The accompanying notes are an integral part of the consolidated financial statements.
SYNUTRA INTERNATIONAL, INC.
The accompanying notes are an integral part of the consolidated financial statements.
SYNUTRA INTERNATIONAL, INC.
The accompanying notes are an integral part of the consolidated financial statements.
SYNUTRA INTERNATIONAL, INC.
The accompanying notes are an integral part of the consolidated financial statements.
SYNUTRA INTERNATIONAL, INC.
The accompanying notes are an integral part of the consolidated financial statements.
SYNUTRA INTERNATIONAL, INC.
| 1. | ORGANIZATION AND PRINCIPAL ACTIVITIES |
Synutra International, Inc. and its subsidiaries (hereinafter collectively referred to as the “Company” or “Synutra”) are principally engaged in production, distribution and sales of dairy based nutritional products under the “Shengyuan” or “Synutra” line of brands in the People’s Republic of China (“China” or “PRC”). The Company focuses on selling powdered formula products for infants and adults, and also engages in other nutritional product offerings, such as prepared foods and certain nutritional ingredients and supplements.
The Company is responsible for the unaudited consolidated financial statements included in this document, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and include all normal and recurring adjustments that management of the Company considers necessary for a fair presentation of its financial position and operating results. The Company prepared these statements following the requirements of the U.S. Securities and Exchange Commission (the “SEC”) for interim reporting. As permitted under those rules, the Company condensed or omitted certain footnotes or other financial information that are normally required by US GAAP for annual financial statements. These statements should be read in combination with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2013.
As of September 30, 2013, the Company's current liabilities exceed its current assets by $9.4 million and the Company has an asset liability ratio of 91%, which is defined as total liabilities divided by total assets. However, the Company regards the going concern assumption as appropriate considering the following mitigating factors:
| · | The Company managed to reverse the trend contributing to losses incurred in first half of fiscal 2013, with breakeven results from operations in the third quarter of fiscal 2013, and income from operations in the fourth quarter of fiscal 2013 and first half of fiscal 2014. |
| · | The Company had positive cash flows from operations for the second half of fiscal 2013 and for first half of fiscal 2014. The Company believes that its cash flows from operations will be sufficiently positive for next twelve months to satisfy its obligations when they fall due. |
| · | As of September 30, 2013, the Company had unused credit facility of $20.8 million which could be used when purchasing materials and the purchased inventory is used as pledge. The facility is not unconditionally committed as the bank may refuse to fund if there is a material adverse change to the Company’s operations. However, for normal operational needs, it provides a backup source of liquidity. |
Based on the above factors, management believes that adequate sources of liquidity will exist to fund the Company’s working capital and capital expenditure requirements, and to meet its short term debt obligations, other liabilities and commitments as they become due. Accordingly, management believes the Company will be able to realize its assets and satisfy its liabilities in the normal course of business. As a result, the accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern.
The unaudited consolidated financial statements include the financial statements of Synutra International, Inc. and its subsidiaries, its consolidated variable interest entity, Beijing Shengyuan Huimin Technology Service Co., Ltd., and Heilongjiang Shengyuan Huiren Clinical Examination Co., Ltd., (Collectively the “VIEs”), in which it has a controlling financial interest. A controlling financial interest is typically determined when a company holds a majority of the voting equity interest in an entity. US GAAP provides guidance on the identification and financial reporting for entities over which control is achieved through means other than voting interests, which requires certain VIEs to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Through the contractual arrangements between the Company and the VIEs, the Company controls the operating activities and holds all the beneficial interests of the VIEs and has been determined to be the primary beneficiary of the VIEs. The Company has concluded that such contractual arrangements are legally enforceable. The operations associated with the consolidated VIEs are insignificant and hold de minimis assets and liabilities.
Net income or loss of a subsidiary is attributed to the Company and to the noncontrolling interests either on the basis of relative ownership interest or in accordance with contractual agreements that specify a different allocation, such as in the case of VIEs. Noncontrolling interests in subsidiaries are presented separately from the Company's equity therein.
All inter-company accounts and transactions have been eliminated in consolidation.
The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.
The Company’s inventories at September 30, 2013 and March 31, 2013 are summarized as follows:
| (In thousands) | | September 30, 2013 | | | March 31, 2013 | |
| Raw materials | | $ | 42,964 | | | $ | 56,607 | |
| Work-in-progress | | | 13,904 | | | | 17,023 | |
| Finished goods | | | 18,408 | | | | 14,077 | |
| Total | | $ | 75,276 | | | $ | 87,707 | |
The value of goods-in-transit included in raw materials was $12.5 million and $15.9 million as of September 30, 2013 and March 31, 2013, respectively, which mainly represented the purchase of milk powder and whey protein powder from international sources.
| 4. | RELATED PARTIES AND RELATED PARTY TRANSACTIONS |
| a. | Due from related parties, including current and non-current portion |
| (In thousands) | | September 30, 2013 | | | March 31, 2013 | |
| Sheng Zhi Da Dairy Group Corporation | | $ | 1,919 | | | $ | 1,882 | |
| St. Angel (Beijing) Business Service Co. Ltd. | | | 3,555 | | | | 3,132 | |
| Beijing Ao Naier Feed Stuff Co., Ltd. | | | 574 | | | | 663 | |
| Total | | $ | 6,048 | | | $ | 5,677 | |
| (In thousands) | | September 30, 2013 | | | March 31, 2013 | |
| Sheng Zhi Da Dairy Group Corporation | | $ | 868 | | | $ | 1,107 | |
| Beijing Honnete Dairy Co., Ltd. | | | 478 | | | | 495 | |
| Beijing Kelqin Dairy Co. Ltd. | | | 0 | | | | 6 | |
| Beijing St. Angel Cultural Communication Co., Ltd. | | | 218 | | | | 254 | |
| Total | | $ | 1,564 | | | $ | 1,862 | |
The Company had certain related party borrowings which were recorded in long-term debt due within one year. See Note 7. Except for the related party borrowings, the amount due to and due from related parties were unsecured and interest free.
| B. | Sales to and services for related parties |
In the three and six months ended September 30, 2013, the Company’s sales to related parties mainly included feed grade milk powder and whey protein powder sold to Ao Naier and powdered formula products sold to St. Angel (Beijing) Business Service. Other transactions with related parties included renting office spaces to Honnete, Ao Naier and St. Angel (Beijing) Business Service, which was immaterial. In the three and six months ended September 30, 2012, the Company’s sales to related parties mainly included whey protein to Honnete, feed grade milk powder to Ao Naier, and powdered formula products to St. Angel (Beijing) Business Service.
