There were no preferred stocks and warrants included in the calculation for the nine months ended December 31, 2011 as there was a loss for those periods and including the preferred stocks and warrants would be anti-dilutive.
Note 6. Accounts Receivable
The majority of our sales are on open credit terms and in accordance with terms specified in the contracts governing the relevant transactions. We evaluate the need of an allowance for doubtful accounts based on general provision that management believes to be uncollectible. If actual collections experience changes, revisions to the allowance may be required.
| | | | | |
| December 31, | | March 31, |
| 2011 | | 2011 |
Accounts receivable, trade | | | | | |
- Billed | $ | 5,282,516 | | $ | 2,343,570 |
- Accrued | | 7,432,139 | | | 5,324,635 |
| | 12,714,655 | | | 7,668,205 |
Less: allowances for doubtful accounts and returns | | (1,380,775) | | | (103,130) |
Accounts receivable, net | $ | 11,333,880 | | $ | 7,565,075 |
For the nine months ended December 31, 2011, we provided for an allowance for doubtful accounts of $1,243,089. In addition, we provided an allowance for returns of $17,193. For the year ended March 31, 2011, we provided for an allowance for doubtful accounts of $24,012 and wrote off accounts receivable of $162,012.
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Accrued accounts receivable represents revenue from the products that are delivered to, received by and accepted by the customers prior to invoicing, and are presented on the balance sheets in the aggregate with accounts receivable. The accrual results from delays in completion of required documentation under the governmental procedures.
Up to February 13, 2012 we collected approximately $902,145 (8%) of the balance of the net accounts receivable and we billed approximately $1,201,402 (16%) of the accrued receivables.
Note 7. Short-Term Borrowings
| | | | | | |
| | December 31, | | March 31, |
| | 2011 | | 2011 |
| | | | | | |
Unsecured, equivalent to RMB4,400,000 with interest rate at 6.5825% per annum, payable monthly, due September 2011 | (a) | $ | - | | $ | 669,701 |
| | | | | | |
Unsecured, equivalent to RMB3,500,000 with interest rate at 7.8084% per annum, payable monthly, due March 2012 | (b) | | 549,908 | | | - |
| | | | | | |
Unsecured, equivalent to RMB125,000 with interest rate at 10.8% per annum, payable monthly, due May 7, 2012 | (c) | | 19,640 | | | - |
| | | | | | |
Unsecured, equivalent to RMB2,250,000 with interest rate at 25.2% per annum, payable monthly, due November 30, 2012 | (d) | | 353,512 | | | - |
| | $ | 923,060 | | $ | 669,701 |
(a) The loan was fully repaid upon maturity.
(b) The borrowing is personally guaranteed by an officer and director of the Company and a third party vendor of the Company.
(c) The borrowing carries administrative fee of RMB2,100 per month ($270 per month).
(d) The borrowing carries administrative fee of RMB10,000 per month ($1,287 per month).
Note 8. Related Party Transactions
Promissory Note
On December 10, 2009, we issued a promissory note (the “Note”) with a principal amount of $500,000, together with accrued interest in the amount of $100,000 due and payable on May 10, 2010, to a director of the Company. The Note is in default and accordingly interest is charged at 18% per annum until such time as the note is paid in full. In consideration for the Note, we agreed to issue a warrant to the director to purchase a total of 2,000,000 shares of our common stock at an exercise price of $0.25 per share. These warrants were valued at $73,877 using the Black-Scholes option-pricing model with the following assumptions: applicable risk-free interest rate of 1%; volatility factor of 79%; and the expected life of the warrants of 5 years. The relative fair value of the warrants of $73,877 was recorded as a debt discount. This debt discount was amortized over the term of the Note using the effective interest method and we recognized $28,730 as a non-cash interest expense for the nine months ended December 31, 2010. No amortization was recognized during the three and nine months ended December 31, 2011 as it was fully amortized prior to that period. Interest expense accrued and or paid was $21,444 and $72,883 for the three and nine months ended December 31, 2011, respectively, and was none and $73,583 for the three and nine months ended December 31, 2010, respectively. The effective annual interest rate was 18% for the three and nine
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months ended December 31, 2011. During the nine month period ended December 31, 2011 we made payments of $100,000 which represented accrued interest.
Amount Due to a Stockholder
As of December 31, 2011 and March 31, 2011, the balance represented temporary advances made by one of our stockholders who is also a director of the Company. The advance is unsecured and interest-free. The stockholder has agreed that he will not request, seek or require repayment of any portion of the outstanding advance until such time as the current operations of the Company becomes profitable (as reflected by financial statements prepared in accordance with U.S. GAAP) and the Company generated gross revenues of in excess of $30,000,000.
Note 9. Notes Payable
Promissory Note
On January 8, 2010, the Company issued a promissory note (the “Note”) with a principal amount of $150,000 in connection with a private purchase of the Company’s common stock. The Note is non-interest bearing and payable on January 8, 2011. Interest is charged at a default rate of 18% per annum when the entire principal is not repaid in full at the maturity date. The Note is in default and accordingly interest is charged at the default rate until such time as the Note is paid in full. Interest expense recognized for the Note was $3,403 and $10,245 for the three and nine months ended December 31, 2011. During the nine month period ended December 31, 2011 we made payments of $25,000.
Convertible Notes Payable
On April 29, 2010, we entered into a Note Modification Agreement which agreed to reduce the outstanding balance from $160,000 to $150,000, reduced the interest rate to 6% per annum, fixed the conversion price at $0.125 per share and extended the due date to March 31, 2011.
Concurrently, the note holder exercised the option to convert into 1,200,000 shares of the Company’s common stock at a price of $0.125 per share. The fair value of this stock conversion was determined as $600,000 at a fair market price of $0.50 per share on the conversion date. The Company recognized $440,000 as a loss on extinguishment of debt for the nine months ended December 31, 2010.
Note 10. Stockholders’ Equity
On May 7, 2010, the Company approved an amendment to its article of incorporation, as below:
(i)
increasing the number of authorized shares of $0.001 par value common stock from 100,000,000 to 200,000,000 shares, and increasing the number of authorized shares of $0.001 par value preferred stock from 10,000,000 to 30,000,000 shares;
(ii)
cancelling the designation of two classes of preferred stock consisting of 5,000,000 shares of Series A preferred stock 1,600,000 shares of Series B preferred stock, and returning such shares to the status of authorized but unissued shares of preferred stock; and
(iii)
designating a new class of preferred stock consisting of 25,714,286 shares of Series AA Convertible Preferred Stock.
On December 9, 2010, the Company approved a further amendment to its article of incorporation, as below:
(i)
cancelling the designation of 15,714,286 shares of preferred stock as Series AA Convertible Preferred Stock, returning such shares to the status of authorized but unissued shares of preferred stock and reducing the number of authorized shares Series AA Convertible Preferred Stock from 25,714,286 shares to 10,000,000 shares; and
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(ii)
designating a new class of preferred stock consisting of 10,000,000 shares of Series AAA Convertible Preferred Stock.
Common Stock
As of December 31, 2011, the number of authorized, issued and outstanding shares of the Company’s common stock was 200,000,000 shares and 63,826,486 shares, respectively.
Series AA Convertible Preferred Stock (“Series AA Preferred Stock”)
The Series AA Preferred Stock has a stated value of $0.35 per share and is entitled to one vote for each share held. The holders of Series AA Preferred Stock are entitled to an annual dividend at the rate of 4%, payable in cash, semi-annually, in arrears. In the event of liquidation, the holders of Series AA Preferred Stock are entitled to a preference of $0.35 per share, in cash, equal to 100% of the stated value for each share outstanding, plus an amount equal to all accrued but unpaid dividends thereon, whether or not declared. At the option of the holders, each share of Series AA Preferred Stock may be converted into one (1) share of our common stock and one-half (1/2) warrant to purchase common stock, together with the payment of all accrued but unpaid dividends in the form of common stock at a price of $0.35 per share. Each two warrants will then be convertible into one share of common stock at a price of $0.70 per share for a period of 5 years.
