UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly report ended January 31, 2007
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the transition period from ________ to __________
Commission file number: 033-10456
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC.
------------------------------------------
(Exact name of small business issuer as specified in charter)
NEVADA 56-2416925
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6 YOUPENG ROAD
QUFU, SHANDONG, CHINA 273100
----------------------------
(Address of principal executive offices)
(86) 537-4424999
----------------
(Issuer's telephone number)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: At March 16, 2007, there were
73,942,276 shares of the registrant's common stock was issued and outstanding.
When used in this report, the terms "Sunwin," the "Company," "we," and "us"
refers to Sunwin International Neutraceuticals, Inc. an Nevada corporation, and
our wholly owned subsidiaries, Sunwin Tech Group, Inc., a Florida corporation,
Sunwin Stevia International Corp., a Florida corporation, Sunwin California,
Inc., a California corporation and Sunwin (Canada) Pharmaceutical Ltd., a
Canadian corporation, as well as Sunwin Tech Group, Inc.'s wholly owned
subsidiary Qufu Natural Green Engineering Co., Ltd. ("Qufu"), and Qufu's three
wholly owned subsidiaries, Shengya Veterinary Medicine Co., Ltd (formerly known
as Shangong Qufu Veterinary Medicine Plant), Shengyuan Herb Extraction Co.,
Ltd., and Qufu Chinese Medicine Factory.
The information which appears on our web site at www.sunwin.biz is not
part of this quarterly report.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
Certain statements in this quarterly report on Form 10-QSB contain or
may contain forward-looking statements that are subject to known and unknown
risks, uncertainties and other factors which may cause actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. These forward-looking statements were based on various factors and
were derived utilizing numerous assumptions and other factors that could cause
our actual results to differ materially from those in the forward-looking
statements. These factors include, but are not limited to, economic, political
and market conditions and fluctuations, government and industry regulation,
interest rate risk, global competition, and other factors as they relate to our
doing business solely within the People's Republic of China. Most of these
factors are difficult to predict accurately and are generally beyond our
control. You should consider the areas of risk described in connection with any
forward-looking statements that may be made herein. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date of this report. Except for our ongoing obligations to disclose material
information under the Federal securities laws, we undertake no obligation to
release publicly any revisions to any forward-looking statements, to report
events or to report the occurrence of unanticipated events.
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTERLY PERIOD ENDED JANUARY 31, 2007
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheet
January 31, 2007 (Unaudited)............... .........................3
Consolidated Statements of Operations (Unaudited)
For the Three and Nine months Ended January 31, 2007 and 2006........4
Consolidated Statements of Cash Flows (Unaudited)
For the Nine months Ended January 31, 2007 and 2006..................5
Notes to Consolidated Financial Statements...........................6-17
Item 2 - Management's Discussion and Analysis or Plan of Operation..18-31
Item 3 - Controls and Procedures.......................................32
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.............................................33
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds...33
Item 3 - Default Upon Senior Securities ...............................33
Item 4 - Submission of Matters to a Vote of Security Holders...........33
Item 5 - Other Information.............................................33
Item 6 - Exhibits......................................................33
-2-
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
January 31, 2007
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash .......................................................... $ 7,152,142
Accounts receivable (net of allowance for doubtful accounts
of $172,272) ................................................ 2,947,568
Inventories, net .............................................. 4,264,049
Prepaid expenses and other .................................... 955,852
------------
Total Current Assets ...................................... 15,319,611
PROPERTY AND EQUIPMENT (net of accumulated depreciation
of $2,295,383) .............................................. 5,184,666
------------
Total Assets .............................................. $ 20,504,277
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ......................... $ 1,684,095
Due to related parties ........................................ 1,297
------------
Total Current Liabilities ................................. 1,685,392
OTHER PAYABLES .................................................. 138,556
------------
Total Liabilities ......................................... 1,823,948
------------
STOCKHOLDERS' EQUITY:
Preferred stock ($.001 Par Value; 1,000,000 shares authorized;
No shares issued and outstanding) ........................... -
Common stock ($.001 Par Value; 200,000,000 shares authorized;
73,942,276 shares issued and outstanding) ................... 73,942
Additional paid-in capital .................................... 12,025,899
Retained earnings ............................................. 7,452,976
Deferred compensation ......................................... (969,212)
Subscription receivable ....................................... (602,900)
Other comprehensive income - foreign currency ................. 699,624
------------
Total Stockholders' Equity ................................ 18,680,329
------------
Total Liabilities and Stockholders' Equity ................ $ 20,504,277
============
See notes to unaudited consolidated financial statements
-3-
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Month For the Nine Month
Ended January 31, Ended January 31,
-------------------------- --------------------------
2007 2006 2007 2006
----------- ------------ ----------- ------------
NET SALES ...................................... $ 3,798,352 $ 3,841,882 $11,562,948 $ 11,065,853
COST OF SALES .................................. 2,850,491 2,615,530 8,518,605 7,555,073
----------- ------------ ----------- ------------
GROSS PROFIT ................................... 947,861 1,226,352 3,044,343 3,510,780
----------- ------------ ----------- ------------
OPERATING EXPENSES:
Bad Debt Recovery ............................ - (619,259) - (867,323)
Stock-based consulting expense ............... 128,848 143,143 414,693 278,517
Selling expenses ............................. 409,436 522,237 1,314,792 1,371,548
General and administrative ................... 360,103 40,077 830,020 760,116
----------- ------------ ----------- ------------
Total Operating Expenses ................. 898,387 86,198 2,559,505 1,542,858
----------- ------------ ----------- ------------
INCOME FROM OPERATIONS ......................... 49,474 1,140,154 484,838 1,967,922
OTHER INCOME (EXPENSE):
Other income (expense) ....................... 10,626 891 8,370 152,771
Interest income (expense) .................... 13,826 (15,818) 57,886 (30,321)
----------- ------------ ----------- ------------
Total Other Income (Expense) ............. 24,452 (14,927) 66,256 122,450
----------- ------------ ----------- ------------
INCOME BEFORE PROVISION INCOME TAXES ........... 73,926 1,125,227 551,094 2,090,372
PROVISION FOR INCOME TAXES ..................... - 2,313 - 523,906
----------- ------------ ----------- ------------
INCOME BEFORE MINORITY INTEREST ................ 73,926 1,127,540 551,094 2,614,278
MINORITY INTEREST IN INCOME OF SUBSIDIARY ...... - (256,342) - (589,174)
----------- ------------ ----------- ------------
NET INCOME ..................................... 73,926 871,198 551,094 2,025,104
OTHER COMPREHENSIVE INCOME:
Unrealized foreign currency translation ...... 418,076 52,004 669,624 183,011
----------- ------------ ----------- ------------
COMPREHENSIVE INCOME ........................... $ 492,002 $ 923,202 $ 1,220,718 $ 2,208,115
=========== ============ =========== ============
NET INCOME PER COMMON SHARE - BASIC AND DILUTED:
Net income per common share - basic .......... $ 0.00 $ 0.02 $ 0.01 $ 0.04
=========== ============ =========== ============
Net income per common share - diluted ........ $ 0.00 $ 0.02 $ 0.01 $ 0.04
=========== ============ =========== ============
Weighted Common Shares Outstanding - basic ... 73,942,276 49,778,814 73,941,003 45,481,225
=========== ============ =========== ============
Weighted Common Shares Outstanding - diluted . 73,942,276 50,970,533 73,941,003 45,854,530
=========== ============ =========== ============
See notes to unaudited consolidated financial statements
-4-
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months
Ended January 31,
--------------------------
2007 2006
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ................................................ $ 551,094 $ 2,025,104
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ........................... 448,064 159,952
Stock-based consulting and fees ......................... 414,694 316,312
Minority interest ....................................... - 589,174
Allowance for doubtful accounts ......................... (100,496) (805,294)
Changes in assets and liabilities:
Accounts receivable ..................................... (150,150) 250,967
Inventories ............................................. (2,430,826) 138,215
Prepaid and other current assets ........................ (13,946) 211,287
Due from/to related parties ............................. (7,459) 67,190
Accounts payable and accrued expenses ................... 70,698 (176,381)
Income taxes payable .................................... - (523,906)
Advances to customers ................................... (38,505) 61,937
----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ......... (1,256,832) 2,314,557
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ...................................... (36,181) (2,156,597)
----------- -----------
NET CASH FLOWS USED IN INVESTING ACTIVITIES ................. (36,181) (2,156,597)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock option and warrants ....... 12,500 2,053,050
Proceeds from subscription receivable ..................... 3,077,100 -
Proceeds from short term loan ............................. 720,000 -
Payment on short term loans .............................. (263,294) -
Payments on loans payable ................................. (720,000) (289,506)
----------- -----------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES ............. 2,826,306 1,763,544
----------- -----------
EFFECT OF EXCHANGE RATE ON CASH ............................. 185,158 36,522
----------- -----------
NET INCREASE IN CASH ........................................ 1,718,451 1,958,026
CASH - beginning of year ................................... 5,433,691 1,674,298
----------- -----------
CASH - end of period ........................................ $ 7,152,142 $ 3,632,324
=========== ===========
SUPPLEMENTAL DISCLOSUREOF CASH FLOW INFORMATION:
Cash paid for
Interest .................................................. $ 12,122 $ -
=========== ===========
Taxes ..................................................... $ - $ -
=========== ===========
Common stock issued for deferred compensation ............. $ - $ 532,833
=========== ===========
Stock options granted for deferred compensation ........... $ - $ 106,546
=========== ===========
Due from related party exchanged for property and equipment $ - $ 978,240
=========== ===========
See notes to unaudited consolidated financial statements.