| | | Three Months Ended | | | Six Months Ended | |
| | | September 30, | | | September 30, | |
| (In thousands) | | 2013 | | | 2012 | | | 2013 | | | 2012 | |
| Beijing Honnete Dairy Co., Ltd. | | $ | 2 | | | $ | 445 | | | $ | 4 | | | $ | 773 | |
| St. Angel (Beijing) Business Service Co., Ltd. | | | 333 | | | | 9 | | | | 1,239 | | | | 2,498 | |
| Qingdao Lvyin Waste Disposal Investment Management Co., Ltd. | | | 0 | | | | 1 | | | | 0 | | | | 1 | |
| Beijing Ao Naier Feed Stuff Co., Ltd. | | | 51 | | | | 56 | | | | 94 | | | | 56 | |
| Total | | $ | 386 | | | $ | 511 | | | $ | 1,337 | | | $ | 3,328 | |
| C. | Purchases from related parties |
In the three months ended September 30, 2013, St. Angel Cultural Communication implemented certain marketing activities for the Company. In the three months ended September 30, 2012, the Company purchased Lactose from Honnete, St. Angel Cultural Communication implemented certain marketing activities for the Company, and the Company purchased supplies for the employee canteen from Kelqin. Kelqin was sold to a third party in April 2013, and was no longer considered a related party from that date.
| | | Three Months Ended | | | Six Months Ended | |
| | | September 30, | | | September 30, | |
| (In thousands) | | 2013 | | | 2012 | | | 2013 | | | 2012 | |
| Beijing St. Angel Cultural Communication Co. Ltd. | | $ | 122 | | | $ | 169 | | | $ | 243 | | | $ | 339 | |
| Beijing Honnete Dairy Co., Ltd. | | | 0 | | | | 1,779 | | | | 0 | | | | 4,489 | |
| Beijing Kelqin Dairy Co., Ltd. | | | 0 | | | | 3 | | | | 0 | | | | 7 | |
| Total | | $ | 122 | | | $ | 1,951 | | | $ | 243 | | | $ | 4,835 | |
In September 2013, the board of directors approved the sale of all of the equity interest of Beijing Shengyuan Huiliduo Food Technology Co., Ltd. over the next twelve month. The Company has identified a third party to purchase the equity interest with consideration close to the carrying amount of the net assets. Accordingly, the Company has classified the carrying value of its long-lived assets of $3.3 million, representing historical costs less accumulated depreciation, as assets held for sale as of September 30, 2013.
| 6. | PROPERTY, PLANT AND EQUIPMENT, NET |
| (In thousands) | | September 30, 2013 | | | March 31, 2013 | |
| Property, plant and equipment, cost: | | | | | | |
| Capital lease of building | | $ | 5,747 | | | $ | 5,637 | |
| Buildings and renovations | | | 90,734 | | | | 84,502 | |
| Plant and machinery | | | 84,858 | | | | 84,559 | |
| Office equipment and furnishings | | | 11,273 | | | | 10,809 | |
| Motor vehicles | | | 3,195 | | | | 3,180 | |
| Others | | | 990 | | | | 918 | |
| Total cost | | $ | 196,797 | | | $ | 189,605 | |
| Less: Accumulated depreciation: | | | | | | | | |
| Capital lease of building | | | 726 | | | | 625 | |
| Buildings and renovations | | | 17,608 | | | | 15,750 | |
| Plant and machinery | | | 43,513 | | | | 40,396 | |
| Office equipment and furnishings | | | 5,268 | | | | 4,190 | |
| Motor vehicles | | | 2,372 | | | | 2,212 | |
| Others | | | 579 | | | | 511 | |
| Total accumulated depreciation | | | 70,066 | | | | 63,684 | |
| Construction in progress | | | 995 | | | | 4,200 | |
| Property, plant and equipment, net | | $ | 127,726 | | | $ | 130,121 | |
The Company recorded depreciation expense for owned assets and capital leased assets of $3.5 million and $3.4 million for the three months ended September 30, 2013 and 2012, respectively, and $6.9 million and $6.8 million for the six months ended September 30, 2013 and 2012, respectively.
As of September 30, 2013 and March 31, 2013, the Company had short-term debt from banks in the amount of $103.4 million and $127.4 million, respectively. The maturity dates of the short-term debt outstanding range from October 2013 to July 2014. The weighted average interest rate on short-term debt outstanding at September 30, 2013 and March 31, 2013 was 4.6% and 3.8%, respectively. Certain portion of these debts use floating interest rates, which are calculated based on the benchmark lending interest rate published by China’s central bank or on LIBOR. The short-term debt at September 30, 2013 and March 31, 2013 were secured by the pledge of certain inventory purchased under letter of credit of $8.4 million and $26.4 million, respectively; the pledge of certain fixed assets totaling $5.2 million and $13.4 million, respectively; the pledge of the Company’s land use right of $4.5 million and $5.4 million, respectively; and the pledge of restricted cash deposits of $34.1 million and $33.0 million, respectively.
As of September 30, 2013 and March 31, 2013, the Company had long-term debt, including current portion, from banks in the amount of $202.2 million and $184.8 million, respectively. The maturity dates of the long-term debt outstanding range from November 2013 to September 2015. The weighted average interest rate of outstanding long-term debt at September 30, 2013 and March 31, 2013 was 5.0% and 5.6%, respectively. Certain portion of these debts use floating interest rates, which are calculated based on the benchmark lending interest rate published by China’s central bank or on LIBOR. The indebtedness at September 30, 2013 and March 31, 2013 was secured by the pledge of certain fixed assets of $14.6 million and $15.3 million, respectively; the pledge of land use right of $0.2 million and $1.2 million, respectively; and the pledge of restricted cash deposits of $58.6 million and $41.2 million, respectively.
As of September 30, 2013 and March 31, 2013, the Company had a long-term loan due within one year from a related party of $2.9 million. The maturity date of the long-term related party loan principal and interest is in November 2013. The interest rate of the long-term loan at September 30, 2013 and March 31, 2013 was 10.0%. The interest expense of related party loans for the three months ended September 30, 2013 and 2012 was $72,000 and $72,000, respectively.
