Item 1. Financial Statements (unaudited).
TANKE BIOSCIENCES CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
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March 31,
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December 31,
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|
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2013
|
|
|
2012
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|
|
|
|
|
|
|
|
|
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ASSETS
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|
|
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Current assets:
|
|
|
|
|
|
|
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Cash and cash equivalents
|
|
$
|
5,585,982
|
|
|
$
|
6,168,754
|
|
|
Restricted cash
|
|
|
-
|
|
|
|
231,838
|
|
|
Accounts receivable, net
|
|
|
1,845,499
|
|
|
|
1,986,663
|
|
|
Inventories, net
|
|
|
1,396,876
|
|
|
|
1,414,600
|
|
|
Loans to customer and supplier
|
|
|
2,900,898
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|
|
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2,892,868
|
|
|
Other receivables
|
|
|
752,715
|
|
|
|
483,884
|
|
|
Prepayments
|
|
|
9,208,129
|
|
|
|
9,029,524
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|
|
Other current assets
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|
|
18,495
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|
|
|
132,746
|
|
|
Deferred tax assets
|
|
|
27,192
|
|
|
|
27,042
|
|
|
Total current assets
|
|
|
21,735,786
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|
|
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22,367,919
|
|
|
|
|
|
|
|
|
|
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Property, plant and equipment, net
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5,157,311
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|
|
|
4,813,232
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|
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Construction in progress
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|
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557,865
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|
|
|
295,248
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|
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Intangible asset, net
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|
1,204,323
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|
|
|
1,238,025
|
|
|
Other non-current assets
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|
|
-
|
|
|
|
134,736
|
|
|
Total assets
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|
$
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28,655,285
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|
|
$
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28,849,160
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|
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|
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LIABILITIES AND EQUITY
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Current liabilities:
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|
|
|
|
|
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Accounts payable
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$
|
659,249
|
|
|
$
|
646,649
|
|
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Advance from customers
|
|
|
245,825
|
|
|
|
128,321
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|
|
Other payables and accrued liabilities
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|
|
732,814
|
|
|
|
942,793
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|
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Income tax payable
|
|
|
1,849,844
|
|
|
|
1,842,139
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|
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Convertible notes, net
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7,509,232
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|
|
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7,267,677
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|
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Current portion of long-term borrowings
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796,950
|
|
|
|
1,268,106
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|
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Total current liabilities
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11,793,914
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|
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12,095,685
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|
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|
|
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Advance from government grant
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49,825
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|
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|
37,948
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|
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Long-term borrowings
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1,434,510
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|
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|
792,567
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Total liabilities
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|
$
|
13,278,249
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|
|
$
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12,926,200
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|
|
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Commitments and contingencies