Series AAA Convertible Preferred Stock (“Series AAA Preferred Stock”)
The Series AAA Preferred Stock has a stated value of $0.35 per share and is entitled to one vote for each share held. The holders of Series AAA Preferred Stock are entitled to an annual dividend at the rate of 4%, payable in cash, semi-annually, in arrears. In the event of liquidation, the holders of Series AAA Preferred Stock are entitled to a preference of $0.35 per share, in cash, equal to 100% of the stated value for each share outstanding, plus an amount equal to all accrued but unpaid dividends thereon, whether or not declared. However, the Series AAA Preferred Stock is subordinate to the Series AA Preferred Stock with respect to dividend rights and rights on liquidation. At the option of the holders, each share of Series AAA Preferred Stock may be converted into one (1) share of our common stock and one warrant to purchase common stock, together with the payment of all accrued but unpaid dividends in the form of common stock at a price of $0.35 per share. Each warrant will then be convertible into one share of common stock at a price of $0.70 per share for a period of 5 years.
During the period ended December 31, 2011, pursuant to two exempt offerings, we issued 1,373,628 shares of Series AAA Preferred Stock at a price of $0.35 per share for total proceeds of $480,770. There was no cost associated with this offering.
Conversion of Series AA Preferred Stock
During the nine months ended December 31, 2011 holders of 71,429 shares of Series AA Preferred Stock elected to convert the Series AA Preferred Stock into Common Stock. Accordingly, under the terms of the Series AA Preferred Stock, we cancelled 71,429 shares of Series AA Preferred Stock and issued 71,429 shares of Common Stock and warrants to purchase 35,715 shares of Common Stock. The carrying value of the Series AA Preferred stock was $0.35 per share. We measured the fair value of the warrants at $0.12 per share ($4,154 in total). The fair value of the warrants was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
| |
| |
Expected life (in years) | 5 |
Volatility | 108.6% |
Risk free interest rate | 1.14% |
Dividend yield (on common stock) | 0.0% |
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A summary of the status of the Company’s outstanding warrants as of December 31, 2011:
In connection with the Series AA and Series AAA Preferred Stock, we recorded accrued dividends of $67,635 and $35,358 for the nine months ended December 31, 2011 and 2010, respectively.
Note 11. Income Taxes
For the nine months ended December 31, 2011 and 2010, the United States and foreign components of (loss) income before income taxes were comprised of the following:
| | | | | |
| 2011 | | 2010 |
Tax jurisdictions from: | | | | | |
– United States | $ | (284,697) | | $ | (641,610) |
– Foreign representing:- | | | | | |
- Hong Kong | | (74,395) | | | (78,523) |
- The PRC | | (52,849) | | | 1,107,628 |
(Loss) income before income taxes | $ | (411,941) | | $ | 387,495 |
The effective tax rate in the periods presented is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. The entities that operate in various countries: United States, Hong Kong and the PRC that are subject to taxes in the jurisdictions in which they operate, as follows:
United States of America
AGSO and FTUS are registered in the State of Colorado and are subject to the tax laws of the United States of America.
As of December 31, 2011, AGSO and FTUS incurred $2,031,420 of the aggregate net operating losses carryforwards available for federal tax purposes that may be used to offset future taxable income and will begin to expire in 2031, if unutilized. We have provided for a full valuation allowance against the deferred tax assets on the expected future tax benefits from the net operating losses carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.
Hong Kong
Our operating subsidiary in Hong Kong is subject to Hong Kong Profits Tax at the statutory rate of 16.5% for the nine months ended December 31, 2011 and 2010 on the assessable income for its tax reporting years. As of December 31, 2011, $794,813 of cumulative operating losses carryforwards is available for income tax purposes at no expiration. We have provided for a full valuation allowance against the deferred tax assets on the expected future tax benefits from the net operating losses carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.
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The PRC
Our subsidiary and VIE, Forboss and Shenzhen Fuwaysun are subject to the Corporate Income Tax Law of the People’s Republic of China (the “New CIT Law”), at a unified income tax rate of 25%. However, for entities operating in special economic zones that previously enjoyed preferential tax rates, the applicable tax rate is increased progressively to 25% over a 5-years’ period under a transitional policy.
Shenzhen Fuwaysun is registered and operates in Shenzhen City, the PRC and is recognized as “Enterprise Located in Special Economic Zone”. Hence, Shenzhen Fuwaysun is entitled to income tax at a preferential tax rate of 15% over the transitional period under the New CIT Law. Shenzhen Fuwaysun is also entitled to the tax holiday at 50%-reduction in its preferential corporate income tax rate for the following three years, expiring through fiscal year 2012.
The reconciliation of income tax rate to the effective income tax rate based on (loss) income before income taxes from the operation in the PRC for the nine months ended December 31, 2011 and 2010 are as follows:
| | | | | |
| 2011 | | 2010 |
(Loss) income before income taxes | $ | (52,849) | | $ | 1,107,628 |
Statutory income tax rate | | 25% | | | 25% |
Income tax (benefit) expense at statutory rate | | (13,212) | | | 276,907 |
Effect of tax holiday | | 6,601 | | | (155,067) |
Effect of non-deductible items | | 157,730 | | | 376 |
Tax adjustments | | (20,366) | | | - |
Income tax expense | $ | 130,753 | | $ | 122,216 |
The following table sets forth the significant components of the aggregate deferred tax assets of the Company as of December 31, 2011 and March 31, 2011:
| | | | | |
| December 31, 2011 | | March 31, 2011 |
Deferred tax assets: | | | | | |
Net operating loss carry forwards from: | | | | | |
United States | $ | 710,997 | | $ | 611,353 |
Hong Kong | | 131,144 | | | 118,869 |
| | 842,141 | | | 730,222 |
Less: valuation allowance | | (842,141) | | | (730,222) |
Deferred tax assets | $ | - | | $ | - |
As of December 31, 2011 and March 31, 2011, We have provided for a full valuation allowance against the aggregate deferred tax assets of $842,141 and $730,222 on the expected future tax benefits from the net operating losses carryforwards as the management believes it is more likely than not that these assets will not be realized in the future. For the nine months ended December 31, 2011, the valuation allowance increased by $111,919, primarily relating to net operating losses carryforwards.
Note 12. Segment Reporting
We operate in one reportable operating segment in the design, manufacture, distribution and sales of solar energy saving, insect killer and plastic products in the PRC and Hong Kong, as defined by ASC Topic 280. All of our identifiable long-lived assets are located in the PRC during the periods presented.