-5-
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2007
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Sunwin International Neutraceuticals, Inc. was incorporated on August 27, 1987
in the State of Nevada as Network USA, Inc. The Company does not have any
substantive operations of its own and substantially all of its primary business
operations are conducted through its 100% owned subsidiary, Qufu Natural Green
Engineering Co. Ltd. and its subsidiaries ("Qufu"). Qufu is a Chinese limited
liability company, organized under the laws of the Peoples Republic of China,
with principal offices in Qufu, China. Qufu was founded in July 1999 and was
re-registered in January 2004 to amend its capital structure. Qufu has three
wholly owned Chinese subsidiaries, Shengya Veterinary Medicine Co., Ltd
(formerly known as Shangong Qufu Veterinary Medicine Plant), Shengyuan Herb
Extraction Co., Ltd., and Qufu Chinese Medicine Factory. Qufu is engaged in the
areas of essential traditional Chinese medicine, organic herbal medicine,
neutraceutical products, natural sweetener called Stevioside, and animal
medicine prepared from organic herbal ingredients.
On January 26, 2004, effective February 1, 2004, Sunwin Tech Group, Inc.,
("Sunwin Tech") a Florida corporation that became a wholly-owned subsidiary of
the Company (on April 30, 2004; see the following paragraph), entered into a
Stock Purchase Agreement with Shandong Shengwang Pharmaceutical Group
Corporation, Ltd. ("Group Corporation") a major shareholder of Qufu. Under this
agreement, Group Corporation exchanged 80% of the issued and outstanding capital
stock of Qufu in exchange for 100% of the issued and outstanding capital stock
of Sunwin Tech with a fair market value of $95,000. The Stock Purchase Agreement
has been accounted for as a reverse acquisition under the purchase method for
business combinations. Accordingly, the combination of the two companies is
recorded as a recapitalization of Qufu, pursuant to which Sunwin Tech is treated
as the continuing entity.
On April 30, 2004, under a Share Exchange Agreement, the Company issued
17,000,004 shares of its common stock for the acquisition of all of the
outstanding capital stock of Sunwin Tech from its four shareholders, Messrs.
Baozhong Yuan, Laiwang Zhang, Xianfeng Kong and Lei Zhang. For financial
accounting purposes, the exchange of stock was treated as a recapitalization of
Sunwin Tech with the former shareholders of the Company retaining 11,492,268 or
approximately 36.3% of the outstanding stock. The consolidated financials
statements reflect the change in the capital structure of the Company due to the
recapitalization and the consolidated financial statements reflect the
operations of the Company and its subsidiaries for the periods presented.
In connection with the Share Exchange Agreement, Sunwin Tech purchased 4,500,000
shares of the common stock of the Company owned by the former principal
shareholders of the Company, for $175,000, and, at the closing Sunwin Tech
distributed the 4,500,000 shares to Baozhong Yuan, Laiwang Zhang, Xianfeng Kong
and Lei Zhang, pro-rata according to their ownership of Sunwin Tech immediately
prior to the closing. This transaction did not affect the issuance of common
shares by the Company.
-6-
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2007
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
THE COMPANY (CONTINUED)
Effective July 27, 2004 the Company changed its name to Sunwin International
Neutraceuticals, Inc. The Company filed an amendment to its Articles of
Incorporation on July 12, 2004 to change its name, and to increase the number of
shares of common stock it is authorized to issue to 200,000,000 with a par value
of $.001 per share.
Also, effective July 27, 2004, the Company effected a six for one (6:1) forward
stock split of its issued and outstanding common stock. Each stockholder of
record at the close of business on July 27, 2004 received five additional shares
of common stock for each share of common stock held. All share and per-share
information has been restated to reflect this forward stock split.
As noted previously, prior to our acquisition of Sunwin Tech, effective February
1, 2004, Sunwin Tech acquired 80% of Qufu ("the Qufu Merger") from Group
Corporation, an entity controlled by Mr. Laiwang Zhang, our President and
Chairman, in exchange for all shares of Sunwin Tech's common stock. At the time
of this merger the minority shareholders of Qufu included Shandong Shengwang
Pharmaceutical Corporation Ltd. ("Corporation Ltd.") (17%) and Shandong
Shengwang Group Corporation (2.5%) ("Shengwang Group"), both of which are
controlled by our President and Chairman. The remaining minority shareholder,
Qufu Veterinary Medicine Company, Ltd. ("Qufu Vet Ltd.") (0.5%) was controlled
by a Chinese state owned agency.
Subsequent to the Qufu Merger, the Shengwang Group acquired the 17% interest of
Qufu owned by Corporation Ltd., and ultimately the Shengwang Group acquired the
0.5% Qufu interest owned by Qufu Vet Ltd., after Qufu Vet Ltd. was dissolved.
These events subsequent to the Qufu Merger resulted in the Shengwang Group
owning 20% of Qufu.
In February 2006, the Company acquired the remaining 20% minority interest of
Qufu from Shandong Shengwang Group Corporation. As a result, Qufu is a
wholly-owned subsidiary of the Company, effective on February 1, 2006. The
Company acquired the remaining 20% interest of Qufu Natural Green Engineering
Company, Ltd. by issuing 5,000,000 shares of common stock in February 2006
valued at $2,775,000. The transaction was treated as a business combination
pursuant to FAS 141. The Company accounted for the acquisition of the remaining
20% of Qufu as if it was a business combination. The fair value of the 5,000,000
shares was based on the price per share as of the close of the market on
February 7, 2006 of $0.555 per share, for a total fair value of $2,775,000. The
acquired minority interest had a value of approximately $2,595,000. The excess
of approximately $180,000 was determined to be an indirect and general expense
related to the business acquisition and was expensed.
On February 7, 2006, the Company formed a wholly owned subsidiary in Florida,
Sunwin Stevia International Corp. The purpose of this subsidiary is to establish
a North American distribution network for Stevioside manufactured by our
Company.
-7-
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2007
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
THE COMPANY (CONTINUED)
On April 11, 2006, the Company formed a wholly owned subsidiary in California,
Sunwin California, Inc. The purpose of this subsidiary is to distribute Chinese
herbs produced by our Company to Asian communities within California.
On April 20, 2006, the Company formed a wholly owned subsidiary in Canada,
Sunwin (Canada) Pharmaceutical Ltd., in order to market its traditional Chinese
medicines throughout Canada. The newly formed subsidiary will endeavor to market
some of its products in Canada. The Company desires to develop a partnership
with Canadian business representatives with knowledge of the consumer product
market within Canada. As of the date of this report the Company has not
identified a resource for this effort.
On May 31, 2006, the Company has entered into an oral agreement with Shandong
Yulong Group Company, Limited ("Yulong") to acquire 100% ownership of Qufu
Pharmaceuticals Factory ("Qufu Pharmaceuticals"). Qufu Pharmaceuticals Factory,
founded in 1994, a wholly owned subsidiary of Yulong, manufactures and
distributes Class I medicines in China. The medicines are derived from chemical
compounds. Yulong is in the process of receiving a GMP (good manufacturing
practices) certification for its facility which is a condition precedent to the
Company finalizing any terms of the proposed acquisition. While the Company has
been informed the certification should be issued during the first quarter of
fiscal 2008, after which time the Company would then proceed with finalizing the
terms under which it would proceed with the transaction, there is no assurance
that the Company will ever consummate this acquisition.