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EQUITY
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Common stock, $0.001 par value, 50,000,000 shares authorized, 13,324,083 issued and outstanding as of March 31, 2013 and December 31, 2012
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13,324
|
|
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|
13,324
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|
|
Additional paid-in capital
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|
12,220,181
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|
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|
12,220,181
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Retained earnings
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1,809,407
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|
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|
2,485,736
|
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Statutory reserve
|
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373,406
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|
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373,406
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Accumulated other comprehensive income
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|
790,840
|
|
|
|
658,870
|
|
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Total Tanke Biosciences Corporation stockholders' equity
|
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|
15,207,158
|
|
|
|
15,751,517
|
|
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Non-controlling interest
|
|
|
169,878
|
|
|
|
171,443
|
|
|
Total Equity
|
|
|
15,377,036
|
|
|
|
15,922,960
|
|
|
Total Liabilities and Equity
|
|
$
|
28,655,285
|
|
|
$
|
28,849,160
|
|
See accompanying notes to the unaudited condensed consolidated financial statements
TANKE BIOSCIENCES CORPORATION
(
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
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Three Months Ended
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March 31,
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|
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2013
|
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|
2012
|
|
|
|
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|
|
|
|
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Net sales
|
|
$
|
4,659,454
|
|
|
$
|
4,540,442
|
|
|
Costs of sales
|
|
|
(2,993,828
|
)
|
|
|
(2,953,211
|
)
|
|
Gross profit
|
|
|
1,665,626
|
|
|
|
1,587,231
|
|
|
Selling expenses
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|
|
(659,614
|
)
|
|
|
(546,053
|
)
|
|
Administrative expenses
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|
|
(981,590
|
)
|
|
|
(541,004
|
)
|
|
Depreciation and amortization
|
|
|
(64,315
|
)
|
|
|
(11,666
|
)
|
|
Income from operations
|
|
|
(39,893
|
)
|
|
|
488,508
|
|
|
Other income/expense
|
|
|
3,268
|
|
|
|
-
|
|
|
Interest income
|
|
|
7,333
|
|
|
|
21,201
|
|
|
Interest expense
|
|
|
(215,059
|
)
|
|
|
(373,087
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)
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|
Amortization of discount on notes
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|
(402,394
|
)
|
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|
(690,903
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)
|
|
Loss before income taxes
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|
|
(646,745
|
)
|
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(554,281
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)
|
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Income tax expense
|
|
|
(32,099
|
)
|
|
|
(116,696
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)
|
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Net loss
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|
$
|
(678,844
|
)
|
|
$
|
(670,977
|
)
|
|
Net loss attributable to non-controlling interest
|
|
|
(2,515
|
)
|
|
|
-
|
|
|
Net loss attributable to Tanke Biosciences Corporation
|
|
$
|
(676,329
|
)
|
|
$
|
(670,977
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(678,844
|
)
|
|
$
|
(670,977
|
)
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
131,970
|
|
|
|
112,486
|
|
|
Comprehensive loss
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|
$
|
(546,874
|
)
|
|
$
|
(558,491
|
)
|
|
Comprehensive loss attributable to non-controlling interest
|
|
|
(1,572
|
)
|
|
|
-
|
|
|
Comprehensive loss attributable to Tanke Biosciences Corporation
|
|
$
|
(545,302
|
)
|
|
$
|
(558,491
|
)
|
|
Loss per common share:
|
|
|
|
|
|
|
|
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Basic and diluted
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|
$
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(0.05
|
)
|
|
$
|
(0.05
|
)
|
|
Weighted average number of common shares used in computation
|
|
|
|
|
|
|
|
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|
Basic and diluted
|
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|
13,324,083
|
|
|
|
13,324,083
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|
See accompanying notes to the unaudited condensed consolidated financial statements
TANKE BIOSCIENCES CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three Months Ended
|
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|
|
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March 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(678,844
|
)
|
|
$
|
(670,977
|
)
|
|
Adjustments to reconcile net loss to net cash (used in)
|
|
|
|
|
|
|
|
|
|
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
179,886
|
|
|
|
123,802
|
|
|
