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EXCEL - IDEA: XBRL DOCUMENT - Nutrastar International Inc. | Financial_Report.xls |
EX-31.1 - EXHIBIT 31.1 - Nutrastar International Inc. | exhibit31-1.htm |
EX-32.2 - EXHIBIT 32.2 - Nutrastar International Inc. | exhibit32-2.htm |
EX-31.2 - EXHIBIT 31.2 - Nutrastar International Inc. | exhibit31-2.htm |
EX-32.1 - EXHIBIT 32.1 - Nutrastar International Inc. | exhibit32-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10−Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2012
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________to _____________
Commission File Number: 000-52899
NUTRASTAR INTERNATIONAL
INC.
(Exact Name of Registrant as Specified in Its
Charter)
Nevada | 80-0264950 |
(State or other jurisdiction of | (I.R.S. Empl. Ident. No.) |
incorporation or organization) |
7/F Jinhua Mansion
41 Hanguang Street
Nangang
District, Harbin 150080
Peoples Republic of China
(Address of
principal executive offices, Zip Code)
(86) 451-87114869
(Registrants telephone
number, including area code)
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 during the past 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 [ ]
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes X No [ ]
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 the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The number of shares outstanding of each of the issuers classes of common equity, as of May 10, 2012 is as follows:
Class of Securities | Shares Outstanding |
Common stock, $0.001 par value | 15,395,850 |
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION | Page | |
Item 1. | Financial Statements | F-1 |
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 1 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 7 |
Item 4. | Controls and Procedures | 7 |
PART II OTHER INFORMATION | ||
Item 1. | Legal Proceedings | 9 |
Item 1A. | Risk Factors | 9 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 9 |
Item 3. | Defaults Upon Senior Securities | 10 |
Item 4. | Mine Safety Disclosures | 10 |
Item 5. | Other Information | 10 |
Item 6. | Exhibits | 10 |
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page(s) | |
Condensed Consolidated Balance Sheets | F-2 |
Condensed Consolidated Statements of Income and Comprehensive Income | F-3 |
Condensed Consolidated Statements of Stockholders Equity | F-4 |
Condensed Consolidated Statements of Cash Flows | F-5 |
Notes to Condensed Consolidated Financial Statements | F-6 F-35 |
F-1
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATED BALANCE SHEETS |
(AMOUNTS EXPRESSED IN US DOLLARS) |
March 31, | December 31, | |||||
2012 | 2011 | |||||
(Unaudited) | ||||||
ASSETS | ||||||
CURRENT ASSETS | ||||||
Cash and cash equivalents | $ | 56,996,050 | $ | 54,556,329 | ||
Restricted cash | - | 4,170 | ||||
Accounts receivable | 90,530 | 82,516 | ||||
Inventories | 1,331,661 | 898,871 | ||||
Prepayments and other receivables | 677,853 | 1,194,466 | ||||
Total current assets | 59,096,094 | 56,736,352 | ||||
OTHER ASSETS | ||||||
Intangible assets, net | 1,907,500 | 2,024,593 | ||||
Property, plant and equipment, net | 12,217,888 | 12,395,567 | ||||
Construction in process | 5,293,097 | 5,271,609 | ||||
Total assets | $ | 78,514,579 | $ | 76,428,121 | ||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||
CURRENT LIABILITIES | ||||||
Accounts payable | $ | - | $ | 6,339 | ||
Other payables and accruals | 1,113,875 | 1,064,045 | ||||
Taxes payable | 1,493,787 | 2,585,738 | ||||
Due to a related party | 80,723 | 80,648 | ||||
Preferred stock dividend payable | 396,683 | 529,851 | ||||
Warrants liabilities | 148,440 | 144,411 | ||||
Total current liabilities | 3,233,508 | 4,411,032 | ||||
Total liabilities | 3,233,508 | 4,411,032 | ||||
COMMITMENTS AND CONTINGENCIES (Note 19) | ||||||
STOCKHOLDERS' EQUITY | ||||||
Preferred Stock, $0.001 par value,
(1,000,000 shares authorized, 113,620 shares and 147,820 shares issued and outstanding, respectively; aggregate liquidation preference amount: $3,181,360 and $4,138,960, plus accrued but unpaid dividend of $396,683 and $529,851, at March 31, 2012 and December 31, 2011, respectively) |
2,591,236 |
3,371,206 |
||||
Common stock, $0.001 par value, 190,000,000 shares
authorized 15,400,511 shares issued and 15,395,850 shares outstanding at March 31, 2012; 14,962,631 shares issued and 14,957,970 shares outstanding at December 31, 2011 |
15,401 |
14,963 |
||||
Additional paid-in capital | 18,259,607 | 17,180,280 | ||||
Treasury stock, at cost, 4,661 shares of common stock as of March 31, 2012 and December 31, 2011 | (9,553 | ) | (9,553 | ) | ||
Statutory reserves | 3,407,481 | 3,076,552 | ||||
Retained earnings | 45,720,579 | 43,167,074 | ||||
Accumulated other comprehensive income | 5,296,320 | 5,216,567 | ||||
Total stockholders' equity | 75,281,071 | 72,017,089 | ||||
Total liabilities and stockholders' equity | $ | 78,514,579 | $ | 76,428,121 |
See accompanying notes to condensed consolidated financial statements.