BASIS OF PRESENTATION
Certain reclassifications have been made to the prior year to conform to current
year presentation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). The accompanying consolidated
financial statements for the interim periods are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the periods presented. The consolidated
financial statements include the accounts of the Company and its wholly and
partially owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated. These consolidated financial statements
should be read in conjunction with the financial statements for the year ended
April 30, 2006 and notes thereto contained on Form 10-KSB of the Company as
filed with the Securities and Exchange Commission. The results of operations for
the nine months ended January 31, 2007 are not necessarily indicative of the
results for the full fiscal year ending April 30, 2007.
The consolidated statements include the accounts of the Company and its wholly
and partially-owned subsidiaries. All significant inter-company balances and
transactions have been eliminated.
-8-
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2007
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
NET INCOME PER SHARE
Net income per common share for the nine months ended January 31, 2007 and 2006
is based upon the weighted average common shares and dilutive common stock
equivalents outstanding during the period as defined by Statement of Financial
Accounting Standards, Number 128 "Earnings Per Share."
INVENTORIES
Inventories, consisting of raw materials and finished goods related to the
Company's products are stated at the lower of cost or market utilizing the
weighted average method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosures of information about the
fair value of certain financial instruments for which it is practicable to
estimate the value. For purpose of this disclosure, the fair value of a
financial instrument is the amount at which the instrument could be exchanged in
a current transaction between willing parties, other than in a forced sale or
liquidation.
The carrying amounts reported in the balance sheet for cash, accounts
receivable, accounts payable and accrued expenses, loans and amounts due from
related parties approximate their fair market value based on the short-term
maturity of these instruments.
INCOME TAXES
The Company files federal and state income tax returns in the United States for
its domestic operations, and files separate foreign tax returns for the
Company's Chinese subsidiaries. Income taxes are accounted for under Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
is an asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns. The
Company has no U.S. tax liability based on the fact that the Company derived all
of its revenues outside of the United States.
-9-
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2007
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight line method over the estimated economic lives of the
assets, which are from five to twenty years. Expenditures for major renewals and
betterments that extend the useful lives of property and equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense as
incurred. In accordance with Statement of Financial Accounting Standards (SFAS)
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the
Company examines the possibility of decreases in the value of fixed assets when
events or changes in circumstances reflect the fact that their recorded value
may not be recoverable.
FOREIGN CURRENCY TRANSLATION
Transactions and balances originally denominated in U.S. dollars are presented
at their original amounts. Transactions and balances in other currencies are
converted into U.S. dollars in accordance with Statement of Financial Accounting
Standards (SFAS) No. 52, "Foreign Currency Translation," and are included in
determining net income or loss.
For foreign operations with the local currency as the functional currency,
assets and liabilities are translated from the local currencies into U.S.
dollars at the exchange rate prevailing at the balance sheet date. Revenues and
expenses are translated at weighted average exchange rates for the period to
approximate translation at the exchange rates prevailing at the dates those
elements are recognized in the financial statements. Translation adjustments
resulting from the process of translating the local currency financial
statements into U.S. dollars are included in determining comprehensive loss.
The functional and reporting currency is the U.S. dollar. The functional
currency of the Company's Chinese subsidiary, Qufu, is the local currency; the
Chinese dollar or Renminbi ("RMB"). The financial statements of the subsidiaries
are translated into United States dollars using year-end rates of exchange for
assets and liabilities, and average rates of exchange for the period for
revenues, costs, and expenses. Net gains and losses resulting from foreign
exchange transactions are included in the consolidated statements of operations
and were not material during the periods presented due to fluctuations between
the RMB and the United States dollar. The cumulative translation adjustment and
effect of exchange rate changes on cash for the nine months ended January 31,
2007 was $185,158.
On July 21, 2005, the central government of China allowed the RMB to fluctuate,
ending its decade-old valuation peg to the U.S. dollar. The new RMB rate
reflects an approximately 2% increase in value against the U.S. dollar.
Historically, the Chinese government has benchmarked the RMB exchange ratio
against the U.S. dollar, thereby mitigating the associated foreign currency
exchange rate fluctuation risk. The Company does not believe that its foreign
currency exchange rate fluctuation risk is significant, especially if the
Chinese government continues to benchmark the RMB against the U.S. dollar.
-10-
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2007
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
STOCK-BASED COMPENSATION
The Company accounts for stock options issued to employees in accordance with
FASB Statement No. 123R, "Share-Based Payment, an Amendment of FASB Statement
No. 123" ("FAS No. 123R"). FAS No. 123R requires companies to recognize in the
statement of operations the grant- date fair value of stock options and other
equity-based compensation issued to employees. The Company has adopted FAS
No.123R in the second quarter of fiscal year 2006.
REVENUE RECOGNITION
The Company follows the guidance of the Securities and Exchange Commission's
Staff Accounting Bulletin 104 for revenue recognition. In general, the Company
records 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 collectibility is reasonably assured.
The Company does not record an allowance for product returns. The Company does
not allow product returns except for previous isolated cases of product
exchanges in the case of expired products.
The following policies reflect specific criteria for the various revenue streams
of the Company: The Company's revenues from the sale of products are recorded
when the goods are shipped, title passes, and collectibility is reasonably
assured.
NOTE 2 - INVENTORIES
At January 31, 2007, inventories consisted of the following:
Raw materials ............................... $ 2,253,623
Finished goods .............................. 2,075,685
-----------
4,329,308
Less: reserve for obsolete inventory ........ (65,259)
-----------
$ 4,264,049
===========
-11-
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2007
(UNAUDITED)
NOTE 3 - RELATED PARTY TRANSACTIONS
DUE TO RELATED PARTIES
The Company pays management fees to Group Corporation, an entity controlled by
Mr. Zhang, our President and Chairman. Group Corporation provides management
services to us, which includes costs and services related to housing provided to
certain of our non-management employees, government mandatory insurance for our
employees, and rent for our principal offices. The management fees, which are
included in general and administrative expenses for the nine months ended
January 31, 2007 and January 31, 2006, were $144,337 and $ 55,200 respectively.
At January 31, 2007, the Company owed Group Corporation $1,297 for management
fees.
NOTE 4 - PREPAID EXPENSES AND OTHERS ASSETS
Prepaid expenses and other assets at January 31, 2007 of $955,852 consisted of a
prepayment to suppliers for merchandise that had not yet been shipped as well as
services that had not yet been provided by the contractors/consultants. The
Company will recognize the prepayment as inventory or expense as suppliers make
delivery of goods or provide services, in compliance with its accounting policy.
As of January 31, 2007, prepaid expenses to suppliers for merchandise which had
not yet been shipped amounted to $612,344 and the prepaid expenses for
consulting services amounted to $343,508.
NOTE 5 - STOCKHOLDERS EQUITY
Common Stock
For the nine months ended January 31, 2007 and 2006, amortization of stock based
compensation amounted to $414,693 and $278,517, respectively.
On March 23, 2005, the Company's Board of Directors authorized and adopted the
2005 Equity Compensation Plan (the "2005 Plan"). The Company has currently
reserved 5,000,000 of its authorized but unissued shares of common stock for
issuance under the 2005 Plan. As of January 31, 2007, there are no available
shares to be issued, or options granted, under the 2005 Plan. On February 7,
2006, the Company's Board of Directors authorized and adopted the 2006 Equity
Compensation Plan (the "2006 Plan"). The Company has currently reserved
6,200,000 of its authorized but unissued shares of common stock for issuance
under the 2006 Plan. As of January 31, 2007, there are 1,265,000 shares
available to be issued or options granted under the 2006 Plan. The number of
shares authorized under the 2006 Plan, may be amended (subject to adjustment in
the event of certain changes in our capitalization) without further action by
the Board of Directors and stockholders, as required.
-12-
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2007
(UNAUDITED)
NOTE 5 - STOCKHOLDERS EQUITY (CONTINUED)
Stock Options
The purpose of the Plan is to encourage stock ownership by the Company's
officers, directors, key employees and consultants, and to give these persons a
greater personal interest in the success of the business and an added incentive
to continue to advance and contribute to the Company. Subject to the limitation
on the aggregate number of shares issuable under the 2005 and 2006 Plan, there
is no limit as to the amount of shares that may be granted to any person. Shares
used for stock grants and plan options may be authorized and unissued shares, or
shares reacquired by the Company, including shares purchased in the open market.
