Nevada | 26-3853855 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
Room 2801, East Tower of Hui Hao Building, No. 519 Machang Road Pearl River New City, Guangzhou, P. R. China | 510627 | |
(Address of principal executive offices) | (Zip Code) |
Large accelerated filer | o | Accelerated filer | o | |
Non-accelerated filer | o | (Do not check if a smaller reporting company) | Smaller reporting company | x |
PART I—FINANCIAL INFORMATION | ||||
Item 1. | Financial Statements (unaudited). | |||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | |||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | |||
Item 4. | Controls and Procedures. | |||
PART II—OTHER INFORMATION | ||||
Item 1. | Legal Proceedings. | |||
Item 1A. | Risk Factors. | |||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | |||
Item 3. | Defaults Upon Senior Securities. | |||
Item 4. | Mine Safety Disclosures. | |||
Item 5. | Other Information. | |||
Item 6. | Exhibits. | |||
Signatures |
March 31, | December 31, | |||||||
2013 | 2012 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 5,585,982 | $ | 6,168,754 | ||||
Restricted cash | - | 231,838 | ||||||
Accounts receivable, net | 1,845,499 | 1,986,663 | ||||||
Inventories, net | 1,396,876 | 1,414,600 | ||||||
Loans to customer and supplier | 2,900,898 | 2,892,868 | ||||||
Other receivables | 752,715 | 483,884 | ||||||
Prepayments | 9,208,129 | 9,029,524 | ||||||
Other current assets | 18,495 | 132,746 | ||||||
Deferred tax assets | 27,192 | 27,042 | ||||||
Total current assets | 21,735,786 | 22,367,919 | ||||||
Property, plant and equipment, net | 5,157,311 | 4,813,232 | ||||||
Construction in progress | 557,865 | 295,248 | ||||||
Intangible asset, net | 1,204,323 | 1,238,025 | ||||||
Other non-current assets | - | 134,736 | ||||||
Total assets | $ | 28,655,285 | $ | 28,849,160 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 659,249 | $ | 646,649 | ||||
Advance from customers | 245,825 | 128,321 | ||||||
Other payables and accrued liabilities | 732,814 | 942,793 | ||||||
Income tax payable | 1,849,844 | 1,842,139 | ||||||
Convertible notes, net | 7,509,232 | 7,267,677 | ||||||
Current portion of long-term borrowings | 796,950 | 1,268,106 | ||||||
Total current liabilities | 11,793,914 | 12,095,685 | ||||||
Advance from government grant | 49,825 | 37,948 | ||||||
Long-term borrowings | 1,434,510 | 792,567 | ||||||
Total liabilities | $ | 13,278,249 | $ | 12,926,200 | ||||
Commitments and contingencies | ||||||||
EQUITY | ||||||||
Common stock, $0.001 par value, 50,000,000 shares authorized, 13,324,083 issued and outstanding as of March 31, 2013 and December 31, 2012 | 13,324 | 13,324 | ||||||
Additional paid-in capital | 12,220,181 | 12,220,181 | ||||||
Retained earnings | 1,809,407 | 2,485,736 | ||||||
Statutory reserve | 373,406 | 373,406 | ||||||
Accumulated other comprehensive income | 790,840 | 658,870 | ||||||
Total Tanke Biosciences Corporation stockholders' equity | 15,207,158 | 15,751,517 | ||||||
Non-controlling interest | 169,878 | 171,443 | ||||||
Total Equity | 15,377,036 | 15,922,960 | ||||||
Total Liabilities and Equity | $ | 28,655,285 | $ | 28,849,160 |
Three Months Ended | ||||||||
March 31, | ||||||||
2013 | 2012 | |||||||
Net sales | $ | 4,659,454 | $ | 4,540,442 | ||||
Costs of sales | (2,993,828 | ) | (2,953,211 | ) | ||||
Gross profit | 1,665,626 | 1,587,231 | ||||||
Selling expenses | (659,614 | ) | (546,053 | ) | ||||
Administrative expenses | (981,590 | ) | (541,004 | ) | ||||
Depreciation and amortization | (64,315 | ) | (11,666 | ) | ||||
Income from operations | (39,893 | ) | 488,508 | |||||
Other income/expense | 3,268 | - | ||||||
Interest income | 7,333 | 21,201 | ||||||
Interest expense | (215,059 | ) | (373,087 | ) | ||||
Amortization of discount on notes | (402,394 | ) | (690,903 | ) | ||||
Loss before income taxes | (646,745 | ) | (554,281 | ) | ||||
Income tax expense | (32,099 | ) | (116,696 | ) | ||||
Net loss | $ | (678,844 | ) | $ | (670,977 | ) | ||
Net loss attributable to non-controlling interest | (2,515 | ) | - | |||||
Net loss attributable to Tanke Biosciences Corporation | $ | (676,329 | ) | $ | (670,977 | ) | ||
Net loss | $ | (678,844 | ) | $ | (670,977 | ) | ||
Other comprehensive income, net of tax: | ||||||||
Foreign currency translation adjustments | 131,970 | 112,486 | ||||||
Comprehensive loss | $ | (546,874 | ) | $ | (558,491 | ) | ||
Comprehensive loss attributable to non-controlling interest | (1,572 | ) | - | |||||
Comprehensive loss attributable to Tanke Biosciences Corporation | $ | (545,302 | ) | $ | (558,491 | ) | ||
Loss per common share: | ||||||||
Basic and diluted | $ | (0.05 | ) | $ | (0.05 | ) | ||
Weighted average number of common shares used in computation | ||||||||
Basic and diluted | 13,324,083 | 13,324,083 |
Three Months Ended | ||||||||
March 31, | ||||||||
2013 | 2012 | |||||||
Operating activities: | ||||||||
Net loss | $ | (678,844 | ) | $ | (670,977 | ) | ||
Adjustments to reconcile net loss to net cash (used in) | ||||||||
