Attached files
| file | filename |
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| EXCEL - IDEA: XBRL DOCUMENT - Tanke Biosciences Corp | Financial_Report.xls |
| EX-32.1 - SECTION 1350 CERTIFICATION OF THE CEO - Tanke Biosciences Corp | e609095_ex32-1.htm |
| EX-32.2 - SECTION 1350 CERTIFICATION OF THE CFO - Tanke Biosciences Corp | e609095_ex32-2.htm |
| EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF THE CEO - Tanke Biosciences Corp | e609095_ex31-1.htm |
| EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF THE CFO - Tanke Biosciences Corp | e609095_ex31-2.htm |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended September 30, 2011
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Or
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£
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period from to
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Commission File Number: 000-53529
_______________
TANKE BIOSCIENCES CORPORATION
(Exact name of registrant as specified in its charter)
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Nevada
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No. 26-3853855
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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Room 2801, East Tower of Hui Hao Building, No. 519 Machang Road Pearl River New City, Guangzhou, P. R. China
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510627
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code:
86-(20) 3885-9025
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer £
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Accelerated filer £
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Non-accelerated filer £
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Smaller reporting company R
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No R
13,324,093 shares of Common Stock, par value $0.001, were outstanding at November 10, 2011.
TANKE BIOSCIENCES CORPORATION
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Throughout this Quarterly Report on Form 10-Q, the “Company”, “we,” “us,” and “our,” refer to (i) Tanke Biosciences Corporation, a Nevada corporation (“Tanke”), (ii) China Flying Development Limited, a Hong Kong corporation (“China Flying”), and (iii) Guangzhou Kanghui Agricultural Technology Co., Ltd., a wholly foreign owned enterprise under the laws of the People’s Republic of China (“Kanghui Agricultural”), and our principal operating business, Guangzhou Tanke Industry Co., Ltd. (“Guangzhou Tanke”), a company organized under the laws of the People’s Republic of China (“China” or the “PRC”), which we control via a series of variable interest entity contractual agreements (the “VIE Agreements”), unless otherwise indicated or the context otherwise requires.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain forward-looking statements (as such term is defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). The statements herein which are not historical reflect our current expectations and projections about the Company’s future results, performance, liquidity, financial condition, prospects and opportunities and are based upon information currently available to us and our management and our interpretation of what we believe to be significant factors affecting our business, including many assumptions about future events. Such forward-looking statements include statements regarding, among other things:
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our ability to produce, market and generate sales of our products;
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our ability to develop, acquire and/or introduce new products;
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our projected future sales, profitability and other financial metrics;
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our future financing plans;
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our plans for expansion of our facilities;
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our anticipated needs for working capital;
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the anticipated trends in our industry;
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our ability to expand our sales and marketing capability;
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acquisitions of other companies or assets that we might undertake in the future;
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our operations in China and the regulatory, economic and political conditions in China;
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our ability as a U.S. company to operate our business in China through an indirect wholly-owned subsidiary; and
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competition existing today or that will likely arise in the future.
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Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “should,” “will,” “plan,” “could,” “target,” “contemplate,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” “seek,” or “project” or the negative of these words or other variations on these or similar words. Actual results, performance, liquidity, financial condition and results of operations, prospects and opportunities could differ materially from those expressed in, or implied by, these forward-looking statements as a result of various risks, uncertainties and other factors, including the ability to raise sufficient capital to continue the Company’s operations. These statements may be found under Part I, Item 2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A—“Risk Factors,” as well as elsewhere in this Quarterly Report on Form 10-Q generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under Part II, Item 1A—“Risk Factors” and matters described in this Quarterly Report on Form 10-Q generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Quarterly Report on Form 10-Q will in fact occur.
Potential investors should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. Such statements are presented only as a guide about future possibilities and do not represent assured events, and we anticipate that subsequent events and developments will cause our views to change. You should, therefore, not rely on these forward-looking statements as representing our views as of any date after the date of this Quarterly Report on Form 10-Q.
This Quarterly Report on Form 10-Q also contains estimates and other statistical data prepared by independent parties and by us relating to market size and growth and other data about our industry. These estimates and data involve a number of assumptions and limitations, and potential investors are cautioned not to give undue weight to these estimates and data. We have not independently verified the statistical and other industry data generated by independent parties and contained in this Quarterly Report on Form 10-Q. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk.
Potential investors should not make an investment decision based solely on our projections, estimates or expectations.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TANKE BIOSCIENCES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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September 30,
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December 31,
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2011
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2010
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ASSETS
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(Unaudited)
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Restated
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CURRENT ASSETS
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Cash and cash equivalents
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$ | 10,216,539 | $ | 2,222,025 | ||||
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Accounts receivable, net
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5,060,072 | 1,767,968 | ||||||
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Inventory
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1,075,641 | 1,354,282 | ||||||
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Other receivables
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1,509,202 | 112,569 | ||||||
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Note receivable-related parties, current portion
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1,223,564 | 2,033,622 | ||||||
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Other current assets
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1,419,697 | 164,846 | ||||||
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Restricted cash
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706,802 | - | ||||||
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Deferred tax assets
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23,949 | 17,887 | ||||||
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Total Current Assets
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21,235,466 | 7,673,199 | ||||||
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Note receivable - related parties, long-term portion
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- | 974,532 | ||||||
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Property, plant and equipment, net
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4,577,903 | 1,554,589 | ||||||
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Construction in process
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296,090 | 2,777,417 | ||||||
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Intangible asset, net
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301,030 | 286,892 | ||||||
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TOTAL ASSETS
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$ | 26,410,489 | $ | 13,266,629 | ||||
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LIABILITIES & STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES
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Current portion of long-term loans
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708,260 | 905,975 | ||||||
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Accounts payable
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550,751 | 604,913 | ||||||
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Other payable and accrued liabilities
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2,719,396 | 195,474 | ||||||
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Income taxes payable
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1,164,379 | 699,637 | ||||||
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Due to related parties
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35,513 | - | ||||||
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Total Current Liabilities
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5,414,386 | 2,405,999 | ||||||
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Long-term loans, less current portion
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944,307 | 452,987 | ||||||
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Note payable - related party
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13,722 | - | ||||||
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Government grant
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355,880 | 73,497 | ||||||
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Convertible notes
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5,559,400 | - | ||||||
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TOTAL LIABILITIES
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12,051,648 | 2,932,483 | ||||||
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STOCKHOLDERS' EQUITY
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Common stock, $0.001 par value, 50,000,000 shares authorized; 13,324,083 and
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10,758,000 shares issued and outsanding as of September 30, 2011 (unaudited)
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13,324 | 10,758 | ||||||
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and December 31, 2010, respectively
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Additional paid-in capital
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12,220,181 | 1,417,098 | ||||||
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Accumulated other comprehensive income
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1,044,194 | 530,070 | ||||||
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Retained earnings
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1,081,142 | 6,205,483 | ||||||
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Non-controlling interest
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- | 2,170,737 | ||||||
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TOTAL STOCKHOLDERS' EQUITY
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14,358,841 | 10,334,146 | ||||||
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
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$ | 26,410,489 | $ | 13,266,629 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
TANKE BIOSCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2010
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2011
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2010
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Net revenue
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$ | 6,247,833 | $ | 5,700,914 | $ | 17,179,146 | $ | 13,307,021 | ||||||||
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Costs of goods sold
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(4,004,212 | ) | (3,596,569 | ) | (10,737,079 | ) | (8,344,688 | ) | ||||||||
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Gross profit
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2,243,621 | 2,104,345 | 6,442,067 | 4,962,333 | ||||||||||||
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Operating expenses:
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Selling expenses
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(486,231 | ) | (416,128 | ) | (1,690,287 | ) | (1,295,817 | ) | ||||||||
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General and administrative expenses
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(545,100 | ) | (220,243 | ) | (3,870,005 | ) | (481,673 | ) | ||||||||
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Depreciation and amortization
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(3,685 | ) | (220,021 | ) | (66,864 | ) | (244,437 | ) | ||||||||
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Other operating expenses
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(4,809 | ) | (1,344 | ) | (96,498 | ) | (1,344 | ) | ||||||||
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Income (loss) from operations
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1,203,796 | 1,246,609 | 718,413 | 2,939,062 | ||||||||||||
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Other income (expense):
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Interest income
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25,563 | 842 | 29,173 | 3,407 | ||||||||||||
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Interest expense
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(814,415 | ) | (23,755 | ) | (1,497,364 | ) | (49,796 | ) | ||||||||
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Amortization of discount on notes
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(1,396,990 | ) | - | (3,538,030 | ) | - | ||||||||||
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Registration rights agreement expense
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(260,782 | ) | - | (260,782 | ) | - | ||||||||||
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Foreign exchange gains (loss), net
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(17,846 | ) | 966 | (70,246 | ) | 684 | ||||||||||
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(Loss) income before tax
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(1,260,674 | ) | 1,224,662 | (4,618,836 | ) | 2,893,357 | ||||||||||
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Income tax
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(185,197 | ) | (192,027 | ) | (505,505 | ) | (408,594 | ) | ||||||||
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Net (loss) income
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(1,445,871 | ) | 1,032,635 | (5,124,341 | ) | 2,484,763 | ||||||||||
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Non-controlling interest in earning of subsidiaries