Shares covered by plan options which terminate unexercised will again become
available for grant as additional options, without decreasing the maximum number
of shares issuable under the plan, although such shares may also be used by the
Company for other purposes.
The 2005 and 2006 Plan is administered by the Company's Board of Directors or an
underlying committee. The Board of Directors or the committee determines from
time to time those of our officers, directors, key employees and consultants to
whom stock grants or plan options are to be granted, the terms and provisions of
the respective option agreements, the time or times at which such options shall
be granted, the type of options to be granted, the dates such plan options
become exercisable, the number of shares subject to each option, the purchase
price of such shares and the form of payment of such purchase price. All other
questions relating to the administration of the plans, and the interpretation of
the provisions thereof and of the related option agreement, are resolved by the
Board or committee.
Plan options may either be options qualifying as incentive stock options under
Section 422 of the Internal Revenue Code of 1986, as amended or non-qualified
options. The Company's officers, directors, key employees and consultants are
eligible to receive stock grants and non-qualified options under the plan; only
its employees are eligible to receive incentive options. In addition, the 2005
and 2006 Plans allow for the inclusion of a reload option provision which
permits an eligible person to pay the exercise price of the option with shares
of common stock owned by the eligible person and receive a new option to
purchase shares of common stock equal in number to the tendered shares.
Furthermore, compensatory stock grants may also be issued.
Any incentive option granted under the plans must provide for an exercise price
of not less than 100% of the fair market value of the underlying shares on the
date of grant, but the exercise price of any incentive option granted to an
eligible employee owning more than 10% of our outstanding common stock must not
be less than 110% of fair market value on the date of the grant. The term of
each Plan's option and the manner in which it may be exercised is determined by
the Board of Directors or the committee, provided that no option may be
exercisable more than ten years after the date of its grant and, in the case of
an incentive option granted to an eligible employee owning more than 10% of the
common stock, no more than five years after the date of the grant. The exercise
price of non-qualified options shall be determined by the Board of Directors or
the Committee, but shall not be less than the par value of our common stock on
the date the option is granted. The per share purchase price of shares issuable
upon exercise of either the 2005 or 2006 Plan option may be adjusted in the
event of certain changes in our capitalization, but no such adjustment shall
change the total purchase price payable upon the exercise in full of options
granted under the Plan.
-13-
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2007
(UNAUDITED)
NOTE 5 - STOCKHOLDERS EQUITY (CONTINUED)
Stock Options (Continued)
All incentive stock options expire on or before the 10th anniversary of the date
the option is granted; however, in the case of incentive stock options granted
to an eligible employee owning more than 10% of the common stock, these options
will expire no later than five years after the date of the grant. Non-qualified
options expire 10 years and one day from the date of grant unless otherwise
provided under the terms of the option grant.
As of January 31, 2007, there are no shares available to be issued, or options
granted, under the 2005 Plan. As of January 31, 2007, there are 1,265,000 shares
available to be issued or options granted under the 2006 Plan. Under the 2006
Plan a total of 860,000 common shares were issued to satisfy the requirements
under a service consulting agreement from January 2006, in February 2006 the
Company granted options to purchase 4,000,000 shares to employees, and the
Company granted options to purchase 75,000 shares under a consulting agreement
entered into in February 2006. All options granted for the purchase by employees
of 4,000,000 shares of common stock were exercised in the year ended April 30,
2006. Of the options granted to the consultant for the purchase of 75,000 shares
of common stock a total of 50,000 were exercised for the year ended April 30,
2006 and a total of 25,000 options were exercised for the nine months ended
January 31, 2007. There were no outstanding stock options as of January 31,
2007.
-14-
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2007
(UNAUDITED)
NOTE 6 - SEGMENT INFORMATION
The following information is presented in accordance with SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information. In the
periods ended January 31, 2007 and January 31, 2006, the Company operated in two
reportable business segments - (1) the sale of essential traditional Chinese
medicine, 100 percent organic herbal medicine, neutraceutical products, and
animal medicines prepared from 100% organic herbal ingredients and (2) sale of
natural sweetener called Stevioside. The Company's reportable segments are
strategic business units that offer different products. They are managed
separately based on the fundamental differences in their operations. Condensed
information with respect to these reportable business segments for the nine
months ended January 31, 2007 and 2006 are as follows:
Nine months Ended January 31, 2007 (Unaudited):
Chinese and Natural
Animal Sweetener Corporate
Medicines (Stevioside) and Other Consolidated
------------ ------------ ----------- ------------
Net Revenues ................ $ 5,307,396 $6,243,196 $ 12,356 $ 11,562,948
Interest income ............. 3,388 52,644 1,854 57,886
Depreciation and amortization 219,541 228,523 - 448,064
Net income (loss) ........... 688,428 649,773 (787,107) 551,094
Long-lived asset expenditures 36,181 - - 36,181
Segment Assets .............. $ 10,226,575 $9,427,275 $ 850,427 $ 20,504,277
Nine months Ended January 31, 2006(Unaudited):
Chinese and Natural
Animal Sweetener Corporate
Medicines (Stevioside) and Other Consolidated
------------ ------------ ----------- ------------
Net Revenues ................ $ 6,622,791 $4,443,062 $ - $ 11,065,853
Interest (expense) .......... (32,704) 2,383 - (30,321)
Depreciation and amortization 47,986 111,966 - 159,952
Net income (loss) ........... 1,434,990 921,704 (331,589) 2,025,104
Long-lived asset expenditures 1,546,346 610,251 - 2,156,597
Segment Assets .............. $ 6,560,683 $7,509,526 $ 1,123,969 $ 15,194,178
-15-
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2007
(UNAUDITED)
NOTE 7 - OPERATING RISK
(a) Country risk
Currently, the Company's revenues are mainly derived from sale of herbs, beet
sugar and veterinary products in the Peoples Republic of China ("PRC"). The
Company hopes to expand its operations to countries outside the PRC, however,
such expansion has not been commenced and there are no assurances that the
Company will be able to achieve such an expansion successfully. Therefore, a
downturn or stagnation in the economic environment of the PRC could have a
material adverse effect on the Company's financial condition.
(b) Products risk
In addition to competing with other companies, the Company could have to compete
with larger U.S. companies who have greater funds available for expansion,
marketing, research and development and the ability to attract more qualified
personnel if access is allowed into the PRC market. If U.S. companies do gain
access to the PRC markets, they may be able to offer products at a lower price.
There can be no assurance that the Company will remain competitive should this
occur.
(c) Exchange risk
The Company can not guarantee that the current exchange rate will remain steady,
therefore there is a possibility that the Company could post the same amount of
profit for two comparable periods and because of a fluctuating exchange rate
actually post higher or lower profit depending on exchange rate of RMB converted
to U.S. dollars on that date. The exchange rate could fluctuate depending on
changes in the political and economic environments without notice.
(d) Political risk
Currently, the PRC is in a period of growth and is openly promoting business
development in order to bring more business into the PRC. Additionally, the PRC
allows a Chinese corporation to be owned by a United States corporation. If the
laws or regulations are changed by the PRC government, the Company's ability to
operate the PRC subsidiaries could be affected.
(e) Key personnel risk
The Company's future success depends on the continued services of executive
management in China. The loss of any of their services could be detrimental to
the Company and could have an adverse effect on business development. The
Company does not currently maintain key-man insurance on their lives. Future
success is also dependent on the ability to identify, hire, train and retain
other qualified managerial and other employees. Competition for these
individuals is intense and increasing.
-16-
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2007
(UNAUDITED)
NOTE 7 - OPERATING RISK (CONTINUED)
(f) Performance of subsidiaries risk
Currently all of the Company's revenues are derived via the operations of Qufu
and its subsidiaries. Economic, governmental, political, industry and internal
company factors outside of the Company's control affect each of the
subsidiaries. If the subsidiaries do not succeed, the value of the assets and
the price of our common stock could decline. Some of the material risks relating
to the subsidiary companies include the fact that Qufu and all of their
subsidiaries are located in China and have specific risks associated with that
and the intensifying competition for the Company's products and services.
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following analysis of our consolidated financial condition and
results of operations for the nine months ended January 31, 2007 and 2006,
should be read in conjunction with the consolidated financial statements,
including footnotes, appearing elsewhere in this quarterly report on Form 10-QSB
for the period ended January 31, 2007.