F-2
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME |
(Unaudited) |
(AMOUNTS EXPRESSED IN US DOLLARS) |
For the Three Months Ended | ||||||
March 31, | ||||||
2012 | 2011 | |||||
NET REVENUE | $ | 6,861,018 | $ | 5,796,242 | ||
Cost of goods sold | (1,778,568 | ) | (1,369,800 | ) | ||
GROSS PROFIT | 5,082,450 | 4,426,442 | ||||
Selling expenses | (382,358 | ) | (409,873 | ) | ||
General and administrative expenses | (664,705 | ) | (521,326 | ) | ||
Income from operations | 4,035,387 | 3,495,243 | ||||
Other income (expenses): | ||||||
Interest income | 67,218 | 39,829 | ||||
Foreign exchange differences | 2,404 | 22,921 | ||||
Change in fair value of warrants | (4,029 | ) | 392,191 | |||
Total other income (expenses) | 65,593 | 454,941 | ||||
Income before income taxes | 4,100,980 | 3,950,184 | ||||
Provision for income taxes | (1,151,402 | ) | (942,413 | ) | ||
NET INCOME | 2,949,578 | 3,007,771 | ||||
OTHER COMPREHENSIVE INCOME: | ||||||
Foreign currency translation adjustments | 79,753 | 512,009 | ||||
COMPREHENSIVE INCOME | $ | 3,029,331 | $ | 3,519,780 | ||
Earnings per share | ||||||
Basic | $ | 0.19 | $ | 0.20 | ||
Diluted | $ | 0.18 | $ | 0.18 | ||
Weighted average number of shares outstanding | ||||||
Basic | 15,361,458 | 14,513,470 | ||||
Diluted | 16,512,858 | 16,274,183 |
See accompanying notes to condensed consolidated financial statements.
F-3
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY |
(Unaudited) |
(AMOUNTS EXPRESSED IN US DOLLARS) |
Preferred Stock | Common Stock | Accumulated | ||||||||||||||||||||||||||||
Outstanding | Additional | Other | ||||||||||||||||||||||||||||
Number | Number | Paid-in | Treasury | Statutory | Retained | Comprehensive | ||||||||||||||||||||||||
of Shares | Amount | of Shares | Amount | Capital | stock | Reserves | Earnings | Income | Total | |||||||||||||||||||||
Balance at January 1, 2012 | 147,820 | $ | 3,371,206 | 14,957,970 | $ | 14,963 | $ | 17,180,280 | $ | (9,553 | ) | $ | 3,076,552 | $ | 43,167,074 | $ | 5,216,567 | $ | 72,017,089 | |||||||||||
Net income | - | - | - | - | - | - | - | 2,949,578 | - | 2,949,578 | ||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | - | - | - | 79,753 | 79,753 | ||||||||||||||||||||
Preferred stock converted into common stock | (34,200 | ) | (779,970 | ) | 342,000 | 342 | 779,628 | - | - | - | - | - | ||||||||||||||||||
Preferred stock dividend converted into common stock | - | - | 33,380 | 33 | 198,279 | - | - | - | - | 198,312 | ||||||||||||||||||||
Preferred stock dividend | - | - | - | - | - | - | - | (65,144 | ) | - | (65,144 | ) | ||||||||||||||||||
Appropriation of statutory reserves | - | - | - | - | - | - | 330,929 | (330,929 | ) | - | - | |||||||||||||||||||
Restricted stock unit vesting | - | - | 62,500 | 63 | (63 | ) | - | - | - | - | ||||||||||||||||||||
Share-based payment | - | - | - | - | 101,483 | - | - | - | 101,483 | |||||||||||||||||||||
Balance at March 31, 2012 (Unaudited) | 113,620 | $ | 2,591,236 | 15,395,850 | $ | 15,401 | $ | 18,259,607 | $ | (9,553 | ) | $ | 3,407,481 | $ | 45,720,579 | $ | 5,296,320 | $ | 75,281,071 |
See accompanying notes to condensed consolidated financial statements.