Amortization of discount on convertible notes payable
|
|
|
402,394
|
|
|
|
690,903
|
|
|
Amortization of capitalized offering costs
|
|
|
115,688
|
|
|
|
198,635
|
|
|
Provision for bad debt
|
|
|
1,863
|
|
|
|
-
|
|
|
Inventory provision
|
|
|
232
|
|
|
|
-
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
139,301
|
|
|
|
196,693
|
|
|
Inventories
|
|
|
17,492
|
|
|
|
(172,013
|
)
|
|
Note receivables and payables - related parties
|
|
|
-
|
|
|
|
165,528
|
|
|
Other receivables
|
|
|
(215,280
|
)
|
|
|
(16,744
|
)
|
|
Deferred tax asset
|
|
|
(150
|
)
|
|
|
(395
|
)
|
|
Prepayments
|
|
|
(178,605
|
)
|
|
|
316,050
|
|
|
Other current assets
|
|
|
(1,437
|
)
|
|
|
(29,549
|
)
|
|
Other non-current assets
|
|
|
134,736
|
|
|
|
(31,264
|
)
|
|
Advance from government grant
|
|
|
11,877
|
|
|
|
(34,871
|
)
|
|
Accounts payable
|
|
|
12,600
|
|
|
|
(270,697
|
)
|
|
Other payables and accrued liabilities
|
|
|
(168,152
|
)
|
|
|
85,169
|
|
|
Income tax payable
|
|
|
7,705
|
|
|
|
(41,595
|
)
|
|
Advance from customer
|
|
|
117,504
|
|
|
|
-
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(101,190
|
)
|
|
|
508,675
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
Increase in loans to customer and supplier
|
|
|
-
|
|
|
|
(180,028
|
)
|
|
Purchase of property and equipment
|
|
|
(746,033
|
)
|
|
|
(193,633
|
)
|
|
Purchase of intangible assets
|
|
|
-
|
|
|
|
(6,484
|
)
|
|
Net cash used in investing activities
|
|
|
(746,033
|
)
|
|
|
(380,145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
Change in restricted cash
|
|
|
231,838
|
|
|
|
-
|
|
|
Payment on convertible notes
|
|
|
(160,839
|
)
|
|
|
-
|
|
|
Proceeds from long-term borrowings
|
|
|
955,200
|
|
|
|
-
|
|
|
Principal payments for long-term borrowings
|
|
|
(796,000
|
)
|
|
|
(304,738
|
)
|
|
Net cash provided by (used in) financing activities
|
|
|
230,199
|
|
|
|
(304,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate fluctuations on cash and cash equivalents
|
|
|
34,252
|
|
|
|
112,486
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(582,772
|
)
|
|
|
(63,722
|
)
|
|
Cash and cash equivalents, beginning of period
|
|
|
6,168,754
|
|
|
|
7,700,156
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
5,585,982
|
|
|
$
|
7,636,434
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
99,371
|
|
|
$
|
21,051
|
|
|
Cash paid for income taxes
|
|
$
|
34,579
|
|
|
$
|
168,472
|
|
See accompanying notes to the unaudited condensed consolidated financial statements
TANKE BIOSCIENCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
In these unaudited condensed 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.
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 11 below) with net proceeds of $6,522,563. Such proceeds will be used to finance the operations and growth of Guangzhou Tanke.
As Tanke Biosciences has complete control over Guangzhou Tanke, all assets presented on the balance sheet of Tanke Biosciences are available to settle obligations of Tanke Biosciences. Furthermore, there are no liabilities on the balance sheets of Guangzhou Tanke that do not have recourse against the assets of Tanke Biosciences. As Guangzhou Tanke is our sole operating entity, nearly all operating assets and liabilities are those of Guangzhou Tanke.
“RMB” and “Renminbi” refer to the legal currency of China and “$”, “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, poultry, and cattle, as well as farmed fish.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation
The Company’s unaudited condensed consolidated financial statements have been stated in US dollars and prepared in accordance with generally accepted accounting principles in the United States of America (“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 three months ended March 31, 2013 are not indicative of the results that may be expected for the fiscal year ending December 31, 2013. The condensed consolidated balance sheet information as of December 31, 2012 was derived from the audited consolidated financial statements included in the Form 10-K. These unaudited condensed financial statements and related notes should be read in conjunction with our audited annual financial statements for the year ended December 31, 2012 included in our Form 10-K filed with the Securities and Exchange Commission on April 15, 2013.
Basis of consolidation
These unaudited condensed consolidated financial statements include the financial statements of the Company and its subsidiaries (the “Group''). All inter-company balances and transactions within the Group have been eliminated.
Use of Estimates
In preparing these unaudited condensed 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.
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, Hong Kong and the United States. 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.
Concentrations of Customers and Suppliers
Substantially all of the Company’s revenue is generated from buyers in mainland China. All the Company’s suppliers are located in mainland China.
For the three months ended March 31, 2013, we had no customer that accounted for more than 10% of our consolidated revenues. For the three months ended March 31, 2012, the three largest customers accounted for 13%, 12% and 10% of consolidated revenues.
For the three months ended March 31, 2013, we had three suppliers that accounted for 16%, 12%, and 11% of our total raw material purchase. For the three months ended March 31, 2012, the three largest suppliers accounted for 17%, 14% and 14% of our total raw material purchase.
Cash and Cash Equivalents
The Company considers all highly liquid investments with initial maturities of three months or less to be cash equivalents.