OVERVIEW
Through our subsidiaries, we manufacture and sell neutraceutical
products which can be classified into three main product groups including;
Stevioside, a 100% natural sweetener, veterinary medicines and animal feed
additives, and traditional Chinese medicine formula extracts. For accounting
purposes, however, we report our revenues in two segments, Stevioside and
Chinese and animal medicines. All of our business and operations are located in
the People's Republic of China.
The majority of our revenues are derived from our Stevioside product,
and our principal customers for this product are located in Asia, primarily
China and Japan where Stevioside is approved for use as both a food additive as
well as a nutritional supplement.
This product group represented approximately 54% of our net sales for
the nine months ended January 31, 2007 and approximately 46% of our net sales
for fiscal 2006. China has emerged as the world's largest producer of
Stevioside, with volume exceeding 80% of the world's supply. We believe that we
are one of the top three Stevioside manufacturers in China.
We also manufacture and sell a comprehensive group of veterinary
medicines including seven series of more than 200 products. These veterinary
medicines include traditional Chinese medicine as well as western medicine, feed
additives, feeds and antibiotics.
We are an advocate of developing animal medicine from Chinese herbs,
especially antivirus and feed additives. We are concentrating our efforts in
this product category on developing and producing medicines which are relevant
to the needs of the animal stock industry in the PRC, and developing special
veterinary medicines made from pure traditional Chinese medicines combined with
Western medicine. This product group represented approximately 21% of our net
sales for the nine months ended January 31, 2007. Our last product group
includes the manufacture and sale of traditional Chinese medicines formula
extracts that are used in products made for use by both humans and animals. This
product group represented approximately 25% of our net sales for the nine months
ended January 31, 2007.
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
Our ability to significantly increase our revenues in any of these
groups faces a number of challenges. In addition to the existing laws which
limit the sale of Stevioside to Western countries, we face competition in the
manufacture and sale of Stevioside. There are approximately 30 Stevioside
manufacturers in China, with approximately 10 companies operating on a
continuing basis. Our other two product groups operate in highly competitive
environments. We estimate that there are more than 5,000 companies in China
selling animal medicines and more than 200 companies in China that produce
Chinese traditional medicines and extracts and refined chemical products. The
sale of our products in these two product groups are concentrated on domestic
customers therefore our ability to expand our revenues in these product groups
are limited to a certain extent by economic conditions in the PRC. In addition,
since we are dependent upon raw materials which are harvested and farmed, our
ability to produce our products and compete in our markets is also subject to
risks including weather and similar events which may reduce the amount of raw
materials we are able to purchase from farmers as well as increased competition
or market pressure which may result in reduced prices for our products. Our
ability, however, to expand our revenues from the sale of Stevioside is limited
as the product is not approved for use as a food additive in most Western
countries, including the United States, Canada and the European Union. In these
countries forms of Stevioside can be marketed and sold as a nutritional
supplement. In an effort to increase our competitive position within our market
segment, we have built an additional Stevioside manufacturing line in order to
expand our Stevioside production, upgraded our existing manufacturing Stevioside
line, and we relocated to a larger facility. In January 2007, our wholly owned
subsidiary, Sunwin Stevia International Corp., launched our website,
www.onlysweet.com.
Through January 31, 2007, we have invested an aggregate of
approximately $2,005,489 for leasehold improvements and equipment related to an
additional veterinary medicine manufacturing line and $1,214,777 towards the
construction and development of a new Stevioside facility.
Even though we are a U.S. company, because all of our operations are
located in the PRC, we face certain risks associated with doing business in that
country. These risks include risks associated with the ongoing transition from
state business ownership to privatization, operating in a cash-based economy,
various government policies, unexpected changes in regulatory requirements,
export restrictions, tariffs and other trade barriers, challenges in staffing
and managing operations in a Communist country, differences in technology
standards, employment laws and business practices, longer payment cycles, and
changes in currency exchange rates and currency exchange controls. We are unable
to control the vast majority of these risks associated both with our operations
and the country in which they are located and these risks could result in
significant declines in our revenues and adversely affect our ability to
continue as a going concern in future periods.
FOREIGN EXCHANGE CONSIDERATIONS
Since revenues from our operations in the PRC accounted for 100% of our
net revenues for fiscal 2006 and fiscal 2005, how we report net revenues from
our PRC-based operations is of particular importance to understanding our
financial statements. Transactions and balances originally denominated in U.S.
dollars are presented at their original amounts. Transactions and balances in
other currencies are converted into U.S. dollars in accordance with Statement of
Financial Accounting Standards (SFAS) No. 52,"Foreign Currency Translation," and
are included in determining net income or loss. For foreign operations with the
local currency as the functional currency, assets and liabilities are translated
from the local currencies into U.S. dollars at the prevailing exchange rate on
the respective balance sheet date.
-19-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
Revenues and expenses are translated at weighted average exchange rates
for the period to approximate translation at the exchange rates prevailing at
the dates those elements are recognized in the financial statements. Translation
adjustments resulting from the process of translating the local currency
financial statements into U.S. dollars are included in determining comprehensive
loss.
The functional currency of our Chinese subsidiaries is the local
currency or the RMB. The financial statements of our subsidiaries are translated
to U.S. dollars using year-end rates of exchange for assets and liabilities, and
average rates of exchange for the period for revenues, costs, and expenses. Net
gains and losses resulting from foreign exchange transactions are included in
the consolidated statements of operations and were not material during the
periods presented. The translation adjustment and effect of exchange rate
changes on cash for the nine month period ending January 31, 2007 was $185,158.
Until 1994, the Renminbi experienced a gradual but significant devaluation
against most major currencies, including the U.S. dollar. There was a
significant devaluation of the Renminbi on January 1, 1994 in connection with
the replacement of the dual exchange rate system with a unified managed floating
rate foreign exchange system. Since 1994, the value of the Renminbi relative to
the U.S. dollar has remained stable; appreciating slightly against the U.S.
dollar. Countries, including the United States, have historically argued that
the Renminbi is artificially undervalued due to China's current monetary
policies and have pressured China to allow the Renminbi to float freely in world
markets. On July 21, 2005, the PRC announced that the Renminbi would be pegged
to a basket of currencies rather than just tied to a fixed exchange rate to the
U.S. dollar. It also increased the value of its currency 2% higher against the
U.S. dollar, effective immediately
As of the period ending January 31, 2007 the Company had cash in banks
in Canada of $78,816., The functional currency of our Canadian subsidiary is the
Canadian Dollar. The Company periodically evaluates the credit quality of the
financial institutions at which it holds deposits. The financial statements of
our subsidiaries are translated to U.S. dollars using year-end rates of exchange
for assets and liabilities, and average rates of exchange for the period for
revenues, costs, and expenses. Net gains and losses resulting from foreign
exchange transactions are included in the consolidated statements of operations
and were not material during the period presented.
If any devaluation of the Renminbi were to occur in the future, returns
on our operations in China, which are expected to be in the form of Renminbi,
will be negatively impacted upon conversion to U.S. dollars. Although we attempt
to have most future payments, mainly repayments of loans and capital
contributions denominated in U.S. dollars, if any increase in the value of the
Renminbi were to occur in the future, our product sales in China and in other
countries may be negatively affected.
-20-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these consolidated financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates based on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
A summary of significant accounting policies is included in Note 1 to
the audited consolidated financial statements on Form 10-KSB as filed with the
Securities and Exchange Commission. Management believes that the application of
these policies on a consistent basis enables us to provide useful and reliable
financial information about the Company's operating results and financial
condition.
We record property and equipment at cost. Depreciation and amortization
are provided using the straight-line method over the estimated economic lives of
the assets, which are from five to twenty years. Expenditures for major renewals
and betterments that extend the useful lives of property and equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense as
incurred. 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
market value.
The Company accounts for stock options issued to employees in
accordance with the FASB Statement No. 123R, "Share-Based Payment, an Amendment
of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires companies to
recognize in the statement of operations the grant- date fair value of stock
options and other equity-based compensation issued to employees. The Company has
adopted FAS No.123R in the second quarter of fiscal year 2006.
-21-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
RESULTS OF OPERATIONS
NINE MONTHS ENDED JANUARY 31, 2007 AS COMPARED TO NINE MONTHS ENDED JANUARY 31,
2006
The following table provides certain comparative information on our
results of operations for the nine months ended January 31, 2007 and the nine
months ended January 31, 2006.