F-4
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
(Unaudited) |
(AMOUNTS EXPRESSED IN US DOLLARS) |
For the Three Months Ended | ||||||
March 31, | ||||||
2012 | 2011 | |||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||
Net income | $ | 2,949,578 | $ | 3,007,771 | ||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||
Change in fair value of warrants | 4,029 | (392,191 | ) | |||
Depreciation and amortization | 309,252 | 263,838 | ||||
Share-based compensation expense | 101,483 | 92,753 | ||||
(Increase) decrease in assets: | ||||||
Accounts receivable | (7,911 | ) | 144,759 | |||
Inventories | (430,950 | ) | (40,953 | ) | ||
Prepayments and other receivables | 516,790 | 230,979 | ||||
Increase (decrease) in liabilities: | ||||||
Accounts payable | (6,332 | ) | 24,756 | |||
Other payables and accruals | 48,578 | (61,212 | ) | |||
Taxes payable | (1,092,388 | ) | 552,406 | |||
Net cash provided by operating activities | 2,392,129 | 3,822,906 | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||
Purchase of property, plant and equipment and construction in progress | (15,927 | ) | (1,168 | ) | ||
Net cash used in investing activities | (15,927 | ) | (1,168 | ) | ||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||
Decrease in restricted cash | 4,170 | 44,650 | ||||
Net cash provided by financing activities | 4,170 | 44,650 | ||||
Foreign currency translation adjustment | 59,349 | 391,926 | ||||
INCREASE IN CASH AND CASH EQUIVALENTS | 2,439,721 | 4,258,314 | ||||
CASH AND CASH EQUIVALENTS, at the beginning of the period | 54,556,329 | 40,758,848 | ||||
CASH AND CASH EQUIVALENTS, at the end of the period | $ | 56,996,050 | $ | 45,017,162 | ||
NON-CASH TRANSACTIONS | ||||||
Preferred stock and dividend converted into common stock | $ | 978,282 | $ | 673,351 | ||
Share-based payment IR warrants | - | 22,359 | ||||
Preferred stock dividend payable | 65,144 | 181,481 | ||||
Share-based payment to officers and directors under equity incentive plan | 101,483 | 92,753 | ||||
SUPPLEMENTAL DISCLOSURE INFORMATION | ||||||
Income taxes paid | $ | 1,899,301 | $ | 215,317 |
See accompanying notes to condensed consolidated financial statements.
F-5
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 1 | DESCRIPTION OF BUSINESS AND ORGANIZATION |
Nutrastar International Inc. (Nutrastar or the Company) was incorporated in the State of Nevada on December 22, 2002. On December 23, 2008, the Company completed a reverse acquisition with New Zealand WAYNES New Resources Development Co., Ltd. (New Resources). As a result of the reverse acquisition with New Resources, the Company is no longer a shell company and active business operations have been revived. Nutrastar together with its subsidiaries and affiliates as described below are referred to as the Company.
On May 19, 2009, the Company filed Amended and Restated Articles of Incorporation with the State of Nevada to amend the Companys Articles of Incorporation to, among other things, (1) change the name of the Company from YzApp International Inc. to Shuaiyi International New Resources Development Inc., (2) increase the total number of shares of common stock that the Company has the authority to issue from 50,000,000 to 190,000,000 shares and (3) effect a one for 114.59 reverse split of the Companys outstanding common stock. The detailed description of the amendment was provided in the Companys Form 8-K filed on May 26, 2009.
