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SUWN > SEC Filings for SUWN > Form 10-Q on 25-Mar-2013All Recent SEC Filings

Show all filings for SUNWIN STEVIA INTERNATIONAL, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SUNWIN STEVIA INTERNATIONAL, INC.


25-Mar-2013

Quarterly Report


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

The following discussion should be read in conjunction with the information contained in the preceding unaudited consolidated financial statements and footnotes and our Annual Report on Form 10-K for fiscal year ended April 30, 2012.

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 production and distribution capabilities designed to meet the needs of our customers.

During fiscal 2013 and 2012 our operations were organized in two operating segments related to our product lines:

- Stevioside, and
- Chinese Medicine.

Fiscal 2013 Developments

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. No additional investment in the facility would be required. During the third quarter of fiscal 2013, we decided to suspend the cooperation agreement with our cooperation partner Hegeng because the revenues were minimal and the reaction to the products was lower than anticipated in the fertilizer market. We plan to use our assets to produce manufacture a variety of traditional Chinese medicine formula extracts. We expect to start production in fiscal 2014.

On August 20, 2012, we entered into a worldwide stevia distribution agreement with WILD Procurement which is an affiliate of WILD Flavors. Under the terms of the agreement, WILD Procurement was granted the non-exclusive worldwide right as a distributor to market and resell all stevia products manufactured by Sunwin and use of all trademarks. During the three and nine months ended January 31, 2013, the Company sold to Wild Flavors approximately 5 metric tons (MT) of Stevia product resulting in revenues of approximately $0.4 million.

In December 2012, Qufu Shengren completed the construction of a new stevia extraction line in the same location of its current stevioside manufacturing facility. This line facility will apply a new stevia extraction technology to produce both high and low grade stevioside. The completion of this high tech expansion of its production facilities brings us total bulk stevia production capacity to 1,300 metric tons including 500 metric tons of steviosin which is a stevioside extract used in the pharmaceutical industry. The total cost of this new line was approximately $4.7 million which had been funded from generated revenues and our working capital. We have begun trial production of our new line and anticipate our additional production capabilities will be fully operational in the third quarter of calendar 2013.

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.

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.

- 18 -

Chinese Medicine Segment

In our Chinese Medicine segment, we manufacture and sell approximately 354 different extracts, including traditional Chinese medicine extracts and purified extracts, which may include active parts and monomer compounds such as soy isofavone.

While this segment is currently operating at full capacity, we do not expect significant growth potential from this segment in the near future. Accordingly, we continue to evaluate alternatives to the potential disposition of the Chinese Medicine segment with the view of further streamlining our product offerings and focusing our business on producing and selling high-quality stevia products. The exit strategy we are contemplating for the Chinese Medicine segment is also been influenced by our concerns regarding the continued stagnation in revenue growth and profitability of this segment in the near future. The competition in Chinese Medicine market has strengthened over the past year. 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.

OUR PERFORMANCE

Three months ended January 31, 2013 compared to same period in 2012

Our total revenues in the third quarter of fiscal 2013 decreased by 33.1%, from the same period in fiscal 2012, while our gross margin increased to 20.2% from 16.9% over the same period in fiscal 2012. Stevioside revenues, which comprised 43.6% and 72.4% of our revenues for the third quarter of fiscal 2013 and fiscal 2012, respectively, decreased by 59.7%, while revenues in our Chinese Medicine segment increased by 36.9%. Within our Stevioside segment, revenues from sales to third parties decreased by 52.1% in the third quarter of fiscal 2013 from the same period in fiscal 2012, while revenues from sales to related parties decreased by 75.4% from the comparable period in fiscal 2012. We did not have any sales to related parties in our Chinese medicine segment in either period.

Our operating expenses in the third quarter of fiscal 2013 decreased by 32.0% from the comparable period in 2012. Our net loss for the third quarter of fiscal 2013 was $0.8 million, as compared to $1.3 million for the same period in fiscal 2012.

