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SUWN > SEC Filings for SUWN > Form 10-K on 2-Aug-2013All Recent SEC Filings

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

Form 10-K for SUNWIN STEVIA INTERNATIONAL, INC.


2-Aug-2013

Annual Report


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:

- Stevioside; and
- 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:

- single traditional Chinese medicine extracts;
- compound traditional Chinese medicine extracts; and
- 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:

• 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;
• 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;
• 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;
• 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:

                                                For the Year Ended April 30, 2013
                                                                                  Corporate and
                       Chinese Medicine                   Stevioside                  Other                  Consolidated
Revenues            2,614,672          100.0 %      7,187,856           100.0 %               -         9,802,528           100.0 %
Cost of goods
sold                1,862,545           71.2 %      5,883,031            81.8 %                         7,745,576            79.0 %
Gross profit          752,127           28.8 %      1,304,825            18.2 %               -         2,056,952            21.0 %
Loss on
disposal of
property and
equipment                   -            0.0 %       (209,500 )         (2.9) %               -          (209,500 )          (2.1 )%
Other operating
expenses             (551,494 )       (21.1) %     (3,271,762 )        (45.5) %      (1,733,205 )      (5,556,461 )        (56.7) %
Other income
(expense)               7,246            0.3 %       (275,293 )         (3.8) %           2,916         (265, 131 )         (2.7) %
Loss before
income taxes
and
non-controlling
interest              207,879            8.0 %     (2,451,730 )        (38.4) %      (1,730,289 )      (3,974,140 )        (40.5) %

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                                               For the Year Ended April 30, 2012
                                                                                    Corporate
                        Chinese Medicine                   Stevioside               and Other               Consolidated
Revenues             3,102,167           100.0 %      9,830,011          100.0 %              -       12,932,178           100.0 %
Cost of goods
sold                 2,823,069            91.0 %      8,194,121           83.4 %              -       11,017,190            85.2 %
Gross profit           279,098             9.0 %      1,635,890           16.6 %              -        1,914,988            14.8 %
Loss on
disposal of
property and
equipment                    -             0.0 %       (673,931 )        (6.9) %              -         (673,931 )         (5.2) %
Other operating
expenses            (1,444,197 )        (46.6) %     (2,898,823 )       (29.5) %      (719,664)       (5,062,684 )        (39.2) %
Other income
(expense)              (48,600 )         (1.6) %       (542,977 )        (5.5) %         17,490         (574,087 )         (4.4) %
Loss before
income taxes
and
non-controlling
interest            (1,213,699 )        (39.1) %     (2,479,841 )       (25.2) %       (702,174 )     (4,395,714 )        (34.0) %

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:

                                April 30, 2013        April 30, 2012
                 China             $     516,071      $     2,938,981
                 United States             1,035               19,914
                 Total             $     517,106      $     2,958,895

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,
• 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
• 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.

. . .

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