On January 11, 2010, the Company filed a Certificate of Amendment to its Articles of Incorporation with the State of Nevada, pursuant to which the Company further changed its name from "Shuaiyi International New Resources Development Inc." to "Nutrastar International Inc."
On October 22, 2010, New Resources, a wholly-owned British Virgin Islands subsidiary of the Company, entered into an equity transfer agreement with the original founders of Heilongjiang Shuaiyi (the Shuaiyi Founders), pursuant to which New Resources transferred all of its equity interests in Heilongjiang Shuaiyi New Energy Development Co., Ltd. (Heilongjiang Shuaiyi), a then wholly-owned Chinese subsidiary of New Resources, to the Shuaiyi Founders (the Equity Transfer).
In connection with the Equity Transfer, the Shuaiyi Founders, the Companys indirectly wholly-owned Chinese subsidiary incorporated on July 13, 2010, Harbin Baixin Biotech Development Co., Ltd. (Harbin Baixin) and Heilongjiang Shuaiyi entered into the following commercial arrangements (the Contractual Arrangement and together with the Equity Transfer, the Restructuring), pursuant to which the Company has contractual rights to control and operate the businesses of Heilongjiang Shuaiyi and Heilongjiang Shuaiyi's two wholly-owned Chinese subsidiaries, Daqing Shuaiyi Biotech Co., Ltd. (Daqing Shuaiyi) and Harbin Shuaiyi Green & Specialty Food Trading LLC (Harbin Shuaiyi and together with Heilongjiang Shuaiyi and Daqing Shuaiyi, the VIEs):
Service Agreement
Pursuant to a technical
service agreement, entered into by and between Harbin Baixin and Heilongjiang
Shuaiyi, Harbin Baixin will provide certain exclusive technical services to
Heilongjiang Shuaiyi in exchange for the payment by Heilongjiang Shuaiyi of a
service fee that is calculated based on the market price in light of the
particulars of the service and the time of such service provided by Harbin
Baixin (the Service Agreement);
Option Agreement
Pursuant to an exclusive
purchase option agreement, entered into by and among Harbin Baixin, the Shuaiyi
Founders and Heilongjiang Shuaiyi, the Shuaiyi Founders granted to Harbin Baixin
an option to purchase at any time during the term of this agreement, all or part
of the equity interests in Heilongjiang Shuaiyi (the Equity Interests), at the
exercise price equal to the lowest possible price permitted by Chinese laws (the
Option Agreement);
F-6
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 1 | DESCRIPTION OF BUSINESS AND ORGANIZATION (CONTINUED) |
Voting Rights Agreement
Pursuant to a voting
rights proxy agreement, entered into by and among Harbin Baixin, the Shuaiyi
Founders and Heilongjiang Shuaiyi, each of the Shuaiyi Founders irrevocably
entrusted Harbin Baixin and any entities or individuals designated by Harbin
Baixin to, among others, exercise its voting rights and other rights as a
shareholder of Heilongjiang Shuaiyi (the Voting Rights Agreement); and
Pledge agreement
Pursuant to an equity pledge
agreement, entered into by and among Harbin Baixin, the Shuaiyi Founders and
Heilongjiang Shuaiyi, the Founders pledged all of the Equity Interests to Harbin
Baixin to secure the full and complete performance of the obligations and
liabilities on the part of the Shuaiyi Founders and Heilongjiang Shuaiyi under
this and above contractual arrangements (the Pledge Agreement and together
with the Service Agreement, the Option Agreement, the Voting Rights Agreement
and the Equity Transfer Agreement, the Restructuring Documents).
As a result of the Restructuring, the Company transferred all of its indirect equity interests in Heilongjiang Shuaiyi back to the Shuaiyi Founders, among whom, Ms. Lianyun Han became a majority shareholder of Heilongjiang Shuaiyi by owning a 68.3% equity interest in Heilongjiang Shuaiyi. At the same time, through the above contractual agreement, the Company maintains substantial control over the VIEs daily operations and financial affairs, election of their senior executives and all matters requiring shareholder approval. As the primary beneficiary of the VIEs, the Company is entitled to consolidate the financial results of the VIEs in its own consolidated financial statements under Financial Accounting Standards Board Accounting Standard Codification (ASC) Topic 810 and related subtopics related to the consolidation of variable interest entities (collectively, ASC Topic 810).