Maturities on long-term debt, including current and non-current portion, subject to mandatory redemption are as follows:
| (In thousands) | | Year Ending March 31, | |
| 2014 | | $ | 51,168 | |
| 2015 | | | 105,193 | |
| 2016 | | | 48,711 | |
| 8. | OTHER CURRENT LIABILITIES |
| (In thousands) | | September 30,
2013 | | | March 31, 2013 | |
| Accrued rebate and slotting fee | | $ | 16,110 | | | $ | 21,314 | |
| Payroll and bonus payables | | | 7,180 | | | | 6,253 | |
| Accrued selling expenses | | | 6,675 | | | | 5,496 | |
| Accrued advertising and promotion expenses | | | 8,824 | | | | 12,034 | |
| Other tax payable | | | 1,281 | | | | 675 | |
| Accrued rental fee | | | 1,709 | | | | 1,461 | |
| Accrued interest expense | | | 2,565 | | | | 2,346 | |
| Others | | | 3,963 | | | | 3,209 | |
| Total | | $ | 48,307 | | | $ | 52,788 | |
The effective tax rate is based on expected income (loss), statutory tax rates and incentives available in the various jurisdictions in which the Company operates. For interim financial reporting, the Company estimates the annual tax rate based on projected taxable income for the full year and records a quarterly income tax provision (benefit) in accordance with the ASC No. 740-270, “Income tax – Interim reporting”. As the year progresses, the Company refines the estimates of the year’s taxable income as new information becomes available. This continual estimation process often results in a change to the expected effective tax rate for the year. When this occurs, the Company adjusts the income tax provision (benefit) during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected annual tax rate.
The Company considers positive and negative evidence to determine whether some portion or all of the deferred tax assets will more likely than not be realized. This assessment considers, among other matters, the nature, frequency and severity of recent losses, forecasts of future profitability, the duration of statutory carryforward periods, the Company's experience with tax attributes expiring unused and tax planning alternatives. Valuation allowances have been established for deferred tax assets based on a more-likely-than-not threshold. The Company's ability to realize deferred tax assets depends on its ability to generate sufficient taxable income within the carryforward periods provided for in the tax law.
| 10. | EARNINGS (LOSS) PER SHARE |
For purposes of calculating basic earnings per share, the Company used the following weighted average common stocks outstanding:
| | | Three Months Ended | | | Six Months Ended | |
| | | September 30, | | | September 30, | |
| (In thousands except for per share data) | | 2013 | | | 2012 | | | 2013 | | | 2012 | |
| Net income (loss) attributable to common stockholders | | $ | 6,073 | | | $ | (44,186 | ) | | $ | 10,848 | | | $ | (53,885 | ) |
| Weighted average common stock outstanding – basic | | | 57,301 | | | | 57,301 | | | | 57,301 | | | | 57,301 | |
| Earnings (loss) per share - basic | | $ | 0.11 | | | $ | (0.77 | ) | | $ | 0.19 | | | $ | (0.94 | ) |
The Company is subject to legal proceedings and claims which arise in the ordinary course of business. Claims have been made against the Company from time to time. The Company intends to contest each lawsuit vigorously. The Company is not involved in any legal proceedings which it believes will have the potential for a materially adverse impact on the Company’s business or financial condition, results of operations or cash flows.
The Company focuses on selling powdered formula products for infants and adults, and also engages in other nutritional product offerings, such as prepared foods and certain nutritional ingredients and supplements. The activities of each segment are as follows:
Powdered Formula - Sales of powdered infant and adult formula products.
Foods - Sales of prepared foods for babies, children and adult.
Nutritional Ingredients and Supplements - Sales of nutritional ingredients and supplements such as chondroitin sulfate to external customers, and microencapsulated Docosahexanoic Acid (“DHA”) and Arachidonic Acid (“ARA”) to powdered formula segment.
Other business - Other business includes non-core businesses such as ancillary sales of excess or unusable ingredients and materials to industrial customers.
The Company’s underlying accounting records are maintained on a legal entity basis for government and public reporting requirements. Segment disclosures are on a performance basis consistent with internal management reporting.
| | | Three Months Ended | | | Six Months Ended | |
| | | September 30, | | | September 30, | |
| (In thousands) | | 2013 | | | 2012 | | | 2013 | | | 2012 | |
| NET SALES TO EXTERNAL CUSTOMERS | | | | | | | | | | | | | | | | |
| Powdered formula | | $ | 71,651 | | | $ | 50,090 | | | $ | 139,730 | | | $ | 100,545 | |
| Foods | | | 14 | | | | 45 | | | | 100 | | | | 110 | |
| Nutritional ingredients and supplements | | | 5,310 | | | | 1,350 | | | | 11,654 | | | | 3,476 | |
| Other business | | | 11,581 | | | | 14,615 | | | | 19,277 | | | | 15,555 | |
| Net sales | | $ | 88,556 | | | $ | 66,100 | | | $ | 170,761 | | | $ | 119,686 | |
| INTERSEGMENT SALES | | | | | | | | | | | | | | | | |
| Powdered formula | | $ | 60 | | | $ | 12 | | | $ | 74 | | | $ | 12 | |
| Foods | | | 0 | | | | 45 | | | | 0 | | | | 281 | |
| Nutritional ingredients and supplements | | | 2,569 | | | | 1,858 | | | | 4,802 | | | | 4,099 | |
| Other business | | | 0 | | | | 0 | | | | 0 | | | | 51 | |
| Intersegment sales | | $ | 2,629 | | | $ | 1,915 | | | $ | 4,876 | | | $ | 4,443 | |
| GROSS PROFIT | | | | | | | | | | | | | | | | |
| Powdered formula | | $ | 38,292 | | | $ | 21,345 | | | $ | 74,573 | | | $ | 39,778 | |
| Foods | | | (409 | ) | | | (522 | ) | | | (737 | ) | | | (875 | ) |
| Nutritional ingredients and supplements | | | (339 | ) | | | (654 | ) | | | (507 | ) | | | (1,694 | ) |
| Other business | | | 1,345 | | | | (2,695 | ) | | | 1,641 | | | | (2,434 | ) |
| Gross profit | | $ | 38,889 | | | $ | 17,474 | | | $ | 74,970 | | | $ | 34,775 | |
| Selling and distribution expenses | | | 13,496 | | | | 14,298 | | | | 28,267 | | | | 27,415 | |
| Advertising and promotion expenses | | | 10,763 | | | | 10,186 | | | | 19,239 | | | | 16,990 | |
| General and administrative expenses | | | 5,831 | | | | 7,162 | | | | 12,283 | | | | 15,019 | |
| Gain on disposal and liquidation of subsidiaries | | | 0 | | | | 2,190 | | | | 367 | | | | 2,610 | |
| Government subsidies | | | 103 | | | | 80 | | | | 268 | | | | 965 | |
| Income (loss) from operations | | | 8,902 | | | | (11,902 | ) | | | 15,816 | | | | (21,074 | ) |
| Interest expense | | | 4,024 | | | | 3,934 | | | | 7,911 | | | | 7,490 | |
| Interest income | | | 1,023 | | | | 590 | | | | 2,110 | | | | 1,077 | |
| Other income (expense), net | | | 111 | | | | (79 | ) | | | 852 | | | | (517 | ) |
| Income (loss) before income tax expense | | $ | 6,012 | | | $ | (15,325 | ) | | $ | 10,867 | | | $ | (28,004 | ) |
| (In thousands) | | September 30, 2013 | | | March 31, 2013 | |
| TOTAL ASSETS | | | | | | |
| Powdered formula | | $ | 489,056 | | | $ | 491,079 | |
| Foods | | | 18,289 | * | | | 20,150 | |
| Nutritional ingredients and supplements | | | 41,513 | | | | 33,879 | |
| Other business | | | 134,818 | | | | 133,748 | |
| Intersegment elimination | | | (204,813 | ) | | | (202,712 | ) |
| Total | | $ | 478,863 | | | $ | 476,144 | |
* The total assets of foods segment included assets held for sale of $3.3 million.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Sections of this Quarterly Report on Form 10-Q (the “Form 10-Q”) including, in particular, the Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed, implied or forecasted in any such forward-looking statements.
