Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the results of operations and financial condition should be read in conjunction with the historical financial statements of Shangrao Bai Hua Zhou Industrial Co., Ltd., our variable interest entity (“Shangrao”), and notes to those financial statements for the years ended December 31, 2011 and 2010, that are included in our Current Report on Form 8-K/A (Amendment No.2) filed on October 12, 2012 (the “Form 8-K”), as well as our unaudited financial statements for the quarter ended September 30, 2012 and 2011 included in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth in Item 2.01 of the Form 8-K under the caption "Risk Factors," as well as our Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 2 of Part I of this report, our consolidated financial statements and related notes included in Item 1 of Part I of this report and our consolidated financial statements and related notes, our Management's Discussion and Analysis of Financial Condition and Results of Operations and the other information in the Form 8-K. Readers should carefully review those risks, as well as additional risks described in other documents we file from time to time with the Securities and Exchange Commission. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.
All amounts are in U.S. Dollars unless otherwise noted.
Overview
Through our variable interest entity, Shangrao, we provide landscape services and nursery stock sales to residential, industrial, and commercial customers in Jiangxi and surrounding provinces. Our services include all aspects of landscape design, construction and maintenance. To date we have emphasized the development of our own nursery stock consisting of both low margin items and higher margin rare and expensive species. Consequently we engage in harvesting, processing and sales of primeval trees, the breeding, cultivation and sale of valuable and rare seedlings, the cultivation and sale of high-grade ancient bonsai tree stump and wood carvings.
Recent Developments
On June 29, 2012, we acquired 100% of the issued and outstanding capital stock of Bai Hua Zhou Green Resources (China) Investment Group Limited
(“Baihuazhou”)
in exchange for 20,000,000 shares of our common stock and 50,000 shares of our Series A Convertible Preferred Stock convertible into an additional 509,800,000 shares, representing in the aggregate approximately 95% of our issued and outstanding shares of common stock on an as converted basis immediately after the consummation of the acquisition.
The following chart reflects our organizational structure as of the date of this report:
Dionics, Inc. (a Delaware corporation)
|
100%
|
Bai Hua Zhou Green Resources (China) Investment Group Limited (BVI)
(“Baihuazhou”)
|
100%
|
Green Resources Investment Group Limited (HK)
(“Baihuazhou HK”)
|
100%
|
Shangrao Baihuazhou Green Resources Agricultural Technology Development Co., Ltd. (PRC)
(“WFOE”)
|
VIE Contractual Arrangements:
| Exclusive Business Cooperation Agreement
| Exclusive Option Agreement
| Share Pledge Agreement
Power of Attorney
Loan Agreement
|
Shangrao Bai Hua Zhou Industrial Co. Ltd. (PRC)
(“Shangrao”)
The Acquisition was accounted for as a recapitalization effected by a share exchange, whereby Baihuazhou is considered the acquirer for accounting and financial reporting purposes. The assets and liabilities of the acquired entity have been brought forward at their book value and no goodwill has been recognized.
At the time of the Acquisition, Baihuazhou owned all of the outstanding capital stock of Green Resources Investment Group Limited, a Hong Kong company (“Baihuazhou HK”). Baihuazhou HK, in turn, owned all of the outstanding capital stock of Shangrao Baihuazhou Green Resources Agricultural Technology Development Co., Ltd. (“WFOE”), a PRC company. WFOE has entered into a series of agreements we refer to as the “VIE Agreements” whereby WFOE controls the operations of and is entitled to receive the pre-tax profits of our variable interest entity, Shangrao Bai Hua Zhou Industrial Co. Ltd. (“Shangrao”), a PRC company. Thus, as a result of the Acquisition of Baihuazhou, we have acquired the economic benefits of the operations of Shangrao and the financial statements included in this report include the results of the historical operations of Shangrao.
Our revenue is derived entirely from the management and other fees we are entitled to receive from Shangrao under the Exclusive Business Cooperation Agreement, which fees are to be equal to the pre-tax profits of Shangrao. Our ability to collect those fees depends upon the validity and enforceability of those agreements under the laws, rules and regulations of the PRC. If a PRC government authority or court were to determine that those agreements were for any reason to be in breach of any existing or future PRC law, rule or regulation, it would have broad authority in
dealing with such a breach, including revoking the business licenses and/or the licenses or certificates of Shangrao, and /or voiding the VIE Agreements, discontinuing or restricting the operations of Shangrao, or taking other regulatory or enforcement actions that could adversely affect our business, results of operations and financial condition. In addition, if PRC tax authorities were to determine that the terms of those agreements are not reflective of an arms’ length transaction, they could adjust our income and expenses, which could result in our being subject to higher tax liabilities, or cause other adverse financial consequences.