F-7
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 1 | DESCRIPTION OF BUSINESS AND ORGANIZATION (CONTINUED) |
As of March 31, 2012, details of the subsidiaries and affiliates of the Company are as follows:
Percentage | ||||||||||||
Domicile and date | of effective | |||||||||||
Names | of incorporation | Paid-up capital | ownership | Principal activities | ||||||||
Subsidiaries | ||||||||||||
New Zealand WAYNES New Resources Development Co., Ltd (New Resources) |
British Virgin Islands, March 13, 2008 |
$ | 50,000 | 100% | Holding company of Oriental Global |
|||||||
Oriental Global Holdings Limited (Oriental Global) |
Hong Kong, May 28, 2010 |
HK$1 | 100% | Holding company of Harbin Baixin |
||||||||
Harbin Baixin Biotech Development Co., Ltd (Harbin Baixin) |
Peoples Republic of China (PRC), July 13, 2010 |
$ | 3,000,000 | 100% | Cordyceps Militaris
cultivation technology research and development, services and Cordyceps Militaris products wholesale |
|||||||
VIEs | ||||||||||||
Heilongjiang Shuaiyi New Energy Development Co., Ltd (Heilongjiang Shuaiyi) |
PRC, July 11, 2006 |
RMB60,000,000 | 100% | Principally engaged in
investment and property holding |
||||||||
Daqing Shuaiyi Biotech Co. Ltd. (Daqing Shuaiyi) |
PRC, August 8, 2005 |
RMB50,000,000 | 100% | Growing and sales of
Cordyceps Militaris products |
||||||||
Harbin Shuaiyi Green and Specialty Food Trading LLC. (Harbin Shuaiyi) |
PRC, May 18, 2001 |
RMB1,500,000 | 100% | Sales of organic and
specialty food products |
F-8
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICES |
Basis of presentation
These interim condensed
consolidated financial statements are unaudited. In the opinion of management,
all material adjustments and disclosures necessary for a fair presentation of
these interim condensed consolidated financial statements, which are of a normal
and recurring nature, have been included. The results reported in the condensed
consolidated financial statements for any interim periods are not necessarily
indicative of the results that may be reported for the entire year. The (a)
condensed consolidated balance sheet as of March 31, 2012, which was derived
from audited financial statements, and (b) the unaudited interim condensed
consolidated financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
note disclosures normally included in annual financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information not misleading. These unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and accompanying footnotes of the Company for the year ended December
31, 2011.
Principle of consolidation
The accompanying
condensed consolidated financial statements include the financial statements of
Nutrastar and its wholly owned subsidiaries, New Resources, Oriental Global and
Harbin Baixin, and its VIEs, Heilongjiang Shuaiyi, Daqing Shuaiyi and Harbin
Shuaiyi. All significant inter-company balances or transactions have been
eliminated on consolidation.
The Company has evaluated the relationship with Heilongjiang Shuaiyi, Daqing Shuaiyi and Harbin Shuaiyi and based on the result of the evaluation, believes that these entities are variable interest entities and that it is the primary beneficiary of these entities. Consequently, the Company has included the results of operations of these variable interest entities in the condensed consolidated financial statements. The Companys relationships with Heilongjiang Shuaiyi, Daqing Shuaiyi and Harbin Shuaiyi are governed by a series of contractual arrangements. Under PRC laws, Heilongjiang Shuaiyi, Daqing Shuaiyi and Harbin Shuaiyi are independent legal persons and none of them is exposed to liabilities incurred by the other parties.
The accounts of Heilongjiang Shuaiyi, Daqing Shuaiyi and Harbin Shuaiyi are consolidated in the accompanying condensed financial statements pursuant to the Financial Accounting Standards Board Accounting Standard Codification (ASC) Topic 810 and related subtopics related to the consolidation of variable interest entities. The Company does not have any non-controlling interests in net income and accordingly, did not subtract any net income in calculating the net income attributable to the Company. Because of the contractual arrangements, the Company had a pecuniary interest in the VIEs that require consolidation of the Companys and the VIEs financial statements.
Use of estimates
The preparation of these
condensed consolidated financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
related disclosure of contingent assets and liabilities at the date of these
condensed consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. Accordingly, actual results may differ from
these estimates under different assumptions or conditions. Significant estimates
for the periods ended March 31, 2012 and 2011 include the useful lives of
property and equipment and intangible assets, assumptions used in assessing
impairment for long-term assets and the fair values of share-based payments and
warrants granted.