provided by operating activities: | ||||||||
Depreciation and amortization | 179,886 | 123,802 | ||||||
Amortization of discount on convertible notes payable | 402,394 | 690,903 | ||||||
Amortization of capitalized offering costs | 115,688 | 198,635 | ||||||
Provision for bad debt | 1,863 | - | ||||||
Inventory provision | 232 | - | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 139,301 | 196,693 | ||||||
Inventories | 17,492 | (172,013 | ) | |||||
Note receivables and payables - related parties | - | 165,528 | ||||||
Other receivables | (215,280 | ) | (16,744 | ) | ||||
Deferred tax asset | (150 | ) | (395 | ) | ||||
Prepayments | (178,605 | ) | 316,050 | |||||
Other current assets | (1,437 | ) | (29,549 | ) | ||||
Other non-current assets | 134,736 | (31,264 | ) | |||||
Advance from government grant | 11,877 | (34,871 | ) | |||||
Accounts payable | 12,600 | (270,697 | ) | |||||
Other payables and accrued liabilities | (168,152 | ) | 85,169 | |||||
Income tax payable | 7,705 | (41,595 | ) | |||||
Advance from customer | 117,504 | - | ||||||
Net cash (used in) provided by operating activities | (101,190 | ) | 508,675 | |||||
Investing activities: | ||||||||
Increase in loans to customer and supplier | - | (180,028 | ) | |||||
Purchase of property and equipment | (746,033 | ) | (193,633 | ) | ||||
Purchase of intangible assets | - | (6,484 | ) | |||||
Net cash used in investing activities | (746,033 | ) | (380,145 | ) | ||||
Financing activities: | ||||||||
Change in restricted cash | 231,838 | - | ||||||
Payment on convertible notes | (160,839 | ) | - | |||||
Proceeds from long-term borrowings | 955,200 | - | ||||||
Principal payments for long-term borrowings | (796,000 | ) | (304,738 | ) | ||||
Net cash provided by (used in) financing activities | 230,199 | (304,738 | ) | |||||
Effect of exchange rate fluctuations on cash and cash equivalents | 34,252 | 112,486 | ||||||
Net decrease in cash | (582,772 | ) | (63,722 | ) | ||||
Cash and cash equivalents, beginning of period | 6,168,754 | 7,700,156 | ||||||
Cash and cash equivalents, end of period | $ | 5,585,982 | $ | 7,636,434 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for interest | $ | 99,371 | $ | 21,051 | ||||
Cash paid for income taxes | $ | 34,579 | $ | 168,472 |
June 30, | December 31, | |||||||
2013 | 2012 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 4,724,584 | $ | 6,168,754 | ||||
Restricted cash | - | 231,838 | ||||||
Accounts receivable, net | 2,384,001 | 1,986,663 | ||||||
Inventories, net | 2,082,340 | 1,414,600 | ||||||
Loans to customer and supplier | 2,952,293 | 2,892,868 | ||||||
Other receivables | 901,482 | 483,884 | ||||||
Prepayments | 8,838,964 | 9,029,524 | ||||||
Other current assets | 8,174 | 132,746 | ||||||
Deferred tax assets | 27,598 | 27,042 | ||||||
Total current assets | 21,919,436 | 22,367,919 | ||||||
Property, plant and equipment, net | 5,263,250 | 4,813,232 | ||||||
Construction in progress | 1,095,988 | 295,248 | ||||||
Intangible asset, net | 1,187,429 | 1,238,025 | ||||||
Other non-current assets | - | 134,736 | ||||||
Total assets | $ | 29,466,103 | $ | 28,849,160 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 843,161 | $ | 646,649 | ||||
Advance from customers | 292,729 | 128,321 | ||||||
Other payables and accrued liabilities | 844,365 | 942,793 | ||||||
Income tax payable | 1,915,712 | 1,842,139 | ||||||
Convertible notes, net | 7,509,232 | 7,267,677 | ||||||
Current portion of long-term borrowings | 1,294,156 | 1,268,106 | ||||||
Total current liabilities | 12,699,355 | 12,095,685 | ||||||
Advance from government grant | 82,086 | 37,948 | ||||||
Long-term borrowings | 808,848 | 792,567 | ||||||
Total liabilities | $ | 13,590,289 | $ | 12,926,200 | ||||
Commitments and contingencies | ||||||||
Equity | ||||||||
Common stock, $0.001 par value, 50,000,000 shares authorized, 13,324,083 issued and outstanding as of June 30, 2013 and December 31, 2012 | 13,324 | 13,324 | ||||||
Additional paid-in capital | 12,220,181 | 12,220,181 | ||||||
Retained earnings | 1,927,571 | 2,485,736 | ||||||
Statutory reserve | 373,406 | 373,406 | ||||||
Accumulated other comprehensive income | 1,171,409 | 658,870 | ||||||
Total Tanke Biosciences Corporation stockholders' equity | 15,705,891 | 15,751,517 | ||||||
Non-controlling interest | 169,923 | 171,443 | ||||||
Total Equity | 15,875,814 | 15,922,960 | ||||||
Total Liabilities and Equity | $ | 29,466,103 | $ | 28,849,160 |
See accompanying notes to the unaudited condensed consolidated financial statements |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Net sales | $ | 5,576,403 | $ | 7,431,486 | $ | 10,235,857 | $ | 11,971,928 | ||||||||
Costs of sales | (3,754,150 | ) | (4,690,963 | ) | (6,747,978 | ) | (7,644,174 | ) | ||||||||
Gross profit | 1,822,253 | 2,740,523 | 3,487,879 | 4,327,754 | ||||||||||||
Selling expenses | (622,855 | ) | (548,179 | ) | (1,282,469 | ) | (1,094,232 | ) | ||||||||