Results of Operations
This discussion should be read in conjunction with our financial statements included elsewhere in this report.
Comparison of the Nine Months Ended September 30, 2012 and 2011
All amounts, other than percentages, are in U.S. dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Increase
|
|
|
% increase
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
(decrease)
|
|
|
(decrease)
|
|
|
|
|
2012
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
18,244,507
|
|
|
|
100
|
%
|
|
$
|
16,781,215
|
|
|
|
100
|
%
|
|
|
1,463,292
|
|
|
|
9
|
%
|
|
Cost of Sales
|
|
|
5,553,421
|
|
|
|
30
|
%
|
|
|
5,201,814
|
|
|
|
31
|
%
|
|
|
351,607
|
|
|
|
7
|
%
|
|
Gross profit
|
|
|
12,691,086
|
|
|
|
70
|
%
|
|
|
11,579,401
|
|
|
|
69
|
%
|
|
|
1,111,685
|
|
|
|
10
|
%
|
|
Selling Expenses
|
|
|
645,032
|
|
|
|
4
|
%
|
|
|
131,956
|
|
|
|
1
|
%
|
|
|
513,076
|
|
|
|
389
|
%
|
|
General and Administrative Expenses
|
|
|
931,856
|
|
|
|
5
|
%
|
|
|
112,070
|
|
|
|
1
|
%
|
|
|
819,786
|
|
|
|
731
|
%
|
|
Income from operations
|
|
|
11,114,198
|
|
|
|
61
|
%
|
|
|
11,335,375
|
|
|
|
68
|
%
|
|
|
(221,177
|
)
|
|
|
-2
|
%
|
|
Subsidy income
|
|
|
10,866
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
126,537
|
|
|
|
1
|
%
|
|
|
10,446
|
|
|
|
0
|
%
|
|
|
116,091
|
|
|
|
1111
|
%
|
|
Interest expenses
|
|
|
(36,669
|
)
|
|
|
0
|
%
|
|
|
(633,922
|
)
|
|
|
-4
|
%
|
|
|
597,253
|
|
|
|
-94
|
%
|
|
Income before provision for income tax
|
|
|
11,214,932
|
|
|
|
61
|
%
|
|
|
10,711,899
|
|
|
|
64
|
%
|
|
|
503,033
|
|
|
|
5
|
%
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
0
|
%
|
|
|
-
|
|
|
|
0
|
%
|
|
|
-
|
|
|
|
|
|
|
Net income
|
|
$
|
11,214,932
|
|
|
|
61
|
%
|
|
$
|
10,711,899
|
|
|
|
64
|
%
|
|
|
503,033
|
|
|
|
5
|
%
|
Revenue
For the nine months ended September 30, 2012, we reported revenue of $18,244,507, an increase of $1,463,292, or 9%, from revenue of $16,781,215 for the nine months ended September 30, 2011. The increase was attributable to the Key Greening Project contracts we entered into and completed during the first quarter of 2012. Most of our customers in the first quarter of 2012 were contractors for the Key Greening Projects approved by the local government of Shangrao. The Key Greening Projects, planned and announced in 2011, comprise the development and construction with governmental funding of public parks, landscape zones, infrastructures, and tourism, sightseeing and hospitality projects in the municipality of Shangrao and surrounding counties. To guarantee a stable supply of nursery plants, contractors for the Key Greening Projects would enter into large-volume contracts with major suppliers like us. Therefore, our revenue during the nine months ended September 30, 2012 has gone up significantly compared with same period last year. In addition, the contractors with public funds granted by the governments tend to pay higher price for on-time delivery, which further boosted our revenues and helped increase our gross profit by 1%.
The subsidy income represents compensation from the local Nursery Bureau.
Costs of Sales
Costs of sales increased by $351,607, or 7%, to $5,553,421 for the nine months ended September 30, 2012, as compared to $5,201,814 for the nine months ended September 30, 2011. The cost of sales for the reporting period accounts for 30% of total revenues, representing a 1% decrease from the same period last year. The decrease was primarily due to the higher sales price paid by Key Greening Project contractors.