F-9
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (CONTINUED) |
Cash and cash equivalents
Cash and cash
equivalents consist of all cash balances and highly liquid investments with an
original maturity of three months or less. Because of the short maturity of
these investments, the carrying amounts approximate their fair value. Restricted
cash is excluded from cash and cash equivalents.
Accounts receivable
Accounts receivable is
stated at cost, net of an allowance for doubtful accounts. The Company maintains
allowances for doubtful accounts for estimated losses resulting from the failure
of customers to make required payments. The Company reviews the accounts
receivable on a periodic basis and provides allowances where there is doubt as
to the collectability of individual balances. In evaluating the collectability
of individual receivable balances, the Company considers many factors, including
the age of the balance, the customers payment history, its current
credit-worthiness and current economic trends.
Inventories
Inventories are stated at the
lower of cost, determined on a weighted average basis, or market. Costs of
inventories include purchase and related costs incurred in bringing the products
to their present location and condition. Market value is determined by reference
to selling prices after the balance sheet date or to managements estimates
based on prevailing market conditions. Management will write down the
inventories to market value if it is below cost. Management also regularly
evaluates the composition of its inventories to identify slow-moving and
obsolete inventories to determine if a valuation allowance is required.
Derivative financial instruments
The Company
evaluates all its financial instruments to determine if such instruments are
derivatives or contain features that qualify as embedded derivatives. For
derivative instruments that are accounted for as liabilities, the derivative
instrument is initially recorded at its fair value and is then revalued at each
reporting date, with changes in the fair value reported in the consolidated
statements of income. For stock-based derivative financial instruments, the
Company uses Monte-Carlo simulation methods to value the derivative instruments
at inception and on subsequent valuation dates.
Property, plant and equipment
Property, plant
and equipment are stated at cost less accumulated depreciation and accumulated
impairment losses, if any. Gains or losses on disposals are reflected as gain or
loss in the year of disposal. The cost of improvements that extend the life of
property, plant and equipment are capitalized. These capitalized costs may
include structural improvements, equipment and fixtures. All ordinary repair and
maintenance costs are expensed as incurred.
Depreciation for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the assets as follows:
Useful Life | |
(In years) | |
Buildings | 20 |
Machinery and motor vehicles | 5-10 |
Office equipment | 2-5 |
Construction in progress
Construction in
progress includes direct costs of construction of buildings, equipment and other
assets. Interest incurred during the period of construction, if material, is
capitalized. Construction in progress is not depreciated until such time as the
assets are completed and put into service.
F-10
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (CONTINUED) |
Intangible assets
The Companys intangible
assets include a ten-year exclusive right to use a proprietary process and
computer software. The Companys amortization policy on intangible assets is as
follows:
Useful Life | |
(In years) | |
Exclusive right | 10 |
Computer software | 4 |
The Company accounts for its intangible assets pursuant to FASB ASC Subtopic 350-30, General Intangibles Other Than Goodwill. Under ASC 350-30-35, intangibles with definite lives continue to be amortized on a straight-line basis over the lesser of their estimated useful lives or contractual terms. Intangibles with indefinite lives are evaluated at least annually for impairment by comparing the assets estimated fair value with its carrying value, based on cash flow methodology.
Impairment of long-lived assets
The Company
reviews and evaluates its long-lived assets for impairment when events or
changes in circumstances indicate that the related carrying amounts may not be
recoverable. An impairment is considered to exist if the total estimated future
cash flows on an undiscounted basis are less than the carrying amount of the
assets, including goodwill, if any. An impairment loss is measured and recorded
based on discounted estimated future cash flows. In estimating future cash
flows, assets are grouped at the lowest level for which there is identifiable
cash flows that are largely independent of future cash flows from other asset
groups.
Revenue recognition
Revenue is recognized
when the following four revenue criteria are met: persuasive evidence of an
arrangement exists, delivery has occurred, the selling price is fixed or
determinable, and collectability is reasonably assured.
Sales revenue is recognized net of value added and sales related taxes, sales discounts and returns at the time when the merchandise is delivered to the customer. Based on historical experience, management estimates that sales returns are immaterial and has not recorded an allowance for estimated sales returns.