Expressions of future goals and expectations or similar expressions including, without limitation, “may,” “should,” “could,” “expects,” “does not currently expect,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “predicts,” “potential,” “targets,” or “continue,” reflecting something other than historical fact are intended to identify forward-looking statements. The factors described in the Company’s Annual Report on Form 10-K under Part I. Item 1A. Risk Factors and below in Part II. Other Information – Item 1A. Risk Factors could cause the Company’s actual results to differ materially from those described in the forward-looking statements. Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the reports and documents the Company files from time to time with the SEC, particularly its Quarterly Reports on Form 10-Q, Annual Report on Form 10-K , Current Reports on Form 8-K and all amendments to those reports.
Available Information
The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the SEC. Such reports and other information filed by the Company with the SEC are available on the Company’s website at http://www.synutra.com when such reports are available on the SEC website. The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The contents of these websites are not incorporated into this filing. Further, the Company’s references to the URLs for these websites are intended to be inactive textual references only.
Overview
We are a leading infant formula company in China. We principally engage in the production, distribution and sale of dairy based nutritional products under the “Shengyuan” or “Synutra” line of brands in the PRC. We focus on selling powdered formula products for infants and adults, and also engage in other nutritional product offerings, such as prepared foods and certain nutritional ingredients and supplements. We sell most of our products through an extensive nationwide sales and distribution network covering all provinces and provincial-level municipalities in mainland China. As of September 30, 2013, this network comprised over 710 independent distributors and over 700 independent sub-distributors who sell our products in approximately 27,000 retail outlets.
We currently have four reportable segments which are:
| ● | Powdered formula segment: Powdered formula segment covers the sale of powdered infant and adult formula products. Major brands include Super, U-Smart, My Angel and Dutch Cow; |
| | |
| ● | Foods segment: Foods segment covers the sale of prepared baby foods for babies, children and adults under the brand of Huiliduo. In June 2013, we introduced prepared adult foods for patients with special nutritional needs after surgical operations; |
| | |
| ● | Nutritional ingredients and supplements segment: Nutritional ingredients and supplements segment covers the production and sale of nutritional ingredients and supplements such as chondroitin sulfate to third parties, and microencapsulated Docosahexanoic Acid (“DHA”) and Arachidonic Acid (“ARA”) to powdered formula segment; |
| | |
| ● | Other business segment: our other business includes non-core businesses such as ancillary sales of excess or unusable ingredients and materials to industrial customers. |
Executive Summary
We believe the “Goldmining” marketing strategy (the “Strategy”) which was initiated in September 2012 has shown positive effect as on our sales channels in the quarter ended September 30, 2013. With the inventory tracking system set up, we believe we have largely prevented distributors from selling outside of their designated areas, and exerted order on our sales channels. We are now monitoring our promotional spending and are organizing nation-wide promotional events through a centralized system, which we believe allows us to more efficiently use our resources.
We are continuing to work towards constructing the drying facility in Carhaix, France (the “French Project”). We received a key approval, the construction permit for the project, from the municipal government of Carhaix in September 2013. Currently we are in the final stage of the regulatory application for the project with the last outstanding document being the environmental impact study. We have engaged certain leading providers to start preliminary work on the design and engineering of the construction and the major equipment for the project. In September 2013 we were informed by one of the leading Chinese state owned banks that they have preliminarily authorized a credit line for project financing of up to €53 million (approximately $72 million) for our project. As of November 8, 2013, we are in the process of finalizing a loan agreement with the bank.
Three Months Results of Operations
Below is a summary of selected comparative results of operations for the three months ended September 30, 2013 and 2012:
| | | Three Months Ended September 30, | | | | |
| (In thousands, except per share data) | | 2013 | | | 2012 | | | % Change | |
| Net sales | | $ | 88,556 | | | $ | 66,100 | | | | 34% | |
- Powdered formula segment | | | 71,651 | | | | 50,090 | | | | 43% | |
| Cost of sales | | | 49,667 | | | | 48,626 | | | | 2% | |
- Powdered formula segment | | | 33,359 | | | | 28,745 | | | | 16% | |
| Gross profit | | | 38,889 | | | | 17,474 | | | | 123% | |
- Powdered formula segment | | | 38,292 | | | | 21,345 | | | | 79% | |
| Gross Margin | | | 44% | | | | 26% | | | | | |
- Powdered formula segment | | | 53% | | | | 43% | | | | | |
| Income (loss) from operations | | | 8,902 | | | | (11,902 | ) | | | * | |
| Interest expense, net | | | 3,001 | | | | 3,344 | | | | -10% | |
| Income (loss) before income tax expense | | | 6,012 | | | | (15,325 | ) | | | * | |
| Income tax expense | | | 14 | | | | 29,018 | | | | * | |
| Net income (loss) | | | 5,998 | | | | (44,343 | ) | | | * | |
| Net income (loss) attributable to common stockholders | | $ | 6,073 | | | $ | (44,186 | ) | | | * | |
| Weighted average common stock outstanding – basic | | | 57,301 | | | | 57,301 | | | | | |
| Earnings (loss) per share – basic | | $ | 0.11 | | | $ | (0.77 | ) | | | * | |
* not meaningful
Net Sales
Our net sales by reportable segments are shown in the table below:
| | | Three Months Ended September 30, | | | | | | % Change in | |
| (In thousands, except percentage data) | | 2013 | | | 2012 | | | % Change | | | Volume | | | Price | |
| Powdered formula | | $ | 71,651 | | | $ | 50,090 | | | | 43% | | | | 9% | | | | 32% | |
| Foods | | | 14 | | | | 45 | | | | -69% | | | | | | | | | |
| Nutritional ingredients and supplements | | | 5,310 | | | | 1,350 | | | | 293% | | | | | | | | | |
| Other business | | | 11,581 | | | | 14,615 | | | | -21% | | | | | | | | | |
| Net sales | | $ | 88,556 | | | $ | 66,100 | | | | 34% | | | | | | | | | |
Net sales of our powdered formula segment include powdered formula products for infants, children and adults. The increase in net sales of our powdered formula products was mainly due to the following factors:
| | ● | Sales volume of powdered formula products for the three months ended September 30, 2013 was 5,004 tons, as compared to 4,605 tons for the same period in the previous year, due primarily to the reduced purchase by distributors in the three months ended September 30, 2012 as the sales channel continued to utilize the products sold prior to the retail price increase on April 1, 2012. |
| | ● | The average selling price of our powdered formula products for the three months ended September 30, 2013 was $14,319 per ton, compared to $10,877 per ton for the same period in the previous year. Average selling price is calculated as net sales, after deducting sales discounts and rebates, divided by sales volume. We provided sales discounts and rebates to offset part of the marketing and promotional expenditures incurred at retail outlets. The increase in average selling price is mainly due to our ability to better control discounts as a result of the continued positive impacts of our Strategy, and more high premium products sold during the period, such as formulas for infants with caesarean birth or special nutritional needs. |
The sales volume and average selling price exclude the amount of free products provided to customers, which is recorded as cost of sales in the period.