Major Products
Summarized financial information concerning our major products is shown in the following table for the three and
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nine months ended December 31, 2011 and 2010:
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| December 31, | | December 31 30, |
| 2011 | | 2010 | | 2011 | | 2010 |
Solar products | $ | 3,632,442 | | $ | 1,648,108 | | $ | 10,303,420 | | $ | 7,298,955 |
Plastic products | | 521,347 | | | 142,009 | | | 790,386 | | | 323,608 |
Total revenue, net | $ | 4,153,789 | | $ | 1,790,117 | | $ | 11,093,806 | | $ | 7,622,563 |
Geographic Segment Reporting
In respect of geographical segment reporting, sales are based on the countries in which the customer is located, as follows:
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| December 31, | | December 31, |
| 2011 | | 2010 | | 2011 | | 2010 |
Revenue, net: | | | | | | | | | | | |
The PRC | $ | 4,123,192 | | $ | 1,670,102 | | $ | 10,948,103 | | $ | 7,449,739 |
Others | | 30,597 | | | 120,015 | | | 145,703 | | | 172,824 |
Total revenue, net | $ | 4,153,789 | | $ | 1,790,117 | | $ | 11,093,806 | | $ | 7,622,563 |
Note 13 Concentrations of Risk
We are exposed to the following concentrations of risk:
Major Customers
For the three months ended December 31, 2011, customers who accounts for 10% or more of our revenues and their outstanding balance at December 31, 2011 is presented as follows:
| | | | | | | |
| Three months ended December 31, 2011 | | December 31, 2011 |
| | Revenue | | Percentage of revenue | | Trade receivable |
Customers | | | | | | | |
Customer A | $ | 1,402,997 | | 34% | | $ | 1,891,373 |
Customer B | | 1,361,368 | | 33% | | | 1,718,117 |
Customer C | | 473,803 | | 11% | | | 1,192,436 |
Total | $ | 3,238,168 | | 78% | | $ | 4,801,926 |
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For the three months ended December 31, 2010, customers who accounts for 10% or more of our revenues and their outstanding balance at December 31, 2010 is presented as follows:
| | | | | | | |
| Three months ended December 31, 2010 | | December 31, 2010 |
| | Revenue | | Percentage of revenue | | Trade receivable |
Customers | | | | | | | |
Customer D | $ | 491,550 | | 27% | | $ | - |
Customer E | | 524,543 | | 29% | | | 281,115 |
Total | $ | 1,016,093 | | 56% | | $ | 281,115 |
For the nine months ended December 31, 2011, customers who accounts for 10% or more of our revenues and their outstanding balance at December 31, 2011 is presented as follows:
| | | | | | | |
| Nine months ended December 31, 2011 | | December 31, 2011 |
Customers | | Revenue | | Percentage of revenue | | Trade receivable |
| | | | | | | |
Customer C | $ | 1,845,164 | | 17% | | $ | 1,192,436 |
Customer A | | 1,624,392 | | 15% | | | 1,891,373 |
Customer B | | 1,365,748 | | 12% | | | 1,718,117 |
Customer D | | 1,318,525 | | 12% | | | 1,872,610 |
Total | $ | 6,153,829 | | 56% | | $ | 6,674,536 |
For the nine months ended December 31, 2010, customers who accounts for 10% or more of our revenues and their outstanding balance at December 31, 2010 is presented as follows:
| | | | | | | |
| Three months ended December 31, 2010 | | December 31, 2010 |
Customers | | Revenue | | Percentage of revenue | | Trade receivable |
| | | | | | | |
Customer D | $ | 1,063,596 | | 14% | | $ | - |
Customer E | | 999,093 | | 13% | | | 281,115 |
Total | $ | 2,062,689 | | 27% | | $ | 281,115 |
Major Vendors
For the three months ended December 31 30, 2011, vendors who accounts for 10% or more of our purchases and their outstanding balance at December 31, 2011 is presented as follows:
| | | | | | | |
| Three months ended December 31, 2011 | | December 31, 2011 |
Vendors | | Purchases | | Percentage of purchases | | Trade payable |
| | | | | | | |
Vendor A | $ | 579,599 | | 29% | | $ | 582,906 |
Vendor B | | 309,429 | | 15% | | | 294,870 |
Vendor C | | 248,289 | | 12% | | | 293,733 |
Total | $ | 1,137,317 | | 56% | | $ | 1,171,509 |
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For the three months ended December 31, 2010, vendors who accounts for 10% or more of our purchases and their outstanding balance at December 31, 2010 is presented as follows:
| | | | | | | |
| Three months ended December 31, 2010 | | December 31, 2010 |
Vendors | | Purchases | | Percentage of purchases | | Trade payable |
| | | | | | | |
Vendor D | $ | 348,168 | | 33% | | $ | 1,104,680 |
Vendor E | | 119,473 | | 11% | | | 326,546 |
Total | $ | 467,641 | | 44% | | $ | 1,431,226 |
For the nine months ended December 31, 2011, one vendor represented 10% or more of the Company’s purchase. This vendor accounts for 12% of purchase amounting to $934,810 with trade payable of $1,118,704 as of December 31, 2011.
For the nine months ended December 31, 2010, vendors who accounts for 10% or more of our purchases and their outstanding balance at December 312010 is presented as follows:
| | | | | | | |
| Nine months ended December 31, 2010 | | December 31, 2010 |
| | Purchases | | Percentage of purchases | | Trade payable |
| | | | | | | |
Vendor D | $ | 1,134,102 | | 25% | | $ | 1,104,680 |
Vendor E | | 853,659 | | 19% | | | 326,546 |
Total | $ | 1,987,761 | | 44% | | $ | 1,431,226 |
Note 14. Guarantees
As of December 31, 2011, its operating VIE in the PRC (“Shenzhen Fuwaysun”) is contingently liable as guarantor with respect to the loans of $549,908 (equivalent to RMB 3,500,000) to an unrelated third parties. The term of the guarantee is commenced from September 2010 through March 2012. At any time from the date of guarantees, should the third party fail to make their due debt payments, Shenzhen Fuwaysun will be obligated to perform under the guarantees by primarily making the required payments, including late fees and penalties. The maximum potential amount of future payments that the Shenzhen Fuwaysun is required to make under the guarantee is $549,908 (equivalent to RMB 3,500,000).
Note 15. Comparative figures
Certain amounts in the prior periods presented have been reclassified to conform to the current period financial statement presentation.
Note16. Subsequent Events
We evaluated subsequent events through the date the financial statements were issued and filed with this Form 10-Q. There were no subsequent events that required recognition or disclosure.
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ITEM 2.
MANAGEMENT’S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
SPECIAL NOTE OF CAUTION REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS IN THIS REPORT, INCLUDING STATEMENTS IN THE FOLLOWING DISCUSSION, ARE WHAT ARE KNOWN AS "FORWARD LOOKING STATEMENTS", WHICH ARE BASICALLY STATEMENTS ABOUT THE FUTURE. FOR THAT REASON, THESE STATEMENTS INVOLVE RISK AND UNCERTAINTY SINCE NO ONE CAN ACCURATELY PREDICT THE FUTURE. WORDS SUCH AS "PLANS," "INTENDS," "WILL," "HOPES," "SEEKS," "ANTICIPATES," "EXPECTS "AND THE LIKE OFTEN IDENTIFY SUCH FORWARD LOOKING STATEMENTS, BUT ARE NOT THE ONLY INDICATION THAT A STATEMENT IS A FORWARD LOOKING STATEMENT. SUCH FORWARD LOOKING STATEMENTS INCLUDE STATEMENTS CONCERNING OUR PLANS AND OBJECTIVES WITH RESPECT TO THE PRESENT AND FUTURE OPERATIONS OF THE COMPANY, AND STATEMENTS WHICH EXPRESS OR IMPLY THAT SUCH PRESENT AND FUTURE OPERATIONS WILL OR MAY PRODUCE REVENUES, INCOME OR PROFITS. NUMEROUS FACTORS AND FUTURE EVENTS COULD CAUSE THE COMPANY TO CHANGE SUCH PLANS AND OBJECTIVES OR FAIL TO SUCCESSFULLY IMPLEMENT SUCH PLANS OR ACHIEVE SUCH OBJECTIVES, OR CAUSE SUCH PRESENT AND FUTURE OPERATIONS TO FAIL TO PRODUCE REVENUES, INCOME OR PROFITS. THEREFORE, THE READER IS ADVISED THAT THE FOLLOWING DISCUSSION SHOULD BE CONSIDERED IN LIGHT OF THE DISCUSSION OF RISKS AND OTHER FACTORS CONTAINED IN THIS REPORT ON FORM 10-Q AND IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. NO STATEMENTS CONTAINED IN THE FOLLOWING DISCUSSION SHOULD BE CONSTRUED AS A GUARANTEE OR ASSURANCE OF FUTURE PERFORMANCE OR FUTURE RESULTS.
Introduction
Through our operating affiliate, Shenzhen Fuwaysun Technology Company Limited, a Peoples Republic of China (“China” or “PRC”) corporation (“Shenzhen Fuwaysun”), we are engaged primarily in the development, production and sale of solar products, including a solar insect killer and other products designed for agricultural and commercial use. Our manufacturing facility is located in Shenzhen, PRC, and a substantial majority of our current sales and business operations are in China.
Corporate History
We were incorporated in the State of Colorado on March 13, 2006 under the name V2K International, Inc. From March, 2006, through January, 2010, we were in the business of selling and supporting franchises in the residential and commercial window fashion industry, and in the business of developing and licensing proprietary software which allows users to decorate windows for both residential and commercial customers. During this time, our business operations were carried on through two wholly-owned subsidiaries, V2K Window Fashions, Inc. and V2K Technology, Inc.