Share-based payments
The Company accounts for
share-based compensation awards to employees in accordance with FASB ASC Topic
718, Compensation Stock Compensation, which requires that share-based
payment transactions with employees be measured based on the grant-date fair
value of the equity instrument issued and recognized as compensation expense
over the requisite service period.
The Company accounts for share-based compensation awards to non-employees in accordance with FASB ASC Topic 718 and FASB ASC Subtopic 505-50, Equity-Based Payments to Non-employees. Under FASB ASC Topic 718 and FASB ASC Subtopic 505-50, stock compensation granted to non-employees has been determined as the fair value of the consideration received or the fair value of equity instrument issued, whichever is more reliably measured and is recognized as expense as the goods or services are received.
F-11
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (CONTINUED) |
Income taxes
The Company is subject to income
taxes in the United States and other foreign jurisdictions where it operates.
The Company accounts for income taxes in accordance with FASB ASC Topic 740,
Income Taxes. FASB ASC Topic 740 requires an asset and liability approach for
financial accounting and reporting for income taxes and allows recognition and
measurement of deferred tax assets based upon the likelihood of realization of
tax benefits in future years. Under the asset and liability approach, deferred
taxes are provided for the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. A valuation allowance is provided for
deferred tax assets if it is more likely than not these items will either expire
before the Company is able to realize their benefits, or that future
deductibility is uncertain.
The Companys income tax returns are subject to examination by the Internal Revenue Service (IRS) and other tax authorities in the locations where it operates. The Company assesses potentially unfavorable outcomes of such examinations based on the criteria of FASB ASC 740-10-25-5 through 740-10-25-7 and 740-10-25-13 (formerly FASB Interpretation No. 48 (FIN 48) Accounting for Uncertainty in Income Taxes). The interpretation prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. This Interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.
Research and development costs
Research and
development costs are expensed as incurred, and are charged to general and
administrative expenses. Research and development costs were $33,993 and $27,855
for the three months ended March 31, 2012 and 2011, respectively.
Advertising costs
The Company expenses all
advertising costs as incurred. Advertising costs charged to selling expenses
were $2,188 and $22,664 for the three months ended March 31, 2012 and 2011,
respectively.
Shipping and handling costs
Substantially all
costs of shipping and handling of products to customers are included in selling
expense. Shipping and handling costs for the three months ended March 31, 2012
and 2011 were insignificant.
Comprehensive income
FASB ASC Topic 220,
Comprehensive Income, establishes standards for reporting and displaying
comprehensive income and its components in the consolidated financial
statements. Accumulated other comprehensive income includes foreign currency
translation adjustments.
F-12
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (CONTINUED) |
Foreign currency
The Company uses the United
States dollar (US Dollar or US$ or $) for financial reporting purposes.
The PRC subsidiaries and VIEs within the Company maintain their books and
records in their functional currency, Chinese Renminbi (RMB), being the lawful
currency in the PRC. Assets and liabilities of the PRC subsidiaries and VIEs are
translated from RMB into US Dollars using the applicable exchange rates
prevailing at the balance sheet date. Items on the statements of income and cash
flows are translated at average exchange rates during the reporting period.
Equity accounts are translated at historical rates. Adjustments resulting from
the translation of the Companys financial statements are recorded as
accumulated other comprehensive income.
The exchange rates used to translate amounts in RMB into US Dollars for the purposes of preparing the consolidated financial statements are based on the rates as published on the website of Peoples Bank of China and are as follows:
March 31, 2012 | December 31, 2011 | |||||
Balance sheet items, except for equity accounts | US$1=RMB6.2943 | US$1=RMB6.3009 |
Three months ended March 31, | ||||||
2012 | 2011 | |||||
Items in the statements of income and cash flows | US$1=RMB6.3074 | US$1=RMB6.5832 |
No representation is made that the RMB amounts could have been, or could be, converted into US Dollars at the above rates. The value of RMB against US dollars and other currencies may fluctuate and is affected by, among other things, changes in Chinas political and economic conditions. Any significant revaluation of RMB may materially affect the Companys financial condition in terms of US Dollar reporting.
Segment reporting
The Company follows FASB
ASC Topic 280, Segment Reporting, which requires that companies disclose
segment data based on how management makes decisions about allocating resources
to segments and evaluating their performance.