The product mix in the foods segment includes prepared baby food, such as cooked meat and vegetables. In June 2013, we launched prepared adult food under this segment for patients with special nutritional needs after surgical operations, but since we are still in the early stage of developing our prepared adult food brand, minimal revenue was recognized in the three months ended September 30, 2013.
The product mix in nutritional ingredients and supplements segment is comprised of external sales of chondroitin sulfate to third parties. Our sales of chondroitin sulfate materials to certain international customers increased significantly since the beginning of fiscal year 2013. Our capacity utilization in this business segment increased to about 70% in this quarter. In September 2013, the chondroitin sulfate sodium manufactured by Meitek Technology (Qingdao) Co., Ltd., one of our PRC subsidiaries which is engaged in the production of nutritional ingredients, was granted an United States Pharmacopeia (“USP”) certificate after various testing, including on-site Good Manufacturing Practices (GMP) audit of the production site, review of the relevant chemistry, manufacturing and controls documentation, and laboratory testing of the ingredient. Obtaining the USP certificate evidences that our quality system provides a source of assurance that chondroitin sulfate sodium meets the applicable monograph requirements which we believe are widely accepted around the world, and that we have formed a solid foundation for selling our chondroitin sulfate products into the overseas market.
Our Other business mainly included sales of milk powder, whey protein powder, packing materials, feed-grade milk powder and whey protein powder, and other raw materials. The decrease in Other business was mainly due to the decreased sales of surplus imported milk powder.
Cost of Sales
Our cost of sales by reportable segments is shown in the table below:
| | | Three Months Ended September 30, | | | | |
| (In thousands, except percentage data) | | 2013 | | | 2012 | | | % Change | |
| Powdered formula | | $ | 33,359 | | | $ | 28,745 | | | | 16% | |
| Foods | | | 423 | | | | 567 | | | | -25% | |
| Nutritional ingredients and supplements | | | 5,649 | | | | 2,004 | | | | 182% | |
| Other business | | | 10,236 | | | | 17,310 | | | | -41% | |
| Cost of sales | | $ | 49,667 | | | $ | 48,626 | | | | 2% | |
The increased total cost of sales of the powdered formula segment was mainly due to the increased price in raw material of milk powder and increased volume sold.
The increase in the cost of sales of nutritional ingredients and supplements segment was mainly due to increased sales volume of chondroitin sulfate to certain international pharmaceutical companies as discussed above.
The decrease in cost of our Other business was mainly due to the decreased sales volume of surplus milk powder.
Gross Profit and Gross Margin
| | | Three Months Ended September 30, | | | | |
| (In thousands, except percentage data) | | 2013 | | | 2012 | | | % Change | |
| Gross profit | | $ | 38,889 | | | $ | 17,474 | | | | 123% | |
| - Powdered formula | | | 38,292 | | | | 21,345 | | | | 79% | |
| Gross margin | | | 44% | | | | 26% | | | | | |
| - Powdered formula | | | 53% | | | | 43% | | | | | |
The increase in gross margin was mainly due to the margin increase in the powdered formula segment. The increase in gross margin of the powdered formula segment was due to increased average selling price and increased volume sold as discussed above, partially offset by a price increase in raw material of milk powder.
Expenses
| | | Three Months Ended September 30, | | | | |
| (In thousands, except percentage data) | | 2013 | | | 2012 | | | % Change | |
| Selling and distribution expenses | | $ | 13,496 | | | $ | 14,298 | | | | -6% | |
| Advertising and promotion expenses | | | 10,763 | | | | 10,186 | | | | 6% | |
- Advertising expenses | | | 3,240 | | | | 3,877 | | | | -16% | |
- Promotion expenses | | | 7,523 | | | | 6,309 | | | | 19% | |
| General and administrative expenses | | | 5,831 | | | | 7,162 | | | | -19% | |
| Gain on disposal and liquidation of subsidiaries | | | 0 | | | | 2,190 | | | | -100% | |
| Government subsidies | | | 103 | | | | 80 | | | | 29% | |
Selling and distribution expenses primarily include compensation expense for sales staff, freight charges and travel expense, which were relatively stable this quarter.
Advertising expenses primarily include media expenses paid to TV stations and e-commerce providers. Advertising expenses decreased as we believe the influence from traditional TV advertising has diminished recently and as a result we have substantially cut back advertising on TV stations. Instead, we have shifted our advertising focus to e-commerce providers, mostly for our specialty infant formula products with special nutritional focus. Promotion expenses primarily include promotional products provided to end customers. Based on our brand positioning, we believe direct communication with end customers is a more cost effective way to market our product compared to mass media advertising. As a result, we now allocate more resources to such promotional activities.
General and administrative expenses primarily include salaries for staff and management, depreciation, office rental, office supplies and bad debt expense. The decrease was mainly due to the decrease in bad debt expense.