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- | (272,479 | ) | - | (630,067 | ) | ||||||||||
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Net (loss) income available to shareholders
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(1,445,871 | ) | 760,156 | (5,124,341 | ) | 1,854,696 | ||||||||||
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Other comprehensive income, net of tax:
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Effects of foreign currency conversion
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308,646 | 607 | 549,414 | (28,430 | ) | |||||||||||
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Translation attributable to non-controlling interest
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- | (6,238 | ) | - | (41,780 | ) | ||||||||||
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Comprehensive (loss) income
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$ | (1,137,225 | ) | $ | 754,525 | $ | (4,574,927 | ) | $ | 1,784,486 | ||||||
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Net (loss) income available to common shareholders
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per share:
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Basic (loss) earnings per share
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$ | (0.11 | ) | $ | 0.10 | $ | (0.40 | ) | $ | 0.23 | ||||||
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Diluted (loss) earnings per share
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$ | (0.11 | ) | $ | 0.10 | $ | (0.40 | ) | $ | 0.23 | ||||||
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Weighted average shares outstanding:
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Basic
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13,324,083 | 10,758,000 | 12,723,196 | 10,758,000 | ||||||||||||
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Diluted
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13,324,083 | 10,758,000 | 12,941,132 | 10,758,000 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
TANKE BIOSCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
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Accumulated
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Non-
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Additional
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Other
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Controlling
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Common Stock
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Paid-in
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Retained
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Comprehensive
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Interest in
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Shares
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Amount
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Capital
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Earnings
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Income
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Subsidiaries
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Total
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Balances at December 31, 2010, restated in
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terms of the Share Exchange Agreeement
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10,758,000 | $ | 10,758 | $ | 1,417,098 | $ | 6,205,483 | $ | 530,070 | $ | 2,170,737 | $ | 10,334,146 | |||||||||||||||
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Effect of Share Exchange Agreement
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399,180 | 399 | 54,200 | - | - | - | 54,599 | |||||||||||||||||||||
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Effect of VIE Agreement with China Flying
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- | - | 2,133,917 | - | (35,290 | ) | (2,170,737 | ) | (72,110 | ) | ||||||||||||||||||
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Effect of Private Placement
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- | - | 6,125,195 | - | - | - | 6,125,195 | |||||||||||||||||||||
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Shares issued for consulting services
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2,166,903 | 2,167 | 2,489,771 | - | - | - | 2,491,938 | |||||||||||||||||||||
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Net loss
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- | - | - | (5,124,341 | ) | - | - | (5,124,341 | ) | |||||||||||||||||||
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Other comprehensive income - effect of foreign
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currency conversion
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- | - | - | - | 549,414 | - | 549,414 | |||||||||||||||||||||
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Balances at September 30, 2011 (Unaudited)
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13,324,083 | $ | 13,324 | $ | 12,220,181 | $ | 1,081,142 | $ | 1,044,194 | $ | - | $ | 14,358,841 | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
TANKE BIOSCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Nine Months Ended
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September 30,
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2011
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2010
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Cash Flows from Operating Activities
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Net (loss) income
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$ | (5,124,341 | ) | $ | 2,484,763 | |||
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation and amortization
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125,563 | 66,864 | ||||||
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Common stock issued for services
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2,491,938 | - | ||||||
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Amortization of discount on convertible notes payable
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3,538,030 | - | ||||||
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Amortization of offering asset
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1,017,184 | - | ||||||
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Changes in operating assets and liabilities:
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Accounts receivable
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(3,150,504 | ) | (180,648 | ) | ||||
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Inventory
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329,033 | (74,550 | ) | |||||
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Other current assets
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(1,221,991 | ) | 198,707 | |||||
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Government grant
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273,478 | (78,815 | ) | |||||
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Accounts payable
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(78,128 | ) | 243,095 | |||||
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Accrued expenses and other payables
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2,393,661 | 347,087 | ||||||
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Income tax payable
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426,086 | (250,918 | ) | |||||
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Deferred tax assets
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(5,194 | ) | (17,838 | ) | ||||
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Net cash provided by operating activities
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1,014,815 | 2,737,747 | ||||||
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Cash Flows from Investing Activities
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Increase in other receivables
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(1,156,767 | ) | - | |||||
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Purchase of property, plant and equipment
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(476,636 | ) | (42,103 | ) | ||||
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Change in restricted cash
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(698,646 | ) | 146,853 | |||||
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Increase in construction in progress
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- | (158,514 | ) | |||||
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Increase in cash due to VIE agreement with China Flying
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76,075 | - | ||||||
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Net cash used in investing activities
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(2,255,974 | ) | (53,764 | ) | ||||
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Cash Flows from Financing Activities
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Due from (to) a related party
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1,907,124 | (557,536 | ) | |||||
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Net proceeds from issuance of convertible notes
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6,522,563 | - | ||||||
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Increase (decrease) in bank borrowing
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458,215 | (440,558 | ) | |||||
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Net cash provided by (used in) financing activities
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8,887,902 | (998,094 | ) | |||||
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Effects of foreign currency conversion on cash
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347,770 | 11,767 | ||||||
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Net increase in cash and cash equivalents
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7,994,514 | 1,697,656 | ||||||
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Cash at beginning of period
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2,222,025 | 1,817,875 | ||||||
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Cash at end of period
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$ | 10,216,539 | $ | 3,515,531 | ||||
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Supplemental Disclosures of Cash Flow Information
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Cash paid during the period for:
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Interest paid on bank loan
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$ | 67,405 | $ | 26,041 | ||||
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Income taxes
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$ | 31,562 | $ | 95,803 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
TANKE BIOSCIENCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
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ORGANIZATION AND PRINCIPAL ACTIVITIES
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In these consolidated financial statements, unless the context requires otherwise, the terms “we”, “our”, “us” and the “Company” refer to Tanke Biosciences Corporation, a Nevada corporation formerly known as Greyhound Commissary, Inc. (“Greyhound”), as well as our direct and indirect subsidiaries, and our principal operating business, Guangzhou Tanke Industry Co., Ltd. (“Guangzhou Tanke”), a company organized under the laws of the People’s Republic of China (“China” or the “PRC”), which we control via a series of variable interest entity contractual agreements (the “VIE Agreements”) more fully described below.
We conduct our business through our subsidiaries, principally our wholly-owned subsidiary China Flying Development Limited (“China Flying”), a Hong Kong incorporated company, and its wholly-owned subsidiary Guangzhou Kanghui Agricultural Technology Co., Ltd. (“Kanghui Agricultural” or the “WFOE”), a wholly foreign owned enterprise incorporated as a limited liability company under the laws of the PRC. The Company operates and controls Guangzhou Tanke through Kanghui Agricultural and China Flying and in connection with the VIE Agreements.
On January 3, 2011, Guangzhou Tanke entered into a series of agreements with Kanghui Agricultural, pursuant to which Kanghui Agricultural effectively assumed management of the business activities of Guangzhou Tanke. Kanghui Agricultural is entitled to 100% of the net income of Guangzhou Tanke and is able to direct Guangzhou Tanke’s actions.
Also on January 3, 2011, our board of directors unanimously approved a resolution to enter into a Share Exchange Agreement with China Flying, and Golden Genesis Limited ("Golden Genesis"), a British Virgin Islands company and the sole stockholder of China Flying. Under the terms of the Share Exchange, Golden Genesis exchanged 100% of its capital stock in China Flying for 10,758,000 shares of authorized, but previously unissued Greyhound common stock, post-split as described below. Also, at the closing, we issued an aggregate of 1,840,000 shares (post split) of our authorized, but previously unissued common stock to a U.S. advisor. Following the closing of the agreement on February 9, 2011, China Flying became our wholly owned subsidiary.
Our board of directors further approved unanimously on January 3, 2011, a one share for 8.512 shares reverse split of our issued and outstanding common stock, the effect of which has been restated for all periods presented. The effective date of the split was established by our board on a date prior to the closing of the acquisition of China Flying.
The acquisition of China Flying was contingent upon the completion of our planned private placement in which we sold 6,669,627 units (the “Units”), with net proceeds of $6,522,563. Each Unit consisted of a $1.15 principal amount 8% Senior Convertible Note and a three year Common Stock Purchase Warrant to purchase one share of the Company’s common stock at an exercise price of $1.40 per share. On February 9, 2011, the Company entered into a Securities Purchase Agreement with individual investors relating to the private placement and completed the private placement transaction (see Note 9 below). The proceeds from such sale will be used to finance the operations and growth of Guangzhou Tanke.
At the time of the Share Exchange Agreement, Greyhound had 3,397,787 shares of common stock issued and outstanding. Following the reverse split, but prior to the issuance of shares pursuant to the acquisition of China Flying, the outstanding shares will be reduced to approximately 399,316 shares, without giving effect to the rounding up of fractional shares. Split shares issued in connection with the reverse stock split were fully paid and non-assessable. The number of stockholders will remain unchanged as a result of the reverse split. The par value of our common stock remained unchanged.
As management of Guangzhou Tanke obtained control of the Company, the Share Exchange was treated as a reverse merger. Accordingly, for accounting purposes Guangzhou Tanke was the acquirer so historical financial information presented herewith is that of Guangzhou Tanke.
Pursuant to the VIE Agreements, Kanghui Agricultural has the right to advise, consult, manage and operate Guangzhou Tanke for a quarterly fee equal to Guangzhou Tanke’s net income. Additionally, the Guangzhou Tanke Shareholders pledged their rights, titles and equity interest in Guangzhou Tanke as security for Kanghui Agricultural to collect consulting and services fees provided to Guangzhou Tanke through an Equity Pledge Agreement. Golden Genesis, and Ms. Wong Kwai Ho, the sole share holder of Golden Genesis and Guangzhou Tanke Shareholders also entered into a call option agreement effective upon completion of the Share Exchange. Such call option agreement granted the Guangzhou Tanke shareholders the ability to acquire 100% of the shares of the Company owned by Golden Genesis, following the exercise of certain stock options within 3 years according to a vesting schedule, resulting in the Tanke Shareholders owning a majority of the outstanding shares of our common stock. Under the vesting Schedule 34% of the shares vest in 2011, 33% of the shares vest in 2012 and 33% of the shares vest in 2013. Each option may be exercised for $0.01 per share. The call option agreement provides that Golden Genesis shall not dispose of its shares of common stock without the Guangzhou Tanke Shareholders’ prior written consent. Neither Tanke Biosciences nor Kanghui Agricultural own the assets or are responsible for the liabilities of Guangzhou Tanke.