The overall decrease in Stevioside revenues for the third quarter of fiscal 2013 of 60% was primarily due to sales return of $0.3 million. Furthermore, the strong price competition and higher cost for lower grade ingredients also caused the revenue decrease in our Stevioside segment. In addition, the demand growth for our intermediate and higher grade stevia products continue to be 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, and in the EU, where full approval of stevia did not take place until the fourth quarter of calendar 2011. We produced 34.3 metric tons of Stevioside for the third quarter of fiscal 2013 as compared to 73.8 metric tons in the same period of fiscal 2012.

During the third quarter of fiscal 2013, the higher sales revenue in our Chinese medicine segment was primarily due to less competition in the market because some veterinary medicine companies were withdraw from the market due to the strengthening of government supervision for cultivation business.

Nine months ended January 31, 2013 compared to same period in 2012

Our total revenues in the first nine months of fiscal 2013 decreased by 18.1%, compared with the same period in fiscal 2012, while our gross margin increased to 19.0% from 16.6% over the same period in fiscal 2012. Our operating expenses during the first nine months of fiscal 2013 decreased by 1.7% compared with the same period in fiscal 2012. Our net loss for the first nine months of fiscal 2013 was $3.1 million, compared to a loss of $3.0 million for the same period in fiscal 2012. Stevioside revenues, which comprised 67.7% and 74.1 % of our revenues for the first nine months of fiscal 2013 and fiscal 2012, respectively, decreased by $1.7 million, or 25.2%, while Chinese Medicine revenues increased by $0.1 million, or 2.2%.

Our operating performance in the first nine months of fiscal 2013 was driven by the sales return of $0.3 million for lower grades stevia products in our Stevioside segment. In addition, the demand growth for our intermediate and higher grade stevia products was slower than anticipated in international markets, especially the North America market, was behind expectations as the demand is relatively smaller than the supply. We also continue to experience significant downward pressure on pricing for some of our products as some of our smaller competitors have been required to liquidate their inventory while under financial distress. We produced 168.0 metric tons of Stevioside for the first nine months of fiscal 2013 as compared to 266.3 metric tons during the same period in fiscal 2012

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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 in collaboration with WILD Flavors and Domino Sugar 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 has remained low for the first nine months of 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. During the first nine months of fiscal 2013, the increase in sales revenues in our Chinese medicine was due primarily to less competition in the market because some veterinary medicine companies were withdraw from the market due to the strengthening of government supervision for cultivation business.

                             RESULTS OF OPERATIONS

The following table summarizes our results from operations for the three month
periods ended January 31, 2013 and 2012:

                                                  January 31, 2013
                                                                            Corporate
                       Chinese Medicine               Stevioside            and other             Consolidated

Total revenues   $ 1,111,530        100.0 %   $   858,961       100.0 %   $         -        1,970,491        100.0 %
Cost of
revenues             957,389         86.1 %       615,372        71.6 %             -        1,572,761         79.8 %
Gross profit         154,141         13.9 %       243,589        28.4 %             -          397,730         20.2 %

Total
operating
expenses              16,631          1.5 %     1,030,099       119.9 %       161,718        1,208,448         61.3 %
Other income
(expenses)               115          0.0 %      (19,682)        -2.3 %             -          (19,567 )       -1.0 %

Income (loss)
before taxes
and
noncontrolling
interest         $   137,625         12.4 %   $  (806,192 )     -93.9 %   $  (161,718 )    $  (830,285 )      -42.1 %



                                                 January 31, 2012
                                                                       Corporate
                   Chinese Medicine              Stevioside            and other             Consolidated
Total revenues   $  812,056      100.0 %   $ 2,133,478      100.0 %   $          -     $  2,945,534        100.0 %
Cost of
revenues            730,835       90.0 %     1,716,831       80.5 %              -        2,447,666         83.1 %
Gross profit         81,221       10.0 %       416,647       19.5 %              -          497,868         16.9 %