Administrative expenses | (997,469 | ) | (680,232 | ) | (1,979,059 | ) | (1,221,236 | ) | ||||||||
Depreciation and amortization | (52,239 | ) | (14,763 | ) | (116,554 | ) | (26,429 | ) | ||||||||
Income from operations | 149,690 | 1,497,349 | 109,797 | 1,985,857 | ||||||||||||
Other income | 40,067 | - | 43,335 | - | ||||||||||||
Interest income | 18,813 | 148,252 | 26,146 | 169,453 | ||||||||||||
Interest expense | (39,376 | ) | (368,782 | ) | (254,435 | ) | (741,869 | ) | ||||||||
Amortization of discount on notes | - | (690,903 | ) | (402,394 | ) | (1,381,806 | ) | |||||||||
Income (loss) before income taxes | 169,194 | 585,916 | (477,551 | ) | 31,635 | |||||||||||
Income tax expense | (53,512 | ) | (313,502 | ) | (85,611 | ) | (430,198 | ) | ||||||||
Net income (loss) | 115,682 | 272,414 | (563,162 | ) | (398,563 | ) | ||||||||||
Net loss attributable to non-controlling interest | (2,482 | ) | - | (4,997 | ) | - | ||||||||||
Net income (loss) attributable to Tanke Biosciences Corporation | $ | 118,164 | $ | 272,414 | $ | (558,165 | ) | $ | (398,563 | ) | ||||||
Net income (loss) | $ | 115,682 | $ | 272,414 | $ | (563,162 | ) | $ | (398,563 | ) | ||||||
Other comprehensive income, net of tax: | ||||||||||||||||
Foreign currency translation adjustments | 380,569 | 98,471 | 512,539 | 210,957 | ||||||||||||
Comprehensive income (loss) | 496,251 | 370,885 | (50,623 | ) | (187,606 | ) | ||||||||||
Comprehensive income (loss) attributable to non-controlling interest | 15 | - | (1,520 | ) | - | |||||||||||
Comprehensive income (loss) attributable to Tanke Biosciences Corporation | $ | 496,236 | $ | 370,885 | $ | (49,103 | ) | $ | (187,606 | ) | ||||||
Income (loss) per common share: | ||||||||||||||||
Basic and diluted | $ | 0.01 | $ | 0.02 | $ | (0.04 | ) | $ | (0.03 | ) | ||||||
Weighted average number of common shares used in computation | ||||||||||||||||
Basic and diluted | 13,324,083 | 13,324,083 | 13,324,083 | 13,324,083 |
See accompanying notes to the unaudited condensed consolidated financial statements |
Six Months Ended | ||||||||
June 30, | ||||||||
2013 | 2012 | |||||||
Operating activities: | ||||||||
Net loss | $ | (563,162 | ) | $ | (398,563 | ) | ||
Adjustments to reconcile net loss to net cash (used in) | ||||||||
provided by operating activities: | ||||||||
Depreciation and amortization | 386,369 | 244,564 | ||||||
Amortization of discount on convertible notes payable | 402,394 | 1,381,805 | ||||||
Amortization of capitalized offering costs | 115,688 | 397,271 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (353,480 | ) | 102,214 | |||||
Inventories | (584,624 | ) | (69,136 | ) | ||||
Note receivables and payables - related parties | - | 239,476 | ||||||
Other receivables | (365,147 | ) | (103,680 | ) | ||||
Deferred tax asset | (556 | ) | (490 | ) | ||||
Prepayments | 190,560 | 308,283 | ||||||
Other current assets | 8,884 | (25,630 | ) | |||||
Other non-current assets | 134,736 | (40,252 | ) | |||||
Advance from government grant | 44,138 | (105,775 | ) | |||||
Accounts payable | 196,512 | (202,725 | ) | |||||
Other payables and accrued liabilities | (86,065 | ) | 289,455 | |||||
Income tax payable | 73,573 | 259,801 | ||||||
Advance from customer | 164,408 | - | ||||||
Net cash (used in) provided by operating activities | (235,772 | ) | 2,276,618 | |||||
Investing activities: | ||||||||
Increase in loans to customer and supplier | - | (376,032 | ) | |||||
Purchase of property and equipment | (1,359,529 | ) | (388,346 | ) | ||||
Purchase of intangible assets | (31,714 | ) | (482,224 | ) | ||||
Net cash used in investing activities | (1,391,243 | ) | (1,246,602 | ) | ||||
Financing activities: | ||||||||
Change in restricted cash | 231,838 | 123,588 | ||||||
Payment on convertible notes | (160,839 | ) | - | |||||
Proceeds from long-term borrowings | 961,200 | 967,629 | ||||||
Principal payments for long-term borrowings | (961,200 | ) | - | |||||
Net cash provided by financing activities | 70,999 | 1,091,217 | ||||||
Effect of exchange rate fluctuations on cash and cash equivalents | 111,846 | 210,957 | ||||||
Net (decrease) increase in cash | (1,444,170 | ) | 2,332,190 | |||||
Cash and cash equivalents, beginning of period | 6,168,754 | 7,700,156 | ||||||
Cash and cash equivalents, end of period | $ | 4,724,584 | $ | 10,032,346 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for interest | $ | 138,746 | $ | 37,797 | ||||
Cash paid for income taxes | $ | 50,140 | $ | 184,227 | ||||
See accompanying notes to the unaudited condensed consolidated financial statements |
Cash and Cash Equivalents |
The Company considers all highly liquid investments with initial maturities of three months or less to be cash equivalents. |
Trade and Other Receivables |
The Company periodically assesses its accounts receivable for collectability on a specific identification basis. If collectability of an account becomes unlikely, an allowance is recorded for that doubtful account. Once collection efforts have been exhausted, the account receivable is written off against the allowance. The Company does not require collateral for trade or other accounts receivable. |
