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SUWN > SEC Filings for SUWN > Form 10-Q on 16-Dec-2013All Recent SEC Filings

Show all filings for SUNWIN STEVIA INTERNATIONAL, INC.

Form 10-Q for SUNWIN STEVIA INTERNATIONAL, INC.


16-Dec-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

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

Our total revenues in the second quarter of fiscal 2014 increased by 15.3%, from the same period in fiscal 2013, while our gross margin decreased to 10.5% from 16.3% compared to the same period in fiscal 2013. Our sales revenues, excluding revenues from related party, increased by 8.6% in the second quarter of fiscal 2014 as compared to the same period in fiscal 2013. Revenues from related parties increased 50.0% in the second quarter of fiscal 2014 from the comparable period in fiscal 2013. Our operating expenses in the second quarter of fiscal 2014 decreased by 29.6% from the comparable period in 2013. Our net loss for the second quarter of fiscal 2014 was $958,000, as compared to $1,362,000 for the same period in fiscal 2013.

Six months ended October 31, 2013 compared to same period in 2012

Our total for the first six months of fiscal 2014 decreased by 2.7% from the same period in fiscal 2013, while our gross margin decreased to 13.5% from 18.6% over the same period in fiscal 2013. Our sales revenues, excluding revenues from related party, decreased by 11.3%, in the first six months of fiscal 2014 as compared to the same period in fiscal 2013. Our operating expenses during the first six months of fiscal 2014 decreased by 28.2% compared with the same period in fiscal 2013. Our net loss for the first six months of fiscal 2014 was $1.5 million, compared to $2.2 million for the same period in fiscal 2013.


Our operating performance for the six months ended October 31, 2013 was primarily driven by a continued decrease in sales revenue attributable to lower sale 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 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 during the fiscal 2014 and 2013 periods. The decline of revenue in Stevioside segment is primarily due to a 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 Stevioside segment. Recently we introduced a new product lines. We are now focusing on new types of stevia products, including tablets, liquid, High A products, and other. We expect to increase our sales of our new products; however we cannot quantify this increase and its effects on future periods.

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 operations for the three month
periods ended October 31, 2013 and 2012:

                                                         October 31, 2013
                                                                                    Corporate
                        Chinese Medicine                   Stevioside               and other               Consolidated

Total revenues     $   577,262          100.0 %    $ 2,246,695          100.0 %    $          -      $ 2,823,957           100.0 %
Cost of revenues       366,377           63.5 %      2,161,160           96.2 %               -        2,527,537            89.5 %
Gross profit           210,885           36.5 %         85,535            3.8 %               -          296,420            10.5 %

Total operating
expenses               259,281           44.9 %        910,890           40.5 %          71,930        1,242,101            44.0 %
Other
income(expenses)         6,254            1.1 %       (18,409)           (0.8 )%              -          (12,155 )          (0.4 )%

Loss before                                   )%                              )%                                                 )%
income taxes       $   (42,142 )         (7.3      $  (843,765 )        (37.6      $    (71,930 )    $  (957,836 )         (33.9



                                                      October 31, 2012
                                                                                 Corporate
                      Chinese Medicine                Stevioside                 and other            Consolidated

Total revenues     $ 608,828         100.0 %   $ 1,840,856         100.0 %    $        -       $  2,449,684         100.0 %
Cost of revenues     472,225          77.6 %     1,577,175          85.7 %             -          2,049,400          83.7 %
Gross profit         136,603          22.4 %       263,681          14.3 %             -            400,284          16.3 %

Total operating
expenses              41,199           6.8 %       804,377          43.7 %       919,177          1,764,753          72.0 %
Other
income(expenses)          99           0.0 %         (118)           0.0 %             -                (19 )         0.0 %

Income (loss)
before
income taxes       $  95,503          15.6 %   $  (540,814 )       (29.4 )%   $ (919,177 )     $ (1,364,488 )       (55.7 )%


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

                                                         October 31, 2013
                                                                                    Corporate
                       Chinese Medicine                   Stevioside                and other              Consolidated

Total revenues    $ 1,148,822          100.0 %    $  4,392,041          100.0 %    $          -     $  5,540,863          100.0 %
Cost of
revenues              753,260           65.6 %       4,040,969           92.0 %               -        4,794,229           86.5 %
Gross profit          395,562           34.4 %         351,072            8.0 %               -          746,634           13.5 %

Total operating
expenses              453,160           39.4 %       1,777,531           40.5 %         141,418        2,372,109           42.8 %
Other
income(expense)         6,598            0.6 %         (40,811 )         (0.9 )%        116,478           82,265            1.5 %

Loss before                                  )%                               )%                                                )%
income taxes      $   (51,000 )         (4.4      $ (1,467,270 )        (33.4      $    (24,940 )   $ (1,543,210 )        (27.9




                                                    October 31, 2012
                                                                             Corporate and
                    Chinese Medicine                 Stevioside                  other                Consolidated