Interest Expense and Interest Income
| | | Three Months Ended September 30, | | | | |
| (In thousands, except percentage data) | | 2013 | | | 2012 | | | % Change | |
| Interest expense | | $ | 4,024 | | | $ | 3,934 | | | | 2% | |
| Interest income | | | 1,023 | | | | 590 | | | | 73% | |
The increase in interest expense was mainly due to an increase in average borrowing balance, partially offset by a decreased average interest rate as we used more trade financing to purchase inventory with lower interest rates, and received more U.S. dollar financing via our Hong Kong subsidiary which has a lower interest rate base than financing in mainland China.
The increase in interest income was mainly due to an increase in average restricted cash balance, which earned a higher interest rate than cash and cash equivalents.
Income Tax Expense
Income tax expense for the three month ended September 30, 2013 was immaterial.
Net Income (Loss) Attributable to Noncontrolling Interest
Net income (loss) attributable to noncontrolling interest represents the interest held by third parties in Meitek Technology (Qingdao) Co., Ltd.
Net Income (Loss) Attributable to Common Stockholders
As a result of the foregoing, net income attributable to common stockholders for the three months ended September 30, 2013 was $6.1 million, compared to a net loss of $44.2 million for the same period in the previous year.
Six Months Results of Operations
Below is a summary of selected comparative results of operations for the six months ended September 30, 2013 and 2012:
| | | Six Months Ended September 30, | | | | |
| (In thousands, except per share data) | | 2013 | | | 2012 | | | % Change | |
| Net sales | | $ | 170,761 | | | $ | 119,686 | | | | 43% | |
- Powdered formula segment | | | 139,730 | | | | 100,545 | | | | 39% | |
| Cost of sales | | | 95,791 | | | | 84,911 | | | | 13% | |
- Powdered formula segment | | | 65,157 | | | | 60,767 | | | | 7% | |
| Gross profit | | | 74,970 | | | | 34,775 | | | | 116% | |
- Powdered formula segment | | | 74,573 | | | | 39,778 | | | | 87% | |
| Gross Margin | | | 44% | | | | 29% | | | | | |
- Powdered formula segment | | | 53% | | | | 40% | | | | | |
| Income (loss) from operations | | | 15,816 | | | | (21,074 | ) | | | * | |
| Interest expense, net | | | 5,801 | | | | 6,413 | | | | -10% | |
| Income (loss) before income tax expense | | | 10,867 | | | | (28,004 | ) | | | * | |
| Income tax expense | | | 93 | | | | 26,115 | | | | * | |
| - Effective tax rate | | | -0.9% | | | | -93.3% | | | | | |
| Net income (loss) | | | 10,774 | | | | (54,119 | ) | | | * | |
| Net income (loss) attributable to common stockholders | | $ | 10,848 | | | $ | (53,885 | ) | | | * | |
| Weighted average common stock outstanding – basic | | | 57,301 | | | | 57,301 | | | | | |
| Earnings (loss) per share – basic | | $ | 0.19 | | | $ | (0.94 | ) | | | * | |
* not meaningful
Net Sales
Our net sales by reportable segments are shown in the table below:
| | | Six Months Ended September 30, | | | | | | % Change in | |
| (In thousands, except percentage data) | | 2013 | | | 2012 | | | % Change | | | Volume | | | Price | |
| Powdered formula | | $ | 139,730 | | | $ | 100,545 | | | | 39% | | | | 20% | | | | 16% | |
| Foods | | | 100 | | | | 110 | | | | -9% | | | | | | | | | |
| Nutritional ingredients and supplements | | | 11,654 | | | | 3,476 | | | | 235% | | | | | | | | | |
| Other business | | | 19,277 | | | | 15,555 | | | | 24% | | | | | | | | | |
| Net sales | | $ | 170,761 | | | $ | 119,686 | | | | 43% | | | | | | | | | |
Net sales of our powdered formula segment include powdered formula products for infants, children and adults. The increase in net sales of our powdered formula products was mainly due to the following factors:
| | ● | Sales volume of powdered formula products for the six months ended September 30, 2013 was 10,748 tons, as compared to 8,985 tons for the same period in the previous year, due primarily to the reduced purchase by distributors in the six months ended September 30, 2012 as the sales channel continued to utilize the products sold prior to the retail price increase on April 1, 2012. |
| | ● | The average selling price of our powdered formula products for the six months ended September 30, 2013 was $13,001 per ton, compared to $11,190 per ton for the same period in the previous year. Average selling price is calculated as net sales, after deducting sales discounts and rebates, divided by sales volume. We provided sales discounts and rebates to offset part of the marketing and promotional expenditures incurred at retail outlets. The increase in average selling price was mainly due to our ability to better control discounts as a result of the continued positive impacts of our Strategy, and more high premium products sold during the period, such as formulas for infants with caesarean birth or special nutritional needs. |
The sales volume and average selling price exclude the amount of free products provided to customers, which is recorded as cost of sales in the period.
The product mix in the foods segment includes prepared baby food, such as cooked meat and vegetables. In June 2013, we launched prepared adult food under this segment for patients with special nutritional needs after surgical operations, but since we are still in the early stage of developing our prepared adult food brand, minimal revenue was recognized in the six months ended September 30, 2013.
The product mix in nutritional ingredients and supplements segment is comprised of external sales of chondroitin sulfate to third parties. Our sales of chondroitin sulfate materials to certain international customers increased significantly since the beginning of fiscal year 2013. Our capacity utilization in this business segment increased to about 70% in this quarter.
Our Other business mainly included sales of milk powder, whey protein powder, packing materials, feed-grade milk powder and whey protein powder, and other raw materials. The increase in Other business was mainly due to the increased sales of whey protein powder.
Cost of Sales
Our cost of sales by reportable segments is shown in the table below:
| | | Six Months Ended September 30, | | | | |
| (In thousands, except percentage data) | | 2013 | | | 2012 | | | % Change | |
| Powdered formula | | $ | 65,157 | | | $ | 60,767 | | | | 7% | |
| Foods | | | 837 | | | | 985 | | | | -15% | |
| Nutritional ingredients and supplements | | | 12,161 | | | | 5,170 | | | | 135% | |
| Other business | | | 17,636 | | | | 17,989 | | | | -2% | |
| Cost of sales | | $ | 95,791 | | | $ | 84,911 | | | | 13% | |
The increase in total cost of sales of the powdered formula segment was the result of the increase in sales volume, partially offset by decreased free product giveaways, and lower provision for inventories.
The increase in the cost of sales of nutritional ingredients and supplements segment was mainly due to increased sales volume of chondroitin sulfate to certain international pharmaceutical companies as discussed above.