Inventories |
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the weighted average method. The cost of inventories includes the purchase cost and other costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. |
As of |
Property, Plant and Equipment |
Property and equipment are stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use. |
Depreciation of property and equipment is calculated using the straight-line method over their estimated useful lives. The estimated useful lives are as follows: |
Buildings | 15-20 years |
Plant and machinery | 3-20 years |
Motor vehicle | 10 years |
Office equipment | 3-10 years |
Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred. |
Upon sale or disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount less the proceeds from disposal is charged or credited to income. |
Intangible Asset |
The intangible asset primarily represented two land use rights and internally developed production technology, and they are recorded at cost less accumulated amortization.
8
Statutory Reserves In accordance with the relevant laws and regulations of the PRC and the articles of associations of the Company, Guangzhou Tanke is required to allocate 10% of its net income reported in the PRC statutory accounts, after offsetting any prior years’ losses, to statutory reserve, on an annual basis. When the balance of such reserve reaches 50% of the respective registered capital of the subsidiaries, any further allocation is optional. As of The statutory surplus reserves can be used to offset prior years’ losses, if any, and may be converted into registered capital, provided that the remaining balances of the reserve after such conversion is not less than 25% of registered capital. The statutory surplus reserve is non-distributable.
The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 605-10, Revenue Recognition, and SEC Staff Accounting Bulletin No.104. Pursuant to these pronouncements, revenue is recognized when all of the following criteria are met:
For technical service provided to third parties, revenue is recognized when the service is rendered.
9
Research and development costs are charged to expense as incurred and are included in operating expenses after partially offset by grants from government sponsored projects.
Income Taxes
Earnings per share (EPS) Earnings per share is calculated in accordance with ASC 260-10 which requires the Company to calculate net income (loss) per share based on basic and diluted net income (loss) per share, as defined. Basic EPS excludes dilution and is computed by dividing net income (loss) by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Warrants and convertible notes were not included in the diluted EPS calculation because their impact was anti-dilutive as the Commitments and Contingencies Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. 10 Foreign Currency Translation The Company, its subsidiaries and The financial statements of each entity are prepared using the functional currency, and have been translated into United States dollars (“US$” or “$”). Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates for the period. Stockholders’ equity is translated at historical exchange rates. Any translation adjustments are included as a foreign exchange adjustment in other comprehensive income, a component of stockholders’ equity.
RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation. Financial Instruments The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, due to/from related parties, notes payable, other payable and accrued liabilities and income tax payable approximate their fair values due to the short-term nature of these items. The carrying amounts of long-term borrowings approximate the fair value based on the Company’s expected borrowing rate for debt with similar remaining maturities and comparable risk. Convertible notes are not carried at fair value due to the discounts for warrants and the beneficial conversion feature. As the interest on these notes approximates market interest, the fair value is their face value of $7,509,232. It is management’s opinion that the Company is not exposed to significant interest, price or credit risks arising from these financial instruments. Recent Accounting Updates Management does not believe that any recently issued, but not yet effective accounting pronouncements would have a material impact on the accompanying financial statements. 11 3. INVENTORIES, NET Inventories as of
4. ACCOUNTS RECEIVABLE, NET Accounts receivable as of
5. OTHER RECEIVABLES AND LOANS TO CUSTOMER AND SUPPLIER Other receivables consisted of the following:
Advance to staff and directors represented advance payments made to directors for business development activities and to staff for business travel purposes. These outstanding amounts are expected to be repaid within a year.