The VIE Agreements were necessary because without them, the shareholders of Tanke Biosciences would not have control of Guangzhou Tanke. With these in place, however, Guangzhou Tanke is contractually equivalent to a subsidiary of Tanke Biosciences.
Guangzhou Tanke has historically self financed, and has been a profitable enterprise. However, on February 9, 2011, Tanke Biosciences sold convertible notes payable (see Note 9 below) with net proceeds of $6,522,563. Such proceeds have been transferred to Guangzhou Tanke and will be used to finance the operations and growth of Guangzhou Tanke.
“RMB” and “Renminbi” refer to the legal currency of China and “$”, “US dollar” and “US$” refer to the legal currency of the United States.
Overview of Our Business
Through Guangzhou Tanke, our principal operating business, we are one of the leading animal nutrition and innovative feed additive providers in China. Our products are distinguished from traditional artificial feed additives in that they are environmentally-friendly and are designed to optimize the growth and health of livestock such as pigs and cattle, as well as farmed fish.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Preparation
The Company’s consolidated financial statements as of September 30, 2011 and for the three and nine months ended September 30, 2011 and 2010 have been stated in US dollars and prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial statements and with instructions to Form 10-Q pursuant to the rules and regulations of Securities and Exchange Act of 1934, as amended (the "Exchange Act") and Article 8-03 of Regulation S-X under the Exchange Act. In the opinion of our management, we have included all adjustments (consisting only of normal recurring adjustments) considered necessary in order to make the financial statements not misleading. Operating results for the nine months ended September 30, 2011 are not indicative of the results that may be expected for the fiscal year ending December 31, 2011. These unaudited financial statements and related notes should be read in conjunction with our audited annual financial statements for the year ended December 31, 2010 included in our Report on Form 8-K filed with the Securities and Exchange Commission on October 21, 2011.
(b) Basis of consolidation
These consolidated financial statements include the financial statements of the Company and its subsidiaries (the “Group''). All significant inter-company balances and transactions within the Group have been eliminated.
(c) Use of Estimates
In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of the amount due from related parties, the net realizable value of inventories, the estimation of useful lives of property and equipment and intangible assets, and the value of warrants. Actual results could differ from those estimates.
(d) Concentrations of Credit Risk
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, accounts receivable and amounts due from related parties. The Company places its cash with financial institutions with high-credit ratings and quality. The Company maintains bank accounts in the PRC only. In addition, the Company conducts periodic reviews of the related party financial conditions and payment practices. The Company has not experienced losses related to these concentrations in the past.
Approximately 98% of the Company’s revenue is generated from buyers in mainland China.
(e) Concentrations of Suppliers
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All the Company’s suppliers are located in mainland China.
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(f) Cash and Cash Equivalents
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The Company considers all highly liquid investments with initial maturities of three months or less to be cash equivalents.
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(g) Restricted Cash
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Deposits that are restricted in use are classified as restricted cash. Such restricted cash is in an escrow account and represents one year of interest on the convertible notes payable. When the notes mature or are converted into stock, the cash in this account will be released from restriction.
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(h) Trade and Other Receivables
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The Company periodically assesses its accounts receivable for collectability on a specific identification basis. If collectability of an account becomes unlikely, an allowance is recorded for that doubtful account. Once collection efforts have been exhausted, the account receivable is written off against the allowance. The Company does not require collateral for trade or other accounts receivable.
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(i) Inventories
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Inventories are stated at the lower of cost or net realizable value. Cost is determined using the weighted average method. The cost of inventories includes the purchase cost and other costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale.
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As of September 30, 2011 and December 31, 2010, the Company did not make any provision for slow-moving or defective inventories.
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(j) Property and Equipment
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Property and equipment are stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use.
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Depreciation of property and equipment is calculated using the straight-line method over their estimated useful lives. The estimated useful lives are as follows:
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Buildings
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15-20 years
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Plant and machinery
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3-20 years
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Motor vehicle
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10 years
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Office equipment
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3-10 years
|
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Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred.
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Upon sale or disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount less the proceeds from disposal is charged or credited to income.
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(k) Intangible Asset
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The intangible asset is a land use right, and it is recorded at cost less accumulated amortization. Amortization is provided over the term of the land use right agreement on a straight-line basis.
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(l) Impairment of Long-lived Assets
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Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company recognizes impairment of long-lived assets in the event that the net book values of such assets exceed the future undiscounted cash flows attributable to such assets.
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(m) Statutory and Discretionary Reserves
In accordance with the laws of the PRC, the Company segregates 10% of its net income as statutory surplus reserves to (a) cover any deficit, (b) increase production and (c) increase registered capital. To date, it has segregated $373,406 related to the statutory reserve requirements. Until the Company achieves an additional $708,243 of reserves, it is prohibited from paying dividends.
In addition, the Company segregates discretionary reserves, for which there is no specific amount required. These reserves are mainly for company development. To date, the Company has accrued $153,992 in discretionary reserves, but has not spent any of this reserve on Company development.
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(n) Revenue Recognition
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Revenue is recognized when all of the following criteria are met:
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- Persuasive evidence of an arrangement exists;
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- Delivery has occurred or services have been rendered;
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- The seller's price to the buyer is fixed or determinable; and
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- Collectability is reasonably assured.
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The Company’s revenue is generated through the wholesale and retail sale of livestock feed including organic trace mineral additives, functional regulation additives, herbal medicinal additives and raw materials. Before the Company recognizes revenue on these product sales, written purchase orders and contracts are received in advance of all shipments of goods to customers. For sales within the Company’s own province, delivery is made by Company employees. Such delivery occurs on the same day as shipment. For delivery outside the province, shipment is made through a separate logistics company that assumes the risk of loss. Revenue is recognized upon shipment of goods to the customers. The Company typically does not incur bad debt losses because this type of loss is deducted from the salesperson’s compensation, thereby mitigating the loss to the Company. Therefore, collectability is reasonably assured.
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Revenue is presented net of sales returns, which are not significant. However, the Company continually performs analyses of returns and records a provision at the time of sale if necessary. As of September 30, 2011 and December 31, 2010, it was determined that potential returns and allowances were not material so the Company did not record a provision for returns. The Company revisits this estimate regularly and adjusts it if conditions change.
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(o) Cost of Goods Sold
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Cost of revenue consists primarily of material cost, labor cost, rent of land allocated to production, overhead associated with the manufacturing process and directly related expenses.
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(p) Research and Development Costs
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Research and development costs are charged to expense as incurred and are included in operating expenses.
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(q) Value Added Tax
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Value added tax is recorded into operations on a gross basis, where the value added tax is included as part of the Company’s revenue and there is a corresponding expense for the amount due to the tax authorities. There is $1,926,122 and $0 value added tax included in the Company’s accounts receivable at September 30, 2011 (unaudited) and December 31, 2010, respectively.
(r) Income Taxes
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The Company uses the asset and liability method of accounting for income taxes pursuant to ASC 740, ”Income Tax”. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and loss carry forwards and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The Company is not subject to United States income tax. Furthermore, the Company is audited every year by an agency of the Chinese tax authority. Consequently, there are no uncertain tax positions requiring accrual or disclosure in accordance with ASC 740-10, Income Taxes.
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(s) Comprehensive Income
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Comprehensive income is defined to include all changes in equity except those resulting from net income or loss, investments by owners and distributions to owners. The Company’s only component of other comprehensive income is the foreign currency translation adjustment.
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(t) Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
(u) Foreign Currency Translation
The Company and its subsidiaries maintain financial statements in the functional currency of each entity. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.
The financial statements of each entity are prepared using the functional currency, and have been translated into United States dollars (“US$” or “$”). Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates for the period. Stockholders’ equity is translated at historical exchange rates. Any translation adjustments are included as a foreign exchange adjustment in other comprehensive income, a component of stockholders’ equity.
RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.
(v) Financial Instruments
The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, due to/from related parties, notes payable, other payable and accrued liabilities and income tax payable approximate their fair values due to the short-term nature of these items. The carrying amounts of long-term borrowings approximate the fair value based on the Company’s expected borrowing rate for debt with similar remaining maturities and comparable risk.
Convertible notes are not carried at fair value due to the discounts for warrants and the beneficial conversion feature. As the interest on these notes approximates market interest, the fair value is their face value of $7,670,071.
It is management’s opinion that the Company is not exposed to significant interest, price or credit risks arising from these financial instruments.
(w) Recent Accounting Updates
In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13 “Multiple-Deliverable Revenue Arrangements — a consensus of the FASB Emerging Issues Task Force” that provides amendments to the criteria for separating consideration in multiple-deliverable arrangements. As a result of these amendments, multiple-deliverable revenue arrangements will be separated in more circumstances than under existing U.S. GAAP. The ASU does this by establishing a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. A vendor will be required to determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. This ASU also eliminates the residual method of allocation and will require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates any discount in the overall arrangement proportionally to each deliverable based on its relative selling price. Expanded disclosures of qualitative and quantitative information regarding application of the multiple-deliverable revenue arrangement guidance are also required under the ASU. The ASU does not apply to arrangements for which industry specific allocation and measurement guidance exists, such as long-term construction contracts and software transactions. The ASU is effective beginning January 1, 2011. The Company adopted this update and it did not have any impact on the financial statements.