Nine Months Ended January 31,
2007 2006 $ %
(Unaudited) (Unaudited) Change Change
----------- ------------ ----------- -------
Net Revenues .......................... $11,562,948 $ 11,065,853 $ 497,095 4.5%
Cost of sales ......................... 8,518,605 7,555,073 963,532 12.8%
Stock-based consulting expense ........ 414,693 278,517 136,176 48.9%
Selling expenses ...................... 1,314,792 1,371,548 (56,756) -4.1%
General and administration(GA) expenses 830,020 (107,208) 937,228 -874.2%
Total operating expenses .............. 2,559,505 1,542,857 1,016,648 65.9%
Operating income ...................... 484,838 1,967,923 (1,483,085) -75.4%
Total other income .................... 66,256 122,449 (56,193) NM
Income taxes .......................... - 523,907 (523,907) -100.0%
Minority interest ..................... - (589,174) 589,174 NM
Net income ............................ $ 551,094 $ 2,025,104 $(1,474,011) -72.8%
Net Income (loss) attributable to
Common shareholders .................. $ 669,520 $ (42,428) $ 711,948 NM
NM = not meaningful
Other key indicators:
Nine Months Nine Months
Ended January Ended January
2007 2006 %
(Unaudited) (Unaudited) Change
------------- ------------- ------
OTHER KEY INDICATORS:
Cost of sales as a percentage of revenues .......... 74% 68% 5.4%
Gross profit margin ................................ 26% 32% -5.4%
Selling expenses as a percentage of revenues ....... 11% 12% -1%
GA expenses as a percentage of revenues ............ 7% -1% 8.1%
Total operating expenses as a percentage of revenues 22% 14% 8.2%
-22-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
REVENUES
For the nine months ended January 31, 2007, our total net sales were
$11,562,948 as compared to total net sales of $11,065,853 for the nine months
ended January 31, 2006, an increase of $497,095 or approximately 4.5%. For nine
months ended January 31, 2007, sales from our Stevioside segment represented
approximately 54% of our net sales and sales from our traditional Chinese
medicine extracts and veterinary medicine segment represented approximately 46%
of our total net sales. For the nine months ended January 31, 2006, sales from
our Stevioside segment represented approximately 40% of our total net sales and
sales from our traditional Chinese medicine extracts and veterinary medicine
segment represented approximately 60% of our total net sales.
Our sales related to the manufacture and sale of Stevioside increased
from $4,443,062 for the nine months ended January 31, 2006 to $6,243,196 for the
nine months ended January 31, 2007, an increase of $1,800,134, or approximately
41%. The increase in the sales of our natural sweetener, Stevioside, reflects
the completion in fiscal 2006 of a new Stevioside manufacturing facility. The
new facility could enable us to capture a larger market share. We manufactured
107 tons of Stevioside and resold 123 tons during fiscal year 2006. For the nine
months ended January 31, 2007, we manufactured 145 tons and resold 248 tons of
Stevioside, while for the nine months ended January 31, 2006, we manufactured 75
tons and resold 167 tons of Stevioside. We continue to witness growing demand
for Stevioside. We credit this growth to increased awareness of the attributes
of Stevioside.
Our sales related to our veterinary medicine products was $2,470,168
for the nine months ended January 31, 2007 as compared to $3,274,677 for the
nine months ended January 31, 2006, a decrease of $804,509 or approximately 25%.
The decrease in the sale of our veterinary medicine products was due in part to
reduced demand for animal medicine products as a result of heightened health
standards which were enforced from February 2006 through May 2006. One such
measure mandates that farmers and breeders euthanize livestock upon confirmation
of avian flu symptoms. Our primary clients are veterinary facilities. This
policy resulted in a decline in market demand for animal medicine products.
Management is cognizant of this market reaction. There can no assurances that
sales will return to their historical levels.
Our sales related to our traditional Chinese medicine products was
$2,837,229 for the nine months ended January 31, 2007 as compared to $3,348,114
for the nine months ended January 31, 2006, a decrease of $510,885 or
approximately 15%. Sales of our traditional Chinese medicine products include
sales of products to third party animal medicine producers who use our products
as a component of their own product. Sales of traditional Chinese medicine
products to these animal medicine producers were sluggish due to reduced demand
for animal medicine products as a result of heightened health standards which
the Chinese government instituted in response to increased reports of the avian
flu. These measures were strictly enforced from February 2006 through May 2006.
One such measure mandates that farmers and breeders euthanize livestock upon
confirmation of avian flu symptoms. This policy has caused a decline in the
demand for animal medicine products in the market. There can no assurances that
sales will return to their historical levels. Accordingly, in addition to
seasonality of sales, as a result of the heightened health standards following
the incidences of avian flu in fiscal 2006 discussed above we also experienced a
decrease in demand for traditional Chinese medicine products by third party
animal medicine producers. There are no assurances sales will return to historic
levels.
-23-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
COST OF SALES AND GROSS PROFIT
For the nine months ended January 31, 2007, cost of sales amounted to
$8,518,605 or approximately 73.8% of net sales as compared to cost of sales of
$7,555,073 or approximately 68.3% of net sales for the nine months ended January
31, 2006, an increase of 12.8%. The cost of sales increased due to the increase
in the cost of raw materials in each of our segments. For traditional Chinese
medicine, the cost of sales as a percentage of revenues increased from 58.4% for
the nine months ended January 31, 2006 to 65.1% for the nine months ended
January 31, 2007. The Company has witnessed an increase in the general cost of
raw materials in this product segment due to reduced supply. The supply of raw
materials has been reduced due to seasonal variances. The Company expects that
the cost of raw materials employed in the process and manufacture of traditional
Chinese medicine will continue to increase in the future. As a precaution the
Company has increased its inventory levels for the raw materials employed in the
process and manufacture of traditional Chinese medicine.
In our veterinary medicine segment, the cost of sales as a percentage
of revenues increased from 66.8% for the nine months ended January 31, 2006 to
69.5% for the nine months ended January 31, 2007. The Company has witnessed an
increase in the general cost of raw materials in this product segment due to a
reduced veterinary medicine raw material market after the avian flu disruption
in fiscal 2006 described elsewhere herein.
In our Stevioside segment, the cost of sales as a percentage of
revenues increased from 76.8% for the nine months ended January 31, 2006 to
79.3% for the nine months ended January 31, 2007. The Company has witnessed an
increase in the general cost of raw materials in this product segment. As demand
for Stevioside grows, the cost of raw materials utilized in the production of
Stevioside will continue to rise. Due to circumstances relating to the
availability of the raw materials which comprise Stevioside the Company has
increased its inventory levels for the raw materials employed in the process and
manufacturing of Stevioside.
Gross profit for the nine months ended January 31, 2007 was $3,044,343
or approximately 26.3% of net sales, as compared to $3,510,780, or approximately
31.7% of net sales for the nine months ended January 31, 2006.
OPERATING EXPENSES
Total operating expenses were $2,559,505 for the nine months ended
January 31, 2007 as compared to operating expenses of $1,542,857 for the nine
months ended January 31, 2006, an increase of $1,016,648, or approximately
65.9%. Included in this increase were:
o For the nine months ended January 31, 2007, we recorded non-cash compensation
expense of $414,693 as compared to $278,517 for the nine months ended January
31, 2006, an increase of $136,176 or approximately 48%. This amount
represented the value of shares of our common stock we issued as compensation
for consulting services and professional services being rendered to us. This
increase primarily represents fees related to our Canadian and California
subsidiaries. While we anticipate that we will enter into additional, similar
agreements during the balance of fiscal year 2007, we cannot predict the
amount of expense which will be attributable to such agreements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
OPERATING EXPENSES (CONTINUED)
o For the nine months ended January 31, 2007, selling expenses amounted to
$1,314,792 compared to $1,371,548 for the nine months ended January 31, 2006
a decrease of $56,756 or approximately 4.1%. For the nine months ended
January 31, 2007 selling expenses were approximately 11.4% of our net sales,
as compared to approximately 12.4% for the nine months ended January 31,
2006. For the nine months ended January 31, 2007 we experienced an increase
in marketing expenses for Stevia products in the North American market of
$130,000; these costs are associated with the introduction of our products to
the North American market. As discussed the Company formed new subsidiaries
in Florida, Canada, and California. The purpose of these subsidiaries is to
establish a North American distribution network for a proprietary blend of
Stevioside, as well as for our traditional Chinese medicine products. The
Company has experienced increased expenditures related to these efforts. As a
result, the Company has been granted a trademark, UPC bar code certification,
retained the services of Blue Chip Marketing and Communications to conduct
extensive market research studies, created an interactive web site, and hired
a chief executive officer for its Sunwin Stevia International Corp.