Restricted Cash
Deposits that are restricted in use are classified as restricted cash. As of December 31, 2012, the Company had restricted cash in an escrow account set aside for use on Investor Relations activities (approximately $232,000). In February 2013, this cash was used to pay for interest and principal of the convertible notes.
|
Trade and Other Receivables
|
|
The Company periodically assesses its accounts receivable for collectability on a specific identification basis. If collectability of an account becomes unlikely, an allowance is recorded for that doubtful account. Once collection efforts have been exhausted, the account receivable is written off against the allowance. The Company does not require collateral for trade or other accounts receivable.
|
|
Inventories
|
|
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the weighted average method. The cost of inventories includes the purchase cost and other costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale.
|
|
As of March 31, 2013 and December 31, 2012, the Company’s provision for slow-moving or defective inventories amounted to $42,194 and $41,962, respectively.
|
Prepayments
Prepayments represent cash paid in advance to suppliers for purchases of raw materials. During the past two years, as cost of raw materials continued to rise, it has become a common practice in our industry to secure supplies of raw material and to lock in prices by entering into year-long agreements with major suppliers and prepay projected usage. In anticipation of a new manufacturing facility starting up and launching of a new product category of premix additives in 2013, we have increased our prepayments substantially in the 4th quarter of 2012. We obtained either formally or informally intelligence of their financial condition and continuously monitor their status. Based on our experience, we anticipate that the prepayments are fully realizable and any unused amounts are fully collectible.
|
Property, Plant and Equipment
|
|
Property and equipment are stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use.
|
|
Depreciation of property and equipment is calculated using the straight-line method over their estimated useful lives. The estimated useful lives are as follows:
|
|
Buildings
|
15-20 years
|
|
Plant and machinery
|
3-20 years
|
|
Motor vehicle
|
10 years
|
|
Office equipment
|
3-10 years
|
|
Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred.
|
|
Upon sale or disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount less the proceeds from disposal is charged or credited to income.
|
|
Intangible Asset
|
The intangible asset primarily represented two land use rights and developed production technology, and they are recorded at cost less accumulated amortization.
|
According to the laws of China, land in the PRC is owned by the government and cannot be sold to an individual or company. However, the government grants the users a land use right to use the land. The land use rights granted to the Company are being amortized using the straight-line method over the lease term of fifty years.
During the second quarter of 2012, we acquired from an agriculture research institute the exclusive right to commercialize a new production technology and manufacturing process. We began amortization of the intangible asset in the third quarter of 2012 over a useful life of three years.
|
|
Impairment of Long-lived Assets
|
|
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. There were no impairments of long-lived assets for the periods presented.
|
Statutory Reserves
In accordance with the relevant laws and regulations of the PRC and the articles of associations of the Company, Guangzhou Tanke is required to allocate 10% of its net income reported in the PRC statutory accounts, after offsetting any prior years’ losses, to statutory reserve, on an annual basis. When the balance of such reserve reaches 50% of the respective registered capital of the subsidiaries, any further allocation is optional.
As of March 31, 2013 and December 31, 2012, the statutory reserves of the subsidiary already reached 50% of the registered capital of the subsidiary and, as a result, the Company did not allocate additional amounts to its statutory reserve.
The statutory surplus reserves can be used to offset prior years’ losses, if any, and may be converted into registered capital, provided that the remaining balances of the reserve after such conversion is not less than 25% of registered capital. The statutory surplus reserve is non-distributable.
The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 605-10, Revenue Recognition, and SEC Staff Accounting Bulletin No.104. Pursuant to these pronouncements, revenue is recognized when all of the following criteria are met:
|
- 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 March 31, 2013 and December 31, 2012, 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.
|
|
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.
|
|
Research and Development Costs
|
Research and development costs are charged to expense as incurred and are included in operating expenses after partially offset by grants from government sponsored projects.
|
Value Added Tax
|
|
In accordance with the relevant tax laws in the PRC, VAT is levied on the invoiced value of sales and is payable by the purchaser. The Company is required to remit the VAT it collects to the tax authority, but may deduct the VAT it has paid on eligible purchases. The difference between the amounts collected and paid is presented as VAT recoverable or payable balance on the balance sheet.
|
Income Taxes
|
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.