In January 2010, the FASB issued ASU No. 2010-02 “Accounting and Reporting for Decrease in Ownership of a subsidiary – a Scope Clarification”. The update provides amendments to subtopic 810-10 and related guidance within US GAAP to clarify that the scope of the decrease in ownership provisions of the Subtopic and related guidance applies to three cases. The amendments in this Update also clarify that the decrease in ownership guidance in Subtopic 810-10 does not apply to the sales of in substance real estate and conveyances of oil and gas mineral rights transactions even if they involve businesses. If a decrease in ownership occurs in a subsidiary that is not a business or nonprofit activity, and entity first needs to consider whether the substance of the transaction causing the decrease in ownership in addressed in other U.S.GAAP, such as transfers of financial assets, revenue recognition, exchanges of nonmonetary assets, sales of in substance real estate, or conveyances of oil and gas mineral rights, and apply that guidance as applicable. If no other guidance exists, an entity should apply the guidance in Subtopic 810-10. The amendments in this Update also expand the disclosure about the deconsolidation of a subsidiary or derecognition of a group of assets within the scope of Subtopic 810-10. The Company adopted this Update on January 1, 2010 and there was no impact.
In September 2009, the FASB issued SFAS No.167, “Amendments to FASB Interpretation No.46(R)”, which is codified as ASC 810. ASC 810 amends FASB Interpretation No.46(R), “Variable Interest Entities” for determining whether an entity is a variable interest entity (“VIE”) and requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. Under ASC 810, an enterprise has a controlling financial interest when it has a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. ASC 810 also requires an enterprise to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has power to direct the activities of the VIE that most significantly impact the entity’s economic performance.
ASC 810 also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE, requires enhanced disclosures and eliminates the scope exclusion for qualifying special-purpose entities. ASC 810 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. ASC 810 is effective for the Company and the consolidation of Guangzhou Tanke was in accordance with this new update.
3. INVENTORIES
Inventories as of September 30, 2011 and December 31, 2010 consisted, of the following.
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September 30,
|
December 31,
|
|||||||
|
2011
|
2010
|
|||||||
|
Raw materials
|
$ | 611,585 | $ | 653,212 | ||||
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Finished goods
|
246,097 | 182,631 | ||||||
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Work in pogress
|
190,038 | 472,060 | ||||||
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Packaging material
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27,921 | 46,379 | ||||||
| $ | 1,075,641 | $ | 1,354,282 | |||||
4. ACCOUNTS RECEIVABLE
Accounts receivable as of September 30, 2011 and December 31, 2010 consisted of the following.
|
September 30,
|
December 31,
|
|||||||
|
2011
|
2010
|
|||||||
|
Accounts receivable
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$ | 5,209,230 | $ | 1,911,065 | ||||
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Less: Allowance for doubtful accounts
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(149,158 | ) | (143,097 | ) | ||||
| $ | 5,060,072 | $ | 1,767,968 | |||||
5. OTHER CURRENT ASSETS
Other current assets as of September 30, 2011 and December 31, 2010 consisted of the following.
|
September 30,
|
December 31,
|
|||||||
|
2011
|
2010
|
|||||||
|
Prepayment to suppliers
|
$ | 780,118 | $ | 115,078 | ||||
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Deferred expenses
|
32,760 | 49,768 | ||||||
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Offering costs, net
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606,819 | - | ||||||
| $ | 1,419,697 | $ | 164,846 | |||||
In connection with the private placement, the Company incurred $1,624,002 of offering costs. These costs have been reflected as other current assets and are being amortized using the interest method over the expected life of the related convertible notes payable. Amortization of these costs is recorded as interest expense. As of September 30, 2011, the remaining book value of these offering costs amounted to $606,819.
6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment as of September 30, 2011 and December 31, 2010 consisted of the following.
|
September 30,
|
December 31,
|
|||||||
|
2011
|
2010
|
|||||||
|
Buildings
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$ | 4,322,107 | $ | 1,507,916 | ||||
|
Plant and equipment
|
679,767 | 613,287 | ||||||
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Motor vehicles
|
55,149 | 52,908 | ||||||
|
Office equipment
|
382,314 | 83,599 | ||||||
| 5,439,337 | 2,257,710 | |||||||
|
Accumulated depreciation
|
861,434 | 703,121 | ||||||
| $ | 4,577,903 | $ | 1,554,589 | |||||
The Company has buildings on the site it occupies, including factory buildings. Due to the lack of a Land Use Right Certificate, the Company is unable to apply for the Property Ownership Certificate for the buildings. However, as the buildings are in use, the Company depreciates them over their expected useful lives. During the quarter ended June 30, 2011, the Company’s factory campus construction project was completed and the costs were moved from construction in process to the buildings account. Upon placement in service, the Company began depreciating them.
7. INTANGIBLE ASSET, NET
The intangible asset as of September 30, 2011 and December 31, 2010 consisted of the following.
|
September 30,
|
December 31,
|
|||||||
|
2011
|
2010
|
|||||||
|
Intangible asset
|
$ | 301,030 | $ | 286,892 | ||||
On November 21, 2003, the Company applied to the Government of Huaqiao Town, Huadu District, Guangzhou, for the land use right of No. 2 Industry Area of Huaqiao Town (i.e., Laohutou Lot, Wangongtang) covering an area of around 430,000 square feet. The total consideration for the land use right is $598,536. As of September 30, 2011, the Company has paid $301,030 of this amount.
While the final approval of the application of land use right is pending, the Company entered into an agreement on April 15, 2006 to lease the land from its beneficial owner until such time as a land use certificate is issued by the government or May 21, 2021, whichever occurs first. Until that time, the lease is at will and payments under the terms of the lease are $8,800 per year.
8. OTHER PAYABLE AND ACCRUED LIABILITIES
Other payable and accrued liabilities as of September 30, 2011 and December 31, 2010 consisted of the following.
|
September 30,
|
December 31,
|
|||||||
|
2011
|
2010
|
|||||||
|
Other payables
|
$ | 172,231 | $ | 4,087 | ||||
|
Staff welfare payable
|
68,590 | 96,417 | ||||||
|
Value added tax payable
|
2,023,793 | 50,230 | ||||||
|
Registration rights penalties
|
260,782 | - | ||||||
|
Accrued interest
|
145,686 | - | ||||||
|
Other tax payable
|
48,314 | 44,740 | ||||||
| $ | 2,719,396 | $ | 195,474 | |||||
Other payables represent loans from third parties, which are interest free, unsecured and repayable on demand.
9. CONVERTIBLE NOTES PAYABLE
On February 9, 2011, the Company entered into a Securities Purchase Agreement with individual investors relating to a private placement transaction by the Company (the “Private Placement”) of 6,669,627 units. Each unit consisted of a $1.15 principal amount 8% Senior Convertible Note (the “Notes”) and a Common Stock Purchase Warrant (the “Warrants”) to purchase one share of the Company’s common stock at an exercise price of $1.40 per share.
As a result of the Private Placement, the Company offered and sold $7,670,071 worth of Notes convertible into 6,669,627 shares of common stock. The Notes are payable 24 months from February 9, 2011 with an interest rate of 8% per annum payable semiannually in arrears. The Company placed in escrow an amount of the proceeds of the Private Placement equal to one semi-annual interest payment on the Notes to secure prompt interest payments. Until such time as 75% of the Notes are converted into shares of Common Stock, if such escrow is depleted in order to make interest payments, the Company will replenish such escrow amount. At the option of the holder, the Notes may be converted into Common Stock at a price of $1.15 per share, which is subject to customary weighted average and stock based anti-dilution protection. The issuance of the Notes was not registered under the Securities Act as such issuance was exempt from registration under Section 4(2) of the Securities Act and Regulation D.
The Notes contain customary events of default and affirmative and negative covenants of the Company, including negative covenants which restrict the Company’s ability to do the following (among other things) without the consent of the investors: (i) incur, or permit to exist, any indebtedness for borrowed money in excess of (A) US$3,000,000 during the twelve (12) month period beginning on February 9, 2011, or (B) US$5,000,000 during the two-year period beginning on February 9, 2011 and ending on February 9, 2013 (the maturity date of the Notes), except in the ordinary course of the Company’s business; (ii) lend or advance money, credit or property to or invest in (by capital contribution, loan, purchase or otherwise) any person or entity in excess of US$1,000,000 except: (A) investments in United States Government obligations, certificates of deposit of any banking institution with combined capital and surplus of at least $200,000,000; (B) accounts receivable arising out of sales in the ordinary course of business; and (C) inter-company loans between and among the Company and its subsidiaries; (iii) pay dividends or make any other distribution on shares of the capital stock of the Company; (iv) create, assume or permit to exist, any lien on any of the Company’s property or assets now owned or hereafter acquired, subject to existing liens and certain exceptions; (v) assume guarantees, subject to certain exceptions; (vi) engage in “sale-leaseback” transactions, subject to certain exceptions; (vii) make capital expenditures in excess of US$5,000,000 in any fiscal year, subject to certain exceptions; and (viii) materially alter the Company’s business.