On January 8, 2010, we acquired all of the issued and outstanding shares of Fuwaysun Technology, Ltd., (“Fuwaysun”), a Colorado corporation, in a share exchange transaction. As a result of completion of this share exchange transaction, Fuwaysun, its wholly-owned subsidiary Fuwaysun Technology (HK) Limited, a Hong Kong corporation (“FTHK”) and Forboss Solar (Shenzhen) Co, Ltd, a PRC corporations, which is a wholly-owned subsidiary of FTHK, became our wholly-owned subsidiaries, and Shenzhen Fuwaysun Technology Company Limited, a PRC corporation (“Shenzhen Fuwaysun”) became our operating affiliate. In conjunction with this share exchange transaction, we changed our name to AgriSolar Solutions, Inc.
We completed the share exchange transaction with Fuwaysun in order to acquire its business operations, and with the intent of focusing our business operations exclusively on the operations of Fuwaysun. As a result, on January 11, 2010, we sold our interest in V2K Window Fashions, Inc., and V2K Technology, Inc., for nominal consideration to Lotus Holdings, LLC, a Colorado limited liability company, which is an entity controlled by the former officers and directors of the Company.
As a result of completion of the share exchange transaction, Shenzhen Fuwaysun became our operating
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affiliate. Shenzhen Fuwaysun was formed in 2006 to manufacture plastic injection parts and plastic moulds at its factory in Shenzhen, PRC. Initially, its business was limited to manufacturing and supplying parts for use in various products, including products used in the automotive industry, in household products, electrical appliances, hospital products, digital products, communication and computer equipment, toys and other industries. Commencing in 2007, Shenzhen Fuwaysun expanded its business to include development and production of solar products including a solar insect killer, solar mouse & bird repeller, a portable solar power supply system, a solar sprinkling and irrigation system and other solar products. For the period ended March 31, 2009, approximately 29.8% of the revenues of Shenzhen Fuwaysun came from production and sale of solar products and approximately 70.2% came from the business of manufacturing and supplying plastic injection parts and plastic moulds. For the fiscal year ended March 31, 2010, approximately 91% of the revenues of Shenzhen Fuwaysun came from production and sale of solar products and approximately 9% came from the business of manufacturing and supplying plastic injection parts and plastic moulds. For the fiscal year ended March 31, 2011, approximately 96% of the revenues of Shenzhen Fuwaysun came from production and sale of solar products and approximately 4% came from the business of manufacturing and supplying plastic injection parts and plastic moulds. For the three and nine months ended December 31, 2011, approximately 88% and 93% of the revenues of Shenzhen Fuwaysun came from production and sale of solar products and approximately 12% and 7% came from the business of manufacturing and supplying plastic injection parts and plastic moulds, respectively.
Corporate Structure
The Chart below depicts our corporate structure. As depicted below, AgriSolar owns 100% of the capital stock of Fuwaysun Technology Ltd., a Colorado corporation (“Fuwaysun”) and Fuwaysun owns 100% of the capital stock of Fuwaysun Technology (HK) Limited, a Hong Kong corporation (“FTHK”). At the present time, we do not have a direct ownership interest in Shenzhen Fuwaysun. However, through a series of contractual arrangements between FTHK and Shenzhen Fuwaysun and its shareholders, Shenzhen Fuwaysun is considered to be our operating affiliate because we are able to exert effective control over it and to receive all of the economic benefits derived from its business operations. We have agreements in place to acquire direct ownership of Shenzhen Fuwaysun, and are currently in the process of completing the administrative steps necessary to finalize the acquisition. Upon completion of these steps, FTHK will own 100% of the capital stock of Forboss Solar (Shenzhen) Co., Ltd., a PRC corporation (“Forboss”), and Forboss will own 100% of the capital stock of Shenzhen Fuwaysun, which will then be our operating subsidiary.
![[agrisoalrsolutions10q1231001.jpg]](https://capedge.com/proxy/10-Q/0001137050-12-000040/agrisoalrsolutions10q1231001.jpg)
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Current Operations
We are currently focused on the marketing and sale of our line of solar insect killers within the agricultural industry in China. China ranks first in worldwide farm output, producing a wide variety of crops including rice, wheat, potatoes, corn, cotton, peanuts, vegetables, tobacco, tea, coffee and many types of fruit. A total of approximately 120,000 of the Company’s solar insect killers are currently installed in various types of farms throughout China where all of these types of crops are being grown. Based on test results and reported results from many of these farms, we believe that our line of solar insect killers can provide effective pest control for all of these types of crops, without use of pesticides.
Ministry of Agriculture Subsidy Program
Since 2004, the China Ministry of Agriculture has had a program in place to promote the development of modern agriculture by providing subsidies for purchase of approved agricultural machinery. Six models of the Company’s line of solar insect killers have been approved by the Ministry of Agriculture, and are the only pest control products of their type which are currently approved for purchase under the terms of this subsidy program.
During calendar year 2010, the Ministry of Agriculture subsidy was 23 Billion RMB (approximately US$3.56 billion), and it is expected to be approximately 26 Billion RMB (approximately US $4.02 billion) for calendar year 2011. Under the subsidy program, farmers submit requests for purchase of approved agricultural equipment to local government offices, and following approval, the government purchases the equipment on their behalf.
We have six models of our line of solar insect killers which have been approved by the Ministry of Agriculture
Under the subsidy program, the government establishes both an allowance price and a maximum retail price for each product. The Company selects distributors and agrees to sell its products to them for the allowance price, which is the equivalent of the wholesale price. The distributors, in turn, are responsible for contacting the local government offices, which are the final purchasers of the products under the subsidy program, and negotiating the final sales price. When the government office completes the purchase transaction using subsidy funds, we receive the allowance price for each product sold, and the distributor retains the difference between the allowance price and the final negotiated purchase price.
Our profit margin from sales of our products generally ranges between 30% and 35%. However, because of the large mark-up between the allowance price and the retail price, which is the maximum purchase price the government will pay for the products under the subsidy program, the potential profit margin for distributors is much larger than the Company’s profit margin. As a result, distributors selected by the Company have a strong incentive to market the Company’s products.
Only agricultural products approved by the Ministry of Agriculture are eligible for purchase under the subsidy program. However, the program is administered by the local Department of Agriculture within each of the 32 areas in China which is designated as a province, an autonomous region or a municipality. As a result, in addition to Ministry of Agriculture approval, it is also necessary for the Company to obtain separate approval from the local Department of Agriculture in any geographical area in which it intends to make sales under the subsidy program.
During the nine months ended December 31, 2011, we were successful in selling our products under the subsidy program in 26 provinces, a significant increase as compared to the nine months ended December 31, 2010.
As of December 31, 2011, our products have been formally included for 2011 in the list of approved products for 29 provinces.
State Forestry Administration of China
The State Forestry Administration of China is responsible for monitoring national forestry affairs. Its mission is to sustain the health, diversity, and productivity of the nation’s forests and provide leadership in protection, management, pest forecasting, pest control, plant quarantine, pollution control, and aquatic ecosystems. Due to past damage to forest areas as a result of extensive use of chemicals in the past, the State Forestry Administration’s mission is to protect the forest by use of green technology and eco- friendly products. The Company’s solar insect
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killer is one of the products that has been tested and authorized by the State Forestry Administration for use in helping to control pests in the National forest. The State Forestry Administration has special funding for purchasing green technology and eco-friendly products. We have begun receiving orders under this new program.
The Plant Plantation Station
The Plant Plantation Station is an arm of the China Ministry of Agricultural which is responsible for the health of food crops nationally. The Station monitors such things as soil and fertilizer technology, seed quality, seed industry development, water saving agriculture, pest control and pest forecasting. The Station has done extensive testing on the Company’s solar insect killer product line and has issued a study report to educate farmers on the advantages of using the Company’s products. In addition, the Plant Plantation Station has a program to promote the use of the solar insect killer nationally, and has special funding set aside for this program which is separate from the Ministry of Agriculture subsidy program. We have already received some orders under this program and expects to continue to receive additional orders.