Total
revenues        $ 1,364,300         100.0 %   $ 4,333,011         100.0 %    $           -     $  5,697,311         100.0 %
Cost of
revenues          1,045,937          76.7 %     3,593,888          82.9 %                -        4,639,825          81.4 %
Gross profit        318,363          23.3 %       739,123          17.1 %                -        1,057,486          18.6 %

Total
operating
expenses            307,105          22.5 %     1,438,521          33.2 %        1,558,715        3,304,341          58.0 %
Other income            119           0.0 %        10,347           0.2 %            1,718           12,184           0.2 %

Loss before                               %                             )%                                                )%
income taxes    $    11,377           0.8     $  (689,051 )       (15.9      $  (1,556,997 )   $ (2,234,671 )       (39.2

Revenues

Total consolidated revenues in the second quarter of fiscal 2014 increased 15.3% as compared to the same period in fiscal 2013. Stevioside revenues, which comprised 79.6% and 75.1% of our revenues for the second quarter of fiscal 2014 and fiscal 2013, respectively, increased by 22.0%, while revenues in our Chinese Medicine segment decreased by 5.2%. Within our Stevioside segment, revenues from sales to third parties increased by 14.4% in the second quarter of fiscal 2014 from the second quarter of fiscal 2013, while revenues from sales to a related party increased by 50.0% in the comparable period. The increase of sales to related party is primarily due to the expansion 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.

Total revenues for the first six months of fiscal 2014 decreased 2.7% as compared to the same period in fiscal 2013. Stevioside revenues, which comprised 79.3% and 76.1% of our revenues for the first six months of fiscal 2014 and fiscal 2013, respectively, increased by 1.4%, while revenues in our Chinese Medicine segment decreased by 15.8%. Within our Stevioside segment, revenues from sales to third parties decreased by 9.2% for the first six months of fiscal 2014 from the same period of fiscal 2013, while revenues from sales to a related party increased by 23.4% in the comparable period.

The revenues in Stevioside segment increased by 1.4% for the first six months of fiscal 2014 as compared to the first six months of fiscal 2013 which is attributable to the increase in sales the related party. This modest increase in volume was offset by a decline in the unit sale price of our Stevioside products which decreased slightly as compared to the same period of prior year. The unit sale price declined as a result of the competitive market. Additionally, we also generated revenue from the sale of our new products that were developed in the prior year which accounted for approximately 8.1% of total consolidated revenues.


The decrease of sales in Chinese Medicine segment is primarily due to an approximately 6.7% decrease in our selling price and a 10.5% increase in sales volume. This decrease was attributable to an oversupply of product in the market. We expect demand to increase in future quarters; however, we are not able to quantify this future increase.

Cost of Revenues and Gross Margin

The consolidated gross margin in the second quarter of fiscal 2014 decreased to 10.5%, compared to 16.3% for the same period in fiscal 2013. Gross margin on Stevioside segment decreased during the second quarter of fiscal 2014 to 3.8%, compared to 14.3% for the same period in fiscal 2013. The decrease was primarily due to the decrease in our sales price as discussed above and from an increase of approximately 12% in raw material costs used in the production of Stevioside. Additionally, in connection with the sale of our new products we recognized a gross loss of approximately $64,000 attributable to the allocation of fixed costs to low productions levels which contributed to our lower gross margins. We expect to recognize gross margins on our new products as we increase sales and increase production levels, The Chinese medicine gross margin increased to 36.5% in the second quarter of fiscal 2014, compared to 22.4% for the same period in fiscal 2013. This increase in gross margin was due primarily due to lower raw material costs during the period compared with the same period in the prior year. We believe that the slower market for animal Chinese medicines seen in prior periods has stabilized and the market has improved.

The consolidated gross margin for the first six months of fiscal 2014 decreased to 13.5%, compared to 18.6% for the same period in fiscal 2013. Gross margin on Stevioside segment decreased during the first six months of fiscal 2014 to 8.0%, compared to 17.1% for the same period in fiscal 2013. The decrease was primarily due to the increase of approximately 12.4% in cost of revenues. The Chinese medicine gross margin increased to 34.4% in the first six months of fiscal 2014, compared to 23.3% for the same period in fiscal 2013, due to similar reasons discussed above.

Total Operating Expenses

Total operating expenses for the second quarter of fiscal 2014 decreased by 29.6% from the comparable period in 2013. The decrease was primarily due to a decreased of $708,000 in general and administrative expenses (consisting of a decrease in stock-based compensation of $810,000, a decrease in management fees of $170,000 and a decrease in consulting fees of $78,500 offset by an increase in office expenses of $113,000, and salaries and wages of $86,000), and by a $93,000 increase in selling expenses which was attributable to an increase in marketing expenses related to our new products. Selling expenses as a percentage of revenues was 10.1% in the second quarter of fiscal 2014 as compared to 7.9% in the second quarter of fiscal 2013. The general and administrative expense as a percentage of revenue was 33.9% in the second quarter of fiscal 2014 as compared to 64.2% in the second quarter of fiscal 2013.