Total
operating
expenses            691,143       85.1 %       872,060       40.9 %        214,683        1,777,886         60.4 %
Other income          7,535        0.9 %         8,834        0.4 %          2,612           18,981          0.6 %

Income (loss)
before taxes
and
noncontrolling
interest         $ (602,387 )    -74.2 %   $  (446,579 )    -20.9 %   $   (212,071 )   $ (1,261,037 )      -42.8 %

- 20 -

The following table summarizes our results from operations for the nine month periods ended January 31, 2013 and 2012:

                                                  January 31, 2013
                                                                          Corporate
                      Chinese Medicine              Stevioside            and other             Consolidated

Total revenues   $ 2,475,830      100.0 %   $  5,191,972      100.0 %   $          -     $  7,667,802        100.0 %
Cost of
revenues           2,003,326       80.9 %      4,209,260       81.1 %              -        6,212,586         81.0 %
Gross profit         472,504       19.1 %        982,712       18.9 %              -        1,455,216         19.0 %

Total
operating
expenses             323,736       13.1 %      2,468,620       47.6 %      1,720,433        4,512,789         58.9 %
Other income             234        0.0 %         (9,335 )     -0.2 %          1,718           (7,383 )       -0.1 %

Income (loss)
before taxes
and
noncontrolling
interest         $   149,002        6.0 %   $ (1,495,243 )    -28.8 %   $ (1,718,715 )   $ (3,064,956 )      -40.0 %



                                                  January 31, 2012
                                                                         Corporate
                    Chinese Medicine              Stevioside             and other             Consolidated
Total revenues   $ 2,421,481      100.0 %   $  6,939,669      100.0 %   $          -     $  9,361,150        100.0 %
Cost of
revenues           2,201,940       90.9 %      5,606,350       80.8 %              -        7,808,290         83.4 %
Gross profit         219,541        9.1 %      1,339,319       19.2 %              -        1,552,860         16.6 %

Total
operating
expenses           1,159,373       47.9 %      2,758,195       39.8 %        671,460        4,589,028         49.0 %
Other income
(expenses)           (48,481 )       -3 %         32,914        0.5 %          9,985           (5,582 )       -0.1 %

Loss before
taxes and
noncontrolling
interest         $  (988,313 )    -40.8 %   $ (1,391,962 )    -20.1 %   $   (661,475 )   $ (3,041,750 )      -32.5 %

Cost of Revenues and Gross Margin

Cost of revenues in the third quarter of fiscal 2013 decreased by 35.7% as compared to the same period in fiscal 2012. Gross margin on Stevioside segment increased during the third quarter of fiscal 2013 to 28.4%, compared to 19.5% for the same period in fiscal 2012. The Chinese medicine gross margin increased to 13.9% in the third quarter of fiscal 2013, compared to 10.0% for the same period in fiscal 2012, primarily due to 4% decrease in cost of revenues. As a result, consolidated gross margin for the third quarter of fiscal 2013 increased to 20.2%, compared to 16.9% for the same period in fiscal 2012.

Cost of revenues for the first nine months of fiscal 2013 decreased by 20.4% compared to the same period in fiscal 2012. Gross margin on Stevioside segment for the first nine months of fiscal 2013 was 18.9%, as compared to 19.2% for the same period in fiscal 2012. The lower gross margins for Stevioside was due primarily to lower sales volume in lower grade stevia 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 19.1% in the first nine months fiscal 2013, compared to 9.1% for the same period in fiscal 2012. The higher gross margin for Chinese Medicines was due primarily to lower costs during the period. 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 margins in future periods. Our consolidated gross margin for the first nine months of fiscal 2013 was 19.0%, compared to 16.6% for the same period in fiscal 2012.