Gross Profit and Gross Margin
| | | Six Months Ended September 30, | | | | |
| (In thousands, except percentage data) | | 2013 | | | 2012 | | | % Change | |
| Gross profit | | $ | 74,970 | | | $ | 34,775 | | | | 116% | |
| - Powdered formula | | | 74,573 | | | | 39,778 | | | | 87% | |
| Gross margin | | | 44% | | | | 29% | | | | | |
| - Powdered formula | | | 53% | | | | 40% | | | | | |
The increase in gross margin was mainly due to the margin increase in the powdered formula segment. The increase in gross margin of the powdered formula segment was due mainly to increased average selling price from the continued positive impact of our Strategy and increased volume sold, decreased cost per ton from decreased free product giveaways, and lower provision for inventories.
Expenses
| | | Six Months Ended September 30, | | | | |
| (In thousands, except percentage data) | | 2013 | | | 2012 | | | % Change | |
| Selling and distribution expenses | | $ | 28,267 | | | $ | 27,415 | | | | 3% | |
| Advertising and promotion expenses | | | 19,239 | | | | 16,990 | | | | 13% | |
- Advertising expenses | | | 3,733 | | | | 6,748 | | | | -45% | |
- Promotion expenses | | | 15,506 | | | | 10,242 | | | | 51% | |
| General and administrative expenses | | | 12,283 | | | | 15,019 | | | | -18% | |
| Gain on disposal and liquidation of subsidiaries | | | 367 | | | | 2,610 | | | | -86% | |
| Government subsidies | | | 268 | | | | 965 | | | | -72% | |
Selling and distribution expenses primarily include compensation expense for sales staff, freight charges and travel expense, which were relatively stable in the six months ended September 30, 2013.
Advertising expenses primarily include media expenses paid to TV stations and e-commerce providers. Advertising expenses decreased as we believe the influence from traditional TV advertising has diminished recently and as a result we have substantially cut back advertising on TV stations. Instead, we have shifted our advertising focus to e-commerce providers, mostly for our specialty infant formula products with special nutritional focus. Promotion expenses primarily include promotional products provided to end customers. Based on our brand positioning, we believe direct communication with end customers is a more cost effective way to market our product compared to mass media advertising. As a result, we now allocate more resources to such promotional activities.
General and administrative expenses primarily include salaries for staff and management, depreciation, office rental, office supplies and bad debt expense. The decrease was mainly due to the decrease in bad debt expense.
Interest Expense and Interest Income
| | | Six Months Ended September 30, | | | | |
| (In thousands, except percentage data) | | 2013 | | | 2012 | | | % Change | |
| Interest expense | | $ | 7,911 | | | $ | 7,490 | | | | 6% | |
| Interest income | | | 2,110 | | | | 1,077 | | | | 96% | |
The increase in interest expense was mainly due to an increase in average borrowing balance, partially offset by a decreased average interest rate as we used more trade financing to purchase inventory with lower interest rates, and received more U.S. dollar financing via our Hong Kong subsidiary which has a lower interest rate base than financing in mainland China.
The increase in interest income was mainly due to an increase in average restricted cash balance, which earned a higher interest rate than cash and cash equivalents.
Income Tax Expense
Income tax expense for the six month ended September 30, 2013 was immaterial.
Net Income (Loss) Attributable to Noncontrolling Interest
Net income (loss) attributable to noncontrolling interest represents the interest held by third parties in Meitek Technology (Qingdao) Co., Ltd.
Net Income (Loss) Attributable to Common Stockholders
As a result of the foregoing, net income attributable to common stockholders for the six months ended September 30, 2013 was $10.8 million, compared to a net loss of $53.9 million for the same period in the previous year.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are cash on hand, cash from operations and available borrowings. Cash flows from operating activities represent the inflow of cash from our customers and the outflow of cash for inventory purchases, manufacturing, operating expenses, interest and taxes. Cash flows used in investing activities primarily represent capital expenditures for equipment and buildings, and restricted cash used as security against letter of credits and short-term and long-term borrowings. Cash flows from financing activities primarily represent proceeds and repayments of borrowings. In addition, while there can be no assurance that we will be able to refinance our short-term bank borrowings as they become due, historically, we have renewed or rolled over most of our bank loans after the maturity date of the loans and we believe we will continue to be able to do so.
Cash and cash equivalents totaled $77.5 million at September 30, 2013, of which $76.5 million was held outside of the United States.
As of September 30, 2013, the Company's current liabilities exceed its current assets by $9.4 million and the Company has an asset liability ratio of 91%, which is defined as total liabilities divided by total assets. However, the Company regards the going concern assumption as appropriate considering the following mitigating factors:
| · | The Company managed to reverse the trend contributing to losses incurred in first half of fiscal 2013, with breakeven results from operations in the third quarter of fiscal 2013, and income from operations in the fourth quarter of fiscal 2013 and first half of fiscal 2014. |
| · | The Company had positive cash flows from operations for the second half of fiscal 2013 and for first half of fiscal 2014. The Company believes that its cash flows from operations will be sufficiently positive for next twelve months to satisfy its obligations when they fall due. |
| · | As of September 30, 2013, the Company had unused credit facility of $20.8 million which could be used when purchasing materials and the purchased inventory is used as pledge. The facility is not unconditionally committed as the bank may refuse to fund if there is a material adverse change to the Company’s operations. However, for normal operational needs, it provides a backup source of liquidity. |
Based on the above factors, management believes that adequate sources of liquidity will exist to fund the Company’s working capital and capital expenditure requirements, and to meet its short term debt obligations, other liabilities and commitments as they become due. Accordingly, management believes the Company will be able to realize its assets and satisfy its liabilities in the normal course of business. As a result, the accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern.
On September 17, 2012, the Company entered into a partnership framework agreement, a milk supply agreement, a whey supply agreement, a whey powder supply agreement, and a technical assistance agreement with Sodiaal Union, a French agricultural cooperative company (“Sodiaal”), and/or Euroserum SAS (“Euroserum”), a French subsidiary of Sodiaal, relating to a long-term industrial and commercial partnership between Sodiaal and the Company. Under these agreements, the Company undertakes to build a new drying facility in Carhaix, France, intended to manufacture powdered milk and fat-enriched demineralized whey. Pursuant to the partnership framework agreement, the operational commissioning of the new drying facility will take place no later than January 2, 2015. In the event of a delay beyond January 2, 2015 and save for limited exceptions, the Company undertakes to compensate, according to the circumstance, Sodiaal or Euroserum for the loss incurred as a result of such delay. The loss incurred by Sodiaal or Euroserum in case of a delay of the operational commissioning of the new drying facility beyond January 2, 2015 shall amount to the loss of profits actually suffered, as the case may be, by Sodiaal or Euroserum under the milk supply agreement or the whey supply agreement. The estimated cost to build the facility is € 90 million (approximately $121 million). The Company plans to finance a majority of the cost with long-term project financing, and the remaining part of the project with cash on hand and operating cash flow. The Company committed to purchase, and Sodiaal and Euroserum committed to sell, 288 million liters of milk per year for ten years, an amount of whey equivalent to 24,000 tons of 70% demineralized pre-concentrated dry whey extract per year for ten years, and 6,000 tons of 70% demineralized whey powder per year, or an equivalent quantity of liquid whey, for ten years, at market based prices at the time of purchase, to satisfy the production needs of the new drying facility. If the Company purchases less than the agreed amount, the Company would compensate Sodiaal or Euroserum for the loss suffered.