In connection with the issuance of the Notes, we entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the investors which sets forth the rights of the investors to have the shares of common stock underlying the Notes and Warrants registered with the SEC for public resale. Pursuant to the Registration Rights Agreement, we agreed to file, no later than April 11, 2011, a registration statement to register the shares underlying the Notes and the Warrants and to have such registration statement effective no later than September 18, 2011. If the registration statement was not filed by April 11, 2011 (the “Filing Failure”), was not effective by September 18, 2011 (the “Effectiveness Failure”) or if, after the effective date, sales of securities included in the registration statement cannot be made (including, without limitation, because of a failure to keep the registration statement effective, to disclose such information as is necessary for sales to be made pursuant to the registration statement, to register a sufficient number of shares of Common Stock or to maintain the listing of the Common Stock) (a “Maintenance Failure”) then, as liquidated damages (and in complete satisfaction and to the exclusion of any claims or remedies inuring to any holder of the securities) the Company is required to pay an amount in cash equal to 1% of the aggregate purchase price paid by the Investors on each of the following dates: (i) 20 days following the date of a Filing Failure; (ii) 30 days following the initial day of a Maintenance Failure; (iii) on every thirtieth day thereafter (pro-rated for periods totaling less than thirty days) until such failure is cured; (iv) on every thirtieth day after the day of an Effectiveness Failure and thereafter (pro rated for periods totaling less than thirty days) until such Effectiveness Failure is cured; (v) on every thirtieth day after the initial day of a Maintenance Failure and thereafter (pro rated for periods totaling less than thirty days) until such Maintenance Failure is cured. The payments to be made by the Company are limited to a maximum of 6% of the aggregate amount paid by the Investors ($460,204.29). The registration statement was not declared effective by September 18, 2011, as such an Effectiveness Failure occurred and the Company made an estimate of the probable amount it would pay in damages and accrued $260,782. The Company will continue to assess the likelihood of payments under this arrangement, and if necessary will recognize these estimates into earnings in the period in which they become likely in accordance with ASC 825-20, Registration Payment Arrangements.
The warrants issued as a component of the units were valued using the Black-Scholes method using the following assumptions: (1) life of warrants of 3 years, (2) annualized volatility of 100%, (3) fair value of stock as of grant date of $1.15, (4) exercise price of $1.40, (5) annual dividend rate of 0%, and (6) discount rate of 1.34%. Such calculation resulted in a warrant value of $4,470,536.
The proceeds of the unit offering were allocated to the Notes and warrants based on their relative fair values on a weighted average basis, with the resulting allocated value of the warrants of $2,824,350 being classified to additional paid in capital. Such discount to the Notes is being amortized over their expected life.
The beneficial conversion feature associated with the issuance of the above Notes, amounted to $2,824,350, which has also been recorded as a discount to the convertible notes payable and is being amortized over the life of the Notes. The Notes do not contain any embedded derivatives which require liability classification.
As of September 30, 2011, the book value of the Notes amounted to $5,559,400, which consisted of the aggregate face value of $7,670,071, less the remaining discount of $2,110,671.
10. INCOME TAX
The Company’s operating subsidiary, Guangzhou Tanke, is a “domestic enterprise” that is registered and operated in Guangzhou, the PRC.
The PRC's legislative body, the National People's Congress, adopted the unified Enterprise Income Tax ("EIT") Law on March 16, 2007. This new tax law replaces the existing separate income tax laws for domestic enterprises and foreign-invested enterprises and became effective on January 1, 2008. Under the new tax law, a unified income tax rate is set at 25% for both domestic enterprises and foreign-invested enterprises. However, there is a transition period for enterprises, whether foreign-invested or domestic, that are currently receiving preferential tax treatments granted by relevant tax authorities. Enterprises that are subject to an enterprise income tax rate lower than 25% may continue to enjoy the lower rate and will transit into the new rate over a five year period beginning on the effective date of the EIT Law. Enterprises that are currently entitled to exemptions for a fixed term may continue to enjoy such treatment until the exemption term expires. Income tax expense for the three and nine months ended September 30, 2011 and 2010 represents the provision for current income tax expenses in the PRC.
Tanke Bio-Tech, a subsidiary of Guangzhou Tanke, is a joint venture with a foreign entity that received a full exemption from income taxes in 2007 and 2008 and half rate reduction for years 2009, 2010 and 2011 in accordance with the Law of the People's Republic of China on Income Tax of Enterprises with Foreign Investment and Foreign Enterprises and Notification of the State Council on Carrying out the Transitional Preferential Policies concerning Enterprise Income Tax (Guofa (2007) No. 39).
As of September 30, 2011 and December 31, 2010, the income tax payable for the Company amounted to $1,164,379 and $699,637, respectively.
Significant components of the Company’s deferred tax asset are as follows.
|
September 30,
|
December 31,
|
|||||||
|
2011
|
2011
|
|||||||
|
Allowance for doubtful accounts
|
23,949 | 17,887 | ||||||
|
Deferred tax asset
|
$ | 23,949 | $ | 17,887 | ||||
11. LONG-TERM LOANS
The details of the Company’s long-term borrowings are as follows:
|
September 30,
|
December 31,
|
|||||||
|
2011
|
2010
|
|||||||
|
Bank loan bearing interest at 5.4% per annum,
|
||||||||
|
maturing on May 21, 2012. The loan is
|
||||||||
|
uncollateralized other than restricted cash
|
||||||||
|
deposited at the bank.
|
$ | 1,652,607 | $ | 1,358,962 | ||||
|
Less: Current portion
|
(708,260 | ) | (905,975 | ) | ||||
| $ | 944,347 | $ | 452,987 | |||||
The bank loans consist of $708,260 (RMB4,500,000) and $944,347 (RMB6,000,000), bearing interest at 5.4% and 5.85% per annum, maturing on May 21, 2012 and January 30, 2013, respectively.
12. GOVERNMENT GRANT
The government grant liability represents an advance from the Chinese government for research and development projects. The Company has recorded the grants received as a government grant liability, and ratably recognizes the amount as a reduction of research and development expense when the related research and development activities are performed.
13. RELATED PARTY TRANSACTIONS
Apart from the transactions and balances disclosed elsewhere in the financial statements, the Company had no material transactions with its related parties during the periods presented.
14. SEGMENT INFORMATION
The Company operates in four segments: organic trace mineral additives, functional regulation additives, herbal medicinal additives and other revenues. Management oversees each of these operations separately.
Property, equipment and other assets are shared and not tracked separately by segment. Administrative expenses are also not tracked by segment. Following is a breakdown of revenue, costs of sales and gross profit by segment.
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
September 30,
|
September 30,
|
|||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
Revenue
|
||||||||||||||||
|
Organic Trace Mineral Additives
|
4,903,065 | 4,312,353 | 13,704,308 | 10,242,093 | ||||||||||||
|
Functional Regulation Additives
|
1,257,219 | 949,268 | 2,915,994 | 2,145,939 | ||||||||||||
|
Herbal Medicinal Additives
|
81,962 | 110,529 | 166,230 | 322,147 | ||||||||||||
|
Other
|
5,587 | 328,764 | 392,614 | 596,842 | ||||||||||||
| 6,247,833 | 5,700,914 | 17,179,146 | 13,307,021 | |||||||||||||
|
Costs of sales
|
||||||||||||||||
|
Organic Trace Mineral Additives
|
3,134,802 | 2,563,794 | 8,534,522 | 6,221,420 | ||||||||||||
|
Functional Regulation Additives
|
799,849 | 623,263 | 1,824,921 | 1,317,928 | ||||||||||||
|
Herbal Medicinal Additives
|
65,349 | 113,464 | 141,023 | 263,092 | ||||||||||||
|
Other
|
4,212 | 296,048 | 236,613 | 542,248 | ||||||||||||
| 4,004,212 | 3,596,569 | 10,737,079 | 8,344,688 | |||||||||||||
|
Gross profits
|
||||||||||||||||
|
Organic Trace Mineral Additives
|
1,768,263 | 1,748,559 | 5,169,786 | 4,020,673 | ||||||||||||
|
Functional Regulation Additives
|
457,370 | 326,005 | 1,091,073 | 828,011 | ||||||||||||
|
Herbal Medicinal Additives
|
16,613 | (2,935 | ) | 25,207 | 59,055 | |||||||||||
|
Other
|
1,375 | 32,716 | 156,001 | 54,594 | ||||||||||||
| 2,243,621 | 2,104,345 | 6,442,067 | 4,962,333 | |||||||||||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our financial statements and the related notes. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as its plans, objectives, expectations and intentions. Its actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements. As a result of the Share Exchange and the VIE Agreements, the Company, through Kanghui Agricultural, its indirect wholly owned subsidiary, assumed management of the business activities of Guangzhou Tanke and has the right to appoint all executives and senior management and the members of the board of directors of Guangzhou Tanke. As used in this section, the terms “we”, “our”, “us” and the “Company” refer to the Company, our direct and indirect subsidiaries and Guangzhou Tanke, our principal operating business.
Overview
We are one of the leading animal nutrition and feed additive providers in China and in 2001 were designated a certified high-tech company by the Guangzhou City Commission of Science and Technology as recognition for new technology developed by us in the agriculture industry. Our products optimize the growth and health of livestock such as pigs and cattle, as well as farmed fish, and seek to capitalize on China’s growing demand for safe and reasonably priced food. Feed additives are utilized in China at less than half the rate of the United States and Europe, and we have a significant growth opportunity as Chinese farmers and ranchers include a greater amount of increasingly sophisticated additive to their feed.
We have more than 150 employees, with 40 engaged in sale or sales-related activities. Our headquarters and manufacturing facilities are in a state-of-the-art 34,000 square-meter facility in the capital city of Guangzhou, in Guangdong province. We currently produce 21 branded feed additives, with each brand available in seven different mixes that correspond to different states of an animal’s life cycle.
Our major products address most key market categories within China’s animal feed additive industry including: Organic Trace Mineral Additives, which account for approximately 82% of our revenue, Functional regulation, which account for approximately 15% of our revenue, and Herbal Medicinal Additives, which account for approximately 1% of our revenue. Our extensive distribution network reaches China’s top 10 feed producers and the 500 largest animal farming operations. We currently market 21 different brands of feed additives at various price points to meet the demands of existing and prospective customers. Within each brand there are seven different mixes that correspond to the different growth stages of an animal’s life cycle. While the majority of our sales are domestic, international sales, mainly in Southeast Asia, Latin American and other developing countries, currently account for approximately 1.5% of our total sales.