12
Loans to customer and supplier represent 8% interest bearing notes to one of the Company’s customers and one supplier, both of which were 6. PREPAYMENTS AND OTHER CURRENT ASSETS In order to secure key raw materials and supplies and to lock in rising purchase prices, the Company paid substantial amounts of cash in advance on purchase orders. Before contracts were signed and the following year’s projected purchases were prepaid, we evaluated these suppliers’ financial position and business condition. We only make prepayment arrangements with companies that are reputable in our industry and have strong financial position. Due to growth expectation in the second half year of 2013 and new product launches that require significant amount of raw materials, and the threat of inflation and material shortages, we increased substantially our prepayments to secure supply of raw materials in 2013. Included in prepayments was also a 5,000,000 RMB (approximately US$ 809,000) deposit paid to the main construction contractor of the Qingyuan production plant project.
Other current assets as of
13 7. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment as of
The Company has buildings on the site it occupies, including factory buildings. Due to the lack of a Land Use Right Certificate, the Company is unable to apply for the Property Ownership Certificate for the buildings. However, as the buildings are in use, the Company depreciates them over their expected useful lives. We recorded depreciation we recorded depreciation expense of $123,802 and $204,564 for the three and six months ended June 30, 2012.8. INTANGIBLE ASSET, NET The intangible asset as of
On November 21, 2003, the Company applied to the Government of Huaqiao Town, Huadu District, Guangzhou, for the land use right of No. 2 Industry Area of Huaqiao Town (i.e., Laohutou Lot, Wangongtang) covering an area of around 430,000 square feet. On October 22, 2010, the Company applied to the Administration Committee of Qingyuan Huaqiao Industrial District for the land use right covering an area of around 60 The Company has been amortizing the land use right at Huadu facility. The amortization of the land use right for the Qingyuan facility is expected to begin when construction of the new manufacturing facility commences. We recorded amortization 9. OTHER
Other payables and accrued liabilities as of
Other payables represent loans from third parties, which are interest free, unsecured and repayable on demand. Registration rights penalties are associated with the registration rights agreement. (See Note On February 9, 2011, the Company entered into a Securities Purchase Agreement with individual investors relating to a private placement transaction by the Company (the “Private Placement”) of 6,669,627 units. Each unit consisted of a $1.15 principal amount 8% Senior Convertible Note (the “Notes”) and a Common Stock Purchase Warrant (the “Warrants”) to purchase one share of the Company’s common stock at an exercise price of $1.40 per share. As a result of the Private Placement, the Company offered and sold $7,670,071 worth of Notes convertible into 6,669,627 shares of common stock. The Notes are payable 24 months from February 9, 2011 with an interest rate of 8% per annum payable semiannually in arrears. The Company placed in escrow an amount of the proceeds of the Private Placement equal to one semi-annual interest payment on the Notes to secure prompt interest payments. Until such time as 75% of the Notes are converted into shares of Common Stock, if such escrow is depleted in order to make interest payments, the Company will replenish such escrow amount. At the option of the holder, the Notes may be converted into Common Stock at a price of $1.15 per share, which is subject to customary weighted average and stock based anti-dilution protection. The issuance of the Notes was not registered under the Securities Act The Notes contain customary events of default and affirmative and negative covenants of the Company, including negative covenants which restrict the Company’s ability to do the following (among other things) without the consent of the investors: (i) incur, or permit to exist, any indebtedness for borrowed money in excess of (A) US$3,000,000 during the twelve (12) month period beginning on February 9, 2011, or (B) US$5,000,000 during the two-year period beginning on February 9, 2011 and ending on February 9, 2013 (the maturity date of the Notes), except in the ordinary course of the Company’s business; (ii) lend or advance money, credit or property to or invest in (by capital contribution, loan, purchase or otherwise) any person or entity in excess of US$1,000,000 except: (A) investments in United States Government obligations, certificates of deposit of any banking institution with combined capital and surplus of at least $200,000,000; (B) accounts receivable arising out of sales in the ordinary course of business; and (C) inter-company loans between and among the Company and its subsidiaries; (iii) pay dividends or make any other distribution on shares of the capital stock of the Company; (iv) create, assume or permit to exist, any lien on any of the Company’s property or assets now owned or hereafter acquired, subject to existing liens and certain exceptions; (v) assume guarantees, subject to certain exceptions; (vi) engage in “sale-leaseback” transactions, subject to certain exceptions; (vii) make capital expenditures in excess of US$5,000,000 in any fiscal year, subject to certain exceptions; and (viii) materially alter the Company’s business. 15 In connection with the issuance of the Notes, we entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the investors which sets forth the rights of the investors to have the shares of common stock underlying the Notes and Warrants registered with the SEC for public resale. Pursuant to the Registration Rights Agreement, we agreed to file, no later than April 11, 2011, a registration statement to register the shares underlying the Notes and the Warrants and to have such registration statement effective no later than September 18, 2011. If the registration statement was not filed by April 11, 2011 (the “Filing Failure”), was not effective by September 18, 2011 (the “Effectiveness Failure”) or if, after the effective date, sales of securities included in the registration statement cannot be made (including, without limitation, because of a failure to keep the registration statement effective, to disclose such information as is necessary for sales to be made pursuant to the registration statement, to register a sufficient number of shares of Common Stock or to maintain the listing of the Common Stock) (a “Maintenance Failure”) then, as liquidated damages (and in complete satisfaction and to the exclusion of any claims or remedies inuring to any holder of the securities) the Company is required to pay an amount in cash equal to 1% of the aggregate purchase price paid by the Investors on each of the following dates: (i) 20 days following the date of a Filing Failure; (ii) 30 days following the initial day of a Maintenance Failure; (iii) on