subsidiary. There is no assurance that these subsidiaries will generate
substantial revenues in the near term.
o For the nine months ended January 31, 2007 we incurred a decrease in
commission expenses of approximately $77,000, a decrease in the local sales
tax of approximately $131,000, a decrease in travel expenses of approximately
$31,000. Commission expenses decreased as a larger portion of our sales are
processed directly from the factory as opposed to sales consummated through
our salespeople. Local sales tax is exempt by local government for fiscal
year 2007.
o For the nine months ended January 31, 2007 we incurred an increase in
shipping and freight expenses of approximately $51,000. The increase in
freight charges are related to an increase in sales and related fuel
surcharges realized by the Company during the period ending January 31, 2007.
o For the nine months ended January 31, 2007, general and administrative
expenses were $830,020 as compared to $(107,208) for the nine months ended
January 31, 2006, an increase of $937,228 or approximately 874.2%. The
Company formed a wholly owned subsidiary, Sunwin California, Inc., on April
11, 2006. The Company incurred expenses related to Sunwin California, Inc.
which are included in the general and administrative costs of approximately
$50,000 for the nine months ended January 31, 2007 which reflects expenses
associated with our efforts to expand distribution of Chinese herbs in
Chinese communities within California. The Company formed a wholly owned
subsidiary in Canada, Sunwin (Canada) Pharmaceutical Limited, on April 20,
2006. The Canadian subsidiary's related expenses included in the general and
administrative costs were approximately $45,000 for the nine months ended
January 31, 2007 which reflects expenses associated with our efforts to
expand distribution of Stevioside into Canada. The Company also incurred
expenses related to Sunwin Tech Group, Inc. which are included in the general
and administrative costs of approximately $60,000 for the nine months ended
January 31, 2007 which reflects expenses associated with consultants and
professional resources for the marketing the proprietary blend of Stevioside,
"Only Sweet" in the U.S. market.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
OPERATING EXPENSES (CONTINUED)
o For the nine months ended January 31, 2007 our subsidiary Natural Green
Neutraceuticals incurred general and administrative expenses of $635,670 as
compared to $(160,280) for the nine months ended January 31, 2006, an
increase of $795,950 or 497%. For the nine months ended January 31, 2006, the
Company incurred a one time bad debt expense recovery of $867,323.
Furthermore, the difference is widened by the abatement of management fees
for the Stevioside factory and the veterinary medicine factory which was
waived by Shandong Shengwang Pharmaceutical Corporation for the nine months
ended January 31, 2006 due to the construction of the new Stevioside
facility.
o For the nine months ended January 31, 2007, the Company completed the upgrade
of the facility and incurred management fees of $144,337 as compared to
$55,200 in management fees for the nine months ended January 31, 2006, an
increase of $89,137, or 161%. Included in the management fees for the nine
months ended January 31, 2007 are approximately $104,376 related to the
operations of our Stevioside and veterinary medicine factories. During fiscal
2006 the Company was undertaking an upgrade of its Stevioside factory and
veterinary medicine factory and we did not pay management fees on those
operations during the period of the upgrade.
o These increases were offset by a decrease of approximately $760,507 in bad
debt expenses, $19,530 in rent expenses, $24,795 in travel expenses and
overall decrease in other general and administrative expenses of
approximately $12,000. Bad debt expenses decreased for the nine months ended
January 31, 2007 as compared to the nine months ended January 31, 2006. For
the nine months ended January 31, 2006 the Company incurred a one time bad
debt expense recovery of $867,323. During the nine months ended January 31,
2007, the Company formed a delinquent accounts receivable department whose
objective is to resolve overdue accounts receivable. The Company established
an initiative to resolve outstanding accounts receivable; the goal is to
improve our collection rate for outstanding accounts receivable. As a result,
the bad debt expenses were decreased by approximately $760,507 for the nine
months ended January 31, 2007 as compared to the nine months ended January
31, 2006. For the nine months ended January 31, 2006, we incurred rental
expense of $41,313 while we upgraded the traditional Chinese medicine
factory. The Company needed additional space to warehouse goods while the
upgrade was in process. For the nine months ended January 31, 2007, the
Company has completed the upgrade of the facility and the rental expense
decreased accordingly. Travel expenses decreased for the nine months ended
January 31, 2007 as compared to the nine months ended January 31, 2006. The
Company expects travel expenses will increase in the near term as our
salespeople are beginning to service their customers on a more frequent basis
since the government mandates have eased related to the Avian flu, and the
Company plans to bolster its sales efforts of its veterinary medicine
products.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
TOTAL OTHER INCOME (EXPENSE)
For the nine months ended January 31, 2007, other income amounted to
$66,256 as compared to other income of $122,449 for the nine months ended
January 31, 2006, a decrease of $56,193. Other income for the nine months ended
January 31, 2006 was associated with income recognized from the accrual of
value-added taxes on certain of our animal medicine products which had not been
assessed to our customers. Respective tax authorities notified the Company that
certain of our animal medicine products are not subject to value added taxes.
However until we received notification of such position from the respective tax
authority, we had accrued additional value added taxes. Upon notification from
the tax authority, the accrued taxes were recorded as other income for the nine
months ended January 31, 2006. For fiscal year 2007, the Company was not
required to record an accrual for value added taxes, since the Company received
the notification from the tax authority.
For the nine months ended January 31, 2007, interest income was $57,886
as compared to interest expense of $30,321 for the nine months ended January 31,
2006, an increase of $88,207. Interest income for the nine months ended January
31, 2007 was associated with interest we received on our increased cash balances
held in our bank accounts, and the interest expense for the nine months ended
January 31, 2006 was associated with our borrowings.
For the nine months ended January 31, 2007, we reported a minority
interest in income of our subsidiary, Qufu, of $0 as compared to a minority
interest of $589,174 for the nine months ended January 31, 2006. On February 7,
2006, we acquired the remaining 20% of Qufu and, as a result, Qufu is now our
wholly-owned subsidiary.
As a result of these factors, we reported net income of $551,094 or
$.01 per share for the nine months ended January 31, 2007 as compared to net
income of $2,025,105 or $.04 per share for the nine months ended January 31,
2006.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of a company to generate funds to support its current
and future operations, satisfy its obligations and otherwise operate on an
ongoing basis. The following table provides certain selected balance sheet
comparisons between January 31, 2007 (unaudited) and April 30, 2006:
January 31, April 30, $ of % of
2007 (Unaudited) 2006 Change Change
---------------- ----------- ---------- -------
Working capital ..................... $13,634,219 $ 8,908,577 4,725,642 53.0%
Cash ................................ $ 7,152,142 $ 5,433,691 1,718,451 31.6%
Accounts receivable, net ............ $ 2,947,568 $ 2,608,873 338,695 13.0%
Inventories ......................... $ 4,264,049 $ 1,778,870 2,485,179 139.7%
Prepaid expenses and other .......... $ 955,852 $ 967,892 (12,040) -1.2%
Total current assets ................ $15,319,611 $10,789,326 4,530,285 42.0%
Property and equipment, net ......... $ 5,184,666 $ 5,375,849 (191,183) -3.6%
Loans payable ....................... $ 0 $ 255,487 (255,487) -100.0%
Accounts payable and accrued expenses $ 1,684,095 $ 1,579,402 104,693 6.6%
Due to related party ................ $ 1,297 $ 8,497 (7,200) -84.7%
Advances from customers ............. $ 0 $ 37,363 (37,363) -100.0%
Total current liabilities ........... $ 1,685,392 $ 1,880,749 (195,357) -10.4%
Total liabilities ................... $ 1,823,948 $ 2,015,197 (191,249) -9.5%
At January 31, 2007, we had working capital of $13,634,219 and cash and
cash equivalents of $7,152,142. At January 31, 2007, our cash position by
geographic area is as follows:
United States .. $ 428,103
Canada ......... 78,816
China .......... 6,645,223
----------
Total .......... $7,152,142
==========
At January 31, 2007 we had prepaid expenses and other of $955,852 as
compared to $967,892 at April 30, 2006, a decrease of $12,040 or approximately
1.2%. As reported in Prepaid expenses and other, advances to vendors for the
year ended April 30, 2006 was $80,224 while the advances to vendors for the
period ending January 31, 2007 was $0; a decrease of $80,224. We advanced funds
to farmers in the region as a down payment to grow Stevia leaves for the
production of our Stevioside. Prepayment to farmers is dependent on the supply
of Stevioside in the market. For the first six months of fiscal 2007 the Company
increased its inventory of Stevia leaves in response to tightening market
conditions. During the three months ended January 31, 2007, however, supply of
Stevia leaves increased and the Company accordingly decreased advances to
farmers.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
Our inventories, net of reserve for obsolete inventory, increased
$2,485,179 during the nine months ended January 31, 2007 from $1,778,870 at
April 30, 2006 to $4,264,049 at January 31, 2007. It is the harvest season for
Stevia leaves. We reserve adequate Stevia leaves for our increased sales of
Stevioside. The Company believes the inventory will be maintained at this level
for the next quarter as well.
