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SUWN > SEC Filings for SUWN > Form 10-Q on 12-Sep-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.


12-Sep-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 condensed consolidated financial statements and footnotes and our 2013 Annual Report on Form 10-K for fiscal year ended April 30, 2013.

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 2014 and 2013 our operations were organized in two operating segments related to our product lines:

- Stevioside, and
- Chinese Medicine.

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 that contain our stevia products, we are evaluating our strategy for the sale and distribution of OnlySweet™.

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.

OUR PERFORMANCE

Our total revenues in the first quarter of fiscal 2014 decreased by 16.3%, from the same period in fiscal 2013, while our gross margin remained relatively constant at 20% in both periods. Our sales revenues, excluding revenues from related party, decreased by 29.6% in the first quarter of fiscal 2014 as compared to the same period in fiscal 2013. Revenues from related parties increased 13% in the first quarter of fiscal 2014 from the comparable period in fiscal 2013. Our operating expenses in the first quarter of fiscal 2014 decreased by 26.6% from the comparable period in 2013. Our net loss for the first quarter of fiscal 2014 was $585,000, as compared to $876,000 for the same period in fiscal 2013.

Our operating performance for the three months ended July 31, 2013 was primarily driven by a continued 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.

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While we have broadened our stevia product offerings to include a number of higher quality stevia grades which are needed in new product formulations we are developing to introduce to the U.S. and European food and beverage market, 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. The decline of revenue in Stevoside segment is primarily due to two factors. One is the highly competitive market. Stevia has been widely accepted by food industry and many new stevia manufacturers have entered this industry in the past few years, and the stevia market became more competitive, which caused a negative influence to our Stevoside segment. The other is we are currently in a transition phase, with our new product lines. We are now more focusing on new types of stevia products, including tablets, liquid, High A products, etc. This transition led to a lower production of our original products and also our revenue. That may affect our revenue in the following year as well.

The decrease in revenues in our Chinese medicine was primarily due to the depressing market which was caused by the outbreak of a new strain of bird flu which was first reported in March 2013. Since 2012, the price of general raw material has kept an increasing trend; meanwhile, many animal epidemic diseases have been found in China, which higher both cost and risk of the livestock breeding industry. . Consequently, in China, many small livestock farms have been closed, and led to a decrease of Chinese Medicine's market demand.

                             RESULTS OF OPERATIONS

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

                                                        July 31, 2013
                                                                                     Corporate
                                Chinese Medicine               Stevioside            and other            Consolidated

Total revenues             $ 571,560        100.0 %   $ 2,145,346        100.0 %   $         -     $ 2,716,906        100.0 %
Cost of revenues             386,883         67.7 %     1,879,809         87.6 %             -       2,266,692         83.4 %
Gross profit                 184,677         32.3 %       265,537         12.4 %             -         450,214         16.6 %

Total operating expenses     193,879         33.9 %       866,641         40.4 %        69,488       1,130,008         41.6 %
Other income(expenses)           344          0.1 %      (22,402)         -1.0 %       116,478          94,420          3.5 %

Loss before income taxes   $  (8,858 )       -1.5 %   $  (623,506 )      -29.1 %   $    46,990     $  (585,374 )      -21.6 %




                                                        July 31, 2012
                                                                                     Corporate
                                Chinese Medicine               Stevioside            and other            Consolidated

Total revenues             $ 755,472        100.0 %   $ 2,492,155        100.0 %   $         -     $ 3,247,627        100.0 %
Cost of revenues             573,712         75.9 %     2,016,713         80.9 %             -       2,590,425         79.8 %
Gross profit                 181,760         24.1 %       475,442         19.1 %             -         657,202         20.2 %

Total operating expenses     265,906         35.2 %       634,144         25.5 %       639,538       1,539,588         47.4 %
Other income(expenses)            20          0.0 %        10,465          0.4 %         1,718          12,203          0.4 %

Loss before income taxes   $ (84,126 )      -11.1 %   $  (148,237 )       -6.0 %   $  (637,820 )   $  (870,183 )      -26.8 %

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Revenues

Total revenues in the first quarter of fiscal 2014 decreased 16.3% as compared to the same period in fiscal 2013. Stevioside revenues, which comprised 79.0% and 76.7% of our revenues for the first quarter of fiscal 2014 and fiscal 2013, respectively, decreased by 13.9%, while revenues in our Chinese Medicine segment decreased by 24.3%. Within our Stevioside segment, revenues from sales to third parties decreased by 32.3% in the first quarter of fiscal 2014 from the first quarter of fiscal 2013, while revenues from sales to a related party increased by 13.1% in the comparable period. The increase of sales to related party is primarily due to the expand of our international business. Since we do not have the authorization to export products from China, we outsourced all of our exporting business to our certified related party Qufu Shengwang Import and Export Corporation. We did not have any sales to related parties in our Chinese medicine segment in either period.

The decline of revenues in Stevoside segment is primarily due to two factors. One is the highly competitive market which caused a negative influence to our Stevoside segment. The other is we are currently in a transition phase, with our new product line, we are now more focusing on new types of Stevia products, including tablets, liquid, and High A products. This transition led to a lower production of our original products and also our revenue. It may affect our revenue in the following year as well.

The decrease of sales in Chinese Medicine segment is primarily due to the depressing market. Since 2012, the price of general raw material has kept an increasing trend; meanwhile, many animal epidemic diseases have been found in China, which increased both the cost and risk of livestock breeding industry. Consequently, in China, many small livestock farms have been closed, and led to a decrease of Chinese Medicine's market demand, the related industries have been shrinking in the past few months.

Cost of Revenues and Gross Margin

The consolidated gross margin remained relatively constant between periods at approximately 20%. Gross margin on Stevioside segment decreased during the first quarter of fiscal 2014 to 12.4%, compared to 19.1% for the same period in fiscal 2013. The decrease was primarily due to the decrease of approximately 5% in the sales prices. The Chinese medicine gross margin increased to 32.3% in the first quarter of fiscal 2014, compared to 24.1% for the same period in fiscal 2013, primarily due to a 32.6% decrease in cost of revenues.

Total Operating Expenses

Total operating expenses for the first quarter of fiscal 2014 decreased by 26.6% from the comparable period in 2013. The decrease was primarily due to a decrease of $570,000 of expenses for corporate consulting services during the first quarter of fiscal 2014, a decrease of $15,000 in sales commissions, a decreased of $70,000 in marketing and sales meeting expenses, an increased by $298,000 in bad debt expense and a decreased of $247,000 in management fees, offset by an increase of $38,000 in shipping and freight fees. Selling expenses as a percentage of revenues was 10.4% in the first quarter of fiscal 2014 as compared to 9.2% in the first quarter of fiscal 2013. The general and administrative expense as a percentage of revenue was 31.2% in the first quarter of fiscal 2014 as compared to 38.2% in the first quarter of fiscal 2013.

Other Income (Expenses)

For the three months ended July 31, 2013, other income amounted to approximately more than $94,000 as compared to other income of $12,000 for the same period ended July 31, 2012, an increase of $82,000. The increase was primarily attributable to repayment for the export case settlement, offset by the increased interest expense. In March 18, 2013 we borrowed $809,822 (RMB5,000,000) from a commercial bank under a loan due in March 2014. We used the proceeds for our working capital.

Net Loss

Net loss from operations in the first quarter of fiscal 2014 was $585,000, compared to $876,000 in the same period in fiscal 2013. The decrease in net loss was primarily due to decrease in operating expenses.

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.

Meanwhile, we are also facing challenges in competitive pricing and raw materials for fiscal 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 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.

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LIQUIDITY AND CAPITAL RESOURCES

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

At July 31, 2013, we had working capital of $4.9 million, including cash of $0.4 million, as compared to working capital of $5.0 million and cash of $0.5 million at April 30, 2013. The approximate 18.0% decline in our cash at July 31, 2013 from April 30, 2013 is primarily attributable to funds advanced to a related party as well as funds advanced to the suppliers for the inventories that had not shipped to us and services that had not provided to us. 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 fiscal year.

Accounts receivable, net of allowance for doubtful accounts, including accounts receivable from related parties, decreased by approximately $317,000 during the three months ended July 31, 2013. The days' sales outstanding in accounts receivable increased to 80 days as of July 31, 2013, as compared to 63 days as of April 30, 2013.

At July 31, 2013 inventories, net of reserve for obsolescence, totaled $5.0 million, as compared to $4.9 million as of April 30, 2013. 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 and domestic demand in fiscal year 2014.

At July 31, 2013, we reported $313,606 of due from Qufu Shengwang Import and Export Corporation, our related party, for working capital purpose. 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.

Our accounts payable and accrued expenses were less than $3.9 million at July 31, 2013, an increase of $268,000 from April 30, 2013. 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 PROVIDED BY (USED IN) OPERATING ACTIVITIES:

Net cash provided by operating activities was approximately $63,000 during the first quarter of fiscal 2014, as compared to net cash used in operating activities of $757,000 during the same period in fiscal 2013. The increase resulting from cash provided by operating activities was due primarily to $245,000 increase in accounts payable and accrued expenses, depreciation expense of $450,000, allowance of doubtful accounts of $150,000 offset by net loss of $585,000, $232,000 increase in prepaid expenses and other current assets related to advance payments for stevia raw materials.

NET CASH FLOW PROVIDED BY (USED IN) INVESTING ACTIVITIES:

Net cash provided by investing activities amounted to $19,000 during the first quarter of fiscal 2014, as compared to net cash used in $723,000 for the same period in fiscal 2013. This was primarily due to $35,000 proceeds from loan offset by $16,500 capital expenditures for property and equipment.

NET CASH FLOW USED IN FINANCING ACTIVITIES:

Net cash used in financing activities amounted to less than $175,400 during the first quarter of fiscal 2014, which represented repayments of advances from related party, as compared to less than $13,000 for the same period in fiscal 2013.

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 July 31, 2013.

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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 is as follows:

                                July 31, 2013     April 30, 2013
                                   (Unaudited)
                  China          $     423,022    $       516,071
                  United States            799              1,035
                  Total          $     423,821    $       517,106

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 as a party, under which we have:

• 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 U.S. GAAP.

CRITICAL ACCOUNTING POLICIES

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 our financial condition and results of operations, and which require us 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 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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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.

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.

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