Selling Expenses
Selli
ng expenses for the nine months ended September 30, 2012 increased by $513,076, or 389%, to $645,032, as compared to $131,956 for the same period last year. The increase in selling expenses is primarily due to an increase of $336,516 in sales commissions accrued for sales persons, and an increase of $77,544 in business advertising and promotion expenses. We paid approximately $189,782 for sales person salaries, training, entertainment and travel for the reporting period compared to $73,264 for the same period in 2011. Sales person salaries increased by $33,296 as a result of pay raises.. Training expenses increased by $59,258 because we focused more on sales persons’ business development capabilities. The increase of $23,964 in travel and entertainment expense was incurred for business development.
General and Administrative Expenses
General and administrative expenses for the nine months ended September 30, 2012 increased by $819,786 or 731% to $931,856, as compared to $112,070 for the nine months ended September 30, 2011. As a percentage of revenue, the general and administrative expenses increased by 4%. The increase in G&A expenses was due in large part to an increase of $282,568 in legal and auditing fees related to the acquisition of Baihuazhou and an increase of $208,414 in business advertising and promotion expenses.
We had a non-cash expense in depreciation of $9,071 in the current period compared with $2,241 last period. We paid approximately $438,626 for salaries, rent, training, entertainment, travel and other office expenses for the nine months ended September 30, 2012. In comparison, we paid $110,672 for salaries, rent, training, entertainment, travel and office expenses for the nine months ended September 30, 2011. The salary paid to G&A persons increased by $92,474 due to a pay raise. The increase of $144,345 in training, travelling and entertainment is related to our focus on management and staff improvement and business development. Office and other expenses also increased by $91,135.
Operating Income
Operating income for the nine months ended September 30, 2012 decreased by $221,177, or 2%, to $11,114,198 from $11,335,375 for the nine months ended September 30, 2011, primarily due to the significant growth in operating and G&A expenses, which decreased our overall operating income by 7% between the periods.
Interest Income and Expenses
Total interest income for the nine months ended September 30, 2012 increased by $116,091 to $126,537 from $10,446 for the nine months ended September 30, 2011, primarily due to the interest received from the related party loans to Jiahe and Li Xiaoling. Both Jiahe and Li Xiaoling have paid off the entire outstanding amount, including principal and interest, as of September 30, 2012.
Total interest expenses for the nine months ended September 30, 2012 decreased by $597,253, or 94%, to $36,669 from $633,922 for the nine months ended September 30, 2011, primarily due to the related party loan from Jiahe during 2011. The entire loan from Jiahe had been paid off as of December 31, 2011.
Net Income
Net income for the nine months ended September 30, 2012 increased by $503,033, or 5%, to $11,214,932, as compared to $10,711,899 for the nine months ended September 30, 2011. The increase is primarily due to the increase in sales in terms of volume and price.
Comparison of the Three Months Ended September 30, 2012 and 2011
All amounts, other than percentages, are in U.S. dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Increase
|
|
|
% increase
|
|
|
|
|
For the Three Months Ended September 30,
|
|
|
(decrease)
|
|
|
(decrease)
|
|
|
|
|
2012
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
4,954,820
|
|
|
|
100
|
%
|
|
$
|
5,478,081
|
|
|
|
100
|
%
|
|
|
(523,261
|
)
|
|
|
-10
|
%
|
|
Cost of Sales
|
|
|
1,497,352
|
|
|
|
30
|
%
|
|
|
1,335,358
|
|
|
|
24
|
%
|
|
|
161,994
|
|
|
|
12
|
%
|
|
Gross profit
|
|
|
3,457,468
|
|
|
|
70
|
%
|
|
|
4,142,723
|
|
|
|
76
|
%
|
|
|
(685,255
|
)
|
|
|
-17
|
%
|
|
Selling Expenses
|
|
|
169,859
|
|
|
|
3
|
%
|
|
|
69,028
|
|
|
|
1
|
%
|
|
|
100,831
|
|
|
|
146
|
%
|
|
General and Administrative Expenses
|
|
|
437,342
|
|
|
|
9
|
%
|
|
|
36,990
|
|
|
|
1
|
%
|
|
|
400,352
|
|
|
|
1082
|
%
|
|
Income from operations
|
|
|
2,850,267
|
|
|
|
58
|
%
|
|
|
4,036,705
|
|
|
|
74
|
%
|
|
|
(1,186,438
|
)
|
|
|
-29
|
%
|
|
Subsidy income
|
|
|
7,863