Markets outside the PRC
In June, 2011, the Company entered into an International Distribution Agreement (“European Distribution Agreement”) which appoints a distributor (“European Distributor”) as the exclusive distributor for the territory of Europe defined as those states, except for Hungary and Russia, belonging to the Council of Europe. Under the terms of the Agreement, if the Company does not appoint a distributor for Hungary by May 31, 2012, then Hungary will become part of the exclusive territory under the European Distribution Agreement. Among other terms, under the European Distribution Agreement, there is no minimum purchase requirement for the year ending December 31, 2011 and a minimum purchase requirement of $1,000,000 for the year ending December 31, 2012. If the European Distributor fails to meet the minimum purchase requirements the Company may, in its sole discretion, terminate the European Distribution Agreement. The initial term of the European Distribution Agreement is for 5 years.
One of the purposes of establishing distribution channels outside China is to eliminate the seasonality associated with the agriculture industry in China. In addition, the Company believes that there is a global market for its products.
Subsequent to June, 2011, the European Distribution Agreement was revised to grant the European Distributor worldwide distribution rights for the Company’s products.
The European Distributor appointed in June, 2011, has actively engaged in establishing its business operations and in developing potential distribution channels. Its efforts to date have included, among other things, approval of the design and development of a logistical infrastructure for operating a distribution company within the European Economic Union, Eastern Europe and Russia, securing an agreement with Amazon Corporation to manage its web-based product ordering, fulfillment, billing and shipping requirements, establishing contacts or working relationships with individuals in various parts of central and eastern Europe, Russia, the Middle East and North Africa, South Africa, and Argentina to represent the Company’s products in these areas, participation in various trade shows in the United States, trade fairs in Holland for the greenhouse market, vegetable expositions in Italy for the Mediterranean field market, and a AgriTechnica Exposition in Germany, which focused on agricultural technology and equipment sales for the Eastern European field farming industry.
We have begun making sales outside of China.
Critical Accounting Policies
The accompanying condensed consolidated financial statements have been prepared using the going concern basis of accounting, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
For the nine months ended December 31, 2011, we experienced negative cash flows from operations of $1,447,613 with an accumulated deficit of $2,368,941 as of that date. Our continuation as a going concern through December 31, 2012 is dependent upon the collections of our accounts receivable, continuing financial support from our stockholders, and credit facilities. We are currently pursuing additional financing for our operations. However, there
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is no assurance that we will be successful in securing sufficient funds to sustain the operations.
These factors raise substantial doubt about our ability to continue as a going concern. These consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that may result in our not being able to continue as a going concern.
We have identified the following accounting policies that are important to the presentation of financial information in this report.
Use of Estimates
In preparing these consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the years reported. Actual results may differ from these estimates.
Variable Interest Entity
Our subsidiary, FTHK through Shenzhen Fuwaysun operates its business in the PRC in the form of a VIE.
FTHK entered into a series of contractual arrangements with Shenzhen Fuwaysun. Through the contractual arrangements, described below, we have control of Shenzhen Fuwaysun and the right to substantially all of the risks and rewards of ownership.
Agreements that provide us with effective control over Shenzhen Fuwaysun:
1. Option Agreement, FTHK has the option to purchase all Shenzhen Fuwaysun’s assets and ownership at any time.
2. Operating Agreement and Exclusive Consulting Services Agreement, FTHK is appointed as the exclusive service provider for Shenzhen Fuwaysun to provide business support and related consulting services. Shenzhen Fuwaysun agrees to pay a consulting and service fee equal to 100% of their net profits to FTHK.
3. Pledge Agreement, Shenzhen Fuwaysun and its shareholders agreed to pledge their legal interest to FTHK as security for performance of the obligations of Shenzhen Fuwaysun under the Exclusive Consulting Services Agreement.
4. Proxy Agreement, The shareholders of Shenzhen Fuwaysun agreed to irrevocably grant FTHK all of their voting rights as shareholders of Shenzhen Fuwaysun.
With the above agreements, FTHK demonstrates its ability to control Shenzhen Fuwaysun as the primary beneficiary and the operating results of the VIE was included in the consolidated financial statements for the years presented.
We believe that FTHK’s contractual arrangements with Shenzhen Fuwaysun are in compliance with PRC law and are legally enforceable. However, uncertainties in the PRC legal system could limit the Company’s ability to enforce these contractual arrangements.
Our ability to control Shenzhen Fuwaysun also depends on the voting power obtained under the Proxy Agreement. As noted above, we believe this Proxy Agreement is legally enforceable but may not be as effective as direct equity ownership.
In addition, if the legal structure and contractual arrangements were found to be in violation of any existing PRC laws and regulations, the PRC government could, among other things:
· revoke our business and operating licenses;
· require us to discontinue or restrict operations;
· restrict our right to issue the invoice and collect revenues;
· block our websites;
· require us to restructure the operations in such a way as to compel us to establish a new enterprise, re-apply for the necessary licenses or relocate our business, staff and assets;
· impose additional conditions or requirements with which the Group may not be able to comply; or
· take other regulatory or enforcement actions against us that could be harmful to our business.
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The imposition of any of these penalties may result in a material and adverse effect on our ability to conduct our business. In addition, if the imposition of any of these penalties causes us to lose the rights to direct the activities of Shenzhen Fuwaysun or the right to receive its economic benefits, we would no longer be able to consolidate Shenzhen Fuwaysun. We do not believe that any penalties imposed or actions taken by the PRC Government would result in the liquidation of the Company, FTHK or Shenzhen Fuwaysun.
Revenue Recognition
In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition”, we recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured.
Sales of products
Revenue from the sale of solar and plastic products is recognized when the products are delivered to and received by the customers, collectability is reasonably assured and the prices are fixed and determinable.
Revenue represents the invoiced value of goods, net of value-added tax (“VAT”) and sales allowance. Our products that are locally sold in the PRC are subject to VAT which is levied at the rate of 13% to 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by us in addition to the invoiced value of purchases to the extent not refunded for export sales. We have recorded an allowance for sales returns of $17,193 for the nine months ended December 31, 2011 and no allowance for the three months ended December 31, 2011 and the three and nine months ended December 31, 2010.
Cost of revenue
Cost of revenue includes cost of raw materials, direct labor, packaging cost, depreciation and production overhead that are directly attributable to the manufacture of solar and other plastic products. Shipping and handling cost are recorded in cost of revenue and are recognized when the related product is delivered to the customer.
Comprehensive income
ASC Topic 220, “Comprehensive Income”, establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as defined includes all changes in equity during a period from non-owner sources. Accumulated comprehensive income, as presented in the accompanying consolidated statements of stockholders’ equity consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit.
Foreign currencies translation
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the consolidated statement of operations.
Our reporting currency is the United States Dollars (“US$”) and the accompanying consolidated financial statements have been expressed in US$. In addition, our operating subsidiaries in Hong Kong and the PRC maintain their books and record in their respective local currencies, Hong Kong Dollars (“HK$”) and Renminbi Yuan (“RMB”), which is a functional currency as being the primary currency of the economic environment in which their operations are conducted.
In general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not US$ are translated into US$, in accordance with ASC Topic 830, “translation of Financial Statement”, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statements of stockholders’ equity.
Translation of amounts from the local currency of our subsidiaries into US$ has been made at the following exchange rates for the nine month periods ending December 31, 2011 and 2010:
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| | | | |
| | 2011 | | 2010 |
Period-end rates HK$: US$1 exchange rate | | 7.76910 | | 7.78320 |
Period average rates HK$: US$1 exchange rate | | 7.78414 | | 7.77136 |
Period-end rates RMB: US$1 exchange rate | | 6.36470 | | 6.61180 |
Period average rates RMB: US$1 exchange rate | | 6.43558 | | 6.76000 |
Stock-based compensation
Stock-based compensation is presented in accordance with the guidance of ASC Topic 718, “Compensation – Stock Compensation” (“ASC 718”). Under the provisions of ASC 718, companies are required to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period in our statement of operations.
We use the Black-Scholes option pricing model (“Black-Sholes model”) to determine fair value. The determination of fair value of shares-based payment awards on the grant using an option-pricing model is affected our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited tom our expected stock price volatility over the term of the awards, and actual and projected employee option exercise behaviors.