Total operating expenses for the first six months of fiscal 2014 decreased by 28.2% from the comparable period in 2013. The decrease was primarily due to a decrease of $584,000 in general and administrative expenses (consisting of decrease in stock-based compensation of $810,000 and a decrease in management fees of $400,000, offset by an increase in bad debt expenses of $300,000, office expense of $134,000, and salaries and wages of $70,000), and an increase in rent of $108,000) and a $78,800 increase in the selling expenses. Selling expenses as a percentage of revenues was 10.3% in the first six months of fiscal 2014 as compared to 8.6% in the same period of fiscal 2013. The general and administrative expense as a percentage of revenue was 32.5% in the first six months of fiscal 2014 as compared to 49.4% in the same period of fiscal 2013.

Other Income (Expenses)

For the three and six months ended October 31, 2013, other (expense) income amounted to approximately ($12,200) and $82,265 as compared to other (expense) income of ($19) and $12,000 for the same period ended October 31, 2012. The decrease was primarily attributable to the increased interest expense. In March 18, 2013 we borrowed $809,822 (RMB 5,000,000) 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 second quarter of fiscal 2014 was $1.0 million, compared to $1.4 million in the same period in fiscal 2013. The decrease in net loss was primarily due to decrease in gross profit and operating expenses as discussed above.

Net loss from operations in the first six months of fiscal 2014 was $1.6 million, compared to $2.2 million for the same period in fiscal 2013. The decrease in net loss was primarily due to decrease in gross profit and operating expenses as discussed above.

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.


LIQUIDITY AND CAPITAL RESOURCES

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

At October 31, 2013, we had working capital of $4.5 million, including cash of $0.8 million, as compared to working capital of $5.0 million and cash of $0.5 million at April 30, 2013. 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 $0.7 million during the six months ended October 31, 2013. The days' sales outstanding in accounts receivable decreased to 71 days as of October 31, 2013, as compared to 80 days as of July 31, 2013.

At October 31, 2013 inventories, net of reserve for obsolescence, totaled $4.2 million, as compared to $4.9 million as of April 30, 2013. The decrease is primarily due to decrease of finished goods inventory and a decrease 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.

From time to time we received advances from related parties and advanced funds to related parties for working capital purposes. The advances bear no interest and are payable on demand. For the six months ended October 31, 2013, due to
(from) related party activities consisted of the following:

                                                                             Qufu
                                                                           Shengwang
                                                      Pharmaceutical      Import and
                                                       Corporation          Export          Total
Balance due to related parties, April 30, 2013       $        110,018     $    64,386     $  174,404
Working capital advances from related parties                       -         249,220        249,220
Repayments                                                   (195,624 )      (313,606 )     (509,230 )
Effect of foreign currency exchange                             1,293               -          1,293
Balance due from related parties, October 31, 2013   $        (84,313 )   $         -     $  (84,313 )

(1) The overpayment to Pharmaceutical Corporation was repaid November 2013.

Our accounts payable and accrued expenses were approximately $3.5 million at October 31, 2013, a decrease of $97,000 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 $510,000 during the first six months of fiscal 2014, as compared to net cash used in operating activities of $921,000 during the same period in fiscal 2013. The increase resulting from cash provided by operating activities was due primarily to $745,000 decrease in inventories, depreciation expense of $897,000, allowance of doubtful accounts of $173,000 offset by net loss of $1.6 million, $632,000 increase in accounts receivables for the sales to related party, $520,000 increase in prepaid expenses and other current assets related to advance payments for stevia raw materials.

Net cash used in operating activities was $0.9 million during the first six months of fiscal 2013, as compared to $1.8 million during the same period in fiscal 2012. The decrease resulting from cash used in operating activities was due primarily to a $0.9 million increase in accounts payable and accrued expenses due to purchases during the quarter coupled with a $0.8 million increase in non-cash stock compensation expense paid to employees in the second quarter of 2013.

NET CASH FLOW USED IN INVESTING ACTIVITIES:

Net cash used in investing activities amounted to $39,500 during the first six months of fiscal 2014, as compared to net cash used in $1.4 million for the same period in fiscal 2013. This was primarily due to $74,500 capital expenditures for property and equipment offset by $35,000 proceeds from loan.

Net cash used in investing activities amounted to $1.4 million during the first six months of fiscal 2013, as compared to $1.0 million for the same period in fiscal 2012. The increase was primarily due to $2.5 million in capital expenditures for property and equipment offset by $1.1 million in loan proceeds.

NET CASH FLOW USED IN FINANCING ACTIVITIES:

Net cash used in financing activities amounted to less than $259,000 during the first six months of fiscal 2014, as compared to less than $13,000 for the same period in fiscal 2013. This was primarily due to repayments of advances from related party of $509,000 and $249,000 net proceeds advanced from related party.

Net cash used in financing activities amounted to $12,546 during the first six months of fiscal 2013, which represented repayments of advances from related party, with no comparable amount in fiscal 2012.


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 October 31, 2013.

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:

                October 31, 2013       April 30, 2013
                   (Unaudited)
China           $         795,469     $        516,071
United States               4,614                1,035
Total           $         800,083     $        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 . . .

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