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,877
|
|
|
|
0
|
%
|
|
|
9,962
|
|
|
|
0
|
%
|
|
|
(7,085
|
)
|
|
|
-71
|
%
|
|
Interest expenses
|
|
|
(12,231
|
)
|
|
|
0
|
%
|
|
|
(148,419
|
)
|
|
|
-3
|
%
|
|
|
136,188
|
|
|
|
-92
|
%
|
|
Income before provision for income tax
|
|
|
2,848,776
|
|
|
|
57
|
%
|
|
|
3,898,248
|
|
|
|
71
|
%
|
|
|
(1,049,472
|
)
|
|
|
-27
|
%
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
0
|
%
|
|
|
-
|
|
|
|
0
|
%
|
|
|
0
|
|
|
|
|
|
|
Net income
|
|
$
|
2,848,776
|
|
|
|
57
|
%
|
|
$
|
3,898,248
|
|
|
|
71
|
%
|
|
|
(1,049,472
|
)
|
|
|
-27
|
%
|
Revenue
For the three months ended September 30, 2012, we reported revenue of $4,954,820, a decrease of $523,261, or 10%, from revenue of $5,478,081 for the three months ended September 30, 2011. The better performance in the third quarter last year was driven by Theme Park Projects approved by the local government of Shangrao, which included The Olympic Sports Center and Dragon Lake Park. In addition, the boom of real estate last year caused significant growth in our revenue. To guarantee a stable supply of nursery plants, contractors for the Theme Park Projects and real estate developers would enter into large-volume contracts with major suppliers like us. However, the real estate market began to slump in late 2011. Consequently, our revenue during the third quarter last year was higher compared with same period this year.
The subsidy income represents compensation from the local Nursery Bureau.
Costs of Sales
Costs of sales increased by $161,994 to $1,497,352 for the three months ended September 30, 2012, compared to $1,335,358 for the three months ended September 30, 2011. The cost of sales for the reporting period accounts for 30% of total revenue, representing a 6% increase from the same period last year. Cost of sales as a percentage of revenue was lower last year due to project contractors and developers having paid a higher price to secure an on-time delivery of the nursery plants.
Selling Expenses
Selli
ng expenses for the three months ended September 30, 2012 increased by $100,831 to $169,859, as compared to $69,028 for the same period last year. The increase in selling expenses is attributable to an increase of $78,654 in sales commissions to sales persons, an a $16,120 increase in salary for sales people due to a pay raise. We paid approximately $6,522 for training, entertainment and travel for the reporting period compared to $1,731 for the same period in 2011.
General and Administrative Expenses
General and administrative expenses for the three months ended September 30, 2012 increased by $400,352 to $437,342 as compared to $36,990 for the three months ended September 30, 2011. As a percentage of revenue, general and administrative expenses increased by 8%. The increase in G&A included a $21,352 increase in legal and auditing fees and a $172,628 increase in advertising expenses for business expansion. We paid $150,699 for staff training, travelling, entertainment, and office expenses for the reporting period compared to $2,596 for the same period in 2011.
Operating Income
Operating income for the three months ended September 30, 2012 decreased by $1,186,438, or 29%, to $2,850,267 from $4,036,705 for the three months ended September 30, 2011, primarily due to the decrease in revenue and decrease in overall sales prices compared with the higher prices charged to project contractors and real estate developers in the same period last year, and the higher operating and G&A expenses incurred in the current period.
Interest Income and Expenses
Total interest income for the three months ended September 30, 2012 decreased by $7,085 to $2,877 from $9,962 for the three months ended September 30, 2011, primarily because Jiahe has paid off the entire outstanding amount, including principal and interest, as of June 30, 2012.
Total interest expenses for three months ended September 30, 2012 decreased by $136,188, or 92%, to $12,231 from $148,419 for the nine months ended September 30, 2011, primarily due to the related party loan from Jiahe during 2011. The entire loan from Jiahe had been paid off as of December 31, 2011.
Net Income
Net income for the three months ended September 30, 2012 decreased by $1,049,472, or 27%, to $2,848,776, as compared to $3,898,248 for the three months ended September 30, 2011, primarily as a result of the reasons discussed above.