Non-employee stock-based compensation is presented in accordance with the guidance ASC Topic 505, “Equity-Based Payments to Non-Employees”, stock-based compensation related to non-employees is accounted for based on the fair value of the related stock or options or the fair value of the services on the grant date, whichever is more readily determinable in accordance with ASC 718.
Fair value measurement
ASC Topic 820, “Fair Value Measurements and Disclosures” ("ASC 820"), provides a comprehensive framework for measuring fair value and expands disclosures which are required about fair value measurements. Specifically, ASC 820 sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. ASC 820 defines the hierarchy as follows:
Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed on the New York Stock Exchange.
Level 2 - Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reported date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts or priced with models using highly observable inputs.
Level 3 - Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts used to determine the fair value of financial transmission rights.
Our financial instruments consist of cash and cash equivalents, trade receivables, other receivables, payables, line of credit, notes payable and amount due to a stockholder. The carrying values of cash and cash equivalents, trade receivables, other receivables, payables and line of credit approximate their fair value due to their short maturities.
Recent accounting pronouncements
We have reviewed all recently issued, but no yet effective, accounting pronouncements and do not believe the future adoptions of any such pronouncements may be expected to cause a material impact on our financial condition or the results of operations.
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Results of Operation
Results of Operation for the Three Months Ended December 31, 2011 Compared to the Three Months Ended December 31, 2010.
Revenue
Revenue for the three months ended December 31, 2011 was $4,153,789 as compared to revenue of $1,790,117 for the three months ended December 31, 2010, an increase of $2,363,672 (132%). The increase in revenue resulted from shipping products to new customers outside of the Ministry of Agriculture subsidy program. During the three months ended December 31, 2011, we made sales to State Forestry Administration of China and the Plant Plantation Station in addition to the sales made under the subsidy program.
We began limited shipments to our European distributor during the three months ended December 31, 2011.
Cost of revenue and gross profit:
Cost of revenue for the three months ended December 31, 2011, as a percentage of revenue, was 67.1% as compared to 71.7% for the three months ended December 31, 2010. Our gross profit increased $861,708 (170%) from $505,976 for the three months ended December 31, 2010 to $1,367,684 for the three months ended December 31, 2011. As a percentage of revenue, gross profit increased from 28.26% for the three months ended December 31, 2010 to 32.93% for the three months ended December 31, 2011. The increase in gross profits is primarily due to increases in material and labor costs offset by economies of scale. As a result of the PRC government’s concern of the environmental effect of lead, a significant number of battery manufacturers were shut down, which caused an increase in battery prices. We cannot determine when or if this price increase will reverse itself or when, however they have appeared to stabilize for now. Plastic costs increased with the increases in oil prices in the three months ended December 31, 2011. We were able to offset this trend by purchasing in larger quantities to get better pricing
As our light bulb production line has matured we have been more efficient. We expect this trend to keep through the end of our fiscal year.
Operating expenses
Operating expenses increased $767,764 (160 %) from $479,062 for the three months ended December 31, 2010 to $1,246,826 for the three months ended December 31, 2011.
Of our operating expenses, $512,983 and $188,011 represent selling and marketing expenses for the three months ended December 31, 2011 and 2010, respectively. The following is a breakdown of our selling and marketing expenses:
| | | | | | | | | |
| | Three Months Ended December 31, |
| | 2011 | | 2010 | | Difference |
Sales commission | | $ | 140,429 | | $ | 65,258 | | $ | 75,171 |
Travel and entertainment expenses | | | 69,492 | | | 25,145 | | | 44,347 |
Service fee | | | 337 | | | - | | | 337 |
Salaries | | | 37,612 | | | 13,651 | | | 23,961 |
Advertising and promotion expenses | | | 144,111 | | | 61,208 | | | 82,903 |
Exhibitions | | | 113,122 | | | 10,480 | | | 102,642 |
Others | | | 7,880 | | | 12,269 | | | (4,389) |
| | $ | 512,983 | | $ | 188,011 | | $ | 324,972 |
Sales commissions increased $75,171 (115%) from $65,258 for the three months ended December 31, 2010 to $140,429 for the three months ended December 31, 2011 as a result of the increase in revenue and the mix of customers. More customers were house accounts and no commissions were paid on those sales.
Travel and entertainment expenses increased $44,347 (176%) from $25,145 for the three months ended December 31, 2010 to $69,492 for the three months ended December 31, 2011 as we were selling in more diverse geographic
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area in the three months ended December 31, 2011 than in the three months ended December 31, 2010.
Salaries increased $23,961 (176%) from $13,651 for the three months ended December 31, 2010 to $37,612 for the three months ended December 31, 2011. We had 5 new employees assigned to the sales and marketing department.
Advertising, promotion and exhibition expenses increased $185,545 (259%) from $71,688 for the three months ended December 31, 2010 to $257,233 for the three months ended December 31, 2011. The increase was deliberate and resulted in more sales.
None of the other changes in our selling and marketing expenses are deemed to be significant.
Of our operating expenses, $733,843 and $291,051 represent general and administrative expenses for the three months ended December 31, 2011 and 2010, respectively. The following is a breakdown of our general and administrative expenses:
| | | | | | | | | |
| | Three Months Ended December 31, |
| | 2011 | | 2010 | | Difference |
Provision for doubtful debts/bad debt | | $ | 378,611 | | $ | 1,690 | | $ | 376,921 |
Research and development | | | 64,133 | | | 41,164 | | | 22,969 |
Salaries and benefits | | | 87,818 | | | 70,961 | | | 16,857 |
Professional fees | | | 44,156 | | | 52,762 | | | (8,606) |
Travel and entertainment | | | 36,846 | | | 25,189 | | | 11,657 |
Public and investor relations | | | 22,944 | | | 735 | | | 22,209 |
Office supplies and expenses | | | 21,283 | | | 21,366 | | | (83) |
Motor vehicle expenses | | | 16,467 | | | 16,200 | | | 267 |
Rent expenses | | | 8,146 | | | 8,920 | | | (774) |
Depreciation and amortization | | | 7,950 | | | 5,925 | | | 2,025 |
Other administrative expenses | | | 45,489 | | | 46,139 | | | (650) |
| | $ | 733,843 | | $ | 291,051 | | $ | 442,792 |
General and administrative expenses increased $442,792 (152%) from $291,051 for the three months ended December 31, 2010 to $733,843 for the three months ended December 31, 2011.
The most significant increase was the provision for doubtful accounts, of $378,611 for the three months ended December 31, 2011, as compared to $1,690 for the three months ended December 31, 2010. A significant majority of our sales to date have been made under the Ministry of Agriculture subsidy program described above. In determining that a loss from uncollectable receivable be accrued we used the guidance in ASC Topic 310 “Receivables” (ASC 310”) and the related sections of ASC Topic “Contingencies” (ASC 450”). We contacted all of our customers with extended aging and in many cases the local agency responsible for processing the reimbursement to our customer. We reviewed the status of the outstanding invoices. In those cases where all of the supporting documentation available was not as yet complete we determined that there was a risk of loss. We estimated the amount of loss to be the amounts outstanding for aging over 1 year. We also estimated that for those amounts over 270 days documentation is still in process and not all are uncollectable. Based on our discussions as to the probability that the documentation will be available we determined that a reserve of approximately 50% of those accounts would be appropriate. In considering those receivables which were not reserved for we made an estimate that 1% of the remaining accounts would be subject to the risk of collectability. We believe that those receivables for which all of the documentation is in process are collectable because of the good faith and credit of the PRC government. We have in a number of cases received collection after one year.
During the three months ended December 31, 2011 we made a decision to increase our research and development to enhance the functionality of our existing products so that the products can be used in forested and orchard environments. Research and development expenses increased $22,969 (55.8%) from $41,164 for the three months ended December 31, 2010 to $64,133 for the three months ended December 31, 2011.
None of the other changes in our administrative expenses are deemed to be significant.
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Results of Operation for the Nine Months Ended December 31, 2011 Compared to the Nine Months EndedDecember 31, 2010.