On March 20, 2013, the Company received the required approvals from China's National Development and Reform Commission and Ministry of Commerce for the project. In September 2013, the Company received the construction permit for the project from the municipal government of Carhaix. In September 2013, the Company was informed by one of the leading Chinese state owned banks that they have preliminarily authorized a credit line of project financing up to €53 million (approximately $72 million) for the French Project financing. As of November 8, 2013, we are in the final stage of the regulatory application for the project with the last outstanding document being the environmental impact study, and we are in the process of finalizing a loan agreement with the bank.
Cash Flows
The following table sets forth, for the periods indicated, certain information relating to our cash flows:
| | | Six Months Ended September 30, | |
| (In thousands) | | 2013 | | | 2012 | |
| Cash flow provided by/(used in): | | | | | | |
| Operating activities | | | | | | | | |
| Net income (loss) | | $ | 10,774 | | | $ | (54,119 | ) |
| Depreciation and amortization | | | 7,025 | | | | 6,531 | |
| Bad debt expense | | | (1,628 | ) | | | 1,451 | |
| Other | | | (321 | ) | | | 22,847 | |
| Changes in assets and liabilities | | | 16,788 | | | | (24,238 | ) |
| Total operating activities | | | 32,638 | | | | (47,528 | ) |
| Investing activities | | | (26,553 | ) | | | (28,210 | ) |
| Financing activities | | | (8,386 | ) | | | 85,702 | |
| Effect of foreign currency translation on cash and cash equivalents | | | 762 | | | | (236 | ) |
| Net change in cash and cash equivalents | | $ | (1,539 | ) | | $ | 9,728 | |
Cash flow provided by operating activities was a result of the net income incurred of $10.8 million, as adjusted for non-cash expense and income items of $5.1 million, and decrease in working capital of $16.8 million. In the six months ended September 30, 2013, we spent $117.7 million to purchase raw materials and other production materials, $24.5 million in staff compensation and social welfare, $19.0 million in taxes, $28.8 million in operating expenses, $7.5 million in interest, $0.7 million in land lease, received $228.8 million from our customers, and received $1.9 million from interest.
Cash flow used in investing activities in the six months ended September 30, 2013 represents $7.3 million payment for the purchase of property, plant and equipment, $20.0 million outflow for restricted cash deposited with banks as security against the issuance of letters of credit for the import of raw materials and as pledges for certain short-term and long-term borrowings, $110,000 in proceeds from disposed assets, and $633,000 proceeds from disposal of a PRC subsidiary.
Cash flow provided by financing activities in the six months ended September 30, 2013 mainly represents net cash outflow of $25.9 million from short-term loans and net cash inflow of $17.6 million from long-term loans, and $150,000 payment for assets under capital leases.
Outstanding Indebtedness
For information on our short-term and long-term borrowings, see “Item 1. Financial Statements – Note 7.”
Capital Expenditures
Our capital expenditures were $3.7 million and the corresponding cash outflow was $7.3 million for the six months ended September 30, 2013, which mainly represented purchasing of manufacturing equipment and other fixed assets.
Off-Balance Sheet Arrangements
We do not have off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Recent Accounting Pronouncements
In July 2013, the FASB issued ASU 2013-11 ”Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (ASU 2013-11), which amends ASC 740 “Income Taxes”. This update provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. This update is effective for annual and interim periods beginning after December 15, 2013, with early adoption permitted. This update will not have a material effect on our consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There is no material change in the information reported under Item 7A, “Foreign Exchange Risk”, “Inflation”, “Interest Rate Risk”, “Concentration of Credit Risk” and “Commodities Risk” contained in our Form 10-K for the fiscal year ended March 31, 2013.
ITEM 4. CONTROLS AND PROCEDURES
Conclusion Regarding Effectiveness of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this report.
Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2013, our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (a) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (b) accumulated and communicated to the our management, including the Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) in the three months ended September 30, 2013, which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of September 30, 2013, the end of the period covered by this report, the Company was subject to various legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. In the opinion of management, the Company does not have a potential liability related to any current legal proceedings and claims that would individually or in the aggregate have a material adverse effect on its financial condition or operating results. However, the results of legal proceedings cannot be predicted with certainty. The Company intends to contest each lawsuit vigorously but should the Company fail to prevail in any of these legal matters or should several of these legal matters be resolved against the Company in the same reporting period, the operating results of a particular reporting period could be materially and adversely affected.
For information regarding the risks and uncertainties affecting our business, please refer to “Part I, Item 1A Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2013. There have been no material changes to these risks and uncertainties during the three months ended September 30, 2013.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit Number | | Description |
| 31.1 | | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended |
| | | |
| 31.2 | | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended |
| | | |
| 32.1 | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer) |
| | | |
| 32.2 | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer) |
| | | |
| 101 | | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets—September 30, 2013 and March 31, 2013, (ii) the Consolidated Statements of Operations—Three and Six Months Ended September 30, 2013 and 2012, (iii) the Consolidated Statements of Comprehensive Income(Loss)—Three and Six Months Ended September 30, 2013 and 2012, (iv) the Consolidated Statements of Equity—Six Months Ended September 30, 2013 and 2012, (v) the Consolidated Statements of Cash Flows—Six Months Ended September 30, 2013 and 2012, and (vi) Notes to Consolidated Financial Statements. |
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 thereunto duly authorized.
| | | | SYNUTRA INTERNATIONAL, INC. | |
| | | | | | | |
| Date: | November 8, 2013 | | By: | /s/ Liang Zhang | |
| | | | | Name: | Liang Zhang | |
| | | | | Title: | Chief Executive Officer and Chairman | |
| | | | By: | /s/ Ning Cai | |
| | | | | Name: | Ning Cai | |
| | | | | Title: | Chief Financial Officer | |