As of January 31, 2007, we had approximately $1,297 in due to related
party. The Company pays management fees to Shandong Shengwang Pharmaceutical
Corporation, Limited, a related entity. The management fees which are included
in general and administrative expenses for the nine months ended January 31,
2007 and January 31, 2006 were $144,337 and $55,200, respectively. At January
31, 2007, the Company owed Shandong Shengwang Pharmaceutical Corporation,
Limited $1,297 for management fees. We do not have a contract with Shandong
Shengwang Pharmaceutical Corporation, Limited and the amount of annual
management fee is subject to increase at Mr. Zhang's discretion.
Net cash provided by (used in) operating activities decreased to
$(1,256,832) for the nine months ended January 31, 2007 from $2,314,557 for the
nine months ended January 31, 2006. This decrease is primarily attributable to:
* a decrease of $1,474,010 in our net income,
* an increase of $288,112 in depreciation and amortization as a result
of the fact that during fiscal 2006 we upgraded a portion of our facilities to
satisfy heightened GMP (good manufacturing practices) standards.
* an increase of $98,382 in stock based compensation which reflects the
increase in the amortization of the payments of non-cash compensation to
consultants during fiscal 2006. We paid stock based compensation to consultants
for business development services, management services, and investor relations
services. The total payments are amortized over the life of the service period.
Most of the amortization expense of stock based compensation commenced in fiscal
2006, therefore for the nine months ended January 31, 2007 amortization has been
recorded for the full nine month period as compared to the three months of
amortization expenses which appeared during the comparable period ending January
31, 2006.
* a decrease of $589,174 in minority interest which represents that
portion of our net income which is attributable to the remaining 20% interest in
Qufu we did not own for the nine months ended January 31, 2006.
* a decrease of $704,798 in allowance for doubtful accounts which
represents a decrease in our allowance for bad debts based on the increased
credit worthiness of our customers and our historical collections. At present
the Company has dedicated additional labor and support in our credit and
accounts receivable department and this initiative has significantly reduced our
bad debt expense
* a decrease of $401,117 in accounts receivable as a result of
collecting our receivables in a more timely manner. The Company has been more
focused on our credit and collection procedures and as a result has witnessed
faster payment by its customers.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
* an increase of $2,485,179 in inventory for the nine months ended
January 31, 2007 as compared to the change in inventory for the nine months
ended January 31, 2006. Our inventory level increased due to our increased
Stevioside production. As well we have increased our inventory for raw materials
used in Stevia production and traditional Chinese medicine production; however
we have decreased our raw material inventory levels for veterinary medicine
production. Presently during the harvest season for Stevia leaves, we have
reserved adequate Stevia leaves for our increased sales of Stevioside. The
management also expects that the availability of the raw materials used in our
veterinary medicine division will decrease and the cost of raw materials used in
our Traditional Chinese medicine division will increase. Therefore, for the nine
months ended January 31, 2007 the inventory for stevioside is $2,640,340, a 92%
increase from the inventory for the nine months ended January 31, 2006 of
$1,374,144. For the nine months ended January 31, 2007 the inventory for Chinese
medicine is $650,467, a 46% increase from the inventory for the nine months
ended January 31, 2006 or $444,723.
* a decrease of $12,040 in prepaid and other current assets, as a
result of advances made to consultants in preparation of our marketing and
business development efforts. We made approximately $252,000 in advances to
consultants and professional resources for the marketing of our proprietary
blend of Stevioside, "Only Sweet" during the three months ended January 31,
2007. These expenses to various professional resources for the marketing of our
products is a continual practice, we expect to witness these expenses in the
foreseeable future.
* a decrease of $74,649 in amounts due to related parties for
management fees which are discussed elsewhere in this section.
* an increase of $230,139 in accounts payable and accrued expenses
which represents the increase in inventory,
* an increase of $523,906 in income tax payable as a result of the
receipt of a tax waiver during the current period which will impact fiscal 2007.
For the nine months ended January 31, 2006 we recorded a benefit from income tax
in the amount of $523,906. For the nine months ended January 31, 2007 we did not
record a provision for tax expenses due to the tax waiver. There is no income
tax payable as of January 31, 2007. We received the tax waiver from the
government for the period from November 2005 to October 2006, and
* a decrease of $100,442 in advances from customers which includes a
reduction in prepayments from our animal medicine customers due to a slow down
in production and shipments as a result of reduced demand of animal medicine
products as discussed earlier in this section.
Net cash used in investing activities decreased to $36,181 for the nine
months ended January 31, 2007 as compared to $2,156,597 for the nine months
ended January 31, 2006. This change is primarily the result of a decrease of
$2,120,416 in capital expenditures for the acquisition of manufacturing
equipment during the nine months ended January 31, 2006 as compared to the nine
months ended January 31, 2007.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
Net cash provided by financing activities was $2,826,306 for the nine
months ended January 31, 2007 as compared to net cash provided by financing
activities of $1,763,544 for the nine months ended January 31, 2006. This change
is primarily attributable to proceeds of $3,077,100 from subscriptions
receivable during the nine months ended January 31, 2007. In February 2006 we
issued options to purchase an aggregate of 4,000,000 shares of our common stock
to four employees as additional compensation for their services to us under the
terms of our 2006 Equity Compensation Plan. Of this amount, options to purchase
3,200,000 shares were exercisable at $0.90 per share and the remaining 800,000
options were exercisable at $1.00 per share. The fair market value of our common
stock on the date of grant was $0.56 per share. On March 30, 2006 these
employees exercised these options and delivered to us unsecured promissory notes
due April 30, 2007 in the amount of the option exercises. The amount of these
notes was reflected on our balance sheet as a subscription receivable in the
amount of $3,680,000. During the nine months ended January 31, 2007 $3,077,100
of these subscription receivables has been paid. This increase was offset by
$720,000 of short term loans which satisfied during the period.
We currently have no material commitments for capital expenditures.
During fiscal 2007, however, we may seek to raise additional working capital to
further augment our cash position and to provide additional funds for marketing
and distribution as we seek to bring distribution of Stevioside to North
American markets. We do not have any firm commitments for any additional capital
and there are no assurances we will obtain a commitment upon terms and
conditions which are acceptable to our Company.
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:
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.
As of the date of this report, 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 generally accepted
accounting principles in the United States.
-31-
ITEM 3. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer (collectively,
the "Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures for us. Based upon such officers' evaluation
of these controls and procedures as of a date as of the end of the period
covered by this Quarterly Report, the Certifying Officers have concluded that
our disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in this Quarterly Report is accumulated and
communicated to management, including our principal executive officer and
principal financial and accounting officer, to allow timely decisions regarding
required disclosure.
There was no change in the Company's internal control over financial
reporting identified in connection with our evaluation that occurred during its
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, its internal control over financial reporting.
Our management, including each of the Certifying Officers, does not
expect that our disclosure controls or our internal controls will prevent all
error and fraud. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
control system are met. In addition, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected. These inherent limitations include the realities that judgments
in decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people or by
management override of the control. The design of any systems of controls also
is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of these inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
-32-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
Exhibit
Number Description
------- -----------
31.1 Section 302 Certificate of Chief Executive Officer
31.2 Section 302 Certificate of Chief Financial Officer
32.1 Section 906 Certificate of Chief Executive Officer
32.2 Section 906 Certificate of Chief Financial Officer
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused his report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC.
By: /s/ Dongdong Lin
--------------------
Dongdong Lin,
Dated: March 16, 2007 CEO, Principal Executive Officer
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