Revenue
Revenue for the nine months ended December 31, 2011 was $11,093,806 as compared to revenue of $7,622,563 for the nine months ended December 31, 2010, an increase of $3,471,243 (45.5%). During the nine months ended December 31, 2011, six models of our line of solar insect killers were approved by the Ministry of Agriculture of the PRC and continued as items which were subsidized by the PRC government. As the acceptance of our product grew in 2011 we sold our products into more provinces than in 2010. Moreover, we continued to employ more sales agent to promote our products in different provinces. We made sales to State Forestry Administration of China and the Plant Plantation Station in addition to the sales made under the subsidy program.
Cost of revenue and gross profit:
Cost of revenue for the nine months ended December 31, 2011, as a percentage of revenue, was 71.0% as compared to 67.7% for the nine months ended December 31, 2010. Our gross profit increased $756,570 from $2,459,210 for the nine months ended December 31, 2010 to $3,215,780 for the nine months ended December 31, 2011. As a percentage of revenue, gross profit decreased from 32.3% for the nine months ended December 31, 2010 to 29% for the nine months ended December 31, 2011. The decrease in gross profits is primarily due to increases in material and labor costs in the second quarter of our fiscal year. This was reversed in the nine months ended December 31, 2011, our third quarter. As a result of the PRC government’s concern of the environmental effect of lead, a significant number of battery manufacturers were shut down, which caused an increase in battery prices. We cannot determine when or if this price increase will reverse itself, however they appear to have stabilized for now. Plastic costs increased with the increases in oil prices in the second quarter. We expect that plastic costs will fluctuate with the price of oil.
Although we did lay off approximately 100 employees we did not see a significant effect on our results of operations as there was a wage increase mandated by the PRC government of approximately 46.7% in mid-year.
As our light bulb light bulb production line has matured we have been more efficient. We expect this trend to keep through the end of our fiscal year.
Operating expenses
Operating expenses increased $1,919,700 (121%) from $1,588,491 for the nine months ended December 31, 2010 to $3,508,191 for the nine months ended December 31, 2011.
Of our operating expenses, $1,142,195 and $529,409 represent selling and marketing expenses for the nine months ended December 31, 2011 and 2010, respectively. The following is a breakdown of our selling and marketing expenses:
| | | | | | | | | |
Selling | | Nine Months Ended December 31, |
| | 2011 | | 2010 | | Difference |
Sales commission | | $ | 411,018 | | $ | 260,440 | | $ | 150,578 |
Travel and entertainment | | | 203,794 | | | 51,180 | | | 152,614 |
Service fee | | | 74,094 | | | 10,001 | | | 64,093 |
Salaries | | | 100,449 | | | 33,939 | | | 66,510 |
Advertising and promotion expenses | | | 184,742 | | | 119,952 | | | 64,790 |
Exhibitions | | | 156,887 | | | 42,350 | | | 114,537 |
Others | | | 11,211 | | | 11,547 | | | (336) |
| | $ | 1,142,195 | | $ | 529,409 | | $ | 612,786 |
Sales commissions increased $150,578 (57.8%) from $260,440 for the nine months ended December 31, 2010 to
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$411,018 for the nine months ended December 31, 2011 as a result of the increase in revenue and the mix of customers. More customers were house accounts and no commissions were paid on those sales..
Travel expenses increased $152,614 (298%) from $51,180 for the nine months ended December 31, 2010 to $203,794 for the nine months ended December 31, 2011 as we were selling in more diverse geographic area in the nine months ended December 31, 2011 than in the nine months ended December 31, 2010.
Service fee increased by $64,093 (640%) from $10,001 for the nine months ended December 31, 2010 to $74,094 for the nine months ended December 31, 2011 as we engaged more agents to help the distributors to accelerate the processing of our invoice with the Ministry of Agriculture of the PRC.
Salaries increased $66,510 (196%) from $33,939 for the nine months ended December 31, 2010 to $100,449 for the nine months ended December 31, 2011. We had 5 new employees assigned to the sales and marketing department.
Advertising, promotion and exhibition expenses increased $179,327 (110%) from $162,302 for the nine months ended December 31, 2010 to $341,629 for the nine months ended December 31, 2011. The increase was deliberate and resulted in more sales
None of the other changes in our selling and marketing expenses are deemed to be significant.
Of our operating expenses, $2,365,996 and $1,059,082 represent general and administrative expenses for the nine months ended December 31, 2011 and 2010, respectively. The following is a breakdown of our general and administrative expenses:
| | | | | | | | | |
| | Nine Months Ended December 31, |
| | 2011 | | 2010 | | Difference |
Provision for doubtful debts/bad debt | | $ | 1,260,282 | | $ | 201,842 | | $ | 1,058,440 |
Research and development | | | 292,618 | | | 76,513 | | | 216,105 |
Salaries and benefits | | | 284,286 | | | 221,247 | | | 63,039 |
Professional fees | | | 145,161 | | | 123,435 | | | 21,726 |
Travel and entertainment | | | 100,655 | | | 178,194 | | | (77,539) |
Public and investor relations | | | 58,749 | | | 11,890 | | | 46,859 |
Office supplies and expenses | | | 55,718 | | | 43,794 | | | 11,924 |
Motor vehicle expenses | | | 52,569 | | | 41,995 | | | 10,574 |
Rent expenses | | | 32,131 | | | 37,623 | | | (5,492) |
Depreciation and amortization | | | 22,820 | | | 14,845 | | | 7,975 |
Other administrative expenses | | | 61,007 | | | 107,704 | | | (46,697) |
| | $ | 2,365,996 | | $ | 1,059,082 | | | 1,306,914 |
General and administrative expenses increased $1,306,914 (123%) from $1,059,082 for the nine months ended December 31, 2010 to $2,365,996 for the nine months ended December 31, 2011.
The most significant increase was the provision for doubtful accounts, of $1,260,282 for the nine months ended December 31, 2011, as compared to $201,842 for the nine months ended December 31, 2010. A significant majority of our sales to date have been made under the Ministry of Agriculture subsidy program described above. In determining that a loss from uncollectable receivable be accrued we used the guidance in ASC Topic 310 “Receivables” (ASC 310”) and the related sections of ASC Topic “Contingencies” (ASC 450”). We contacted all of our customers with extended aging and in many cases the local agency responsible for processing the reimbursement to our customer. We reviewed the status of the outstanding invoices. In those cases where all of the supporting documentation available was not as yet complete we determined that there was a risk of loss. We estimated the amount of loss to be the amounts outstanding for aging over 1 year. We also estimated that for those amounts over 270 days documentation is still in process and not all are uncollectable. Based on our discussions as to the probability that the documentation will be available we determined that a reserve of approximately 50% of those accounts would be appropriate. In considering those receivables which were not reserved for we made an estimate that 1% of the remaining accounts would be subject to the risk of collectability. We believe that those receivables
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for which all of the documentation is in process are collectable because of the good faith and credit of the PRC government. We have in a number of cases received collection after one year.
During the nine months ended December 31, 2011 we made a decision to increase our research and development to enhance the functionality of our existing products so that the products can be used in forested and orchard environments. Research and development expenses increased $216,105 (282%) from $76,513 for the nine months ended December 31, 2010 to $292,618 for the nine months ended December 31, 2011.
Salaries and benefits increased $63,039 (28.5%) from $221,247 for the nine months ended December 31, 2010 to $284,286 for the nine months ended December 31, 2011. The increase resulted primarily from the hiring of a Chief Financial Officer for our factory in Shenzhen, PRC.
Professional fees increased $21,726 (17.6%) from $123,435 for the nine months ended December 31, 2010 to $145,161 for the nine months ended December 31, 2011. This results primarily from increased accounting and auditing fees and the use of more consultants.
Travel and entertainment decrease $77,539 (43.5%) from $178,194 for the nine months ended December 31, 2010 to $100,655 for the nine months ended December 31, 2011. We anticipate an increased travel expenses to be closer to 2010 levels.
Included in other administrative expenses is an adjustment for an over accrual of social insurance expenses in prior years of $67,376. None of the other changes in our administrative expenses are deemed to be significant.