every thirtieth day thereafter (pro-rated for periods totaling less than thirty days) until such failure is cured; (iv) on every thirtieth day after the day of an Effectiveness Failure and thereafter (pro rated for periods totaling less than thirty days) until such Effectiveness Failure is cured; (v) on every thirtieth day after the initial day of a Maintenance Failure and thereafter (pro rated for periods totaling less than thirty days) until such Maintenance Failure is cured. The payments to be made by the Company are limited to a maximum of 6% of the aggregate amount paid by the Investors ($460,204). The registration statement was not declared effective by December 31, 2011, as such an Effectiveness Failure occurred and the Company accrued the full $460,204. The Company will continue to assess the likelihood of payments under this arrangement. The warrants issued as a component of the units were valued using the Black-Scholes method using the following assumptions: (1) life of warrants of 3 years, (2) annualized volatility of 100%, (3) fair value of stock as of grant date of $1.15, (4) exercise price of $1.40, (5) annual dividend rate of 0%, and (6) discount rate of 1.34%. Such calculation resulted in a warrant value of $4,470,536. The proceeds of the unit offering were allocated to the Notes and warrants based on their relative fair values on a weighted average basis, with the resulting allocated value of the warrants of $2,824,350 being classified to additional paid in capital. Such discount to the Notes is being amortized over their expected life. The beneficial conversion feature associated with the issuance of the above Notes, amounted to $2,824,350, which has also been recorded as a discount to the convertible notes payable and is being amortized over the life of the Notes. As of June 30, 2013, the discount to the convertible notes was fully amortized. The Notes do not contain any embedded derivatives which require liability classification. As of February 10, 2013, the Company is in default on the Notes due to failure to pay the investors in full the $7,670,071 principal and accrued interest on February 9, 2013. Subsequently, the Company has released $229,018 from investor relations escrow to pay the accrued interest of $68,178 and principal of $160,839 to investors. The Company and the investor representatives are in ongoing discussions to develop a repayment plan for the remaining principal. General terms of note amendment and repayment schedules are being finalized. An agreement is anticipated to be signed in the third quarter and the first installment payment should be made in coming months. As of The Company’s operating subsidiary, Guangzhou Tanke, is a “domestic enterprise” that is registered and operated in Guangzhou, the PRC.
As of Significant components of the Company’s deferred tax asset are as
The details of the Company’s long-term borrowings are as follows:
The loans are uncollateralized and consist of $1,275,120 (RMB 8,000,000) and $956,340 (RMB 6,000,000), bearing interest at 7.36% and 6.15% per annum, maturing on June 20, 2014 and March 19, 2015, respectively. Interest is calculated and paid on the 20th of each month. 17 13. GOVERNMENT GRANT The government grant liability represents an advance from the Chinese government for research and development projects. The Company has recorded the grants received as a government grant liability, and ratably recognizes the amount as a reduction of research and development expense when the related research and development activities are performed. As of 14. COMMITMENTS AND CONTINGENCIES The Company has entered into a construction contract with Ganzhou Huifeng Construction Company, Ltd. for the construction of the new Qingyuan production plant. The total fee is RMB 16,500,000 (approximately $2,670,000) and a deposit of RMB 5,000,000 (approximately $809,000) was made in the second quarter. 15. SEGMENT INFORMATION The Company operates in four segments: organic trace mineral additives, functional regulation additives, herbal medicinal additives and other revenues. Management oversees each of these operations separately. Property, equipment and other assets are shared and not tracked separately by segment. Administrative expenses are also not tracked by segment. Following is a breakdown of revenue, costs of sales and gross profit by segment.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis should be read in conjunction with our financial statements and the related notes. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as its plans, objectives, expectations and intentions. Its actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements. As Overview We are one of the leading animal nutrition and feed additive providers in China. In 2001, we were We have more than 130 employees, with 40 engaged in sale or sales-related activities. Our headquarters and state-of-art manufacturing facilities of 34,000 square-meters are Our major products In 2013, we have several new products in the pipeline, with the designed feature of improving health and enhancing growth in pigs, chicken, cattle, and seafood. We have launched a new plant-based antioxidant additive. We are fine tuning a number of new products and plan to launch them in the third quarter of 2013. Critical Accounting Policies While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Basis of Preparation The Company’s unaudited condensed consolidated financial statements have been stated in US dollars and prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP") and have been consistently applied. 19 Basis of These unaudited condensed consolidated financial statements include the financial statements of the Company, its subsidiaries and its VIE-Guangzhou Tanke (the “Group''). All significant inter-company balances and transactions within the Group have been eliminated. Use of Estimates In preparing Revenue Recognition The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 605-10, Revenue Recognition, and SEC Staff Accounting Bulletin No. 104. Pursuant to these pronouncements, revenue is recognized when all of the following criteria are met: - Persuasive evidence of an arrangement exists; - Delivery has occurred or services have been rendered; - The seller's price to the buyer is fixed or determinable; and - Collectability is reasonably assured. The Company’s revenue is generated through the wholesale and retail sale of livestock feed additives, including organic trace mineral additives, functional regulation additives, herbal medicinal additives and raw materials. Before the Company recognizes revenue on these product sales, written purchase orders and contracts are received in advance of all shipments of goods to customers. For sales within the Company’s own province, delivery is made by Company employees. Such delivery occurs on the same day as shipment. For delivery outside the province, shipment is made through a separate logistics company that assumes the risk of loss. Revenue is recognized upon shipment of goods to the customers. The Company typically does not incur bad debt losses because this type of loss is deducted from the salesperson’s compensation, thereby mitigating the loss to the Company. Therefore, collectability is reasonably assured. Revenue is presented net of sales returns, which are not significant. However, the Company continually performs analyses of returns and records a provision at the time of sale if necessary. As of Research and Development Costs Research and development costs are charged as expense when incurred and included in operating expenses. Foreign Currency Translation The Company and its subsidiaries maintain financial statements in the functional currency of each entity. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods. The financial statements of each entity are prepared using the functional currency, and have been translated into United States dollars (“US$” or “$”). Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates for the period. Equity is translated at historical exchange rates. Any translation adjustments are included as a foreign exchange adjustment in accumulated other 20 RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation. Results of Operations for the Three Months Ended The following is a comparison of our net sales, costs of sales and gross profit by segment for the three months ended Revenue and Costs of Sales The Company operates in four segments: (1) Organic Trace Mineral Additives, (2) Functional Regulation Additives, (3) Herbal Medicinal Additives and (4) Other. Management tracks each of these
Organic Trace Mineral Additives Organic 21 Revenue from Functional Regulation Additives Functional Revenue from Herbal Medicinal Additives Revenue from 2013. Other Other revenue mainly consists of buying and then reselling raw materials. 22 Operating Expenses and Other Income / Expenses The following table reconciles aggregate segment gross profit to net income for the three months ended
Selling, General and Administrative Expenses Selling expenses for the three months ended General and administrative expenses for the three months ended Other Income/Expenses Interest income for the three months ended Interest expense for the three months ended The expense associated with the amortization of discounts on our convertible notes payable for the Income Tax Expense Our income tax expense decreased by Pursuant to Section 26 of the Inland Revenue Ordinance (“IRO”), the governing statute of Hong Kong taxation, any dividend income received by any entity subject to IRO would not be taxable in Hong Kong. Furthermore, foreign (non-Hong Kong) investment income that is repatriated to Hong Kong is not subject to Hong Kong profits (income) tax. Results of Operations for the Six Months Ended June 30, 2013 as Compared to the Six Months Ended June 30, 2012 The following is a comparison of our revenue, costs of sales and gross profit by segment for the six months ended June 30, 2013 and 2012. Revenue and Costs of Sales The Company operates in four segments: (1) Organic Trace Mineral Additives, (2) Functional Regulation Additives, (3) Herbal Medicinal Additives and (4) Other. Management tracks each of these segments separately. The Company evaluates the performance of its operating segments based on segment revenue and gross profit, and management uses aggregate segment gross profit as a measure for the overall performance of the business. The Company believes that aggregate segment gross profit helps to evaluate changes in the gross profit of the Company’s various offerings separate from factors other than product offerings that affect net income.
Organic Trace Mineral Additives Organic Trace Mineral Additives constitute the largest and fastest growing area of our business. We are one of China’s largest domestic providers of organic trace mineral additives, specializing in the development and production of chelated organic trace mineral additives. Our current trace mineral manufacturing facility is the largest chelating facilities in China and has the capacity to produce approximately 350 metric tons of organic trace minerals per week. 24 Revenue from Organic Trace Mineral Additives for the six months ended June 30, 2013 decreased by $1,710,329, or 17.3%, as compared to 2012. As mentioned above, the Organic Trace Mineral Additives revenues were negatively impacted by H7N9 attacks to the China poultry industry during the second quarter. As a result of this decrease, in 2013, the Organic Trace Mineral Additives revenue accounted for approximately 80% of our revenues for the six months ended June 30, 2013 as compared to 83% for the six months ended June 30, 2012. Our gross profit percentage for the organic trace mineral additive sales amounted to 33.7% and 37.9% for the six months ended June 30, 2013 and 2012, respectively. The decrease in gross profit percentage in 2013 was primarily due to pricing pressure in the market and increased unit production cost. Functional Regulation Additives Functional Regulation Additives are widely used to enhance the properties of other products, improve feed efficiency and stimulate the rapid maturation of the immune system. We currently produce two types of functional regulation additives: feed acidifiers and flavor enhancers. Feed acidifiers are used to prevent microbial degradation of raw materials or finished feeds and maintain the quality of feed. Flavor enhancers are used to improve feed palatability, enhance animal appetite and stimulate saliva, gastric and pancreatic juices and other digestive juice secretion, gastrointestinal motility and ultimately feed consumption, and yield from production animals. Revenue from Functional Regulation Additives for the six months ended June 30, 2013 decreased by $751,166, or 43.0%, as compared to 2012. The decrease in sales was primarily due to the shift of emphasis away from this segment by management during 2013 and the last half of 2012. Herbal Medicinal Additives Herbal Feed Additives utilize traditional Chinese medicine theory to improve an animal’s digestion and appetite and regulate the yin and yang balance of an animal’s health. Herbal medicines come from plants, plant extracts, fungal and bee products, minerals, shells and certain animal parts. Compared to synthetic antibiotics or inorganic chemicals, these naturally-derived products are less toxic, residue free and thought to be ideal feed additives in food animal production. Revenue from Herbal Feed Additives for the six months ended June 30, 2013 increased by $310,952, or 321.1%, as compared to the six months ended June 30, 2012. The revenue from herbal medicinal additives increased as a result of the Company’s introduction of a new plant-based antioxidant product in 2013. Other Other revenue mainly consists of buying and then reselling raw materials. However, in the second quarter of 2013, Kanghui Agricultural began providing technical consulting services to a customer in Shanghai. Other revenues increased by $414,472 during the six months ended June 30, 2013 as compared to 2012. 25 Operating Expenses and Other Income / Expenses The following table reconciles aggregate segment gross profit to net income for the six months ended June 30, 2013 and 2012.