Liquidity and Capital Resources
General
Cash and cash equivalents totaled $618,592 at September 30, 2012. As of September 30, 2012, our accounts receivable increased by $4,905,827, or 974%, to $5,409,524 from $503,697 at December 31, 2011, primarily due to sales transactions incurred in the current quarter. Customers are given on average a one year credit term, with new customers normally given a 6 months credit term. We normally concentrate more on collecting our accounts receivable at year end. For this reason, accounts receivable for the reporting period are high.
As of September 30, 2012, the average account receivables turnover day increased to 43 days from 20 days since December 31, 2011.
Our current ratio was approximately 2:1 (current assets to current liabilities) as of December 31, 2011 and improved to approximately 6:1 as of September 30, 2012.
The average age of inventory decreased to 372 days as of September 30, 2012 from 545 days as of December 31, 2011 as a result of quicker turnover and fewer purchases.
The following is a summary of our cash flows provided by (used in) operating, investing, and financing activities during the periods indicated:
|
|
|
For the Nine Months Ended September 30,
|
|
|
Dollar Increase
|
|
|
% increase
|
|
|
|
|
2012
|
|
|
2011
|
|
|
(decrease)
|
|
|
(decrease)
|
|
|
Net cash provided by operating activities
|
|
$
|
7,233,877
|
|
|
$
|
14,543,505
|
|
|
|
-7,309,628
|
|
|
|
-50
|
%
|
|
Net cash (used in) investing activities
|
|
|
(2,468,811
|
)
|
|
|
(3,396,495
|
)
|
|
|
927,684
|
|
|
|
-27
|
%
|
|
Net cash (used in) financing activities
|
|
|
(4,570,071
|
)
|
|
|
(10,956,605
|
)
|
|
|
6,386,534
|
|
|
|
-58
|
%
|
|
Effect of exchange rate on cash and cash equivalents
|
|
|
3,676
|
|
|
|
7,880
|
|
|
|
-4,204
|
|
|
|
-53
|
%
|
|
Net cash inflow
|
|
$
|
198,671
|
|
|
$
|
198,285
|
|
|
|
386
|
|
|
|
0
|
%
|
Cash Flows from Operating Activities
For the nine months ended September 30, 2012, net cash generated by operations was $7,233,877 compared to net cash provided by operations of $14,543,505 for the nine months ended September 30, 2011. The decrease of $7,309,628 or 50% in net cash provided by operations was primarily due to a decrease in sales and slow accounts receivable turnover compared with same period last year. However, all the customers are within the credit terms given.
Cash Flows from Investing Activities
For the nine months ended September 30, 2012, net cash used in investing activities was $2,468,811 compared to net cash used in investing activities of $3,396,495 for the nine months ended September 30, 2011. The decrease of $927,684 or 27% in net cash used in investing activities was primarily due to the receipt of the related party loan from Jiahe in the amount of $11,627,741 in total including principal and interest offset by a loan to Jiahe of $8,702,657. We also prepaid $5,943,344 as a deposit to purchase an office building. The purchase of additional office equipment and motor vehicles has used $123,092 during the reporting period. The outflow of $3,265,923 in 2011 represented a third party loan provided.
Cash Flows from Financing Activities
For the nine months ended September 30, 2012, net cash used in financing activities was $4,570,071 compared to net cash used in financing activities of $10,956,605 during the nine months ended September 30, 2011. The higher net cash used in financing activities for the period ended September 30, 2011 was primarily due to the payment of the related party loan from Jiahe in an amount of $15,760,819 offset by repayment of a loan in the amount of $3,278,952, and offset by additional contributions from the owners of $1,539,001. We paid $3,746,170 to buy back shares from one of the previous shareholders in the current period.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, financings, or other relationships that are currently material or reasonably likely to be material to our financial position or results of operations.
Inflation
In recent years, the Chinese economy has experienced periods of rapid expansion and highly fluctuating rates of inflation. During the past ten years, the rate of inflation in China has been as high as 20.7% and as low as -2.2%. These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products and our company.
Critical Accounting Policies
The discussion and analysis of our results of operations and liquidity and capital resources are based on our financial statements, which have been prepared in accordance with GAAP. In connection with the preparation of financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. The assumptions, estimates and judgments included within these estimates are based on historical experience, current trends and other factors we believe to be relevant at the time the financial statements were prepared. On a regular basis, the accounting policies, assumptions, estimates and judgments are reviewed to ensure that the financial statements are presented fairly and in accordance with GAAP.