As of the end of March 31, 2013, an income tax liability of $1,849,844 was accrued based on an ongoing discussion among the local tax authority, the city government officials of Huadu, and Guangzhou Tanke, concerning income taxes owed during the years from 2009 to 2012. We have the full support of the local government and tax authority to quickly resolve this issue and the amount accrued should be sufficient to cover all late taxes plus any potential interest and penalty.
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.
|
Comprehensive loss 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 loss is the foreign currency translation adjustment.
|
Earnings per share (EPS)
Earnings per share is calculated in accordance with ASC 260-10 which requires the Company to calculate net income (loss) per share based on basic and diluted net income (loss) per share, as defined. Basic EPS excludes dilution and is computed by dividing net income (loss) by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Warrants and convertible notes were not included in the diluted EPS calculation because the Company had net losses for the three months ended March 31, 2013 and 2012 and the amounts are anti-dilutive.
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.
Foreign Currency Translation
The Company, its subsidiaries and Variable Interest Entity (“VIE”) 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 loss 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 “$”). Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates for the period. Stockholders’ equity is translated at historical exchange rates. Any translation adjustments are included as a foreign exchange adjustment in other comprehensive income, a component of stockholders’ equity.
|
Exchange rates used (RMB to USD)
|
|
2012
|
|
|
2013
|
|
|
Assets and liabilities
|
Balance sheet date (March 31)
|
|
|
0.1583
|
|
|
|
0.1594
|
|
|
|
Balance sheet date (December 31)
|
|
|
0.1585
|
|
|
|
N/A
|
|
|
Revenue and expenses
|
Period average (Three months ended March 31)
|
|
|
0.1585
|
|
|
|
0.1592
|
|
RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.
Financial Instruments
The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, due to/from related parties, notes payable, other payable and accrued liabilities and income tax payable approximate their fair values due to the short-term nature of these items. The carrying amounts of long-term borrowings approximate the fair value based on the Company’s expected borrowing rate for debt with similar remaining maturities and comparable risk.
Convertible notes are not carried at fair value due to the discounts for warrants and the beneficial conversion feature. As the interest on these notes approximates market interest, the fair value is their face value of $7,509,232.
It is management’s opinion that the Company is not exposed to significant interest, price or credit risks arising from these financial instruments.
Recent Accounting Updates
Management does not believe that any recently issued, but not yet effective accounting pronouncements would have a material impact on the accompanying financial statements.
3. INVENTORIES, NET
Inventories as of March 31, 2013 and December 31, 2012 consisted of the following.
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
748,778
|
|
|
$
|
636,319
|
|
|
Finished goods
|
|
|
461,934
|
|
|
|
576,509
|
|
|
Work in pogress
|
|
|
195,163
|
|
|
|
210,625
|
|
|
Packaging material
|
|
|
33,195
|
|
|
|
33,109
|
|
|
Less: Inventory allowance
|
|
|
(42,194
|
)
|
|
|
(41,962
|
)
|
|
|
|
$
|
1,396,876
|
|
|
$
|
1,414,600
|
|
4. ACCOUNTS RECEIVABLE
Accounts receivable as of March 31, 2013 and December 31, 2012 consisted of the following.
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account receivables
|
|
$
|
2,184,069
|
|
|
$
|
2,323,370
|
|
|
Less: Allowance for doubtful accounts
|
|
|
(338,570
|
)
|
|
|
(336,707
|
)
|
|
|
|
$
|
1,845,499
|
|
|
$
|
1,986,663
|
|
5. OTHER RECEIVABLES AND LOANS TO CUSTOMER AND SUPPLIER
Other receivables consisted of the following:
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Deposit and others
|
|
$
|
50,836
|
|
|
$
|
30,401
|
|
|
Business advance to staff
|
|
|
256,132
|
|
|
|
166,451
|
|
Business advance to directors
|
|
|
445,747
|
|
|
|
287,032
|
|
|
|
|
$
|
752,715
|
|
|
$
|
438,884
|
|
Advance to staff and directors represented advance payments made to directors for business development activities and to staff for business travel purposes. These outstanding amounts are expected to be repaid within a year.