Selling, General and Administrative Expenses Selling expenses for the six months ended June 30, 2013 increased by $188,237, or 17.2%, as compared to 2012. Despite an unexpected decline in sales in 2013, especially in the second quarter, an increased emphasis in sales operations is part of our growth strategy. General and administrative expenses for the six months ended June 30, 2013 increased by $757,823, or 62.1%, as compared to 2012. R&D expenses increased by approximately $766,000 in the first six months in 2013 due to increased product development projects and a delay in application for government subsidies. Other Income/Expenses Interest income for the six months ended June 30, 2013 decreased by $143,307 as compared to the six months ended June 30, 2012. Interest payments from loans to a customer and a supplier were not collected due to miscommunication between Tanke’s accounting department and the debtors. As of June 30, 2013, the related interest income has been accrued. However, a full provision is made against such interest income due to the uncertainty of collection. Interest expense for the six months ended June 30, 2013 decreased by $487,434 as compared to 2012. The primary reason for this decrease was due to lower amortization of capitalized offering costs recorded in 2013. These offering costs were fully amortized as of February 9, 2013. As a result, there was only approximately one month of amortization recorded during the six months ended June 30, 2013. During 2012, we had a full six months worth of amortization in these offering costs. The expense associated with the amortization of discounts on our convertible notes payable for the six months ended June 30, 2013 amounted to $402,394 as compared to $1,381,806 in 2012. As discussed above with the amortization of the capitalized offering costs, the discounts were amortized through February 9, 2013. As a result, we only had approximately one month of amortization during the six months ended June 30, 2013 as compared to a full six months during the same period in 2012. Income Tax Expense Our income tax expense decreased by $344,587 for the six months ended June 30, 2013 as compared to 2012. The decrease was attributable to a decrease in taxable income during the period. Pursuant to Section 26 of the Inland Revenue Ordinance (“IRO”), the governing statute of Hong Kong taxation, any dividend income received by any entity subject to IRO would not be taxable in Hong Kong. Furthermore, foreign (non-Hong Kong) investment income that is repatriated to Hong Kong is not subject to Hong Kong profits (income) tax. 26 Liquidity and Capital Resources As of The following table sets forth a summary of our cash flows for the periods indicated.
Operating Activities Net cash used in operating activities was During the same period in 2012, our net loss of Investing Activities Net cash used in investing activities was Financing Activities Net cash provided by financing activities was 27 We have historically funded our operation primarily through cash generated from operations. Over the next twelve months, we intend to pursue organic and acquisitive growth and increase our market share in mainland China. We believe that our cash on hand and cash flow from operations will meet our present operating cash needs for the next 12 months. However, we will require additional cash resources to meet the cash requirements of our planned long-term growth. Additionally, we may require additional cash resources due to changed business conditions, implementation of our strategy to ramp up our marketing efforts and increase brand awareness, or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity, securities, convertible notes or warrants in the future. Effect of Changes in the Foreign Exchange Rate Upon translation of the Company’s financial statements into US Dollars for the purpose of financial reporting in the United States, the exchange rate between the Chinese Renminbi and the US Dollar can have an impact on the amount of reported cash on hand. However all of the Company’s revenue is generated in China, and currently over 90% of its cost is within China. As a result, from an operational standpoint, a change in the exchange rate has relatively little impact on the Company. Such change is not expected to affect the Company’s liquidity in any significant way. Economy and Inflation Inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. We have not experienced any significant cancellation in orders due to the downturn in the economy. Furthermore, we have also had only a small number of customer-requested delays in delivery or production. Off Balance Sheet Arrangements We do not have any off balance sheet arrangements that have, or are reasonably likely to have a current or future effect on our financial statements. Seasonality Our operating results and operating cash flows historically have not been subject to significant seasonal variations. However, sales around Chinese New Year are typically comparatively lower than other Recent Accounting Pronouncements See Note 2 of the accompanying Item 3. Quantitative and Qualitative Disclosures About Market Risk. 28 Item 4. Controls and Procedures. Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report.
A material weakness is a control deficiency, or combination of control deficiencies such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Our management has discussed the material weaknesses described above with our board of directors. Changes in Internal Control over Financial Reporting There were no changes to our internal control over financial reporting during the period ended The nature of our business exposes us to the potential for legal proceedings related to labor and employment, personal injury, property damage, and environmental matters. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including our assessment of the merits of each particular claim, as well as our current reserves and insurance coverage, we do not expect that any known legal proceeding will in the foreseeable future have a material adverse impact on our financial condition or the results of our operations. There has been no material change to our risk factors from those presented in our annual report on Form 10-K for the fiscal year ended December 31, 2012. None. 29 None. Not applicable. None.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
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