Critical Accounting Policies
While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Basis of Presentation
The Company’s consolidated financial statements have been stated in US dollars and prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial statements and with instructions to Form 10-Q pursuant to the rules and regulations of Securities and Exchange Act of 1934, as amended (the "Exchange Act") and Article 8-03 of Regulation S-X under the Exchange Act. In the opinion of our management, we have included all adjustments considered necessary in order to make the financial statements not misleading. Operating results for the nine months ended September 30, 2011 are not indicative of the results that may be expected for the fiscal year ending December 31, 2011.
Use of Estimates
In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of the amount due from related parties, the net realizable value of inventories, the estimation of useful lives of property and equipment and intangible assets, and the value of warrants. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 605-10, Revenue Recognition, and SEC Staff Accounting Bulletin No. 104. Pursuant to these pronouncements, revenue is recognized when all of the following criteria are met:
- Persuasive evidence of an arrangement exists;
- Delivery has occurred or services have been rendered;
- The seller's price to the buyer is fixed or determinable; and
- Collectability is reasonably assured.
The Company’s revenue is generated through the wholesale and retail sale of livestock feed, including organic trace mineral additives, functional regulation additives, herbal medicinal additives and raw materials. Before the Company recognizes revenue on these product sales, written purchase orders and contracts are received in advance of all shipments of goods to customers. For sales within the Company’s own province, delivery is made by Company employees. Such delivery occurs on the same day as shipment. For delivery outside the province, shipment is made through a separate logistics company that assumes the risk of loss. Revenue is recognized upon shipment of goods to the customers. The Company typically does not incur bad debt losses because this type of loss is deducted from the salesperson’s compensation, thereby mitigating the loss to the Company. Therefore, collectability is reasonably assured.
Revenue is presented net of sales returns, which are not significant. However, the Company continually performs analyses of returns and records a provision at the time of sale if necessary. As of September 30, 2011, it was determined that potential returns and allowances were not material so the Company did not record a provision for returns. The Company revisits this estimate regularly and adjusts it if conditions change.
Research and Development Costs
Research and development costs are charged as expense when incurred and included in operating expenses.
Foreign Currency Translation
The Company and its subsidiaries maintain financial statements in the functional currency of each entity. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.
The financial statements of each entity are prepared using the functional currency, and have been translated into United States dollars (“US$” or “$”). Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates for the period. Stockholders’ equity is translated at historical exchange rates. Any translation adjustments are included as a foreign exchange adjustment in other comprehensive income, a component of stockholders’ equity.
RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.
Results of Operations
Comparison of Three Months Ended September 30, 2011 and September 30, 2010
The following is a comparison of our revenue, costs of sales and gross profit by segment for the three months ended September 30, 2011 and 2010.
The Company operates in four segments: (1) Organic Trace Mineral Additives, (2) Functional Regulation Additives, (3) Herbal Medicinal Additives and (4) Other. Management tracks each of these operations separately. The Company evaluates the performance of its operating segments based on segment revenue and gross profit, and management uses aggregate segment gross profit as a measure of the overall performance of the business. The Company believes that information about aggregate segment gross profit assists investors by allowing them to evaluate changes in the gross profit of the Company’s various offerings separate from factors other than product offerings that affect net income.
|
Three Months Ended
|
||||||||||||||||
|
September 30,
|
$ | % | ||||||||||||||
|
2011
|
2010
|
Change
|
Change
|
|||||||||||||
|
Revenue
|
||||||||||||||||
|
Organic Trace Mineral Additives
|
4,903,065 | 4,312,353 | 590,712 | 13.70 | % | |||||||||||
|
Functional Regulation Additives
|
1,257,219 | 949,268 | 307,950 | 32.44 | % | |||||||||||
|
Herbal Medicinal Additives
|
81,962 | 110,529 | (28,568 | ) | -25.85 | % | ||||||||||
|
Other
|
5,587 | 328,764 | (323,177 | ) | -98.30 | % | ||||||||||
| 6,247,833 | 5,700,914 | 546,919 | 9.59 | % | ||||||||||||
|
Costs of sales
|
||||||||||||||||
|
Organic Trace Mineral Additives
|
3,134,802 | 2,563,794 | 571,007 | 22.27 | % | |||||||||||
|
Functional Regulation Additives
|
799,849 | 623,263 | 176,586 | 28.33 | % | |||||||||||
|
Herbal Medicinal Additives
|
65,349 | 113,464 | (48,115 | ) | -42.41 | % | ||||||||||
|
Other
|
4,212 | 296,048 | (291,836 | ) | -98.58 | % | ||||||||||
| 4,004,212 | 3,596,569 | 407,643 | 11.33 | % | ||||||||||||
| Gross profits | ||||||||||||||||
|
Organic Trace Mineral Additives
|
1,768,263 | 1,748,559 | 19,705 | 1.13 | % | |||||||||||
|
Functional Regulation Additives
|
457,370 | 326,005 | 131,365 | 40.30 | % | |||||||||||
|
Herbal Medicinal Additives
|
16,613 | (2,935 | ) | 19,548 | 666.06 | % | ||||||||||
|
Other
|
1,375 | 32,716 | (31,341 | ) | -95.80 | % | ||||||||||
| 2,243,621 | 2,104,345 | 139,276 | 6.62 | % | ||||||||||||
Organic Trace Mineral Additives
Organic trace mineral additives constitute the largest and fastest growing area of our business. We are one of China’s largest domestic providers of organic trace mineral additives, specializing in the development and production of chelated organic trace mineral additives. Our current trace mineral manufacturing facility is the one of the largest chelating facilities in China and has the capacity to produce approximately 250 metric tons of organic trace minerals per week.
Revenue from organic trace mineral additives in the third quarter of 2011 increased by $590,712, or 13.70%, as compared to 2010 due to a volume variance. In 2011, this revenue accounted for approximately 78.48% of our revenues for the three months ended September 30, 2011 as compared to 75.64% for the three months ended September 30, 2010. Our gross profit percentage for the organic trace mineral additive sales amounted to 36.06% and 40.55% for the quarter ended September 30, 2011 and 2010 respectively. The decrease in the gross profit as a percent of revenue was due to cost increases, particularly in raw materials. In order to increase the volume of sales, the Company has not raised prices to offset its increased costs.
Functional Regulation Additives
Functional feed additives are widely used to enhance the properties of other products, improve feed efficiency and stimulate the rapid maturation of the immune system.
We currently produce two types of functional regulation additives: feed acidifiers and flavor enhancers. Feed acidifiers are used to prevent microbial degradation of raw materials or finished feeds and to maintain the quality of feed. Flavor enhancers are used to improve feed palatability, enhance animal appetite and stimulate saliva, gastric and pancreatic juices and other digestive juice secretion and gastrointestinal motility and ultimately feed consumption and yield from production animals.
Revenue from functional regulation additives for the quarter ended September 30, 2011 increased by $307,950, or 32.44%, as compared to the third quarter of 2010. The increase in sales is primarily due to increased volume sales to existing customers due to adopting a lower pricing strategy. Accordingly, the gross profit percentage for the quarter ended September 30, 2011 increased to 36.38%, as compared to 34.34% in the third quarter of 2010. The reason for the improved profit margins was a new product that was launched at the end of second quarter of 2011 that has begun performing very well. In addition, a few other high margin flavor enhancer products were gaining market acceptance.
Herbal Medicinal Additives
Chinese herbal feed additives utilize traditional Chinese medicine theory to improve an animal’s digestion and appetite and to regulate the yin and yang balance of an animal’s health.
Herbal medicines come from plants, plant extracts, fungal and bee products, minerals, shells and certain animal parts. Compared to synthetic antibiotics or inorganic chemicals, these naturally-derived products are less toxic, residue free and thought to be ideal feed additives in food animal production.
Revenue from herbal medicinal additives for the quarter ended September 30, 2011 decreased by $28,568, or 25.85%, as compared to the quarter ended September 30, 2010.
Herbal Medicinal Additives are still in a development and introductory stage when customers are adapting to the usage and Tanke is making minor modifications to products. Prices and costs will continue to fluctuate in the near future until the right balance is reached.
Other
Other revenue mainly consists of buying and then reselling raw materials. Revenue from raw material sales accounted for less than 1% of our revenue for the three months ended September 30, 2011 and decreased by $323,177 as compared to 2010. This revenue is very price sensitive, and since our costs increased in the second quarter to the point that selling raw materials actually lost money, we curtailed this activity. Going forward, we do not expect this to be a significant source of revenue.
Operating Expenses and Other Income / Expenses
The following table reconciles aggregate segment gross profit to net income for the three months ended September 30, 2011 and 2010.
|
Three Months Ended
|
||||||||||||||||
|
September 30,
|
$ | % | ||||||||||||||
|
2011
|
2010
|
Change
|
Change
|
|||||||||||||
|
Operating expenses:
|
||||||||||||||||
|
Selling expenses
|
(486,231 | ) | (416,128 | ) | (70,103 | ) | 16.85 | % | ||||||||
|
General and administrative expenses
|
(545,100 | ) | (220,243 | ) | (324,857 | ) | 147.50 | % | ||||||||
|
Depreciation and amortization
|
(3,685 | ) | (220,021 | ) | 216,336 | -98.33 | % | |||||||||
|
Other operating expenses
|
(4,809 | ) | (1,344 | ) | (3,465 | ) | 257.81 | % | ||||||||
|
Income (loss) from operations
|
1,203,796 | 1,246,609 | (42,813 | ) | -3.43 | % | ||||||||||
|
Other income (expense):
|
||||||||||||||||
|
Interest income
|
25,563 | 842 | 24,721 | 2935.99 | % | |||||||||||
|
Interest expense
|
(814,415 | ) | (23,755 | ) | (790,660 | ) | 3328.39 | % | ||||||||
|
Amortization of discount on notes
|
(1,396,990 | ) | - | (1,396,990 | ) |
NA
|
||||||||||
|
Registration rights agreement expense
|
(260,782 | ) | - | (260,782 | ) |
NA
|
||||||||||
|
Foreign exchange gains (loss), net
|
(17,846 | ) | 966 | (18,812 | ) | -1947.41 | % | |||||||||
|
(Loss) income before tax
|
(1,260,674 | ) | 1,224,662 | (2,485,336 | ) | -202.94 | % | |||||||||
|
Income tax
|
(185,197 | ) | (192,027 | ) | 6,830 | -3.56 | % | |||||||||
|
Net (loss) income
|
(1,445,871 | ) | 1,032,635 | (2,478,506 | ) | -240.02 | % | |||||||||
Selling, General and Administrative Expenses
Selling expenses for the three months ended September 30, 2011 increased by $70,103 as compared to 2010. The amount represents primarily travel and meeting expenses for sales department staff to develop new customers and expand the market. The amount increased in 2011 due to the increase in the number of salespeople, along with an increase in travel and meeting expenses for the sales department staff to develop new customers and expand the market.
General and administrative expenses for three months ended September 30, 2011 increased by $324,857 as compared to 2010. This was due to higher accounting and legal expenses associated with our public filings in 2011, which did not occur in 2010.
Our selling, general and administrative expenses may fluctuate in the future due to a variety of factors, including, but not limited to:
| ● |
Additional expenses as a result of becoming a reporting company including, but not limited to, director and officer insurance, compensation for the director, SEC reporting and compliance, transfer agent fees, additional staffing, professional fees and similar expenses;
|
| ● |
Expenses resulting from developing new products or expansion of new markets, including travel and entertainment and advertising expenses.
|
Other Income/Expenses
Interest expense for the three months ended September 30, 2011 increased by $790,660 as compared to 2010. The primary reason for this increase was related to the amortization of our capitalized offering costs recorded in February 2011 related to the issuance of our convertible notes payable, which amounted to $401,635 for the third quarter of 2011. These amounts are recorded as a component of interest expense. This account also includes actual interest expense on the convertible notes. These expenses did not occur in 2010, as we had no capitalized offering costs or convertible notes at that point.
The expense associated with the amortization of discounts on our convertible notes payable for the three months ended September 30, 2011 amounted to $1,396,990 as compared to $0 in 2010. As discussed above with the amortization of the capitalized offering costs, the convertible notes payable were issued in February 2011. The notes were not outstanding in 2010, and therefore there was no amortization expense recorded in the prior year.
The registration rights expense relates to our failure to have an effective registration statement by September 18, 2011. We have estimated the amount we will need to pay related to this expense and have recorded it in this quarter as it is now probable that we will need to pay it. We did not have this agreement in place in 2010.
Income Tax Expense
Out income tax expense decreased by $6,830 for the three month ended September 30, 2011 as compared to 2010. The decrease was attributable to a decrease in taxable income during the quarter. We pay different income tax rates depending on which company records the activity. For example, Guangzhou Tanke is taxed at 25%, while Tanke Bio-Tech is taxed at 12.5%. In the second quarter of 2011, proportionally more income was generated by Tanke Bio-Tech, so the effective tax rate was lower than prior periods.
Taking into consideration the new tax law, the effective statutory tax rate for Guangzhou Tanke Bio-Tech Co. Ltd was 12.5% both for three and nine months ended September 30, 2011.
Pursuant to Section 26 of the Inland Revenue Ordinance ('IRO'), the governing statute of Hong Kong taxation, any dividend income received by any entity subject to IRO would not be taxable in Hong Kong. Furthermore, foreign (non-Hong Kong) investment income that is repatriated to Hong Kong is not subject to Hong Kong profits (income) tax.
Nine Months ended September 30, 2011 Compared to the Nine Months ended September 30, 2010
The following is a comparison of our revenue, costs of sales and gross profit by segment for the nine months ended September 30, 2011 and 2010.
Revenue and Costs of Sales
Our revenues, cost of goods sold, and gross profit consists of the four segments discussed above in the discussion and analysis relating to the nine months ended September 30, 2011.
|
Nine Months Ended
|
||||||||||||||||
|
September 30,
|
%
|
|||||||||||||||
|
2011
|
2010
|
Change
|
Change
|
|||||||||||||
|
Revenue
|
||||||||||||||||
|
Organic Trace Mineral Additives
|
13,704,308 | 10,242,093 | 3,462,215 | 33.80 | % | |||||||||||
|
Functional Regulation Additives
|
2,915,994 | 2,145,939 | 770,054 | 35.88 | % | |||||||||||
|
Herbal Medicinal Additives
|
166,230 | 322,147 | (155,918 | ) | -48.40 | % | ||||||||||
|
Other
|
392,614 | 596,842 | (204,228 | ) | -34.22 | % | ||||||||||
| 17,179,146 | 13,307,021 | 3,872,125 | 29.10 | % | ||||||||||||
|
Costs of sales
|
||||||||||||||||
|
Organic Trace Mineral Additives
|
8,534,522 | 6,221,420 | 2,313,101 | 37.18 | % | |||||||||||
|
Functional Regulation Additives
|
1,824,921 | 1,317,928 | 506,993 | 38.47 | % | |||||||||||
|
Herbal Medicinal Additives
|
141,023 | 263,092 | (122,069 | ) | -46.40 | % | ||||||||||
|
Other
|
236,613 | 542,248 | (305,635 | ) | -56.36 | % | ||||||||||
| 10,737,079 | 8,344,688 | 2,392,391 | 28.67 | % | ||||||||||||
|
Gross profits
|
||||||||||||||||
|
Organic Trace Mineral Additives
|
5,169,786 | 4,020,673 | 1,149,114 | 28.58 | % | |||||||||||
|
Functional Regulation Additives
|
1,091,073 | 828,011 | 263,062 | 31.77 | % | |||||||||||
|
Herbal Medicinal Additives
|
25,207 | 59,055 | (33,848 | ) | -57.32 | % | ||||||||||
|
Other
|
156,001 | 54,594 | 101,407 | 185.75 | % | |||||||||||
| 6,442,067 | 4,962,333 | 1,479,734 | 29.82 | % | ||||||||||||
Organic Trace Mineral Additives
Revenue from organic trace mineral additives for the nine months ended September 30, 2011 increased by $3,462,215, or 33.80%, as compared to 2010 due to a volume variance. In 2011, this revenue accounted for approximately 79.77% of our revenues for the nine months ended September 30, 2011 as compared to 76.97% for the nine months ended September 30, 2010. Our gross profit margin for the organic trace mineral additive sales amounted to approximately 37.72% and 39.26% for the nine months ended September 30, 2011 and 2010 respectively. The decrease in our gross profit margin was primarily due to higher material and labor costs compared with last year while we needed to keep our prices steady to increase our volume.
Functional Regulation Additives
Revenue from functional regulation additives for the nine months ended September 30, 2011 increased by $770,054, or 35.88%, as compared to the same period in 2010. The increase in sales is primarily due to increased volume sales to existing customers due to adopting a lower pricing strategy. However, the gross profit percentage for the nine months ended September 30, 2011 decreased to 37.42%, as compared to 38.59% in the same period of 2010. The gross profit percentage for functional regulation additives had been trending down in 2011 due to increase in cost but the introduction of higher margin new products in the third quarter reversed the trend. As compared to the year to date Gross Profit Percentage for 2010, we are still lower in 2011.
Herbal Medicinal Additives
Revenue from herbal medicinal additives for the nine months ended September 30, 2011 decreased by $155,918, or 48.40%, as compared to the same period in 2010. The decrease is primarily due to unstable market demand for the products.
Other
Other revenue decreased by $204,228, or 34.22%, during the nine months ended September 30, 2011 as compared to the same period in 2010. Other revenue mainly consists of buying and then reselling raw materials. We had lower sales of raw materials in the nine-month period of 2011, which is driving the decrease in gross profit for the same period. This revenue is very price sensitive, and since our costs increased in the second quarter to the point that selling raw materials actually lost money, we have curtailed this activity. Going forward, we do not expect this to be a significant source of revenue.
Operating Expenses and Other Income / Expenses
The following table reconciles aggregate segment gross profit to net income for the nine months ended September 30, 2011 and 2010.
|
Nine Months Ended
|
||||||||||||||||
|
September 30,
|
$ | % | ||||||||||||||
|
2011
|
2010
|
Change
|
Change
|
|||||||||||||
|
Operating expenses:
|
||||||||||||||||
|
Selling expenses
|
(1,690,287 | ) | (1,295,817 | ) | (394,470 | ) | 30.44 | % | ||||||||
|
General and administrative expenses
|
(3,870,005 | ) | (481,673 | ) | (3,388,332 | ) | 703.45 | % | ||||||||
|
Depreciation and amortization
|
(66,864 | ) | (244,437 | ) | 177,573 | -72.65 | % | |||||||||
|
Other operating expenses
|
(96,498 | ) | (1,344 | ) | (95,154 | ) | 7079.91 | % | ||||||||
|
Income (loss) from operations
|
718,413 | 2,939,062 | (2,220,649 | ) | -75.56 | % | ||||||||||
|
Other income (expense):
|
||||||||||||||||
|
Interest income
|
29,173 | 3,407 | 25,766 | 756.27 | % | |||||||||||
|
Interest expense
|
(1,497,364 | ) | (49,796 | ) | (1,447,568 | ) | 2907.00 | % | ||||||||
|
Amortization of discount on notes
|
(3,538,030 | ) | - | (3,538,030 | ) |
NA
|
||||||||||
|
Registration rights agreement expense
|
(260,782 | ) | - | (260,782 | ) |
NA
|
||||||||||
|
Foreign exchange gains (loss), net
|
(70,246 | ) | 684 | (70,930 | ) | -10369.88 | % | |||||||||
|
(Loss) income before tax
|
(4,618,836 | ) | 2,893,357 | (7,512,193 | ) | -259.64 | % | |||||||||
|
Income tax
|
(505,505 | ) | (408,594 | ) | (96,911 | ) | 23.72 | % | ||||||||
|
Net (loss) income
|
(5,124,341 | ) | 2,484,763 | (7,609,104 | ) | -306.23 | % | |||||||||
Selling, General and Administrative Expenses
Selling expenses for the nine months ended September 30, 2011 increased by $394,470 as compared to 2010. The amount represents primarily travel and meeting expenses for sales department staff to develop new customers and expand the market. The amount increased in 2011 due to the increase in our volume of sales, along with an increase in travel and meeting expenses for the sales department staff to develop new customers and expand the market.
General and administrative expenses for the nine months ended September 30, 2011 increased by $3,388,332 as compared to the same period in 2010. The increase was largely due to $2,491,938 of expenses associated with the issuance of shares of common stock to service providers in 2011. Additionally, we had higher accounting and legal expenses associated with our public filings in 2011, which did not occur in 2010.
Other Income/Expenses
Interest expense for the nine months ended September 30, 2011 amounted to $1,497,364, which consisted primarily of $1,017,184 for the amortization of capitalized offering costs relating to the convertible notes payable issued in February 2011. Interest expense also includes the interest on our convertible notes. Additionally, we recorded amortization associated with the discounts on our convertible notes payable of $3,538,030 for the nine months ended September 30, 2011. These expenses did not occur in 2010.
The registration rights agreement expense relates to the amount we owe investors for failing to have our registration statement effective as of September 18, 2011. As a result, we estimated the total amount we will need to pay and have recorded it in this account. We did not have this agreement in 2010 and therefore there was no corresponding expense.
Liquidity and Capital Resources
As of September 30, 2011, and 2010 we had cash and balances of $10,216,539 and $2,222,025, respectively. The following table provides detailed information about our net cash flow for all financial statement periods presented in this report. To date, we have financed our operations primarily by cash from operations, issuance of convertible notes and capital contribution by our stockholders.
The following table sets forth a summary of our cash flows for the periods indicated.
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Nine Months Ended
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||||||||||||||||
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September 30,
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$ | % | ||||||||||||||
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2011
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2010
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Change
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Change
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|||||||||||||
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Net cash provided by operating activities
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$ | 1,014,815 | $ | 2,737,747 | $ | (1,722,932 | ) | -62.93 | % | |||||||
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Net cash used in investing activities
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(2,255,974 | ) | (53,764 | ) | (2,202,210 | ) | 4096.07 | % | ||||||||
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Net cash provided by financing activities
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8,887,902 | (998,094 | ) | 9,885,996 | -990.49 | % | ||||||||||
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Effect of foreign currency conversion on cash
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347,770 | 11,767 | 336,003 | 2855.47 | % | |||||||||||
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Net increase in cash
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$ | 7,994,514 | $ | 1,697,656 | $ | 6,296,858 | 370.91 | % | ||||||||
Operating Activities
Net cash provided by operating activities was $1,014,815 for the nine months ended September 30, 2011 compared to cash provided of $2,737,747 for the nine months ended September 30, 2010. Although we had a net loss of $5,124,341 during the nine months ended September 30, 2011, a significant amount of our expenses were non-cash related such as $2,491,938 in expenses associated with the issuance of common stock for services, $3,538,030 for the amortization of the discounts recorded on our convertible notes payable, as well as $1,017,184 of offering cost amortization. These non-cash expenses offset the loss and allowed us to continue generating cash from operations.
Investing Activities
Net cash used in investing activities was $2,255,974 for the nine months ended September 30, 2011, which was the result of an increase in other receivables of $1,363,001, spending for the acquisition of property and equipment of $264,709, change in restricted cash of $698,646, offset by cash of $76,075 acquired as a result of the VIE agreement with China Flying in the first quarter of 2011. During 2010, our net cash used in investing activities was $53,764 due to spending for the acquisition of property and equipment of $42,103 and spending for construction in progress of $158,514, offset by a decrease in restricted cash of $146,853.
Financing Activities
Net cash provided by financing activities was $8,887,902 for the nine months ended September 30, 2011. The proceeds from financing activities were the result of net proceeds from the issuance of convertible notes of $5,559,400 an increase in borrowings from related parties of $1,907,124, and an increase in bank borrowings of $458,215. During 2010, our cash used in financing activities was $1,299,514 resulting from payments on related party borrowings of $557,536, as well as payments made on bank borrowings of $440,558.
We have historically funded our operation primarily through cash generated from operations. Over the next twelve months, we intend to pursue organic and acquisitive growth and increase our market share in mainland China. We believe that our cash on hand and cash flow from operations will meet our present operating cash needs for the next 12 months. However, we will require additional cash resources to meet the cash requirements of our planned growth.
Additionally, we may require additional cash resources due to changed business conditions, implementation of our strategy to ramp up our marketing efforts and increase brand awareness, or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity, securities, convertible notes or warrants in the future.
Effect of Changes in the Foreign Exchange Rate
Upon translation of the Company’s financial statements into US Dollars for the purpose of financial reporting in the United States, the exchange rate between the Chinese Renminbi and the US Dollar can have an impact on the amount of reported cash on hand.
However all of the Company’s revenue is generated in China, and currently over 90% of its cost is within China. As a result, from an operational standpoint, a change in the exchange rate has relatively little impact on the Company. Such change is not expected to affect the Company’s liquidity in any significant way.
Economy and Inflation
Inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.
We have not experienced any significant cancellation in orders due to the downturn in the economy. Furthermore, we have also had only a small number of customer-requested delays in delivery or production.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements that have, or are reasonably likely to have a current or future effect on our financial statements.
Seasonality
Our operating results and operating cash flows historically have not been subject to significant seasonal variations. However, sales around Chinese New Year are typically comparatively lower than other months. This pattern may change as a result of new market opportunities or new product introduction.
Recent Accounting Pronouncements
See Note 2 of the accompanying consolidated financial statements for a description of recent accounting pronouncements. We do not anticipate that the adoption of these recent accounting pronouncements will have a material impact on our financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures.
We maintain disclosure controls and procedures as required under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of September 30, 2011, our management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures.
Based on that assessment, management identified material weaknesses in internal control over financial reporting related to the maintenance of our books and records in accordance with GAAP used in the Peoples’ Republic of China, and the conversion of those books and records to GAAP used in the United States of America. Specifically, the material weaknesses related to (1) our process for periodic financial reporting, including documentation of procedures and timely review of financial reports and statements, particularly as it relates to the conversion from Chinese to US GAAP, (2) adequate qualified staff necessary to effectively apply the process, and (3) methods and practices employed to report unusual transactions such as our reverse merger. A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Based on this assessment, management concluded that the Company's internal control over financial reporting was not effective as of September 30, 2011. Our management has discussed the material weakness described above with our audit committee.
In an effort to remediate the identified material weaknesses, we have hired a new Chief Financial Officer. We also plan to document our process and procedures governing our internal reporting. Furthermore, we plan to implement additional changes to our internal control over financial reporting, including (1) timely review of reports prior to issuance, (2) a re-evaluation of our staffing needs, and (3) analysis of unusual transactions as they are occurring to allow adequate time for multiple levels of review.
Our internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. There is no assurance that our disclosure controls or our internal controls over financial reporting can prevent all errors. An internal control system, no matter how well designed and operated, has inherent limitations, including the possibility of human error. Because of the inherent limitations in a cost-effective control system, misstatements due to error may occur and not be detected. We monitor our disclosure controls and internal controls and make modifications as necessary. Our intent in this regard is that our disclosure controls and our internal controls will improve as systems change and conditions warrant.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
The nature of our business exposes us to the potential for legal proceedings related to labor and employment, personal injury, property damage, and environmental matters. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including our assessment of the merits of each particular claim, as well as our current reserves and insurance coverage, we do not expect that any known legal proceeding will in the foreseeable future have a material adverse impact on our financial condition or the results of our operations.
There has been no material change to our Risk Factors from those presented in our Form 10-K for the fiscal year ended December 31, 2010.
None.
Item 5. Other Information.
None.
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31.1
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Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer of the Company.
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|
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|
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31.2
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Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of the Company.
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|
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32.1
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Section 1350 Certification of the Chief Executive Officer.
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|
|
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32.2
|
Section 1350 Certification of the Chief Financial Officer.
|
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Tanke Biosciences Corporation
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||
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November 21, 2011
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By:
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/s/ Guixiong Qiu
|
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Guixiong Qiu
Chief Executive Officer
(Principal Executive Officer)
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||
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November 21, 2011
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By:
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/s/ Gilbert Kwong-Yiu Lee
|
|
Gilbert Kwong-Yiu Lee
Chief Financial Officer
(Principal Accounting Officer)
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||
Exhibit Index
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31.1
|
Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer of the Company.
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|
|
|
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31.2
|
Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of the Company.
|
|
|
|
|
32.1
|
Section 1350 Certification of the Chief Executive Officer
|
|
|
|
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32.2
|
Section 1350 Certification of the Chief Financial Officer
|