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans to customer and supplier
|
|
$
|
2,900,898
|
|
|
$
|
2,892,868
|
|
|
|
|
$
|
2,900,898
|
|
|
$
|
2,892,868
|
|
Loans to customer and supplier represent 8% interest bearing notes to one of the Company’s customers and one supplier, both of which were issued in December 2011. Additional amounts were advanced in first quarter of 2012 based on the same terms. The amounts are expected to be repaid within a year of December 31, 2012. The customer is a longtime customer of ours in the aquaculture business, and has been our business partner in other projects. The supplier is in the packaging business and their business is growing rapidly that we have considered acquiring them. There is no concern of the collectability of the loans based on our assessment of their financial condition, and both companies have been making the required interest payments.
6. PREPAYMENTS AND OTHER CURRENT ASSETS
In order to secure key raw materials and supplies and to lock in rising purchase prices, the Company paid substantial amounts of cash in advance on purchase orders. Before contracts were signed and the following year’s projected purchases were prepaid, we evaluated these suppliers’ financial position and business condition. We only make prepayment arrangements with companies that are reputable in our industry and have strong financial position. Due to growth expectation in 2013 and new product launches that require significant amount of raw materials, and the threat of inflation and material shortages, we increased substantially our prepayments to secure supply of raw materials in 2013.
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepayments to suppliers
|
|
$
|
9,208,129
|
|
|
$
|
9,029,524
|
|
Other current assets as of March 31, 2013 and December 31, 2012 consisted of the following.
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred expenses
|
|
$
|
18,495
|
|
|
$
|
16,221
|
|
|
Other current assets
|
|
|
-
|
|
|
|
837
|
|
|
|
|
|
-
|
|
|
|
115,688
|
|
|
|
|
$
|
18,495
|
|
|
$
|
132,746
|
|
7. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment as of March 31, 2013 and December 31, 2012 consisted of the following.
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings and leasehold improvements
|
|
$
|
5,069,572
|
|
|
$
|
4,596,527
|
|
|
Plant and equipment
|
|
|
1,372,593
|
|
|
|
1,365,043
|
|
|
Motor vehicles
|
|
|
169,918
|
|
|
|
168,984
|
|
|
Office equipment
|
|
|
342,756
|
|
|
|
340,870
|
|
|
Total property, plant and equipment
|
|
|
6,954,839
|
|
|
|
6,471,423
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(1,797,528
|
)
|
|
|
(1,658,192
|
)
|
|
Property, plant and equipment, net
|
|
$
|
5,157,311
|
|
|
$
|
4,813,232
|
|
The Company has buildings on the site it occupies, including factory buildings. Due to the lack of a Land Use Right Certificate, the Company is unable to apply for the Property Ownership Certificate for the buildings. However, as the buildings are in use, the Company depreciates them over their expected useful lives.
We recorded depreciation expenses of $139,336 and $123,802 for the three months ended March 31, 2013 and 2012, respectively.
8. INTANGIBLE ASSET, NET
The intangible asset as of March 31, 2013 and December 31, 2012 consisted of the following.
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit for land use right
|
|
$
|
1,222,204
|
|
|
$
|
1,215,480
|
|
|
New production technology
|
|
|
478,170
|
|
|
|
475,540
|
|
|
Other
|
|
|
1,337
|
|
|
|
1,330
|
|
|
|
|
|
1,701,710
|
|
|
|
1,692,350
|
|
|
Less: Accumulated amortization
|
|
|
(497,388
|
)
|
|
|
(454,325
|
)
|
|
Intangible assets, net
|
|
$
|
1,204,323
|
|
|
$
|
1,238,025
|
|
On November 21, 2003, the Company applied to the Government of Huaqiao Town, Huadu District, Guangzhou, for the land use right of No. 2 Industry Area of Huaqiao Town (i.e., Laohutou Lot, Wangongtang) covering an area of around 430,000 square feet.
On October 22, 2010, the Company applied to the Administration Committee of Qingyuan Huaqiao Industrial District for the land use right covering an area of around 60 mu.