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Total Operating Expenses

Total operating expenses for the third quarter of fiscal 2013 decreased by 32.0% from the comparable period in 2012. The decrease of $0.6 million in general and administrative expenses was primarily due to $0.8 million reduction in cash compensation paid to administrative management and certain of our employees, offset by an increase of $0.2 million in loss on disposition of equipment. Selling expenses as a percentage of revenues was 13.3% in the second quarter of fiscal 2013 as compared to 7.8% in the third quarter of 2012.

Total operating expenses decreased by 1.7%, in the first nine months of fiscal 2013 compared to the same period in fiscal 2012. The decrease of $0.1 million in general and administrative expenses was primarily due to the bad debt recovery of $0.3 million offset by an increase of $0.2 million in loss on disposition of equipment.

Net Loss

Net loss in the third quarter of fiscal 2013 was $0.8 million, compared to $1.3 million in the same period in fiscal 2012. The decrease in net loss was primarily due to lower general and administrative expenses.

Net loss in the first nine months of fiscal 2013 was $3.1 million, compared to $3.0 million for the same period in fiscal 2012

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 2013 and beyond, we will continue to focus on our core business of producing and selling stevioside series products.

Some of the recent favorable trends in the stevia segment include:

- Chinese domestic food and beverages, particularly herbal tea manufacturers and the pharmaceutical industry, have increased the use of steviosides;
- 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;
- The marketing strategy to differentiate ourselves as a producer of higher quality stevia grades and product formulations through these collaboration efforts has begun to lead to growth in stevia sales volume; and
- In December 2012 we completed the construction of our new stevia extraction line with trial production underway. This new line will add additional 1,300 metric tons to our current annual production capacity.

Meanwhile, we are also facing challenges in competitive pricing and raw materials for fiscal 2013 and 2014. During fiscal 2013, the market prices of stevioside series were impacted by strong price competition among Chinese manufacturers. We expect the price pressure to continue in fiscal 2013 and into fiscal 2014. 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 calendar year 2013.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is the ability of a company to generate sufficient cash to meet its operational cash requirements.

At January 31, 2013 and April 30, 2012, we had working capital of $6.0 million and $8.7 million, respectively. Our cash balance at January 31, 2013 was $0.1 million, as compared to cash of $3.0 million at April 30, 2012. The approximate 98% decline in our cash at January 31, 2013 from April 30, 2012 is primarily attributable to funds advanced to a related party as described below and the payment of a land use rights deposit paid in the third quarter of fiscal 2013. During the third quarter of fiscal 2013, Qufu Shengwang paid Qufu Public Auction Center (the "Center"), a government agency, $591,495 as deposit for the update of Qufu Shengwang's land use rights related to Qufu Shengwang's facility which expire in 2054. The deposit was required by the Center to perform an appraisal of the land use right and to update to the land use right certificate to comply with updated laws and regulations. According to the Center, the deposit will be refunded by the end of June 2013.

- 22 -

Our commitments for capital expenditures in fiscal 2013 are estimated at $0.5 million for last installment on apartment complex unit, which is expected to be sold during fiscal 2013. We expect to satisfy these obligations from our working capital. Our working capital is not sufficient to fund our expenses and satisfy our obligations for the next twelve months. In the next twelve months, we have following plans to obtain sufficient working capital from:

· existing cash and cash equivalents and internally generated funds,

· collection of the amounts due from Pharmaceutical Corporation of $0.8 million,the receipt of advances from related parties,

· collection of the deposit for the update of Qufu Shengwang's Land use right from the Center.

If we are unable to collect these amounts or the deposit is not refunded in full, our ability to continue as a going concern could be in jeopardy. In that event, you could lose your entire investment in our company.

Accounts receivable, net of allowance for doubtful accounts, excluding accounts receivable from related parties, decreased by less than $0.8 million during the third quarter of fiscal 2013. The days' sales outstanding in accounts receivable increased to 88 days as of January 31, 2013, as compared to 63 days as of April 30, 2012.

At January 31, 2013, loan receivable amounted to $0.1 million, which represented a decrease of $1.9 million from April 30, 2012 and reflect the repayment of amounts we had advanced to Shandong Anda in December 2011. At January 31, 2013, we are owed $42,087 by China Direct, Inc., an affiliate of CDI, our corporate management services provider, related to a loan made in fiscal 2011. This amount, which is comprised of $22,821 in principal and $19,266 in accrued interest, is due on demand.

At January 31, 2013, inventories, net of reserve for obsolescence, amounted to $5.3 million, as compared to $4.3 million as of April 30, 2012. The increase was primarily due to purchases of raw materials for stevia products in anticipation of future demand.

Our accounts payable and accrued expenses increased to $3.8 million at January 31, 2013 from $4.1 million at April 30, 2012. This balance, as well as that of V.A.T. taxes payable, is subject to timing of payments for purchases related to raw material purchases made in the ordinary course of business.

Related Party Transactions

Historically we have entered into a number of related party transactions with Pharmaceutical Corporation and other entities controlled by our Chairman, which are in addition to sales made to a company also controlled by him. During the second quarter of fiscal 2013, we advanced $783,507 to Pharmaceutical Corporation for working capital purposes. The advance bears no interest, is not secured and is due on demand. Pharmaceutical Corporation agreed to repay the advance by March 31, 2013. In addition, during the third quarter of fiscal 2013, we borrowed $432,543 from Pharmaceutical Corporation for working capital purpose. The loan bears no interest, is unsecured and due on demand. Lastly, during the nine month ended January 31, 2013, we paid Pharmaceutical Corporation $417,036 for management compensation. As these transactions, and the amount of the management fee, were not negotiated on an arms-length basis, there are no assurances that these transactions are as fair to us as we might negotiate with a third party. As described elsewhere herein, at January 31, 2013 we owe Pharmaceutical Corporation an aggregate of $517,814, which includes $432,543 for a working capital and $85,271 in management fees. At January 31, 2013, Pharmaceutical Corporation owes our company $807,162 for working capital advances. As a result of internal PRC practices, we have not offset the amounts we owe Pharmaceutical Corporation against the amounts due it by our company. It is possible that these working capital advances by us to Pharmaceutical could be deemed to be in violation of Section 402 of the Sarbanes-Oxley Act of 2002, however, we have not made a determination as of the date hereof if the advances resulted in a violation of that provision. We expect that the working capital advance made by us to Pharmaceutical Corporation will be repaid. If, however, the amount is not repaid and/or it was determined that these advances violated the prohibitions of Section 402 from making loans to executive officers or directors, the Company could be subject to investigation and/or litigation that could involve significant time and costs and may not be resolved favorably. The Company is unable to predict the extent of its ultimate liability with respect to these transactions. The costs and other effects of any future litigation, government investigations, legal and administrative cases and proceedings, settlements, judgments and investigations, claims and changes in this matter could have a material adverse effect on the Company's financial condition and operating results.

- 23 -

Cash Flows Analysis

NET CASH FLOW USED IN OPERATING ACTIVITIES:

Net cash used in operating activities was $2.5 million during the first nine months of fiscal 2013, as compared to $8.9 million during the same period in fiscal 2012. The decrease resulting from cash used in operating activities was due primarily to a $1 million increase in accounts receivable and notes receivable due to cash collection during the quarter coupled with an $0.8 million increase in non-cash stock compensation expense paid to employees in the third quarter of 2013.

Net cash used in operating activities was $8.9 million during the first nine months of fiscal 2012, as compared to net cash used in operating activities of $0.3 million during the first nine months of fiscal 2011. The increase resulting from cash used in operating activities was due primarily to $2.1 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 $0.6 million of cash to purchase raw materials inventory in stevia to support future sales, advanced $3.1 million in a short-term loan to a related party, Pharmaceutical Corporation, to acquire land use rights where we will have the beneficial ownership of the acquired land, and advanced $3.1 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 . . .

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