Liquidity and Capital Resources
As of December 31, 2011, we had working capital of $3,811,865 as compared to a working capital of $3,817,347 at March 31, 2011. However the working capital at December 31, 2011 included accounts receivable of $11,333,880, broken down as follows.
| | |
Accounts receivable, trade | | |
- Billed | $ | 5,282,516 |
- Accrued | | 7,432,139 |
| | 12,714,655 |
Less: allowances for doubtful accounts and returns | | (1,380,775) |
Accounts receivable, net | $ | 11,333,880 |
For the nine months ended December 31, 2011, we provided for an allowance for doubtful accounts of $1,243,089. In addition, we provided an allowance for returns of $17,193 for the nine months ended December 31, 2011.
Accrued accounts receivable represents revenue from the products that are delivered to, received by and accepted by the customers prior to invoicing, and are presented on the balance sheets in the aggregate with accounts receivable. The accrual results from delays in completion of required documentation under governmental procedures.
Our receivables tend to be outstanding for extended periods of time. Of the total billed accounts receivable at December 31, 2011, $367,068 were between 0 and 90 days old, $361,124 were between 91 and 180 days old, and $4,554,324 were over 180 days old. Of the total accrued accounts receivable at December 31, 2011, $3,922,379 were between 0 and 90 days old, $293,466 were between 91 and 180 days old, and $3,216,294 were over 180 days old. This results primarily from our customers’ aging of government subsidy payments. .
In determining that a loss from uncollectable receivable be accrued we used the guidance in ASC Topic 310 “Receivables” (ASC 310”) and the related sections of ASC Topic “Contingencies” (ASC 450”). We contacted all of our customers with extended aging and in many cases the local agency responsible for processing the reimbursement to our customer. We reviewed the status of the outstanding invoices. In those cases where all of the supporting documentation available was not as yet complete we determined that there was a risk of loss. We estimated the amount of loss to be the amounts outstanding for aging over 1 year. We also estimated that for those amounts over
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270 days documentation is still in process and not all are uncollectable. Based on our discussions as to the probability that the documentation will be available we determined that a reserve of approximately 50% of those accounts would be appropriate. In considering those receivables which were not reserved for we made an estimate that 1% of the remaining accounts would be subject to the risk of collectability. We believe that those receivables for which all of the documentation is in process are collectable because of the good faith and credit of the PRC government. We have in a number of cases received collection after one year. We will continue to monitor our receivable closely. We believe that our receivables, not reserved for, are collectable, albeit slowly
Up to February 13, 2012 we collected approximately $902,145 (8%) of the balance of the net accounts receivable and we billed approximately $1,201,402 (16%) of the accrued receivables.
We are currently exploring the possibility of factoring or selling our receivables to generate cash flow. There can be no assurance that we will be able to find buyer or investor for our receivables.
During the nine months ended December 31, 2011 we used cash in operations of $1,447,613, as compared to cash used in operations of $1,802,259 for the nine months ended December 31, 2010. For the nine months ended December 31, 2011 we used cash of $127,137 for investing activities as compared to cash used for investing activities of $68,227 for the nine months ended December 31, 2010. Cash in the amount of $694,970 was provided from financing activities for the nine months ended December, 31, 2011 as compared to $2,434,299 for the nine months ended December 31, 2010.
As of December 31, 2011, we have an outstanding liability to our CEO, Liang Chao Wei, in the amount of $955,844, which represents temporary advances made by Mr. Liang to fund current operations. The advances are unsecured and interest-free. Mr. Liang has agreed that no repayment of any portion of these temporary advances is required until we are profitable and have generated annual gross revenues of in excess of $30,000,000.
On December 10, 2009, we issued a promissory note (the “Note”) with a principal amount of $500,000, together with accrued interest in the amount of $100,000 due and payable on May 10, 2010, to a Director of the Company. The Note is in default and accordingly interest is charged at 18% per annum until such time as the note is paid in full. During the nine months ended December 31, 2011 we made payments of $100,000 which represented accrued interest. The note is currently in default.
Prior to closing of the share exchange transaction between the Company and Fuwaysun Technology, Ltd., on January 8, 2010, Fuwaysun acquired control of the Company through the purchase of a total of 172,712 shares, or approximately 57.88%, of the then issued and outstanding common stock. The shares were purchased from Lotus Holdings, LLC, a shareholder of the Company, for a total purchase price of $350,000, including $200,000 paid in cash and $150,000 through execution of a promissory note due and payable on or before January 8, 2011. During the nine months ended December 31, 2011 we made payments aggregating $75,000 on the note. The note is currently in default.
At December 31, 2011, we had contractual obligations under various non-cancelable operating leases of approximately $309,820 of which $120,834 is due by December 31, 2012.
The aggregate minimum requirements under the non-cancelable leases at December 31, 2011 are as follows:
| | | |
| | | |
Years ending December 31,: | | | |
2012 | | $ | 120,834 |
2013 | | | 94,658 |
2014 | | | 80,941 |
2015 | | | 12,357 |
2016 | | | 1,030 |
Total: | | $ | 309,820 |
We anticipate that we will require additional working capital for various purposes, including payment of expenses associated with production and sale of our line of solar insect killer under the subsidy program of the PRC Ministry
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of Agriculture. Based on initial purchase plan estimates received from 29 provinces, management is expecting significant orders of its solar insect killer for the remainder of 2011 and for 2012. The expenses associated with a rapid increase in production include purchase of raw materials, payment of costs associated with hiring additional staff, and payment of costs associated with an increase in inventory.
We also intend to use working capital to improve the efficiency of the our production line and to pay marketing and development costs related to seeking to establish distribution channels for our products in markets outside of China, including particularly the US and South America. In that regard we have entered into a distribution agreement for Europe.
The Company does not currently have any commitments to obtain working capital. We are currently assessing all options to raise working capital.
We have begun selling our products outside of the PRC and to customers other than those that receive subsidy payment in the PRC.
We are currently expanding our operations in the European market. In May 2011 we entered into a distribution agreement for the exclusive distribution of our products in Europe. The distributor is currently ordering samples and developing its distribution strategies. We anticipate deriving revenues from sales in the European market by the end of our fiscal year, March 31, 2012. We believe that this will have a positive effect on our cash flow as there will be no deferred payment terms on all sales outside of the PRC.
Summary December 31, 2011
Our need to raise additional equity or debt financing and our ability to generate cash flow from operations will depend on the timing of additional provinces within the PRC approving the subsidy payments for the purchase of our products and our ability to expand to new markets outside of the PRC. If our working capital is insufficient to fund the implementation of our business plan we will be required to seek additional financing sooner than currently anticipated in order to proceed with our business goals. In the event that we need additional capital and are unable to obtain it, we could be left without sufficient liquidity.
Off-Balance Sheet Arrangements
At December 31, 2011 we had no obligations that would qualify to be disclosed as off-balance sheet arrangements.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable
ITEM 4.
CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
The Securities and Exchange Commission defines the term “disclosure controls and procedures” to mean the controls and other procedures of an issuer that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company maintains such a system of controls and procedures in an effort to ensure that all information which it is required to disclose in the reports it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified under the SEC's rules and
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forms and that information required to be disclosed is accumulated and communicated to principal executive and principal financial officers to allow timely decisions regarding disclosure.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are designed to provide reasonable assurance of achieving the objectives of timely alerting them to material information required to be included in our periodic SEC reports and of ensuring that such information is recorded, processed, summarized and reported within the time periods specified. Our chief executive officer and chief financial officer also concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance of the achievement of these objectives.
Changes in Internal Control over Financial Reporting
There was no change in the Company's internal control over financial reporting during the period ended December 31, 2011, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II-OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS.
The Company is not a party to any pending legal proceedings, and no such proceedings are known to be contemplated. No director, officer or affiliate of the Company and no owner of record or beneficial owner of more than 5.0% of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to the Company or has a material interest adverse to the Company in reference to pending litigation.
ITEM 1A.
RISK FACTORS.
Not Applicable.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4.
(REMOVED AND RESERVED)
ITEM 5.
OTHER INFORMATION.
None.
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ITEM 6.
EXHIBITS.
(a)
The following exhibits are filed herewith:
