we are in compliance with all provisions of those registrations, inspections and licenses and have no reason to believe that they will not be renewed as required by the applicable rules of the Central Government and the Shandong Province. In addition, our operations must conform to general governmental regulations and rules for private (non-state owned) companies doing business in China.
The production, distribution and sale of our products in the United States is subject to various federal and state regulations, including but not limited to: the Federal Food, Drug and Cosmetic Act (“FDCA”); the Dietary Supplement Health and Education Act of 1994; the Occupational Safety and Health Act; various environmental statutes; and various other federal, state and local statutes and regulations applicable to the production, transportation, sale, safety, advertising, labeling and ingredients of such products.
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Compliance with applicable federal and state regulations is essential to our business. Although we believe that we are in compliance with applicable regulations, should the FDA or any state in which we operate amend its guidelines or impose more stringent interpretations of current laws or regulations, we may not be able to comply with these new guidelines. Such regulations could require the reformulation of certain products to meet new standards, market withdrawal or discontinuation of certain products we are unable to reformulate, imposition of additional record keeping requirements, expanded documentation regarding the properties of certain products, expanded or different labeling and/or additional scientific substantiation. Failure to comply with applicable requirements could result in sanctions being imposed on us or the manufacturers of any of our products, including but not limited to fines, injunctions, product recalls, seizures and criminal prosecution.
The FDCA generally regulates ingredients added to foods and requires that such ingredients making up a food product are themselves safe for their intended uses. In this regard, when a company adds an ingredient to a food, the FDCA generally requires that the ingredient either be determined by the company to be generally regarded as safe by qualified experts or go through FDA’s review and approval process as a food additive.
PRC Legal System
Despite efforts to develop its legal system over the past several decades, including but not limited to legislation dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade, the PRC continues to lack a comprehensive system of laws. Further, the laws that do exist in the PRC are often vague, ambiguous and difficult to enforce, which could negatively affect our ability to do business in China and compete with other companies in our segments.
In September 2006, the Ministry of Commerce (“MOFCOM”) promulgated the Regulations on Foreign Investors' Mergers and Acquisitions of Domestic Enterprises (M&A Regulations) in an effort to better regulate foreign investment in China. The M&A Regulations were adopted in part as a needed codification of certain joint venture formation and operating practices, and also in response to the government's increasing concern about protecting domestic companies in perceived key industries and those associated with national security, as well as the outflow of well-known trademarks, including traditional Chinese brands.
As a U.S. based company doing business in China, we seek to comply with all PRC laws, rules and regulations and pronouncements, and endeavor to obtain all necessary approvals from applicable PRC regulatory agencies such as the MOFCOM, the State Assets Supervision and Administration Commission , the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission , and the State Administration of Foreign Exchange (“SAFE”).
Currency
The value of the Renminbi (“RMB”), the main currency used in China, fluctuates and is affected by, among other things, changes in China’s political and economic conditions. The conversion of RMB into foreign currencies such as the U.S. dollar have generally been based on rates set by the People’s Bank of China, which are set daily based on the previous day’s interbank foreign exchange market rates and current exchange rates on the world financial markets.
OUR CORPORATE HISTORY
We were incorporated in Nevada in August 1987 under the name Network USA, Inc. for the purposes of completing a merger or other business combination with an operating entity. From our inception through April 2002 we did not conduct business. On April 9, 2002, we acquired 20% of One Genesis, Inc., a privately-held Texas real estate corporation, from one of our then principal stockholders in exchange for approximately 4,333,332 shares of our common stock. The shares of One Genesis, Inc. were sold on July 31, 2002 for $120,000 in cash.
Effective on April 30, 2004, we acquired 100% of the issued and outstanding shares of Sunwin Tech from its stockholders in exchange for approximately 17,000,000 shares of our common stock which resulted in a change of control of our company. Sunwin Tech was organized in January 2004 before its acquisition of 80% of Qufu Natural Green. Prior to the acquisition of Qufu Natural Green, we did not have any business and operations. Concurrent with the closing of the acquisition of Qufu Natural Green, our officers and directors resigned and current officers and directors of Qufu Natural Green were appointed to their positions. In connection with the transaction, Sunwin Tech purchased 4,500,000 shares of our common stock owned by our former principal stockholders for $175,000, and, at the closing, Sunwin Tech distributed the 4,500,000 shares to Messrs. Baozhong Yuan, Laiwang Zhang, Xianfeng Kong and Lei Zhang, pro-rata to their ownership of Sunwin Tech immediately prior to the closing. Following the transactions, the former Sunwin Tech stockholders owned approximately 68 % of our issued and outstanding capital stock.
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Prior to our acquisition of Sunwin Tech, effective February 1, 2004, Sunwin Tech acquired 80% of Qufu Natural Green from Pharmaceutical Corporation, a company controlled by Mr. Laiwang Zhang, our President and Chairman, in exchange for 32,500,000 shares of Sunwin Tech’s common stock. At the time of this merger the minority stockholders of Qufu Natural Green included Pharmaceutical Corporation (17%) and Shandong Group (2.5%), both of which are controlled by Mr. Laiwang Zhang, our President and Chairman. The remaining minority stockholder, Qufu Veterinary Medicine Company, Ltd. (0.5%) was controlled by a Chinese state owned agency.
In July 2004 following the transaction with Sunwin Tech, we changed the name of our company from Network USA, Inc. to Sunwin International Neutraceuticals, Inc.
Subsequent to the acquisition of 80% of Qufu Natural Green, Shandong Group acquired the 17% interest of Qufu Natural Green owned by Pharmaceutical Corporation, and ultimately the Shandong Group acquired the 0.5% Qufu Natural Green interest owned by Qufu Veterinary Medicine Company, Ltd., after it was dissolved. These events resulted in Shandong Group owning 20% of Qufu Natural Green.
In February 2006, we acquired the remaining 20% of Qufu Natural Green from Shandong Group in exchange for 5,000,000 shares of our common stock valued at $2,775,000. At the request of Mr. Zhang, the control person of Shandong Group, 2,000,000 shares were issued to Ms. Dongdong Lin, our Chief Executive Officer, and the remaining 3,000,000 shares were issued to Mr. Zhang. Of the total purchase price, approximately $179,994 was allocated to consulting expenses paid to Mr. Zhang and Ms. Lin as it represented the difference between the purchase price and the valuation of the minority interest purchased.
On June 30, 2008, Qufu Natural Green, agreed to acquire a 60% interest in Qufu Shengwang from Shandong Group for $7,016,200. This purchase price was based on 60% of the value of the net tangible assets of Qufu Shengwang as of April 30, 2008. Upon completion of the acquisition of Qufu Shengwang in June 2008, Shandong Group agreed to purchase 29,000,000 shares of our common stock at a price of $.25 per share.
On September 2, 2008, Qufu Natural Green amended its June 30, 2008 acquisition agreement with Qufu Shengwang and Shandong Group. Under the terms of the amendment, Qufu Natural Green agreed to acquire Shandong Group's 60% interest in Qufu Shengwang for $6,200,413. The purchase price was based on 60% of the revised value of the net tangible assets of Qufu Shengwang of $10,334,022 as of April 30, 2008. The net tangible assets of Qufu Shengwang were reduced from $11,693,666 to $10,334,022 as a result of the application of generally accepted accounting principles (“U.S. GAAP”) which require elimination of the difference between the fair market value and cost basis of the land use rights recorded by Qufu Shengwang upon completion of an audit of its financial statements as of April 30, 2008.
In addition, on September 2, 2008, we entered into an amendment to the June 30, 2008 stock sale and purchase agreement with Shandong Group to purchase 29,525,776 shares of the common Stock at $0.21 per share, representing approximately 34% of our issued and outstanding common stock. In addition, the amendment provided that in the event Qufu Shengwang did not earn a minimum of $5,000,000 in net income as determined in accordance with U.S. GAAP (the “Target Amount”) over a period of 36 consecutive months beginning the first day of the month following the closing (the “Earnings Target Period”), then Shandong Group was obligated to return to us a number of shares of our common stock equal to an amount computed by multiplying (i) a fraction, the numerator of which was the Target Amount less the amount of Qufu Shengwang’s net income earned over the Earnings Target Period and the denominator was the Target Amount; by 29,525,776, the number of shares purchase under the amendment. As set forth below, the provision for the possible return of shares to us was terminated in November 2008 a subsequent amendment to this amended agreement.
On November 18, 2008, Qufu Natural Green entered into a second amendment to the June 30, 2008 acquisition agreement with Qufu Shengwang and its shareholder, Shandong Group, to further reduce the purchase price for the acquisition of a 60% interest in Qufu Shengwang to $4,026,851. The revised purchase price represents 60% of the revised value of the net assets of Qufu Shengwang of $6,711,418 as of April 30, 2008. The net assets of Qufu Shengwang were further revised to account for a $698,115 decrease in the value of inventory and a $2,924,489 decrease in the value of intangible assets as of April 30, 2008.
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In addition, on November 18, 2008, we entered into a second amendment to the stock sale and purchase agreement to reduce the total number of shares of common stock to be purchased by Shandong Group from 29,525,776 shares to 19,175,480 shares at $0.21 per share. As a result of the second amendment , we cancelled 10,350,296 shares of our common stock issued to Shandong Group, reduced the amount due from Shandong Group by $2,173,562 reflecting the difference between the purchase price under the first amendment and the purchase price for the shares under the second amendment and eliminated the requirement for the earnings target amount provided for in the first amendment. In satisfaction of this term, the purchase was completed by Shandong Group’s delivery of the 60% interest in Qufu Shengwang. The 19,175,480 shares of common stock purchased by Shandong Group represented approximately 22% of the issued and outstanding shares of our common stock prior to completion of the transaction.
On March 25, 2009 Qufu Natural Green acquired Qufu Shengren for $3,097,242. The purchase price was equal to the value of the assets of Qufu Shengren as determined by an independent asset appraisal in accordance with PRC issued asset appraisal principles in China. Qufu Shengren is engaged in the production and distribution of bulk drugs and pharmaceuticals.
Upon completion of the acquisition of Qufu Shengren in March 2009, the shareholders of Qufu Shengren purchased 21,434,201 shares of our common stock at $0.145 per share representing approximately 14.4% of our issued and outstanding common stock at the time of the sale. In satisfaction of this term, the purchase was completed by delivery of the 100% interest in Qufu Shengren by its shareholders.
In July 2010 Qufu Natural Green sold its 100% ownership interest in Shengya Veterinary Medicine to Mr. Laiwang Zhang, our president and chairman of our board of directors. Shengya Veterinary Medicine historically represented less than 20% of our total revenues and represented approximately 12% of our total revenues in fiscal 2010, compared to 16.7% in fiscal 2009. Under the terms of the agreement, Mr. Zhang tendered to us for cancellation 7,818,545 shares of our common stock he owned, valued at $3,674,716, based on the closing stock price at July 31, 2010. The carrying value of Shengya Veterinary Medicine’s net assets totaled $4,906,747 at July 31, 2010 and we recognized a foreign currency translation gain of $1,243,481 that had previously been reflected in accumulated other comprehensive income. As a result, we booked a gain on sale of subsidiary of $11,450 in fiscal 2011.
On September 30, 2011, Qufu Shengwang purchased the 40% equity interest in Qufu Shengwang owned by our Korean partners, Korea Stevia Company, Limited, for $626,125 in cash, and as a result of this repurchase transaction we now own 100% equity interest in all of the net assets of our subsidiary Qufu Shengwang. Therefore, the non-controlling interest of $2,109,028 in our balance sheet as of April 30, 2012 has been eliminated to reflect our 100% interest in Qufu Shengwang. Qufu Shengwang plans to resume production in fiscal 2013 for the products including bio-fermentation bacterial fertilizers, foliar fertilizers, and biological pesticides.
In April 2012 we changed our corporate name to Sunwin Stevia International, Inc.
In August 2012, the Company entered into an Exchange Agreement with WILD Flavors pursuant to which it purchased its 45% membership interest in Sunwin USA for an aggregate consideration of approximately $1,625,874, which includes the issuance of 7,666,666 shares of our common stock valued at approximately $1,533,333 and a cash payment of $92,541. In connection with the Exchange Agreement, WILD Flavor granted, transferred and assigned to Sunwin USA all of its rights, title and interest, and the trade name Only Sweet, including any trademarks, trademark registrations and applications, service marks, service mark registrations and applications, copyrights, copyright registrations and applications, trade dress, trade names (whether or not registered or by whatever name or designation), owned, applied for, or registered in the name of, the WILD Flavor (the "Only Sweet Name Rights").
EMPLOYEES
As of July 5, 2013, we have 189 full time employees. All of our employees are primarily based in Qufu, China while some managerial and sales staff occasionally work in other Chinese cities or overseas on different projects. Each full-time Chinese employee is a member of a local trade union. Labor relations have remained positive and we have not had any employee strikes or major labor disputes. Unlike trade union in western countries, trade unions in most parts of China are organizations mobilized jointly by the government and the management of the corporation.
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U.S. and Chinese Advisors
On April 22, 2012 we entered into a consulting agreement with China Direct Investments, Inc., a subsidiary of CD International Enterprises, Inc. (“CDI”) to continue to provide us with management services from May 1, 2012 through April 30, 2013. Under the terms of this agreement, CDI provided various consulting services to us including coordination of corporate matters, filings with the SEC, capital structuring advice assistance with investor relations and negotiations with foreign business partners to expand sales of steviosides. As compensation for these services, we issued CDI a total of 2,500,000 shares of our common stock and CDI agreed to cover the costs charged by third-party vendor.
On May 1, 2012 we entered into a consulting agreement with CDI for fiscal 2013 pursuant to which CDI is to provide us with a variety of consulting services, including, but not limited to, coordinating the preparation and filing of our various reports under the Securities Exchange Act of 1934, assistance in improving our internal control over financial reporting, advice concerning the disposition of our Chinese medicine segment, assistance in maintaining our relationship with Domino Foods, Inc. and WILD Procurement, investor and public relations, and advice in our capital raising efforts, among other services. As compensation, we agreed to issue CDI an aggregate of 2,500,000 shares of our common stock valued at $650,000, of which 2,000,000 shares were to be issued within 10 business days from the execution of the agreement and the remaining 500,000 shares are to be issued by December 31, 2012. Under the terms of this agreement, CDI is responsible for the payment of all of our legal, accounting, travel and related third party expenses we might incur during the period, and the amount of shares we agreed to issue included reimbursement of $92,341 paid on our behalf to WILD Flavors as partial compensation for our purchase of the minority interest in Sunwin USA described elsewhere herein. Under the terms of the agreement CDI also modified the payment terms of a loan we had previously made to CDI China, Inc., its sister company, which had an outstanding balance of $213,807, to provide that $113,807 of this amount was due by August 25, 2012 and the balance is due by December 30, 2012. We have subsequently received the initial payment.
We are currently in the negotiation with CDI to renew the consulting agreement under similar conditions for fiscal 2014 and we expect to enter the new annual consulting agreement in mid fiscal 2014. CDI orally agreed to continue to provide the services to us while the terms of the new agreement are being finalized.
ITEM 1A.
ITEM 1A.
RISK FACTORS
An investment in our common stock involves a significant degree of risk. You should not invest in our common stock unless you can afford to lose your entire investment. You should consider carefully the following risk factors and other information in this report before deciding to invest in our common stock. If any of the following risks and uncertainties develops into actual events, our business, financial condition or results of operations could be materially adversely affected and you could lose your entire investment in our company.
RISKS RELATED TO OUR COMPANY
IN RECENT YEARS OUR REVENUES HAVE DECLINED AND THERE ARE NO ASSURANCES THEY WILL RETURN TO HISTORIC LEVELS IN FUTURE PERIODS. OUR OPERATING LOSSES ARE IMPACTING OUR LIQUIDITY
Our total revenues were $9.8 million in fiscal 2013 as compared to $12.9 million in fiscal 2012, a decreased of 24%. Our revenues continue to be less than recent fiscal years. In fiscal 2009 reported total revenues of $22.0 million and in fiscal 2010 our total revenues were $14.5 million. The decline in our revenues from historic periods is described later in this report under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. In addition, while our operating loss and net loss each increased in fiscal 2013 from fiscal 2012, it is likely that we will continue to report losses from operations in future periods and we will be required to use our working capital to fund our operating expenses instead of our growth.
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OUR CASH AND WORKING CAPITAL DECLINED IN FISCAL 2013 FROM FISCAL 2012. CONTINUING DECLINES WILL IMPACT OUR ABILITY TO FUND OUR OPERATIONS AND MAY REQUIRE US TO RAISE CAPITAL.
At April 30, 2013 we had cash of approximately $517,000 as compared to $2.96 million at April 30, 2012, a decline of $2.44 million. Our working capital at April 30, 2013 was $5.0 million as compared to $8.7 million at April 30, 2012, a decline of 43%. Our cash and working capital in fiscal 2013 were adversely impacted by our net loss of $4.0 million as well as our net cash used in operating activities of $2.0 million. We do not have any sources for working capital other than our operations. While we believe that we have adequate working capital to fund our operations for the next 12 months, if our operating losses were to increase for any reason, it is possible that we would need to raise additional capital or curtail some of our expansion plans. We do not have any agreements or understandings with any third parties for capital commitments and there are no assurances we would be able to secure additional capital as may be necessary upon terms and conditions satisfactory to us. In that event, it is likely we would curtain some of our expansion plans which would adversely impact our operating results in future periods.
OUR FUTURE REVENUES DEPEND UPON CONTINUED MARKET ACCEPTANCE OF OUR STEVIOSIDE PRODUCTS AND APPLICATION OF STEVIOSIDE IN MAINSTREAM CONSUMER PRODUCTS.
Currently we derive a majority of our revenue from the sale of stevioside and stevioside based products, and we expect this will continue for the foreseeable future. If manufacturers and producers of products that use stevioside as a sweetener do not increase their purchases and the market does not continue to accept these products, our revenues will continue decline significantly, which would negatively affect our results of operations, financial condition and cash flows.
Factors that may affect the market acceptance of our stevioside based sweetener products include the taste, price, availability of supply, competing products, the development of stevioside-based flavors, and its applications in mainstream consumer products. Many of these factors, especially research and development activities related to stevioside-based flavors and mainstream consumer products, are beyond our control.
EACH OF OUR TWO MAIN PRODUCT GROUPS OPERATES IN HIGHLY COMPETITIVE MARKETS WHERE THE BARRIER TO ENTRY IS LOW.
Each of our product groups is subject to competition from other manufacturers of those products and the barriers to entry in the markets in which we compete are relatively low. While we believe we are one of the leading manufacturers of stevioside in the PRC, from time to time there is a sporadic oversupply of this product which can decrease our market share and competitive position in this product group. Because there are no assurances we will be successful in this endeavor, we may never attain a competitive position in this product group. In addition, our competition within the traditional Chinese medicine formula extract portion of our business is the most intense. There are over 500 companies in China against whom we compete in the sale of traditional Chinese medicine formula extracts and the barriers to entry in this product segment are relatively low. If these other companies successfully market their products or market their products better than we market ours, we may have a difficult time marketing and selling our products. As a result, we cannot assure you that we will be able to effectively compete in any of our product segments.
WE ARE DEPENDENT ON OUR PRESIDENT AND THE LOSS OF HIS SERVICES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We are dependent upon the services of Mr. Laiwang Zhang, our president and chairman of the board of directors, for the continued growth and operation of our company because of his experience in the industry and his personal and business contacts in the PRC. We do not have an employment agreement with Mr. Zhang. We also have done business with several companies which are affiliated with Mr. Zhang as described later in this report under “Certain Relationships and Related Party Transactions.” Although we have no reason to believe that Mr. Zhang would discontinue his services with us, the interruption or loss of his services would adversely affect our ability to effectively run our business and pursue our business strategy as well as our results of operations.
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WE CANNOT CONTROL THE COST OF OUR RAW MATERIALS, WHICH MAY ADVERSELY IMPACT OUR PROFIT MARGIN AND FINANCIAL POSITION.
Our principal raw materials are stevia used to make stevioside and herbs used in the formulation of traditional Chinese medicine extracts. The prices for these raw materials are subject to market forces largely beyond our control, including availability and competition in the market place. The prices for these raw materials have varied significantly in the past and may vary significantly in the future. Our cost of sales as a percentage of revenues was 79% in fiscal 2013 and 85% in fiscal 2012, and we may experience significantly higher costs in the future. Because of increased competition in all of our business segments, we may not be able to pass along potential raw material price increases to our customers and, accordingly, our gross profit margins would be adversely impacted.
OUR OPERATIONS ARE SUBJECT TO GOVERNMENT REGULATION. IF WE FAIL TO COMPLY WITH THE APPLICABLE REGULATIONS, OUR ABILITY TO OPERATE IN FUTURE PERIODS COULD BE IN JEOPARDY.
We are subject to state and local environmental laws related to certification of water release. We are subject to registration and inspection under the PRC Food Safety Laws by the SFDA with respect to the manufacturing and distribution of traditional Chinese medicine extracts and steviosides. We are also licensed by the Shandong Provincial Government to manufacture stevioside. While we are in substantial compliance with all provisions of these laws, inspections and licenses and have no reason to believe that any licenses will not be renewed as required by the applicable rules of the PRC Central Government and the Shandong Province, any non-renewal of these licenses could result in the cessation of our business activities. In addition, any change in those laws and regulations could impose costly compliance requirements on us or otherwise subject us to future liabilities.
OUR RECOGNITION OF UNREALIZED GAINS (LOSS) ON FOREIGN CURRENCY TRANSACTION CAN MATERIALLY IMPACT OUR INCOME FROM PERIOD TO PERIOD.
As described elsewhere herein, the functional currency of our Chinese subsidiaries is the RMB. As required by generally accepted accounting principles, net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations. In fiscal 2013 the effect of the foreign exchange transaction was $0.4 million and in fiscal 2012 it was $0.9 million. The recording of these non-cash gains, which is required under generally accepted accounting principles in the United States, could have a material impact on our financial statements.
WE HAVE NOT VOLUNTARILY IMPLEMENTED VARIOUS CORPORATE GOVERNANCE MEASURES, IN THE ABSENCE OF WHICH STOCKHOLDERS MAY HAVE LESS PROTECTIONS AGAINST INTERESTED DIRECTOR TRANSACTIONS, CONFLICTS OF INTEREST AND OTHER MATTERS.
The Sarbanes-Oxley Act of 2002 and other federal legislation has resulted in the adoption of various corporate governance measures designed to promote the integrity of corporate management and the securities markets. Some of these measures have been adopted in response to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges, such as the NYSE MTK LLC or The Nasdaq Stock Market, on which their securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges are those that address board of directors’ independence, audit committee oversight, the adoption of a code of ethics and the adoption of a related persons transaction policy. Although we have adopted a Code of Ethics, we have not yet adopted any of these other corporate governance measures and, since our securities are not yet listed on a national securities exchange, we are not required to do so. We have not adopted corporate governance measures such as an audit committee or other independent committees of our board of directors as we presently do not have any independent directors. It is possible that if we were to adopt some or all of these corporate governance measures, stockholders would benefit from somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct. For example, in the absence of audit, nominating and compensation committees comprised of at least a majority of independent directors and our lack of independent directors, decisions concerning matters such as the terms of related party transactions, the amount of management fee paid to a related party, compensation packages to our senior officers and recommendations for director nominees may be made by a majority of directors who have an interest in the outcome of the matters being decided. Prospective investors should bear in mind our current lack of corporate governance measures in formulating their investment decisions.
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OUR ACCOUNTING PERSONNEL HAVE LIMITED EXPERIENCE WITH U.S. GAAP AND WE ARE DEPENDENT UPON THE SERVICES OF CDI TO ENSURE THAT OUR FINANCIAL STATEMENTS ARE PROPERLY PREPARED.
Although our Chief Financial Officer and members of our accounting staff have significant experience with the application of accounting principles and the relevant financial regulations applicable to enterprises established in the PRC, these individuals have limited experience in the application of U.S. GAAP. Since 2005 CDI has been providing various accounting and other corporate management services to us and we are materially dependent upon this firm to assist us in the preparation of our financial statements and reports we file with the Securities and Exchange Commission. If we were to lose the services of CDI, or any similar firm which we may engage in the future, our ability to prepare our financial statements in conformity with U.S. GAAP and to timely file our annual and quarterly reports with the Securities and Exchange Commission would be materially and adversely impacted.
RISKS RELATED TO DOING BUSINESS IN CHINA
UNCERTAINTIES WITH RESPECT TO THE PRC LEGAL SYSTEM COULD HARM US.
Our operations in China are governed by PRC laws and regulations. The PRC legal system is a civil law system based on written statutes. Unlike common law systems, prior court decisions have limited precedential value. We are subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to wholly foreign-owned enterprises. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and recently-enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until some-time after the violation has occurred. Moreover, some regulatory requirements issued by certain PRC government authorities may not be consistently applied by other government authorities, including local government authorities, thus making strict compliance with all regulatory requirements impractical, or in some circumstances, impossible. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
Further, on August 29, 2008, SAFE promulgated Circular 142, a notice regulating the conversion by a foreign-invested company of its capital contribution in foreign currency into RMB. The notice requires that the capital of a foreign-invested company settled in RMB converted from foreign currencies shall be used only for purposes within the business scope as approved by the authorities in charge of foreign investment or by other competent authorities and as registered with the Administration for Industries and Commerce and, unless set forth in the business scope or in other regulations, may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the capital of a foreign-invested company settled in RMB converted from foreign currencies. The use of such RMB capital may not be changed without SAFE’s approval, and may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations of Circular 142 will result in severe penalties, including heavy fines. As a result, Circular 142 may significantly limit our ability to capitalize our PRC operations, which could adversely affect our ability to invest in or acquire any other PRC companies.
RESTRICTIONS ON CURRENCY EXCHANGE MAY LIMIT OUR ABILITY TO RECEIVE AND USE OUR REVENUE EFFECTIVELY.
Because all of our revenue is denominated in RMB, restrictions on currency exchange may limit our ability to use revenue generated in RMB to fund any business activities we may ultimately have outside China or to make dividend payments to our shareholders in U.S. dollars. The principal regulation governing foreign currency exchange in China is the Foreign Currency Administration Rules (1996), as amended. Under these rules, RMB is freely convertible for trade and service-related foreign exchange transactions, but not for direct investment, loan or investment in securities outside China unless the prior approval of SAFE is obtained. Although the PRC government regulations now allow greater convertibility of RMB for current account transactions, significant restrictions still remain. For example, foreign exchange transactions under our subsidiaries capital accounts, including principal payments in respect of foreign currency-denominated obligations, remain subject to significant foreign exchange controls. These limitations could affect our ability to obtain foreign exchange for capital expenditures. We cannot be certain that the PRC regulatory authorities will not impose more stringent restrictions on the convertibility of RMB, especially with respect to foreign exchange transactions.
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FLUCTUATIONS IN THE VALUE OF THE RMB MAY HAVE A MATERIAL ADVERSE EFFECT ON YOUR INVESTMENT.
The change in value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the current policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. Recently, the PRC has decided to proceed further with reform of the RMB exchange regime and to enhance the RMB exchange rate flexibility. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in a further and more significant adjustment of the RMB against the U.S. dollar. Any significant revaluation of the RMB may have a material adverse effect on the value of, and any dividends payable on, our common stock in foreign currency terms. More specifically, if we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our common stock or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. Consequently, appreciation or depreciation in the value of the RMB relative to the U.S. dollar could materially adversely affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations.
RECENT SAFE REGULATIONS COULD ADVERSELY IMPACT OUR COMPANY AND SUBJECT US TO FINES.
Recent PRC regulations relating to offshore investment activities by PRC residents and employee stock options granted by overseas-listed companies may increase our administrative burden, restrict our overseas and cross-border investment activity or otherwise adversely affect the implementation of our acquisition strategy. If our shareholders who are PRC residents, or our PRC employees who are granted or exercise stock options, fail to make any required registrations or filings under such regulations, we may be unable to distribute profits and may become subject to liability under PRC laws. In 2005, SAFE promulgated regulations that require PRC residents and PRC corporate entities to register with local branches of SAFE in connection with their direct or indirect offshore investment activities. These regulations apply to our shareholders who are PRC residents and may apply to any offshore acquisitions that we make in the future.
Under the SAFE regulations, PRC residents who make, or have previously made, direct or indirect investments in offshore companies, will be required to register those investments. In addition, any PRC resident who is a direct or indirect shareholder of an offshore company is required to file or update the registration with the local branch of SAFE, with respect to that offshore company, any material change involving its round-trip investment, capital variation, such as an increase or decrease in capital, transfer or swap of shares, merger, division, long-term equity or debt investment or creation of any security interest. If any PRC shareholder fails to make the required SAFE registration, the PRC subsidiary of that offshore parent company may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation, to their offshore parent company, and the offshore parent company may also be prohibited from injecting additional capital into their PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
We cannot provide any assurances that all of our shareholders who are PRC residents will make or obtain any applicable registrations or approvals required by these SAFE regulations. The failure or inability of our PRC resident shareholders to comply with the registration procedures set forth in the SAFE regulations may subject our company fines and legal sanctions, restrict our cross-border investment activities, or limit our ability to distribute dividends to or obtain foreign-exchange dominated loans from our company. As it is uncertain how the SAFE regulations will be interpreted or implemented, we cannot predict how these regulations will affect our business operations or future strategy. For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and obtaining foreign currency denominated borrowings, which may harm our results of operations and financial condition. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the SAFE regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.
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THE NEW M&A RULES ESTABLISH MORE COMPLEX PROCEDURES FOR SOME ACQUISITIONS OF CHINESE COMPANIES BY FOREIGN INVESTORS, WHICH COULD MAKE IT MORE DIFFICULT FOR US TO PURSUE GROWTH THROUGH ACQUISITION IN CHINA.
The New M&A Rules that became effective on September 8, 2006 established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. Complying with the requirements of the M&A Rules to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could materially adversely affect our ability to grow our business through acquisitions in China.
UNDER PRC LAWS, ARRANGEMENTS AND TRANSACTIONS AMONG RELATED PARTIES MAY BE SUBJECT TO A HIGH LEVEL OF SCRUTINY BY THE PRC TAX AUTHORITIES.
Under PRC laws, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. Under the Regulation on the Implementation of the Enterprise Income Tax Law of the PRC, the “related party” means the enterprises, other organizations or individuals that have any of the following relations with an enterprise:
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direct or indirect control relationship with respect to capital, management, sale or purchase, etc.;
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directly or indirectly controlled by a common third-party;
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any other relationship of interest.
We engage in a number of transactions with related parties. If any of the transactions we enter into with related parties are found not to be on an arm’s-length basis, or to result in an unreasonable reduction in tax under PRC law, the PRC tax authorities have the authority to disallow any tax savings, adjust the profits and losses of such possible future PRC entities and assess late payment interest and penalties. A finding by the PRC tax authorities that we are ineligible for any such tax savings would in all likelihood substantially increase our possible future taxes and thus reduce our net income in future periods.
WE FACE RISKS RELATED TO NATURAL DISASTERS AND HEALTH EPIDEMICS IN CHINA, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.
Our business could be materially adversely affected by natural disasters or the outbreak of health epidemics in China. For example, in May 2008, Sichuan Province suffered a strong earthquake measuring approximately 8.0 on the Richter scale that caused widespread damage and casualties. In addition, in the last decade, the PRC has suffered health epidemics related to the outbreak of avian influenza and severe acute respiratory syndrome, or SARS. In April 2009, an outbreak of the H1N1 virus, also commonly referred to as “swine flu” occurred in Mexico and has spread to other countries. Cases of swine flu have been reported in Hong Kong and mainland China. The Chinese government and certain regional governments within China have enacted regulations to address the H1N1 virus, which may have an effect on our business. If the outbreak of swine flu were to become widespread in China or increase in severity, it could have an adverse effect on economic activity in China, and could require the temporary closure of our facilities. Such events could severely disrupt our business operations and harm our results of operations. Any future natural disasters or health epidemics in the PRC could also have a material adverse effect on our business and results of operations.
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CERTAIN AGREEMENTS TO WHICH WE ARE A PARTY AND WHICH ARE MATERIAL TO OUR OPERATIONS LACK VARIOUS LEGAL PROTECTIONS WHICH ARE CUSTOMARILY CONTAINED IN SIMILAR CONTRACTS PREPARED IN THE UNITED STATES.
Although we are a U.S. company, substantially all of our business and operations are conducted in the PRC. We are a party to certain material contracts, including the leases for the facilities used by our stevioside and our Chinese medicine segments. While these contracts contain the basic business terms of the agreements between the parties, these contracts do not contain certain provisions which are customarily contained in similar contracts prepared in the U.S., such as representations and warranties of the parties, confidentiality and non-compete clauses, provisions outlining events of defaults, and termination and jurisdictional clauses. Because our material contracts omit these types of clauses, notwithstanding the differences in Chinese and U.S. laws we may not have the same legal protections as we would if the contracts contained these additional provisions. We anticipate that contracts we enter into in the future will likewise omit these types of legal protections. While we have yet to experience any adverse consequences as a result of the omission of these types of clauses, and we consider the contracts to which we are a party to contain all the material terms of our business arrangements with the other party, we cannot assure you that future events will not occur which could have been avoided if the contracts were prepared in conformity with U.S. standards, or what the impact, if any, of these hypothetical future events could have on our company.
IT MAY BE DIFFICULT FOR STOCKHOLDERS TO ENFORCE ANY JUDGMENT OBTAINED IN THE UNITED STATES AGAINST US, WHICH MAY LIMIT THE REMEDIES OTHERWISE AVAILABLE TO OUR STOCKHOLDERS.
Substantially all of our assets are located outside the United States and substantially all of our current operations are conducted in the PRC. Moreover, all of our directors and officers are nationals or residents of the PRC. All or a substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult for our stockholders to effect service of process within the United States upon these persons. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts obtained against us or such officers and/or directors predicated upon the civil liability provisions of the securities law of the United States or any state thereof, or be competent to hear original actions brought in the PRC against us or such persons predicated upon the securities laws of the United States or any state thereof.
FAILURE TO COMPLY WITH THE UNITED STATES FOREIGN CORRUPT PRACTICES ACT COULD SUBJECT US TO PENALTIES AND OTHER ADVERSE CONSEQUENCES.
We are subject to the United States Foreign Corrupt Practices Act which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the PRC. We can make no assurance, however, that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.
RISKS RELATED TO OUR COMMON STOCK
DUE TO RECENT CHINESE ACCOUNTING SCANDALS, THE PRICE OF OUR COMMON STOCK MIGHT FLUCTUATE SIGNIFICANTLY AND IF OUR STOCK PRICE DROPS SHARPLY, WE MAY BE SUBJECT TO SHAREHOLDER LITIGATION, WHICH COULD CAUSE OUR STOCK PRICE TO FALL FURTHER.
In the past few years, there have been well-publicized accounting problems at several U.S.-listed Chinese companies that have resulted in significant drops in the trading prices of their shares and, in some cases, have led to the resignation of outside auditors, trading halts or share delistings by NASDAQ or the New York Stock Exchange, and investigations by the Division of Enforcement of the Securities and Exchange Commission. Many, but not all, of the companies involved in these scandals had entered the U.S. trading market through “reverse mergers” into publicly traded shells. The scandals have had a broad effect on Chinese companies with shares listed or quoted in the United States. Past or future accounting scandals in other Chinese companies could have a material adverse effect on the market for shares of our common stock and the interest of investors in our company or generally in PRC companies. In this event, the fluctuations in the market prices of our common stock could result in decreased liquidity and/or declining stock prices unrelated to our results of operation or business. In addition, as set forth in the risk factor immediately below, we do not have any audit committee financial experts on our Board of Directors and, accordingly, the risk of future errors in our financial statements is increased.
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PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS MAY DELAY OR PREVENT A TAKE-OVER WHICH MAY NOT BE IN THE BEST INTERESTS OF OUR STOCKHOLDERS.
Provisions of our articles of incorporation and bylaws may be deemed to have anti-takeover effects, which include when and by whom special meetings of our stockholders may be called, and may delay, defer or prevent a takeover attempt. In addition, certain provisions of the Nevada Revised Statutes also may be deemed to have certain anti-takeover effects which include that control of shares acquired in excess of certain specified thresholds will not possess any voting rights unless these voting rights are approved by a majority of a corporation’s disinterested stockholders.
In addition, our articles of incorporation authorize the issuance of up to 1,000,000 shares of preferred stock with such rights and preferences as may be determined from time to time by our Board of Directors, of which no shares are currently outstanding. Our Board of Directors may, without stockholder approval, issue preferred stock with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of our common stock. Collectively, these provisions may prevent a change of control of our company in situations where a change of control would be beneficial to our stockholders.
BECAUSE OUR STOCK CURRENTLY TRADES BELOW $5.00 PER SHARE, AND IS QUOTED ON THE OTCMARKETS, OUR STOCK COULD BE CONSIDERED A “PENNY STOCK” WHICH CAN ADVERSELY AFFECT ITS LIQUIDITY.
As the trading price of our common stock is less than $5.00 per share, our common stock could be considered a “penny stock,” and trading in our common stock could be subject to the requirements of Rule 15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. The broker/dealer must make an individualized written suitability determination for the purchaser and receive the purchaser’s written consent prior to the transaction. SEC regulations also require additional disclosure in connection with any trades involving a “penny stock”, including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of securities in the secondary market because few broker or dealers are likely to undertake these compliance activities. In addition to the applicability of the penny stock rules, other risks associated with trading in penny stocks could also be price fluctuations and the lack of a liquid market.
A LARGE PORTION OF OUR OUTSTANDING COMMON SHARES ARE “RESTRICTED SECURITIES” AND FUTURE SALES OF THOSE SHARES BY OUR STOCKHOLDERS COULD ADVERSELY IMPACT THE MARKET PRICE OF OUR COMMON STOCK.
At July 23, 2013 we had 173,882,803 shares of common stock outstanding, of which approximately 62,295,305 shares are "restricted securities." Future sales of restricted common stock under Rule 144 or otherwise could negatively impact the market price of our common stock.
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ITEM 1B.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not applicable for smaller reporting companies.
ITEM 2.
ITEM 2.
PROPERTIES
All of our facilities described below are located in the Shuyuan Economic Zone of Qufu City, of the Shandong Province except our traditional Chinese medicine facility located in 6 Youpeng Road of Qufu City.
Our principal executive offices and stevioside manufacturing facility is comprised of approximately 64,000 square feet situated on land which we hold land use rights. The land use rights expire on March 14, 2054.
In October 2002 Qufu Natural Green entered into a lease agreement with Pharmaceutical Corporation, an affiliate, which covers the approximately 54,000 square foot facility used in our traditional Chinese medicine business. The lease expired on October 1, 2012, after that, Pharmaceutical Corporation allows Qufu Natural Green to use the facility for free.
Qufu Shengwang owns an 89,000 square foot facility which includes 30,000 square feet of manufacturing space, a 21,500 square foot warehouse and 38,000 square feet of office space. Qufu Shengwang occupies this facility pursuant to land use rights which expire in March 2054.
Qufu Shengren occupies approximately 4.9 acres of land at no cost pursuant to a March 13, 2004 land use agreement with Shandong Group that expires on March 14, 2054. Located on this land is a 33,000 square foot manufacturing facility we are converting to a high grade stevioside production facility, an 18,000 square foot warehouse facility and approximately 3.74 acres (approximately 163,000 square feet) of vacant land.
We sub-lease a 408 square-foot furnished office from CD International Enterprises, Inc. (“CDI”) located at 431 Fairway Drive Suite 251, Deerfield Beach, FL 33441 which we use as our U.S. corporate administrative offices. The term of the lease begins on June 1, 2011 and terminated on May 31, 2012. Annual rent for this office was $10,000. We did not renew the sub-lease agreement since a U.S corporate is no longer needed.
On August 25, 2011, Qufu Natural Green entered into an agreement with Qufu Jinxuan Real Estate Development Co., Ltd., an unaffiliated third party, to purchase 30 apartment units in China for investment. The total area of the apartment complex units is 41,979 square feet, with 6,458 square feet of storage area for a total purchase price of RMB15,120,000 (approximately $2,390,325). Under the terms of the agreement, the apartment units are expected to be delivered by December 30, 2012. We prepaid 30% of the purchase price, approximately $717,097, upon signing the agreement on August 25, 2011. An additional 50% of the purchase price, or approximately $1,195,162, was paid in December 2011, with the balance, or approximately $478,066, upon completion of the ownership documents and transfer of the apartment units to us.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings, and to our knowledge, none of our officers, directors or principal stockholders are party to any legal proceeding in which they have an interest adverse to us.
ITEM 4.
ITEM 4.
MINE SAFETY DISCLOSURES.
Not applicable for our operations.
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PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is quoted in the over-the counter markets on the OTCQB tier of the OTC Markets under the symbol “SUWN”. The following table sets forth the reported high and low closing prices for our common stock for the following periods. These prices do not include retail mark-ups, markdowns or commissions, and may not necessarily represent actual transactions.
On July 29, 2013, the last reported sale price of the common stock on OTC Markers was $0.15 per share. As of July 29, 2012 there were 753 stockholders of record of the common stock. The number of record holders does not include beneficial owners of common stock whose shares are held in the names of banks, brokers, nominees or other fiduciaries.
Transfer Agent
Our transfer agent is Colonial Stock Transfer Company, Inc. which is located at 66 Exchange Place, Salt Lake City, Utah 84111. The phone number is (801) 355-5740 and its website is www.colonialstock.com.
Dividend Policy
We have never paid cash dividends on our common stock. We intend to keep future earnings, if any, to finance the expansion of our business, and we do not anticipate that any cash dividends will be paid in the foreseeable future. Our future payment of dividends will depend on our earnings, capital requirements, expansion plans, financial condition and other relevant factors. Under Nevada law, we are prohibited from paying dividends if the distribution would result in our company not being able to pay its debts as they become due in the usual course of business, or if our total assets would be less than the sum of our total liabilities plus the amount that would be needed, were we to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of stockholders whose preferential rights are superior to those receiving the distribution. In addition, as a result of Chinese laws our operating subsidiaries may be subject to restrictions on their ability to make distributions to us, including as a result of restrictions on the conversion of local currency into U.S. dollars, or other hard currency, and other regulatory restrictions.
RECENT SALES OF UNREGISTERED SECURITIES
On August 24, 2012, our board of directors authorized our 2012 Equity Compensation Plan (the “2012 Plan”) covering 10,000,000 shares of common stock. On August 28, 2012, we filed a registration statement on Form S-8 with the SEC covering the 2012 Plan to permit us to compensate and offer to our employees, officers, directors and consultants whose past, present and/or potential contributions to our company have been or will be important to our success, an opportunity to acquire a proprietary interest in our company. On September 27, 2012, we issued 6,000,000 shares of our common stock at $0.135 per share to three employees in China as bonus. In connection with this share issuance, $810,000 in stock-based compensation expense was recognized during the year ended April 30, 2013.
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ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
Not applicable to smaller reporting companies.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion and analysis of our consolidated financial condition and results of operations for the fiscal years 2013 and 2012 should be read in conjunction with the consolidated financial statements and footnotes, and other information presented elsewhere in this Form 10-K.
OVERVIEW
We sell stevioside, a natural sweetener, as well as herbs used in traditional Chinese medicines. Substantially all of our operations are located in the PRC. We have built an integrated company with the sourcing and production capabilities designed to meet the needs of our customers.
During 2013 and 2012 our operations were organized in two operating segments related to our product lines:
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Stevioside; and
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Chinese medicine.
Recent Developments
On September 30, 2011, Qufu Shengwang repurchased the 40% equity interest in Qufu Shengwang owned by Korea Stevia Company, Limited, for $626,125 in cash. As a result of this purchase, we own 100% of the equity interest in Qufu Shengwang. On July 1, 2012, Qufu Shengwang entered the Cooperation Agreement with Hegeng (Beijing) Organic Farm Technology Co, Ltd. (“Hegeng”), a Chinese manufacturer and distributor of bio-fertilizers and pesticides, to jointly develop the bio-bacterial fertilizers based on the residues from our stevia extraction. Under the Cooperation Agreement, Hegeng provides strain and formula that we apply to the stevia residues to produce bio-bacterial fertilizers in the current facility of Qufu Shengwang. The bio-bacterial fertilizers will be distributed under Qufu Shengwang’s name. We plan to start production in fiscal 2014. No additional investment in the facility would be required. Our facility has an estimated annual capacity to produce 10,000 metric tons of bio-bacterial fertilizers.
In December 2012, Qufu Shengren finished the construction of a new stevia extraction line in the same location of its current stevioside manufacturing facility. This line facility applies a new stevia extraction technology to produce both high and low grade stevioside. The annual production capacity of this line facility is 500 metric tons including 300 metric tons of high purity rebaudioside A products and 200 metric tons of low purity Rebaudioside A product.
Since January 2013, our facilities have the capability of producing A3-99 stevia products, which is the highest quality stevioside extracts produced in the world and are used in the pharmaceutical and food industries.
Stevioside segment
Stevioside and rebaudioside are all natural low calorie sweeteners extracted from the leaves of the stevia rebaudiana plant. Stevioside is a safe and natural alternative to sugar for people needing low sugar or low calorie diets. Stevioside can be used to replace sugar in beverages and foods, including those that require baking or cooking where synthetic chemical based sweetener replacements are not suitable.
Steviosin is a natural low calorie stevioside extract for medicinal use, containing rebaudioside A at 90% with the total steviol glycosides meeting or exceeding 95% on a dry weight basis. Steviosin is used as an alternative sweetener in the pharmaceutical production in China.
OnlySweet™ is an all natural, zero calorie, dietary supplement comprised of three natural ingredients, including stevioside. Based on our strategy to develop new products in collaboration with Domino Sugar that contain our stevia products, we are evaluating our strategy for the sale and distribution of OnlySweet™.
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In an effort to meet the international food safety standards mandated by larger consumer product companies that we expect to target as customers in the future, we have made capital investments to enhance our manufacturing facilities, equipment and documentation systems, changed certain manufacturing processes and carried out additional personnel training in order to meet these standards. These investments allowed us to meet the HACCP System Certification, ISO 9001:2008 Certification and ISO 22000:2005 Food Safety Certification. We obtained these certifications in November, 2010.
Chinese medicine segment
In our Chinese medicine segment, we manufacture and sell approximately 354 different extracts, which can be divided into the following three general categories:
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single traditional Chinese medicine extracts;
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compound traditional Chinese medicine extracts; and
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purified extracts, including active parts and monomer compounds such as soy isoflavone.
We are currently evaluating alternatives as to the potential disposition of the Chinese medicine segment to further streamline our product offering and focus our business on producing and selling high-quality stevia products. The exit strategy contemplated for the Chinese medicine segment has also been influenced by our concerns regarding the profitability of this segment in the near future. The competition in Chinese medicine market has strengthened over the past few months. In addition, the Chinese government continues to issue more regulations covering the supply of Chinese herbal raw materials and has increased the regulatory manufacturing standards on this segment. These measures are expected to further increase our raw materials and production costs in the coming quarters and beyond. However, this segment is currently operating at full capacity and we do not expect significant growth potential from this segment in the near future.
Our Performance
Our total revenues of $9.8 million in fiscal 2013, decreased by 24% as compared with fiscal 2012, while our gross margin increased to 21% from 15% primarily due to the adoption of a new technology and the adjustment of the products structure. Our total operating expenses in fiscal 2013 increased by approximately $29,000 compared to fiscal 2012 primarily due to an increase 10% in general and administrative expenses and an increased 7.0% in selling expenses. Our net loss for fiscal 2013 was $4.0 million, compared to $4.3 million in fiscal 2012.
Our operating performance for fiscal 2013 was primarily driven by a decrease in sales revenue from lower volume of our lower and higher grades stevia products in our Stevioside segment and lower revenues in our Chinese medicine segment.
While we have broadened our stevia product offerings to include a number of higher quality stevia grades needed in new product formulations we are developing to introduce to the U.S. and European food and beverage industry, the demand for higher grade stevia products has yet to materialize to the degree we had anticipated, and thus our sales volume in higher grade stevia products was lower than expected for fiscal 2013. Furthermore, we continue to encounter strong competition from smaller Chinese vendors who supplied cheaper and lower grade ingredients and stevioside extracts for export to Southeast Asia and one of our biggest competitors has dumped its stevioside products into the U.S and Europe market, which cause a huge influence to the market. As a result, some of our customers reduced purchases of our higher quality grades of stevia in favor of lower quality stevia grades, a trend which began in 2010. The decrease in revenues in our Chinese medicine was due primarily to was primarily due to the depressing market which was caused by bird flu.
Our Outlook
We believe that there are significant opportunities for worldwide growth in our Stevioside segment, primarily in the U.S. and EU. For fiscal 2014 and beyond, we will continue to focus on our core business of producing and selling stevioside series products.
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Some of the recent favorable observations related to the stevia markets in fiscal 2013 include:
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Chinese domestic food and beverages, particularly herbal tea manufacturers and the pharmaceutical industry, have increased the use of steviosides;
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Southeast and South Asia have renewed and increased their interest in stevia, particularly high grade stevia.
•
We were notified in November of 2011 that our stevia extracts production process has been certified organic under standards established by the USDA National Organic Program and European Commission (EC) 834/2007 and EC 889/2008 which will further expand the use of our organic stevia products in the food and beverage industry market in the US and Europe;
•
We signed a supplier agreement with Domino Sugar in December 2011 for the sale of our stevia products , the agreement is still active, we hope will further develop our market share;
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The marketing strategy to differentiate ourselves as a producer of higher quality stevia grades and product formulations through these collaboration efforts will lead to sustainable growth in stevia sales volume in the future;
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A new stevia extraction line was finished in December 2012. This new line will add additional 500 metric tons to our current annual production capacity; and
Meanwhile, we are also facing challenges in competitive pricing and raw materials for fiscal 2014 and 2015. During fiscal 2013, the market prices of stevioside productswere impacted by strong price competition among Chinese manufacturers. We expect the price pressure to continue in fiscal 2014 and into fiscal 2015. We anticipate the price of stevia leaves, the raw material used to produce our stevioside series products, to increase in the coming harvest fall season for 2013.
GOING CONCERN
As of April 30, 2013, we had cash of approximately $517,000 as compared to $2.96 million at April 30, 2012, a decline of $2.44 million. Net cash we used in operating activities was $2.0 million in fiscal 2013, as compared to $3.9 million in fiscal 2012. As of April 30, 2013, we had $1.2 million prepaid expenses, account payable of $3.6 million, and short-term loan of $0.8 million. We also had incurred a net loss of approximately $4.0 million in fiscal year 2013 and net loss of $4.3 million in fiscal year 2012. We also had decrease of $3.7 million in working capital and cash and cash equivalent and revenues are not currently sufficient and cannot be projected to cover operating expenses in the coming year. These factors raise substantial doubt as to the ability of the Company to continue as a going concern. Management's plans include attempting to raise funds through debt and equity financings, restructure on-going operations to eliminate inefficiencies to raise cash balance and meet operating needs. Management intends to make every effort to identify and develop sources of funds.
RESULTS OF OPERATIONS
The following table summarizes our results from continuing operations in fiscal 2013 and fiscal 2012. The percentages represent each line item as a percent of revenues:
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Revenues
Total revenues in fiscal 2013 decreased by $3.1 million, or 24.0%, as compared to fiscal 2012. Stevioside revenues, which comprised 73.3% and 76.0% of our revenues in fiscal 2013 and fiscal 2012, respectively, decreased by $2.64 million, or 26.9%, while Chinese medicine revenues slightly decreased by $0.5 million.
The decrease in Stevioside revenues was driven by lower sales revenues of both higher and lower grade Stevioside products. In addition, the demand growth for our intermediate and higher grade stevia products was slower than anticipated in international markets, especially in the U.S., where the adoption rate for stevia in the food and beverage has been slower than expected. We produced 232 metric tons of stevioside for fiscal 2013 as compared to 266 metric tons in fiscal 2012.
Cost of Revenues and Gross Margin
Cost of revenues for fiscal 2013 decreased by $3.27 million, or 29.7%, compared to fiscal 2012. The decrease in cost of revenues basically offset the decrease in sale volume. Gross margin on Stevioside segment for fiscal 2013 was 18.15%, as compared to 16.6% for fiscal 2012. The higher gross margins for Stevioside was due primarily to the adoption of our high-efficiency product line offset the higher costs of raw materials and increased competition in both the domestic and international markets which resulted in having to charge lower prices for our products to remain competitive. Gross margin on Chinese Medicine was 28.8% in fiscal 2013, compared 9% in fiscal 2012. The higher gross margin for Chinese Medicines was primarily due to the adoption of a new technology and the adjustment of the products structure. Since we purchase our raw materials on the spot market, we are unable to predict with any degree of certainty our raw material costs and their impact on gross margin in future periods. Our consolidated gross margin for fiscal 2013 was 21.0%, compared to 14.8% in fiscal 2012.
Total Operating Expenses
Our operating expenses for fiscal 2013 increased by approximately $29,000, or 1%, after exclusion of the loss on disposition of obsolete property and equipment for both periods in 2013 and 2012 of approximately $209,000 and $674,000, respectively, the increase was primarily due to a $431,000 increase in general and administrative expenses, which including $167,800 increased in management fees paid to Pharmaceutical Corporation, offset a decrease of $100,000 in office expenses and $106,000 for legal fees. We also increased of $810,000 in stock compensation expense paid primarily for consulting services and $63,000 in selling and other consulting expenses.
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Included in our operating expenses for fiscal 2013 and 2012 was $0.5 and $0.8 million of management fees paid to Pharmaceutical Corporation, respectively. These fees are for the administrative management of our operations and include compensation payable to certain of our employees. As described elsewhere herein, Pharmaceutical Corporation is controlled by Mr. Zhang, our President and Chairman.
Other Income (Expenses)
For the year ended April 30, 2013, other expenses amounted to approximately $265,000 as compared to $574,000 for the year ended April 30, 2012, a decrease of $309,000 or 53.8%. The decrease was primarily attributable to charge inventory impairment.
Net Loss
Net loss in fiscal 2013 was $4.0 million, compared to $4.3 million in fiscal 2012. The decrease was primarily due to higher gross profits offset by slight higher operational expenses.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of a company to generate sufficient cash to meet its operational cash requirements.
At April 30, 2013, we had working capital of $5.0 million, including cash of $0.5 million, as compared to working capital of $8.7 million and cash of $3 million at April 30, 2012. The approximate 82.5% decline in our cash at April 30, 2013 from April 30, 2012 is primarily attributable to funds used to purchase new fixed assets to implement new technology and high -efficient product lines. We believe that our existing cash and cash equivalents and internally generated funds will be sufficient to cover working capital requirements and capital expenditures for the next twelve months.
Accounts receivable, net of allowance for doubtful accounts, including accounts receivable from related parties, decreased by approximately $68,000 during fiscal 2013. The days’ sales outstanding in accounts receivable decreased to 63 days as of April 30, 2013, as compared to 79 days as of April 30, 2012.
At April 30, 2013 inventories, net of reserve for obsolescence, totaled $4.9 million, as compared to $4.3 million as of April 30, 2012. The increase is primarily due to increase of finished goods inventory and an increase in raw materials inventory in our stevioside business as we adjusted our production levels in anticipation of higher overseas demand.
At April 30, 2013, loan receivable amounted to $43,600, which represented a decrease of $1.92 million from April 30, 2012 and reflect the repayment of amounts we had advanced to Shangdong Anda in December 2011. At April 30, 2013, we are owed $43,614 from CDI China, Inc., an affiliate of CDI, our corporate management service provider, and relates to a loan made in fiscal 2011. This amount, which is comprised of $22,821 in principal and $20,793 in accrued interests, is due on demand.
Our accounts payable and accrued expenses were $3.7 million at April 30, 2013, a decrease of $0.43 million from April 30, 2012. The balance was primarily due to the timing of payments for balances related to raw material purchases made in the ordinary course of business.
Cash Flows Analysis
NET CASH FLOW USED IN/PROVIDED BY OPERATING ACTIVITIES:
Net cash used in operating activities was $2.0 million in fiscal 2013, as compared to net cash used of $3.9 million in fiscal 2012. The decrease resulting from cash used in operating activities was due primarily to a $0.8 million increase in accounts receivable and notes receivable due to cash collection coupled with an $0.8 million and 0.6 million increase in non-cash stock compensation expense paid to employees and constants, respectively. In fiscal 2013, we also had $0.5 million increase in prepaid expenses and other current assets, $0.7 million decrease in accounts receivable from related party. We also used $0.8 million of cash to purchase raw materials inventory in stevia to support future sales, and decrease $0.4 million in accounts payable and other accrued expenses.
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Net cash used in operating activities was $3.9 million in fiscal 2012, which primarily consisted of $0.6 million increase in prepaid expenses and other current assets related to advance payments for stevia raw materials and deposits for apartment units contracted for future employees under our talent search plan sponsored by our company. We also used $0.9 million of cash to purchase raw materials inventory in stevia to support future sales, and advanced $1.6 million to a stevia supplier in a short-term loan to secure a supply of stevia leaves for our production in anticipation of the expected shortage for this product during the fall of calendar 2012.
NET CASH FLOW USED IN INVESTING ACTIVITIES:
Net cash used in investing activities amounted to $1.4 million in fiscal 2013, as compared to $4.0 million in fiscal 2012. In fiscal 2013, we spent $3.3 million in capital expenditures for property and received $1.9 million repayment from the loan receivable in fiscal 2013.
Net cash used in investing activities amounted to $4.0 million in fiscal 2012, including $0.6 million used for the purchase of the remaining 40% equity interest in Qufu Shengwang from our Korean partners, Korea Stevia Company, Limited, $1.9 million invested in purchase of apartment building for resale, and $1.6 million in capital expenditures for property and equipment, offset by $0.2 million in proceeds from repayments of loan receivable during fiscal 2012.
NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES:
Net cash provided by financing activities amounted to $0.8 million in fiscal 2013 primarily due to the short-term loan borrowed. Net cash provided by financing activities amounted to $78,500 in fiscal 2012 primarily due to the management fee owed to Pharmaceutical Corporation.
CASH ALLOCATION BY COUNTRIES
The functional currency of our Chinese subsidiaries is the Chinese RMB. Substantially all of our cash is held in the form of RMB at financial institutions located in the PRC, where there is no equivalent of federal deposit insurance as in the United States. As a result, cash accounts at financial institutions in the PRC are not insured. We have not experienced any losses in such accounts as of April 30, 2012.
In 1996, the Chinese government introduced regulations which relaxed restrictions on the conversion of the RMB; however restrictions still remain, including but not limited to restrictions on foreign invested entities. Foreign invested entities may only buy, sell or remit foreign currencies after providing valid commercial documents at only those banks authorized to conduct foreign exchanges. Furthermore, the conversion of RMB for capital account items, including direct investments and loans, is subject to PRC government approval. Chinese entities are required to establish and maintain separate foreign exchange accounts for capital account items. We cannot be certain Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB, especially with respect to foreign exchange transactions. Accordingly, cash on deposit in banks in the PRC is not readily deployable by us for purposes outside of the PRC. Our cash position by geographic area was as follows:
Off Balance Sheet Arrangements
Under SEC regulations, we are required to disclose our off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement or contractual arrangement to which any entity that is not consolidated with us is a party, under which we have:
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•
Any obligation under certain guarantee contracts,
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Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets,
•
Any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to our stock and classified in stockholder’s equity in our statement of financial position, and
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Any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.
We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with accepted accounting principles generally accepted in the U.S. (“U.S. GAAP”).
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 1 to our financial statements. Although we believe that our estimates, assumptions and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.
Estimates
Significant estimates for the periods reported include the allowance for doubtful accounts which is based on an evaluation of our outstanding accounts receivable including the age of amounts due, the financial condition of our specific customers, knowledge of our industry segment in Asia, and historical bad debt experience. This evaluation methodology has proven to provide a reasonable estimate of bad debt expense in the past and we intend to continue to employ this approach in our analysis of collectability. However, we are aware that given the current global economic crises, including that of the PRC, meaningful time horizons may change. We intend to enhance our focus on the evaluation of our customers' sustainability and adjust our estimates as may be indicted.
We rely on assumptions such as volatility, forfeiture rate, and expected dividend yield when calculating the fair value of our derivative liability related to common stock purchase warrants. We also rely on assumptions and estimates to calculate our reserve for obsolete inventory and the depreciation of property, plant and equipment. We make assumptions of expiration of our products held as inventory based on historical experience and if applicable, regulatory recommendation. We also group property plant and equipment into similar groups of assets and estimate the useful life of each group of assets.
Further, we rely on certain assumptions and calculations underlying our provision for taxes in the PRC. Assumptions and estimates employed in these areas are material to our reported financial conditions and results of operations. These assumptions and estimates have been materially accurate in the past and are not expected to materially change in the future. Actual results could differ from these estimates.
Revenue recognition
We follow the guidance of ASC 605, "Revenue Recognition,??and the Securities and Exchange Commission's Staff Accounting Bulletin (“SAB”) No. 104 and SAB Topic 13 for revenue recognition. In general, we record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured.
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Long-lived assets
We review the carrying value of long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparison of its carrying amount to the undiscounted cash flows that the asset or asset group is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair value.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable to smaller reporting company.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our financial statements are contained in pages through, which appear at the end of this annual report.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On January 8, 2013, we were informed by our independent registered public accounting firm, Sherb & Co., LLP ("Sherb"), that it had combined its practice with RBSM LLP (the "Merger") effective January 1, 2013. As a result of the combination and upon notice by Sherb to the Company, on February 21, 2013 Sherb in effect resigned as the Company's independent registered public accounting firm and RBSM LLP became the Company's independent registered public accounting firm. The engagement of RBSM LLP as the Company's independent registered public accounting firm was ratified and approved by the Board of Directors of the Company on February 21, 2013.
The principal accountant's reports of Sherb on the financial statements of the Company as of and for the two years ended April 30, 2012 and 2011 did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to audit scope or accounting principles.
During the two years ended April 30, 2012 and 2011 and through February 25, 2013, the date of the Current Report on Form 8-K reporting this event, there were no disagreements with Sherb on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which if not resolved to Sherb's satisfaction would have caused it to make reference thereto in connection with its reports on the financial statements for such years. During the two years ended April 30, 2012 and through the date of the Current Report on Form 8-K disclosing the change of auditor, there were no reportable events of the type described in Item 304(a)(1)(v) of Regulation S-K.
During the two years ended April 30, 2012 and through February 25, 2013, the date of the Current Report on Form 8-K reporting this event, the Company did not consult with RBSM LLP with respect to any of (i) the application of accounting principles to a specified transaction, either completed or proposed; (ii) the type of audit opinion that might be rendered on the Company's financial statements; or (iii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K) or an event of the type described in Item 304(a)(1)(v) of Regulation S-K.
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ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective such that the information relating to our company, required to be disclosed in our Securities and Exchange Commission reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
•
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of April 30, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of these controls. Based on this assessment, our management has concluded that as of April 30, 2013, our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in connection with the evaluation of our controls performed during the fourth quarter ended April 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION.
None
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PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Directors and Executive Officers
The following sets forth the names and ages of each of our executive officers and directors and the positions they hold:
Laiwang Zhang. Mr. Zhang has served as our President and Chairman since April 30, 2004 and he has served as Chairman of Qufu Natural Green since January 2003. Mr. Zhang also serves as Chairman of Pharmaceutical Corporation, a company engaged in the sale and distribution of Chinese herb medicines, since April 2000. In 1996, Mr. Zhang founded Shandong Group, a holding company with interests in companies operating in the areas of nutritional products, Chinese herb extracts, packaged products, animal health products, animal medicine and chemical products. Since April 1996, he has been General Manager of this company. From April 1992 to April 1996 Mr. Zhang served as Manager of our subsidiary Shengya Veterinary Medicine. From 1984 to 1992, Mr. Zhang served as President of Shandong Qufu Amylum Plant, a company that manufactures amylum. Mr. Zhang graduated from Shandong Technical University in 1984 with a Masters Degree in Engineering.
Dongdong Lin. Ms. Lin has served as our Chief Executive Officer, Secretary and a member of our Board of Directors since February 2005. Ms. Lin served as Manager of the Technology Information Department of Pharmaceutical Corporation, a company engaged in the sale and distribution of Chinese herb medicines, from January 2003 to December 2004. Ms. Lin joined Shandong Group in 1996, serving as a supervisor from April 1998 to April 2000, and Manager of the Department of Export and Import from April 2000 to December 2002. Ms. Lin holds a Bachelors Degree in Technology English from Haerbin Industry University and a Masters Degree in Economics from the China Academy of Social Science.
Fanjun Wu. Ms. Wu has been our Chief Financial Officer since April 30, 2004. Since 1997, she has been employed by Qufu Natural Green, serving as Director of Finance from 1997 to 1998 and thereafter as Chief Financial Officer. From 1992 to 1996, Ms. Wu was a Director of Finance for our subsidiary Shengya Veterinary Medicine, which was owned by Shandong Group prior to our acquisition in 2004. Ms. Wu graduated from Qufu Industrial College in 1995 with the Bachelor’s Degree in Accounting.
Chengxiang Yan. Mr. Yan has been the General Manager of our subsidiary Qufu Natural Green since 1999 and a member of our Board of Directors since April 30, 2004 following our acquisition of Qufu Natural Green. From 1999 to 2004, Mr. Yan was the Director of the Marketing Department for that company. From 1996 to 1998, Mr. Yan was Director of the Marketing Department for Shandong Group, a holding company with interests in companies operating in the areas of nutritional products, Chinese herb extracts, packaged products, animal health products, animal medicine and chemical products, and from 1993 to 1996, he was Director of the Marketing Section for our subsidiary Shengya Veterinary Medicine owned by Shandong Group before our acquisition in 2004. Mr. Yan graduated from Shandong Agriculture University in 1993 with a Bachelor’s Degree in Farming.
There are no family relationship between any of the executive officers and directors. Each director is elected at our annual meeting of stockholders and holds office until the next annual meeting of stockholders, or until his successor is elected and qualified.
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Director Qualifications
The following is a discussion for each director of the specific experience, qualifications, attributes or skills that led to our conclusion that such person should be serving as a member of our Board of Directors as of the date of this annual report in light of our business and structure. In addition to their individual skills and backgrounds which are focused on our industry as well as financial and managerial experience, we believe that the collective skills and experience of our Board members are well suited to guide us as we continue to grow our company.
Liawang Zhang. Mr. Zhang has over 13 years of professional experience in areas of nutritional products, Chinese herb extracts, packaged products, animal health products, animal medicine and chemical products. He has significant experience in starting companies within our industry segments and has many professional contacts which serve to promote our efforts to expand our business and operations.
Dongdong Lin. Ms. Lin has over 17 years operational experience in our industry.
Chengxiang Yan. Mr. Yan has over 17 years marketing experience in our industry and an advanced degree in farming.
Stockholders Agreement - Election of Directors
On February 5, 2009, as part of the Securities Purchase Agreement we entered into with WILD Flavors, we entered into a stockholders agreement with WILD Flavors and certain of our shareholders who owned approximately 34.12% of our common stock at the time the agreement was entered into. The stockholders agreement provides that so long as WILD Flavors owns at least 4,000,000 shares of our common stock, the parties to that agreement will vote or cause their shares of our common stock to be voted to elect two members of our Board of Directors designated by WILD Flavors and three members designated by our shareholders who are a party to the stockholders agreement. As of the date of this report, WILD Flavors has not designated anyone to be appointed to our Board of Directors.
Compliance with Section 16(a) of the Exchange Act
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us under Rule 16a-3(d) of the Securities Exchange Act of 1934 during the fiscal year ended April 30, 2013 and Forms 5 and amendments thereto furnished to us with respect to the fiscal year ended April 30, 2013, as well as any written representation from a reporting person that no Form 5 is required, we are not aware that any officer, director or 10% or greater shareholder failed to file on a timely basis, as disclosed in the aforementioned Forms, reports required by Section 16(a) of the Securities Exchange Act of 1934 during the fiscal year ended April 30, 2013.
Code of Business Conduct and Ethics
In April 2005, we adopted a Code of Ethics applicable to our Chief Executive Officer, principal financial and accounting officers and persons performing similar functions. A Code of Ethics is a written standard designed to deter wrongdoing and to promote:
-
honest and ethical conduct;
-
full, fair, accurate, timely and understandable disclosure in regulatory filings and public statements;
-
compliance with applicable laws, rules and regulations;
-
the prompt reporting violation of the code; and
-
accountability for adherence to the Code.
A copy of our Code of Ethics is filed as an exhibit to this annual report and we will provide a copy, without charge, to any person desiring a copy of the Code of Ethics, by written request to us at our principal offices, attention: Corporate Secretary.
Committees of the Board of Directors and Independence
Our Board of Directors has not yet established an Audit Committee, a Compensation Committee, a Nominating Committee or any committee performing a similar function. The functions of those committees are being undertaken by the entire board as a whole. Because we do not have any independent directors, our Board of Directors believes that the establishment of committees of the Board would not provide any benefits to our company and could be considered more form than substance.
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We do not have a policy regarding the consideration of any director candidates which may be recommended by our stockholders, including the minimum qualifications for director candidates, nor has our Board of Directors established a process for identifying and evaluating director nominees. We have not adopted a policy regarding the handling of any potential recommendation of director candidates by our stockholders, including the procedures to be followed. Our Board has not considered or adopted any of these policies as we have never received a recommendation from any stockholder for any candidate to serve on our Board of Directors. Given that all our operations are located in the PRC and our lack of directors and officers insurance coverage, we do not anticipate that any of our stockholders will make such a recommendation in the near future. While there have been no nominations of additional directors proposed, in the event such a proposal is made, all members of our Board will participate in the consideration of director nominees.
None of our directors is an “audit committee financial expert” within the meaning of Item 407(d)(5) of Regulation S-K. In general, an “audit committee financial expert” is an individual member of the audit committee or Board of Directors who:
-
understands generally accepted accounting principles and financial statements;
-
is able to assess the general application of such principles in connection with accounting for estimates, accruals and reserves;
-
has experience preparing, auditing, analyzing or evaluating financial statements comparable to the breadth and complexity to our financial statements;
-
understands internal controls over financial reporting; and
-
understands audit committee functions.
Since the reverse acquisition of our company by Sunwin Tech in April 2004 our Board of Directors has been comprised of individuals who are members of our management or otherwise affiliated with our company. While we would prefer that one or more of our directors be an audit committee financial expert, none of our current directors have professional backgrounds in either finance or accounting.
All of our current management is located in the PRC and no member of our Board of Directors has previously served as an officer or a director of a U.S. public company. As a result of both the cultural differences between doing business in the PRC and doing business as a public company in the U.S., as well as the lack of experience of our Board of Directors with laws, rules and regulations which apply to public companies in the U.S., we are seeking to expand our Board of Directors to include qualified individuals who are also residents of the U.S. to serve as independent directors. At such time as we are able to attract additional members to our Board of Directors which include one or more independent directors, we intend to establish an Audit Committee of our Board of Directors. It is our intention that one or more of these independent directors will also qualify as an audit committee financial expert. Our securities are not quoted on a stock exchange that has requirements that a majority of our Board members be independent and we are not currently otherwise subject to any law, rule or regulation requiring that all or any portion of our Board of Directors include “independent” directors, nor are we required to establish or maintain an Audit Committee or other committee of our Board of Directors.
Board oversight in risk management
Risk is inherent with every business, and how well a business manages risk can ultimately determine its success. We face a number of risks, including liquidity risk, operational risk, strategic risk and reputation risk. Our Chief Executive Officer also serves as one of our three directors and we do not have a lead director. In the context of risk oversight, at the present stage of our operations we believe that our selection of one person to serve in both positions provides the Board with additional perspective which combines the operational experience of a member of management with the oversight focus of a member of the Board. The business and operations of our company are managed by our Board as a whole, including oversight of various risks that our company faces. Because our Board is comprised of members of our management, these individuals are responsible for both the day-to-day management of the risks we face as well as the responsibility for the oversight of risk management.
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ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table summarizes all compensation recorded by us in fiscal 2013 for:
-
our principal executive officer or other individual serving in a similar capacity;
-
our two most highly compensated executive officers other than our principal executive officer who made in excess of $100,000 in fiscal 2013 and who were serving as executive officers at April 30, 2013 as that term is defined under Rule 3b-7 of the Securities Exchange Act of 1934; and
-
up to two additional individuals for whom disclosure would have been required but for the fact that the individual was not serving as an executive officer at April 30, 2013.
All compensation was paid in RMB and the amounts below reflect the conversion to U.S. dollar, rounded to the nearest whole dollar, based upon an exchange rate of RMB 6.3 to $1.00. For definitional purposes in this annual report these individuals are sometimes referred to as the “named executive officers.” The value attributable to any option awards is computed in accordance with FASB ASC Topic 718.
Narrative Regarding Executive Compensation
Neither Mr. Zhang nor Ms. Lin are a party to an employment agreement with our company. Their compensation is determined by our Board of Directors, of which Mr. Zhang and Ms. Lin are members. The Board of Directors considers a number of factors in determining the compensation of Mr. Zhang and, Ms. Lin, including the scope of their duties and responsibilities to our company, compensation levels of executives with comparable duties in similar companies such as ours and the time they devote to our business. The Board of Directors did not consult with any experts or other third parties in establishing the compensation for Mr. Zhang or Ms. Lin. The amount of compensation payable to either Mr. Zhang or Ms. Lin can be changed at any time at the discretion of the Board of Directors.
We are required to contribute a portion of our employees’ total salaries to the Chinese government’s social insurance funds, including medical insurance, unemployment insurance and job injuries insurance, and a housing assistance fund, in accordance with relevant regulations. Mr. Zhang and Ms. Lin are covered by these government sponsored programs.
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Outstanding Equity Awards at Fiscal Year End
The following table provides information concerning unexercised options, stock that has not vested and equity incentive plan awards for each named executive officer outstanding as of April 30, 2013:
2005 Equity Compensation Plan
On March 23, 2005, our Board of Directors authorized and adopted our 2005 Equity Compensation Plan. The purpose of the plan is to encourage stock ownership by our officers, directors, key employees and consultants, and to give these persons a greater personal interest in the success of our business and an added incentive to continue to advance and contribute to us. We have currently reserved 5,000,000 of our authorized but unissued shares of common stock for issuance under the plan, and a maximum of 5,000,000 shares may be issued, unless the plan is subsequently amended (subject to adjustment in the event of certain changes in our capitalization), without further action by our Board of Directors and stockholders, as required. Subject to the limitation on the aggregate number of shares issuable under the plan, there is no maximum or minimum number of shares as to which a stock grant or plan option may be granted to any person. Shares used for stock grants and plan options may be authorized and unissued shares or shares reacquired by us, including shares purchased in the open market. Shares covered by plan options which terminate unexercised will again become available for grant as additional options, without decreasing the maximum number of shares issuable under the plan, although such shares may also be used by us for other purposes. As of July 22, 2013, there are no shares available to be issued or options outstanding under the 2005 Equity Compensation Plan.
2006 Equity Compensation Plan
On February 7, 2006, our Board of Directors authorized and adopted our 2006 Equity Compensation Plan. The purpose of the plan is to encourage stock ownership by our officers, directors, key employees and consultants, and to give such persons a greater personal interest in the success of our business and an added incentive to continue to advance and contribute to us. Our Board of Directors administers the 2006 Equity Compensation Plan including, without limitation, the selection of the persons who will be awarded stock grants and granted options, the type of options to be granted, the number of shares subject to each Option and the exercise price. We have currently reserved 6,200,000 of our authorized but unissued shares of common stock for issuance under the 2006 Equity Compensation Plan, and a maximum of 6,200,000 shares may be issued, unless the plan is subsequently amended (subject to adjustment in the event of certain changes in our capitalization). Subject to the limitation on the aggregate number of shares issuable under the plan, there is no maximum or minimum number of shares as to which a stock grant or plan option may be granted to any person. Shares used for stock grants and plan options may be authorized and unissued shares or shares reacquired by us, including shares purchased in the open market. Shares covered by plan options which terminate unexercised will again become available for grant as additional options, without decreasing the maximum number of shares issuable under the 2006 Equity Compensation Plan, although such shares may also be used by us for other purposes. As of July 22, 2013, there are no shares available to be issued or options outstanding under the 2006 Equity Compensation Plan.
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2012 Equity Compensation Plan
On August, 2012, our Board of Directors authorized and adopted our 2012 Equity Compensation Plan. The purpose of the plan is to encourage stock ownership by our officers, directors, key employees and consultants, and to give these persons a greater personal interest in the success of our business and an added incentive to continue to advance and contribute to us. We have currently reserved 10,000,000 of our authorized but unissued shares of common stock for issuance under the plan, and a maximum of 10,000,000 shares may be issued, unless the plan is subsequently amended (subject to adjustment in the event of certain changes in our capitalization), without further action by our Board of Directors and stockholders, as required. Subject to the limitation on the aggregate number of shares issuable under the plan, there is no maximum or minimum number of shares as to which a stock grant or plan option may be granted to any person. Shares used for stock grants and plan options may be authorized and unissued shares or shares reacquired by us, including shares purchased in the open market. Shares covered by plan options which terminate unexercised will again become available for grant as additional options, without decreasing the maximum number of shares issuable under the plan, although such shares may also be used by us for other purposes.
Director Compensation
We do not have a policy establishing compensation arrangements for members of our Board of Directors and no Board member received any compensation for his or her services during fiscal 2013 other than their regular employee compensation.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
At July 30, 2013 we had 173,882,803 shares of common stock issued and outstanding. The following table sets forth information known to us as of July 30, 2013 relating to the beneficial ownership of shares of our common stock by:
-
each person who is known by us to be the beneficial owner of more than five percent of our outstanding common stock;
-
each director;
-
each named executive officer; and
-
all named executive officers and directors as a group.
Unless otherwise indicated, the business address of each person listed is in care of 6 Shengwang Avenue, Qufu, Shandong, China 273100. We believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock shown as being owned by them. Under securities laws, a person is considered to be the beneficial owner of securities owned by them (or certain persons whose ownership is attributed to them) and that can be acquired by them within 60 days from the that date, including upon the exercise of options, warrants or convertible securities. We determine a beneficial owner’s percentage ownership by assuming that options, warrants or convertible securities that are held by them, but not those held by any other person, and which are exercisable within 60 days of the that date, have been exercised or converted.
Amount includes 20,000,000 shares of our common stock owned of record and five year warrants to purchase 26,666,666 shares of common stock with an exercise price of $0.35 per share issued pursuant to a securities purchase agreement with WILD Flavors in February 2009. Michael H. Ponder has voting and dispositive control over securities held by WILD Flavors whose address is 1261 Pacific Avenue, Erlanger, Kentucky 41018.
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Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth securities authorized for issuance under any equity compensation plans approved by our shareholders as well as any equity compensation plans not approved by our shareholders as of April 30, 2013.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Related Party Transactions
From time to time we engage in transactions with related parties. The following is a summary of the related party transactions reflected on our consolidated financial statements at April 30, 2013 and which have occurred through the date of this report:
From time to time we sell high-grade stevia products to Qufu Shengwang Import and Export Corporation, a Chinese entity owned by our Chairman. In fiscal 2013, sales to this related party were $2,503,147. At April 30, 2013, this related party accounts receivable due us from this related party was $1,239,222.
At April 30, 2013, we owed Qufu Shengwang Import and Export Corporation $64,386 and $19,704 to Pharmaceutical Corporation for working capital purpose. We also owed Pharmaceutical Corporation $90,317 for the salaries and benefit expenses for management of fiscal 2013. These fees are for the administrative management of our operations and include compensation payable to certain of our employees. We also paid off management fees to Pharmaceutical Corporation, which is included in general and administrative expense. No more any management compensation will be charged by Pharmaceutical Corporation in fiscal 2014.
Director Independence
None of our directors are considered independent within The NASDAQ Stock Market’s director independence standards pursuant to Marketplace Rule 5605.
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ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
RBSM LLP ("RBSM") served as our independent registered public accounting firm for fiscal 2013, and Sherb & Co., LLP ("Sherb") served as our independent registered public accounting firm for fiscal 2012. Due to the consulting agreement we signed with CDI, the corporate consulting provider was covered by the third party provider costs, which is including the audit fees. CDI paid $94,000 auditing fee and $6,500 other tax fees to RBSM in fiscal 2013 and paid $95,000 auditing fee and $6,500 tax fee to Sherb in fiscal 2012. The following table shows the fees that were billed for the audit and other services provided by such firm for fiscal 2013 and fiscal 2012.
Audit Fees - This category includes the audit of our annual financial statements, review of financial statements included in our quarterly reports on Form 10-Q and services that are normally provided by the independent auditors in connection with engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.
Audit-Related Fees - This category consists of assurance and related services by the independent auditors that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under Audit Fees.” The services for the fees disclosed under this category include consultation regarding our correspondence with the SEC and other accounting consulting.
Tax Fees - This category consists of professional services rendered by our independent auditors for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice.
All Other Fees - This category consists of fees for other miscellaneous items.
Our Board of Directors has adopted a procedure for pre-approval of all fees charged by our independent auditors. Under the procedure, the Board approves the engagement letter with respect to audit, tax and review services. Other fees are subject to pre-approval by the Board, or, in the period between meetings, by a designated member of Board. Any such approval by the designated member is disclosed to the entire Board at the next meeting.
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PART IV
ITEM 15.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
a) The following documents are filed as a part of this report or are incorporated by reference to previous filings, if so indicated:
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- 39 -
+ Management contract or compensatory plan or arrangement.
* filed herewith
** In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise Exhibit 101 to this Quarterly Report on Form 10-Q/A shall be deemed “furnished” and not “filed"
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934,, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Reports of Independent Registered Public Accounting Firm
F - 2 to F - 3
Consolidated Financial Statements:
Consolidated Balance Sheets
F - 4
Consolidated Statements of Operations and Comprehensive Income (Loss)
F - 5
Consolidated Statement of Stockholders’ Equity
F - 6
Consolidated Statements of Cash Flows
F - 7
Notes to Consolidated Financial Statements
F - 8 to F - 21
F - 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Directors
Sunwin Stevia International, Inc.
We have audited the accompanying consolidated balance sheet of Sunwin Stevia International, Inc. and its Subsidiaries as of April 30, 2013, and the related consolidated statements of operations, stockholders’ equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sunwin Stevia International, Inc. and Subsidiaries as of April 30, 2013, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred operating losses and negative cash flows from operations as more fully described in Note 1. These issues raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
F - 2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Directors
Sunwin Stevia International, Inc.
We have audited the accompanying consolidated balance sheet of Sunwin Stevia International, Inc. and its Subsidiaries as of April 30, 2012, and the related consolidated statements of operations, stockholders’ equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company?痵 management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sunwin Stevia International, Inc. and Subsidiaries as of April 30, 2012, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States.
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SUNWIN STEVIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2013 AND 2012
NOTE 1 - ORGANIZATION, NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Sunwin Stevia International, Inc., a Nevada corporation, and its subsidiaries are referred to in this report as “we”, “us”, “our”, or “Sunwin”. We changed our name from Sunwin Neutraceuticals International Inc. to Sunwin Stevia International, Inc. on April 23, 2012 to more accurately reflect our business operations.
We sell stevioside, a natural sweetener, as well as herbs used in traditional Chinese medicines and veterinary products. Substantially all of our operations are located in the People’s Republic of China (the “PRC”). We have built an integrated company with the sourcing and production capabilities designed to meet the needs of our customers.
Our operations are organized into two operating segments related to our Stevioside and Chinese Medicine product lines.
Stevioside Segment
In our Stevioside segment, we produce and sell a variety of purified steviol glycosides with rebaudioside A and stevioside as the principal components, an all natural, low calorie sweetener, and OnlySweet, a stevioside based table top sweetener.
Chinese Medicine Segment
In our Chinese Medicine Segment, we manufacture and sell a variety of traditional Chinese medicine formula extracts which are used in products made for use by both humans and animals.
Qufu Shengwang
In fiscal 2009, Qufu Natural Green acquired a 60% interest in Qufu Shengwang from its shareholder, Shandong Group, for $4,026,851. The purchase price represented 60% of the value of the net tangible assets of Qufu Shengwang as of April 30, 2008. Shandong Group is owned by Laiwang Zhang, our President and Chairman of the Board of Directors. Qufu Shengwang manufactures and sells stevia -based fertilizers and feed additives.
On September 30, 2011, Qufu Shengwang purchased the 40% equity interest in Qufu Shengwang owned by our Korean partner, Korea Stevia Company, Limited, for $626,125 in cash, and as a result of this repurchase transaction we now own 100% equity interest in all of the net assets of our subsidiary Qufu Shengwang. Therefore, the non-controlling interest of $2,109,028 in our balance sheet as of April 30, 2012 has been eliminated to reflect our 100% interest in Qufu Shengwang. On July 1, 2012, Qufu Shengwang entered the Cooperation Agreement with Hegeng (Beijing) Organic Farm Technology Co, Ltd. (“Hegeng”), a Chinese manufacturer and distributor of bio-fertilizers and pesticides, to jointly develop bio-bacterial fertilizers based on the residues from our stevia extraction. Under the Cooperation Agreement, Hegeng provides strain and formula that we apply to the stevia residues to produce bio-bacterial fertilizers in the current facility of Qufu Shengwang. The bio-bacterial fertilizers will be distributed under Qufu Shengwang’s name. No additional investment in the facility would be required. During the third quarter of fiscal 2013, we decided to suspend the agreement with Hegeng due to a lack of sales since the reaction to the products was lower than anticipated in fertilizer market. Currently we plan to use these assets to manufacture a variety of traditional Chinese medicine formula extracts. We expect to start production in fiscal 2014.
Qufu Shengren
In fiscal 2009, Qufu Natural Green acquired Qufu Shengren for $3,097,242. The purchase price was equal to the value of the assets of Qufu Shengren as determined by an independent asset appraisal in accordance with asset appraisal principles in the PRC. Prior to being acquired by us, Qufu Shengren was engaged in the production and distribution of bulk drugs and pharmaceuticals. Subsequent to the acquisition, Qufu Shengren produces and distributes steviosides with a full range of grades from rebaudioside-A 10 to 98.
Sunwin USA
In fiscal 2009, we entered into a distribution agreement with WILD Flavors to assist our 55% owned subsidiary, Sunwin USA, in the marketing and worldwide distribution of our stevioside-based sweetener products and issued WILD Flavors a 45% interest in Sunwin USA. In exchange, WILD Flavors agreed to provide Sunwin USA with sales, marketing, logistics and supply chain management, product development and regulatory services valued at $1,000,000 over a period of two years beginning on February 5, 2009.
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SUNWIN STEVIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2013 AND 2012
On August 8, 2012, we entered into an Exchange Agreement with WILD Flavors pursuant to which we purchased its 45% membership interest in Sunwin USA for an aggregate consideration of approximately $1,625,874, which includes the issuance of 7,666,666 shares of our common stock valued at approximately $1,533,333 and a cash payment of $92,541. The transaction closed on August 20, 2012. On August 22, 2012, we issued 7,666,666 shares of our common stock and paid $92,541 cash to WILD Flavors. The $92,541 cash payment was paid by China Direct Investment, Inc. (“CDI”), our corporate management services provider, and reimbursed by us to CDI through the issuance of our common shares as part of the terms of the consulting agreement with CDI dated May 1, 2012. The net tangible assets of Sunwin USA were reduced from $1,825,804 to $1,625,874 as a result of the application of generally accepted accounting principles (“U.S. GAAP”) which requires elimination of the difference between the purchase price of the 45% membership interest in Sunwin USA and cost basis of the intangible assets recorded by Sunwin USA. Intangible assets include the product development and supply chain for OnlySweet.
Under the terms of the agreement, WILD Flavors assumed certain pre-closing obligations of Sunwin USA totaling approximately $694,000, including trade accounts receivable, loans, health care and monthly expenses of an employee, potential chargebacks, bank fees and broker commissions incurred prior to the closing date. The agreement also contained customary joint indemnification and general releases. As a result of this transaction, we began consolidating the operations of Sunwin USA from the date of acquisition (August 20, 2012).
In addition to the Exchange Agreement, on August 8, 2012 we entered into the following additional agreements with WILD Flavors or its affiliate:
• We entered into an Amendment to Operating Agreement with WILD Flavors pursuant to which we are now the sole manager of Sunwin USA and certain sections of the original agreement dated April 29, 2009 were cancelled as they were no longer relevant following our purchase of the minority interest in Sunwin USA described above;
• We entered into a Termination of Distribution Agreement with WILD Flavors and Sunwin USA pursuant to which the Distribution Agreement dated February 5, 2009 was terminated; and
• We entered into a Distributorship Agreement with WILD Procurement Gmbh, a Swiss corporation (“WILD Procurement”) which is an affiliate of WILD Flavors. Under the terms of this agreement, we appointed WILD Procurement as a non-exclusive world-wide distributor for the resale of our stevia products. There are no minimum purchase quantities under the agreement, and the pricing and terms of each order will be negotiated by the parties at the time each purchase order is placed. The agreement restricts WILD Procurement from purchasing steviosides or other forms of stevia that are included in our products from sources other than our company under certain circumstances. In addition, at such time as we desire to offer new products, we must first offer WILD Procurement the non-exclusive right to distribute those products and the parties will have 60 days to reach mutually agreeable terms. The agreement contains certain representations by us as to the quality of the products we may sell WILD Procurement and the products’ compliance with applicable laws and good manufacturing practices, as well as customary confidentiality and indemnification provisions.
In the event WILD Procurement should fund research on stevia used in food, beverage or dietary supplement applications, and as a result of this research it develops new intellectual property, such intellectual property shall be the sole property of WILD Procurement. In the event we should jointly fund research, any new intellectual property developed from this effort will be jointly owned and each party will have the right to use the developed intellectual property in stevia-based products.
The agreement is for an initial term of 12 months and will automatically renew for successive 12 month terms unless the agreement has been terminated by either party upon 45 days prior written notice. There are no assurances any purchase orders will be placed under the terms of the Distribution Agreement. The agreement may also be terminated by either party upon a material breach by the other party, or upon the filing of a bankruptcy petition, both subject to certain cure periods. In the event the agreement is terminated, WILD Procurement has the right to continue to distribute our products on a non-exclusive basis for 24 months upon terms and conditions to be negotiated by the parties.
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SUNWIN STEVIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2013 AND 2012
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") for interim financial reporting. The accompanying consolidated financial statements for the interim periods presented are audited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the periods presented. Certain financial statement amounts relating to prior periods have been reclassified to conform to the current period presentation.
Our consolidated financial statements include the accounts of Sunwin and all our wholly-owned and majority- owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Our subsidiaries include the following:
- Qufu Natural Green;
- Qufu Shengren;
- Qufu Shengwang;
- Sunwin Tech; and
- Sunwin USA
As reflected in the accompanying consolidated financial statements, the Company had a net loss and net cash used in operations of $4,010,728 and $2,001,836, respectively, for the year ended April 30, 2013 and has cash and cash equivalents and an accumulated deficit of $517,106 and $12,829,706 at April 30, 2013, respectively. These matters raise substantial doubt about the company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’s ability to further implement its business plan, raise additional capital, and generate more revenues. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the allowance for doubtful accounts, the allowance for obsolete inventory, the useful life of property and equipment and intangible assets, assumptions used in assessing impairment of long-term assets and valuation of deferred tax assets, and the value of stock-based compensation. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
We consider all highly liquid investments with maturities of three months or less at the time of purchase to be cash and equivalents. As of April 30, 2013, we held $516,071, of our cash and cash equivalents with commercial banking institutions in the PRC, and $1,035 with banks in the United States. In the PRC, there is no equivalent federal deposit insurance as in the United States, so the amounts held in banks in the PRC are not insured. We have not experienced any losses in such bank accounts through April 30, 2013.
ACCOUNTS RECEIVABLE
Accounts receivable and other receivable are reported at net realizable value. We have established an allowance for doubtful accounts based upon factors pertaining to the credit risk of specific customers, historical trends, and other information. Delinquent accounts are written off when it is determined that the amounts are uncollectible. At April 30, 2013 and 2012, the allowance for doubtful accounts was $1,000,291 and $933,678, respectively.
INVENTORIES
Inventories, consisting of raw materials, work in process, and finished goods related to our products, are stated at the lower of cost or market (estimated net realizable value) utilizing the weighted average method. An allowance is established when management determines that certain inventories may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, the Company will record reserves for the difference between the cost and the market value. These reserves are recorded based on estimates. At April 30, 2013 and 2012, the Company recorded a reserve for obsolete or slow-moving inventories of $954,108 and $708,897, respectively.
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SUNWIN STEVIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2013 AND 2012
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are provided using the straight line method over the estimated economic lives of the assets, which range from five to twenty years. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. In accordance with Accounting Standards Codification (“ASC”), 360-10-35-17 of the Financial Accounting Standards Board (FASB), we examine the possibility of decreases in the value of property and equipment when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
LONG-LIVED ASSETS
In accordance with ASC Topic 360, we review and evaluate our long-lived assets, including property and equipment, intangible assets, and land use rights, for impairment or when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. An impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the assets, including goodwill, if any. An impairment loss is measured and recorded based on discounted estimated future cash flows. In estimating future cash flows, assets are grouped at the lowest level for which there is identifiable cash flows that are largely independent of future cash flows from other asset groups. Our estimates of future cash flows are based on numerous assumptions and it is possible that actual future cash flows will be significantly different than the estimates. Based on our evaluation, we recorded an impairment loss of $209,500 and $673,931 related to impairment of the carrying amounts certain machinery and equipment deemed unusable as of April 30, 2013 and 2012, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
We follow the FASB ASC Section 825-10-50-10 for disclosures regarding the fair value of financial instruments and have adopted ASC Section 820-10-35-37 to measure the fair value of our financial instruments. ASC Section 820-10-35-37 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. The adoption of ASC Section 820-10-35-37 did not have an impact on our financial position or operating results, but did expand certain disclosures.
ASC Section 820-10-35-37 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC Section 820-10-35-37 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
Level 1:
Observable inputs such as quoted market prices in active markets for identical assets or liabilities
Level 2:
Observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3:
Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.
The carrying amounts of our financial assets and liabilities, such as cash, accounts receivable, loans receivable, prepayments and other current assets, accounts payable and accrued expenses, and taxes payable, approximate their fair values because of the short maturity of these instruments.
TAXES PAYABLE
We are required to charge for and to collect value added taxes (VAT) on our sales. In addition, we pay value added taxes on our primary purchases, recorded as a receivable. These amounts are presented as net amounts for financial statement purposes. Taxes payable at April 30, 2013 and 2012 amounted to $0 and $73,327, respectively, consisting primarily of VAT taxes payable.
INCOME TAXES
We file federal and state income tax returns in the United States for our corporate operations, and file separate foreign tax returns for our Chinese subsidiaries. We account for income taxes under the provisions of ASC Section 740-10-30, which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns.
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SUNWIN STEVIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2013 AND 2012
We apply the provisions of ASC 740-10-50, “Accounting for Uncertainty in Income Taxes”, which provides clarification related to the process associated with accounting for uncertain tax positions recognized in our consolidated financial statements. Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. As of April 30, 2013, the Company had no uncertain tax positions, and will continue to evaluate for uncertain positions in the future.
BASIC AND DILUTED LOSS PER SHARE
Pursuant to ASC Section 260-10-45, basic income (loss) per common share is computed by dividing income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding for the periods presented. Diluted income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the income of us, subject to anti-dilution limitations.
At April 30, 2013 and 2012, the effect of the 26,666,666 outstanding common stock purchase warrants was anti-dilutive as we reported a net loss applicable to our common shareholders for both periods. Additionally, outstanding purchase warrants which could result in the issuance of 26,666,666 additional common shares were anti-dilutive as the exercise price of the warrants exceeded the average market price. As a result, basic loss per share was equal to diluted loss per share for all periods presented.
FOREIGN CURRENCY TRANSLATION
Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. Transactions and balances in other currencies are converted into U.S. dollars in accordance with ASC Section 830-20-35 and are included in determining net income or loss.
The reporting currency of the Company is the U.S. dollar. The functional currency of the parent company is the U.S. dollar and the functional currency of the Company’s operating subsidiaries is the Chinese Renminbi (“RMB”). In accordance with ASC 830-20-35, the consolidated financial statements were translated into United States dollars using balance sheet date rates of exchange for assets and liabilities, and average rates of exchange for the period for the income statements and cash flows. Equity accounts were stated at their historical rate. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in other comprehensive income or loss.
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SUNWIN STEVIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2013 AND 2012
RMB is not a fully convertible currency. All foreign exchange transactions involving RMB must take place either through the People’s Bank of China (the “PBOC”) or other institutions authorized to buy and sell foreign exchange. The exchange rate adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC, which are determined largely by supply and demand. Translation of amounts from RMB into United States dollars (“$") was made at the following exchange rates for the respective periods:
CONCENTRATIONS OF CREDIT RISK
Substantially all of our operations are carried out in the PRC. Accordingly, our business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC’s economy. Our operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America. Our results 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.
Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and trade accounts receivable. We place our cash with high credit quality financial institutions in the United States and China. At April 30, 2013, we had $516,071 on deposit in the PRC, which is not insured. We have not experienced any losses in such accounts through April 30, 2013.
Almost all of our sales are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, we believe that the concentration of credit risk with respect to trade accounts receivable is limited due to generally short payment terms. We also perform ongoing credit evaluations of our customers to help further reduce potential credit risk.
STOCK-BASED COMPENSATION
Stock-based compensation is accounted for based on the requirements of the Share-Based Payment topic of ASC Topic 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The Financial Accounting Standards Board (“FASB”) ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company records compensation expense based on the fair value of the award at the reporting date. The awards to consultants and other third-parties are then revalued, or the total compensation is recalculated, based on the then current fair value, at each subsequent reporting date.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred and are included in general and administrative expenses in the accompanying statements of operations. Research and development costs are incurred on a project specific basis. Research and development cost were $0.1 million and $0.2 million for fiscal 2013 and 2012, respectively, and are included in general and administrative expenses on the accompanying statements of operations.
REVENUE RECOGNITION
In general, we record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured.
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SUNWIN STEVIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2013 AND 2012
SHIPPING COSTS
Shipping costs are included in selling expenses and totaled $0.2 million and $0.1 million for fiscal 2013 and fiscal 2012, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2012, FASB issued Accounting Standards Update ("ASU") No. 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. ASU No. 2012-02 simplifies the guidance for testing the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill. ASU No. 2012-02 allows an entity the option of first performing a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of ASU No. 2012-02 will not have a material impact on our consolidated financial statements.
In September 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-08, Intangibles - Goodwill and Other, which simplifies how an entity is required to test goodwill for impairment. This ASU would allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under the ASU, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The ASU includes a number of factors to consider in conducting the qualitative assessment. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of ASU 2011-08 did not have an impact on our consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. Under the amendments, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The presentation option under current GAAP to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity has been eliminated. The amendments in this Update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted because compliance with amendments is already permitted. We already comply with this presentation.
A variety of proposed or otherwise potential accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and preliminary nature of those proposed standards, we have not determined whether implementation of such proposed standards would be material to our consolidated financial statements.
GOING CONCERN
Our consolidated financial statements have been prepared assuming we will continue as a going concern. The report of our independent registered accounting firm on our consolidated financial statements for the year ended April 30, 2013 contained a qualification as to our ability to continue as a going concern. For the year ended April 30, 2013, the Company has incurred a net loss of approximately $4.0 million. The Company also has decreased of $3.7 million in working capital and its cash and cash equivalent and its revenues are not currently sufficient and cannot be projected to cover operating expenses in the coming year. These factors raise substantial doubt as to the ability of the Company to continue as a going concern. Management's plans include attempting to raise funds through debt and equity financings, restructure on-going operations to eliminate inefficiencies to raise cash balance and meet operating needs. Management intends to make every effort to identify and develop sources of funds. Our financial statements do not include any adjustments that might result from the outcome of these uncertainties.
NOTE 2 -INVESTMENT IN REAL ESTATE HELD FOR RESALE
On August 25, 2011, Qufu Natural Green entered into an agreement with Qufu Jinxuan Real Estate Development Co., Ltd., an unaffiliated third party, to purchase thirty apartment units in China for investment. The total area of the apartment complex units is 41,979 square feet, with 6,458 square feet of storage area for a total purchase price of RMB15,120,000 (approximately $2,390,325) (the “Purchase Price”). Under the terms of the agreement, the apartment units were expected to be delivered by December 30, 2012. As of April 30, 2013, we did not receive the deed and other legal documents for the apartment; the apartment units are expected to be delivered by December 31, 2013. We prepaid 30% of the Purchase Price, approximately $717,097, upon signing the agreement on August 25, 2011. An additional 50% of the Purchase Price, or approximately $1,195,162, was paid on December 8, 2011, with the balance of approximately $478,066 due upon completion of the ownership documents and transfer of the apartment units to us. As of April 30, 2013 and 2012, we classified investment in real estate held for resale as a long-term asset since we do not plan on selling the apartment units within one year. As of April 30, 2013 and 2012, investment in real estate held for resale amounted to $1,947,042 and $1,919,665, respectively.
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SUNWIN STEVIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2013 AND 2012
NOTE 3 - INVENTORIES
At April 30, 2013 and 2012, inventories consisted of the following:
NOTE 4 - PROPERTY AND EQUIPMENT
At April 30, 2013 and 2012, property and equipment consisted of the following:
For fiscal 2013 and 2012, depreciation expense totaled $1,587,892 and $1,334,960, respectively. During the third quarter of fiscal 2013, the Company performed an impairment analysis of long-lived assets and decided to impair certain Qufu Shengwang’s property and equipment with a net value of $209,500. During the second quarter of fiscal 2012, we disposed of obsolete manufacturing equipment and incurred a loss on disposition of $673,931. Accordingly, for fiscal 2013 and 2012, the Company recorded a loss on impairment of property and equipment of $209,500 and $673,931, respectively. Depreciation is not taken during the period of construction or equipment installation. Upon completion of the installation of manufacturing equipment or any construction in progress, construction in progress balances will be classified to their respective property and equipment category.
NOTE 5 - INTANGIBLE ASSETS
On August 8, 2012 the Company entered into an Exchange Agreement with WILD Flavors pursuant to which it purchased its 45% membership interest in Sunwin USA for an aggregate consideration of approximately $1,625,874, which includes the issuance of 7,666,666 shares of our common stock valued at approximately $1,533,333 and a cash payment of $92,541. In connection with the Exchange Agreement, WILD Flavor granted, transferred and assigned to Sunwin USA all of its rights, title and interest, and the trade name Only Sweet, including any trademarks, trademark registrations and applications, service marks, service mark registrations and applications, copyrights, copyright registrations and applications, trade dress, trade names (whether or not registered or by whatever name or designation), owned, applied for, or registered in the name of, the WILD Flavor (the "Only Sweet Name Rights"). Additionally, we entered into a new Distributorship Agreement with WILD Procurement which is an affiliate of WILD Flavors, as discussed in Note 1. The transaction closed on August 20, 2012. The tangible assets of Sunwin USA were reduced from $1,825,804 to $1,625,874 as a result of the application of U.S. GAAP which requires elimination of the difference between the purchase price of the 45% membership interest in Sunwin USA and cost basis of the intangible assets recorded by Sunwin USA. Intangible assets have a useful life of five years and consist of the cost of Only Sweet Name Rights and related technologies as well as the fair value of the Wild Flavors distribution Agreement. For fiscal year 2013 and 2012, amortization expense amounted to $216,784 and $0, respectively.
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SUNWIN STEVIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2013 AND 2012
Intangible assets consisted of the following:
NOTE 6- LAND USE RIGHT
Land use right consisted of the following:
In conjunction with our acquisition of Qufu Shengwang, we acquired land use rights for properties located in the PRC until March 14, 2054. For fiscal 2013 and 2012, amortization expense related to land use rights amounted to $42,084 and $73,930, respectively.
NOTE 7 - LOAN RECEIVABLE
In December 2011, we entered into a short-term loan agreement with Shandong Anda Biotech Co., Ltd. (“Shandong Anda"), a third party. According to the terms of the agreement, we agreed to lend Shandong Anda approximately $3,181,016 (RMB 20,000,000). The loan was due on December 18, 2012 and bears no interest. Shandong Anda is a major supplier of stevia leaves to the Company. During the fourth quarter of fiscal 2012, Shandong Anda returned $1.5 million, and during the second quarter of fiscal 2013, an additional $0.8 million was repaid, and the balance of the loan of $0.8 million was repaid during the third quarter of fiscal 2013. As of April 30, 2013, the balance of the loan was $0.
On December 22, 2010, we loaned $500,000 to CDI China, Inc., a subsidiary of CD International Enterprises, Inc., and an affiliate of CDI our corporate management services provider. The loan bears interest at the rate of 3% per annum and the principal balance and accrued interest were due March 30, 2011. Part of the principal of $305,459 was repaid to us by CDI China, Inc. during fiscal 2012. At April 30, 2013, the balance of this loan was $43,614, which is comprised of $22,821 in principal and $20,793 in accrued interest. Both the principal and accrued interest are now due on demand.
NOTE 8 - RELATED PARTY TRANSACTIONS
Accounts receivable - related party and revenue - related party
For fiscal 2013 and 2012, we recorded revenue - related of $2,503,147 and $1,451,056, respectively related to sales of products to Qufu Shengwang Import and Export Corporation, a Chinese entity owned by our Chairman, Mr. Laiwang Zhang. At April 30, 2013 and 2012, we had $1,239,222 and $550,740 in accounts receivable - related party, respectively, from Qufu Shengwang Import and Export Corporation.
Due to related parties
At April 30, 2013, we owed Qufu Shengwang Import and Export Corporation $64,386 and $19,716 to Pharmaceutical Corporation for working capital purpose. We also owed Pharmaceutical Corporation $90,302 for salaries and benefit expenses for management during fiscal 2013. These fees are for the administrative management of our operations and include compensation payable to certain of our employees. At April 30, 2012, we owed Pharmaceutical Corporation $79,351 for management fee compensation.
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SUNWIN STEVIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2013 AND 2012
NOTE 9 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets at April 30, 2013 and 2012 totaled $1,189,416 and $633,522, respectively. As of April 30, 2013, prepaid expenses and other current assets includes $718,437 prepayments to suppliers for merchandise that had not been shipped to us and services that had not been provided to us; $159,149 for employee advances; $95,413 prepaid VAT and a $216,417 deposit for renewing land use rights. During the third quarter of fiscal 2013, Qufu Shengwang paid Qufu Public Auction Center $591,495 as deposit for renewing the land use right. The deposit is required for the Center to do the appraisal of the land use right. In the fourth quarter of fiscal 2013, we received a repayment of this deposit of $375,078.
As of April 30, 2012, prepaid expenses and other current assets includes $517,256 prepayments to suppliers for merchandise that had not been shipped to us and services that had not been provided to us, and $116,266 for employee advances and interest receivable.
NOTE 10 - LOAN PAYABLE
In March 18, 2013 we borrowed short-term loan of $804,829 (RMB5,000,000) from China Construction Bank. According to the terms of the agreement with China Construction Bank, the loan bears interest at the rate of 7.8% per annum and the principal balance with accrued interest are due on March 17, 2014.
NOTE 11 - INCOME TAXES
We account for income taxes under ASC 740, “Expenses - Income Taxes”. ASC 740 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. ASC 740 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets.
Our subsidiaries in the PRC are governed by the Income Tax Law of the People’s Republic of China concerning Foreign Investment Enterprises and Foreign Enterprises and local income tax laws (the PRC Income Tax Law”). Pursuant to the PRC Income Tax Law, our PRC subsidiaries are subject to tax at a maximum statutory rate of 25% (inclusive of state and local income taxes).
The components of loss before income tax consisted of the following:
The table below summarizes the reconciliation of our income tax provision (benefit) computed at the statutory U.S. Federal rate and the actual tax provision:
We have a net operating loss (“NOL”) carry forward for U.S. income tax purposes aggregating approximately $7,100,000 at April 30, 2013 expiring through the year 2033, subject to the Internal Revenue Code Section 382, which places a limitation on the amount of taxable income that can be offset by net operating losses after a change in ownership. In addition, to U.S. NOL’s, we have a PRC NOL for our Chinese operations as of April 30, 2013 of approximately $12,800,000 that expires in 2018.
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SUNWIN STEVIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2013 AND 2012
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. Included in the deferred tax asset is the aforementioned NOL and the tax benefit associated with the issuance of stock-based compensation. The realization of the deferred tax assets is dependent on future taxable income, in addition to the exercise of stock options; we are not able to predict if such future taxable income will be more likely than not sufficient to utilize the benefit. As such, we do not believe the benefit is more likely than not to be realized and we recognize a full valuation allowance for those deferred tax assets. Our deferred tax assets as of April 30, 2013 and 2012 are as follows:
NOTE 12 - STOCKHOLDERS' EQUITY
Common stock
At April 30, 2013, we are authorized to issue 200,000,000 shares of common stock. We had 173,882,803 and 157,356,137 shares outstanding at April 30, 2013 and 2012, respectively.
On September 14, 2012 we entered into a consulting agreement with Dore Scott Perler to perform consulting services from August 1, 2012 to July 31, 2013. According to the terms of the agreement, we agreed to pay Mr. Perler a consulting fee of 90,000 shares of our common stock each quarter. On September 27, 2012, we issued 180,000 shares of our common stock at $0.135 per share to Mr. Perler for July 2012 to December 2012 consulting services. On January 8, 2013, we issued 180,000 shares of our common stock at $0.24 per share to Mr. Perler for January 2013 to June 2013 consulting services. In connection with this share issuance, $67,500 in stock-based consulting expense was recognized during the year ended April 30, 2013.
On August 24, 2012, our board of directors authorized our 2012 Equity Compensation Plan (the “2012 Plan”) covering 10,000,000 shares of common stock. On August 28, 2012, we filed a registration statement on Form S-8 with the SEC covering the 2012 Plan to permit us to compensate and offer to our employees, officers, directors and consultants whose past, present and/or potential contributions to our company have been or will be important to our success, an opportunity to acquire a proprietary interest in our company. On September 27, 2012, we issued 6,000,000 shares of our common stock at $0.135 per share to three employees in China as bonus. In connection with this share issuance, $810,000 in stock-based compensation expense was recognized during the year ended April 30, 2013.
On August 8, 2012 we entered into an Exchange Agreement with WILD Flavors pursuant to which we purchased its 45% membership interest in Sunwin USA for an aggregate consideration of approximately $1,625,874, which includes the issuance of 7,666,666 shares of our common stock valued at approximately $1,533,333 and a cash payment of $92,541. The transaction closed on August 20, 2012. On August 22, 2012, we issued 7,666,666 shares of our common stock and paid $92,541 cash to WILD Flavors. The $92,541 cash payment was paid by CDI and reimbursed by us through shares as part of the terms in the terms in the consulting agreement with CDI dated May 1, 2012.
On May 1, 2012 we entered into a consulting agreement with CDI to perform consulting services for fiscal 2013 and agreed to a consulting fee of 2,500,000 shares of our common stock which includes the reimbursement of $92,541 paid by CDI to WILD Flavors on our behalf in connection with our purchase of the minority interest of Sunwin USA as described in Note 1. On August 21, 2012, we issued 2,000,000 shares to CDI with a total value of $520,000. On January 8, 2013, we issued 500,000 shares to CDI with a total value of $120,000.
On May 9, 2011, we issued Yefu Sun 333,328 shares of our common stock for legal services pursuant to an agreement we entered into with Mr. Sun in December 2009 and amended in March 2010. The shares were part of our agreement to issue Mr. Sun a total of 1,000,000 shares as compensation for services over a 24 month period because there was no performance commitment at the date of the agreement. We recognized compensation expense based on the fair value of our common stock at each interim reporting date. In connection with this share issuance, $103,332 in stock-based consulting expense was recognized during the year ended April 30, 2012.
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SUNWIN STEVIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2013 AND 2012
On April 22, 2011 we entered into a consulting agreement with a subsidiary of CD International Enterprises, Inc., to perform consulting services for fiscal 2012 and agreed to a consulting fee of 1,500,000 shares of our common stock. On May 6, 2011 we issued 1,000,000 shares of our common stock valued at $343,000 to CDI. On November 21, 2011 we issued another 500,000 shares of our common stock valued at $181,800 to CDI as consulting expenses pursuant to this agreement. During the year ended April 30, 2012, we recognized a total of $524,800 in stock-based consulting expenses. We recognized $183,127 in stock-based consulting expenses during the year ended April 30, 2011. These amounts are reflected in general and administrative expenses in the accompanying consolidated statements of operations.
Common stock purchase warrants
In February 2009, we issued 20,000,000 shares of our common stock at a price of $0.15 per share together with five year warrants to purchase 26,666,666 shares of common stock with an exercise price of $0.35 per share in connection with a securities purchase agreement in which subsequently WILD Flavors owned approximately 15.7% of the issued and outstanding of our common stock. As part of the securities purchase agreement, we also entered into a stockholders agreement with WILD Flavors and certain of our stockholders, including Laiwang Zhang, Dongdong Lin, Xingyuan Li, Junzhen Zhang, Xiangsheng Kong, Weidong Chai, and Fanjun Wu who then owned approximately 34.12% of our common stock. The stockholders agreement provides that so long as WILD Flavors owns at least 4,000,000 shares of our common stock, the parties will vote or cause their shares of our common stock to be voted to elect two members of our Board of Directors designated by WILD Flavors and three members designated by our stockholders who are a party to the stockholders agreement.
During fiscal 2013 and 2012, we did not issue any shares of our common stock for the exercise of purchase warrants.
Warrant activities for the years ended April 30, 2013 and 2012 were summarized as follows:
The following information applies to all warrants outstanding at April 30, 2013:
NOTE 13 - SEGMENT INFORMATION
The following information is presented in accordance with ASC Topic 280, “Segment Reporting”, in fiscal 2013 and 2012, we operated in two reportable business segments - (1) natural sweetener (stevioside) and (2) traditional Chinese medicines. Our reportable segments are strategic business units that offer different products and are managed separately based on the fundamental differences in their operations.
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SUNWIN STEVIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2013 AND 2012
Condensed financial information with respect to these reportable business segments for fiscal 2013 and 2012 is as follows:
NOTE 14 - COMMITMENTS AND CONTINGENCIES
We lease office and manufacturing space under leases in Shandong, China that expire through 2014.
All facilities related to traditional Chinese medicine segment are leased from Pharmaceutical Corporation, a related party. The term of this lease will expire in October, 2012 and provides for annual lease payments of $23,400. We have paid the rent for this facility in fiscal 2012 which was included in the management fee we paid to Pharmaceutical Corporation during fiscal 2012. After October 1, 2012 Pharmaceutical Corporation agreed to waive the lease payments.
We sub-leased a 408 square-foot furnished office from CD International Enterprises, Inc. (“CDI”) located at 431 Fairway Drive Suite 251, Deerfield Beach, FL 33441 which we use as our U.S. corporate administrative offices. The term of the lease began on June 1, 2011 and terminated on May 31, 2012 and total rent for this office was $10,000.
Rent expense included in general and administrative expenses for fiscal 2013 and fiscal 2012 totaled to $0 and $32,565, respectively.
On August 25, 2011, Qufu Natural Green entered into an agreement with Qufu Jinxuan Real Estate Development Co., Ltd., an unaffiliated third party, to purchase thirty apartment units in China for investment. The total area of the apartment complex units is 41,979 square feet, with 6,458 square feet of storage area for a total purchase price of RMB15,120,000 (approximately $2,390,325) (the “Purchase Price”). Under the terms of the agreement, the apartment units were expected to be delivered by December 30, 2012. As of April 30, 2013, we did not receive the deed and other legal documents for the apartment. ; the apartment units are expected to be delivered by December 31, 2013. We prepaid 30% of the Purchase Price, approximately $717,097, upon signing the agreement on August 25, 2011. An additional 50% of the Purchase Price, or approximately $1,195,162, was paid on December 8, 2011, with the balance, or approximately $478,066 due upon completion of the ownership documents and transfer of the apartment units to us. As April 30, 2013 and 2012, we classified investment in real estate held for resale as a long-term asset since we do not plan on selling the apartment units within one year. As of April 30, 2013 and 2012, investment in real estate held for resale amounted to $1,947,042 and $1,919,665, respectively.
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SUNWIN STEVIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2013 AND 2012
NOTE 15 - CONCENTRATIONS AND CREDIT RISK
(i) Customer Concentrations
The top customer concentrations, which the sales income is over 5% of total sales, for the fiscal year ended April 30, 2013 and 2012 are as follows:
(ii) Vendor Concentrations
The top vendor concentrations, which the purchase from those vendor is over 5% of total cost of goods sold, for the fiscal year ended April 30, 2013 and 2012 are as follows:
(iii) Credit Risk
Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and trade accounts receivable. We place our cash with high credit quality financial institutions in the United States and the PRC. At April 30, 2013, we had $516,071 on deposit in the PRC, where there is no equivalent of federal deposit insurance as in the United States. As a result, cash held in PRC financial institutions is not insured. We have not experienced any losses in such accounts through April 30, 2013.
Almost all of our sales are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, we believe that the concentration of credit risk with respect to trade accounts receivable is limited due to generally short payment terms. We also perform ongoing credit evaluations of our customers to help further reduce potential credit risk.
NOTE 16 - SUBSEQUENT EVENTS
Till July 30, 2013, no material agreements has been signed and no shares of our common stock has been newly issued.
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