The Company has been amortizing the land use right at Huadu facility. The amortization of the land use right for the Qingyuan facility is expected to begin when construction of the new manufacturing facility commences.
We recorded amortization expenses of $43,063 and $270 for the three months ended March 31, 2013 and 2012, respectively.
9. OTHER NON-CURRENT ASSETS
Other non-current assets consisted of the following.
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Staff loan
|
|
$
|
-
|
|
|
$
|
134,736
|
|
|
Others
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
-
|
|
|
$
|
134,736
|
|
Staff loans are made to employees under terms that call for repayment of the amounts within two years.
10. OTHER PAYABLES AND ACCRUED LIABILITIES
Other payables and accrued liabilities as of March 31, 2013 and December 31, 2012 consisted of the following.
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other payables
|
|
$
|
25,169
|
|
|
$
|
22,930
|
|
|
Staff welfare payable
|
|
|
68,957
|
|
|
|
68,578
|
|
|
Accrued payroll
|
|
|
125,473
|
|
|
|
306,174
|
|
|
Value added tax payable
|
|
|
38,245
|
|
|
|
62,401
|
|
|
Registration rights penalties
|
|
|
460,206
|
|
|
|
460,206
|
|
|
Other tax payable
|
|
|
14,764
|
|
|
|
22,504
|
|
|
|
|
$
|
732,814
|
|
|
$
|
942,793
|
|
Other payables represent loans from third parties, which are interest free, unsecured and repayable on demand. Registration rights penalties are associated with the registration rights agreement. (See Note 11)
11. 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 of 1933 (“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). The registration statement was not declared effective by December 31, 2011, as such an Effectiveness Failure occurred and the Company accrued the full $460,204. The Company will continue to assess the likelihood of payments under this arrangement.
The warrants issued as a component of the units were valued using the Black-Scholes method using the following assumptions: (1) life of warrants of 3 years, (2) annualized volatility of 100%, (3) fair value of stock as of grant date of $1.15, (4) exercise price of $1.40, (5) annual dividend rate of 0%, and (6) discount rate of 1.34%. Such calculation resulted in a warrant value of $4,470,536.
The proceeds of the unit offering were allocated to the Notes and warrants based on their relative fair values on a weighted average basis, with the resulting allocated value of the warrants of $2,824,350 being classified to additional paid in capital. Such discount to the Notes is being amortized over their expected life.
The beneficial conversion feature associated with the issuance of the above Notes, amounted to $2,824,350, which has also been recorded as a discount to the convertible notes payable and is being amortized over the life of the Notes. The Notes do not contain any embedded derivatives which require liability classification.
As of February 10, 2013, the Company is in default on the Notes due to failure to pay the investors in full the $7,670,071 principal and accrued interest on February 9, 2013. Subsequently, the Company has released $229,018 from investor relations escrow to pay the accrued interest of $68,178 and principal of $160,839 to investors. The Company and the investor representatives are in ongoing discussions to develop a repayment plan for the remaining principal.
As of March 31, 2013, the book value of the Notes amounted to $7,509,232. There is no further unamortized discount remaining as of March 31, 2013.
12. INCOME TAX
The Company’s operating subsidiary, Guangzhou Tanke, is a “domestic enterprise” that is registered and operated in Guangzhou, the PRC. Income tax expense for the three months ended March 31, 2013 and 2012 of $32,099 and $116,696 respectively, represents the provision for current income tax expenses in the PRC. The statutory income tax rate in PRC is 25%.
The provision for income tax expense consists of the following components:
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Current provision
|
|
|
|
|
|
|
|
PRC
|
|
$
|
32,249
|
|
|
$
|
117,091
|
|
|
Deferred provision
|
|
|
|
|
|
|
|
|
|
PRC
|
|
|
(150
|
)
|
|
|
(395
|
)
|
|
|
|
$
|
32,099
|
|
|
$
|
116,696
|
|
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 (12.5%) 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). Beginning in 2012, Tanke Bio-Tech starts benefiting from a different reduced tax rate of 15% due to its status of an official new, high-tech company.
As of March 31, 2013 and December 31, 2012, the income tax payable for the Company amounted to $1,849,844 and $1,842,139, respectively. All of the Company’s U.S. net operating loss carry forward was fully reserved.
Significant components of the Company’s deferred tax asset are as follows:
Significant components of the Company’s deferred tax asset are as follows:
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Allowance for doubtful accounts in China
|
|
$
|
61,712
|
|
|
$
|
61,373
|
|
|
Net operating loss carryforward
|
|
|
3,172,379
|
|
|
|
2,995,201
|
|
|
Share based payment
|
|
|
1,127,078
|
|
|
|
1,047,130
|
|
|
Valuation allowance
|
|
|
(4,333,977
|
)
|
|
|
(4,076,661
|
)
|
|
Net deferred tax asset
|
|
$
|
27,192
|
|
|
$
|
27,042
|
|
The details of the Company’s long-term borrowings are as follows:
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Bank loans bearing interest at 7.36% and 6.15% per
|
|
|
|
|
|
|
|
annum, maturing on June 20, 2014 and March 19, 2015.
|
|
$
|
2,231,460
|
|
|
$
|
2,060,673
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Current portion
|
|
|
796,950
|
|
|
|
1,268,106
|
|
|
|
|
$
|
1,434,510
|
|
|
$
|
792,567
|
|
The loans are uncollateralized and consist of $1,275,120 (RMB 8,000,000) and $956,340 (RMB 6,000,000), bearing interest at 7.36% and 6.15% per annum, maturing on June 20, 2014 and March 19, 2015, respectively. Interest is calculated and paid on the 20th of each month. Principal payments are made on a quarterly basis on the $1,275,120 loan and on a semi-annual basis on the $956,340 loan.
14. GOVERNMENT GRANT
The government grant liability represents an advance from the Chinese government for research and development projects. The Company has recorded the grants received as a government grant liability, and ratably recognizes the amount as a reduction of research and development expense when the related research and development activities are performed. As of March 31, 2013 and December 31, 2012, government grant balances are $49,825 and $37,948, respectively.
15. SEGMENT INFORMATION
The Company operates in four segments: organic trace mineral additives, functional regulation additives, herbal medicinal additives and other revenues. Management oversees each of these operations separately.
Property, equipment and other assets are shared and not tracked separately by segment. Administrative expenses are also not tracked by segment. Following is a breakdown of revenue, costs of sales and gross profit by segment.
|
|
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2013
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues
|
|
|
|
|
|
|
|
|
|
Organic Trace Mineral Additives
|
|
$
|
3,882,320
|
|
|
$
|
3,385,908
|
|
|
Functional Regulation Additives
|
|
|
496,485
|
|
|
|
901,901
|
|
|
Herbal Medicinal Additives
|
|
|
79,498
|
|
|
|
42,585
|
|
|
Other
|
|
|
201,151
|
|
|
|
210,048
|
|
|
|
|
$
|
4,659,454
|
|
|
$
|
4,540,442
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment costs of sales
|
|
|
|
|
|
|
|
|
|
Organic Trace Mineral Additives
|
|
$
|
2,452,808
|
|
|
$
|
2,120,456
|
|
|
Functional Regulation Additives
|
|
|
307,155
|
|
|
|
582,823
|
|
|
Herbal Medicinal Additives
|
|
|
64,553
|
|
|
|
51,065
|
|
|
Other
|
|
|
169,312
|
|
|
|
198,867
|
|
|
|
|
$
|
2,993,828
|
|
|
$
|
2,953,211
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment gross profit
|
|
|
|
|
|
|
|
|
|
Organic Trace Mineral Additives
|
|
$
|
1,429,512
|
|
|
$
|
1,265,452
|
|
|
Functional Regulation Additives
|
|
|
189,330
|
|
|
|
319,078
|
|
|
Herbal Medicinal Additives
|
|
|
14,945
|
|
|
|
(8,480
|
)
|
|
Other
|
|
|
31,839
|
|
|
|
11,181
|
|
|
|
|
$
|
1,665,626
|
|
|
$
|
1,587,231
|
|