The Company believes that during the three months ended March 31, 2012 and 2011, it operated in three business segments growing and sales of Cordyceps Militaris, which is widely used for Chinese medicine, manufacturing and sale of functional health beverages featuring the Cordyceps Militaris as a core ingredient, and sales of organic and specialty products. The manufacturing and sale of Cordyceps Militaris functional health beverages was launched in the fourth quarter of 2010.
Throughout the three months ended March 31, 2012 and 2011, all of the Companys operations were carried out in one geographical segment - China.
Earnings per share
The Company reports
earnings per share in accordance with the provisions of FASB ASC Topic 260,
"Earnings per Share". FASB ASC Topic 260 requires presentation of basic and
diluted earnings per share in conjunction with the disclosure of the methodology
used in computing such earnings per share. Basic earnings per share excludes
dilution and is computed by dividing income available to common stockholders by
the weighted average common shares outstanding during the period. Diluted
earnings per share takes into account the potential dilution (using the treasury
stock method) that could occur if securities or other contracts to issue common
stock were exercised and converted into common stock.
F-13
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (CONTINUED) |
Commitments and contingencies
The Company
follows FASB ASC Subtopic 450-20, Loss Contingencies in determining its
accruals and disclosures with respect to loss contingencies. Accordingly,
estimated losses from loss contingencies are accrued by a charge to income when
information available prior to issuance of the financial statements indicates
that it is probable that a liability could be incurred and the amount of the
loss can be reasonably estimated. Legal expenses associated with the contingency
are expensed as incurred. If a loss contingency is not probable or reasonably
estimable, disclosure of the loss contingency is made in the financial
statements when it is at least reasonably possible that a material loss could be
incurred.
Recent accounting pronouncements
In December
2011, the FASB issued ASU No. 2011-11 Balance Sheet (Topic 210). The objective
of this update is to provide enhanced disclosures that will enable users of its
financial statements to evaluate the effect or potential effect of netting
arrangements on an entitys financial position. This includes the effect or
potential effect of rights of setoff associated with an entitys recognized
assets and recognized liabilities within the scope of this update. The
amendments require enhanced disclosures by requiring improved information about
financial instruments and derivative instruments that are either (1) offset in
accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to
an enforceable master netting arrangement or similar agreement, irrespective of
whether they are offset in accordance with either Section 210-20-45 or Section
815-10-45. An entity is required to apply the amendments for annual reporting
periods beginning on or after January 1, 2013, and interim periods within those
annual periods. An entity should provide the disclosures required by those
amendments retrospectively for all comparative periods presented. The Company
does not expect the adoption of the provisions in this update will have a
significant impact on its consolidated financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Companys consolidated financial statements upon adoption.
F-14
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 3 | FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS |
The Company values its financial instruments as required by FASB ASC 320-12-65 (formerly SFAS No. 107, Disclosures about Fair Value of Financial Instruments). The estimated fair value amounts have been determined by the Company, using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.
ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entitys own assumptions (unobservable inputs). The hierarchy consists of three levels:
Level one | Quoted market prices in active markets for identical assets or liabilities; | |
Level two | Inputs other than level one inputs that are either directly or indirectly observable; and | |
Level three |
Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use. |
Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter.
Assets and liabilities measured at fair value on a recurring basis are summarized as follows:
Fair value measurement using inputs | Carrying amount at | ||||||||||||||
Financial instruments | Level 1 | Level 2 | Level 3 | March 31, | December 31, | ||||||||||
2012 | 2011 | ||||||||||||||
Liabilities: | |||||||||||||||
Derivative instruments Warrants | $ | | $ | 148,440 | $ | | $ | 148,440 | $ | 144,411 | |||||
Total | $ | | $ | 148,440 | $ | | $ | 148,440 | $ | 144,411 |
The carrying values of cash and cash equivalents, trade and other receivables and payables approximate their fair values due to the short maturities of these instruments.
There was no asset or liability measured at fair value on a non-recurring basis as of March 31, 2012 and December 31, 2011.
For stock-based derivative financial instruments, the Company uses Monte-Carlo simulation methods to value the derivative instruments at inception and on subsequent valuation dates using the following assumptions:-
March 31, 2012 | December 31, 2011 | |||||
Series C Warrants to investors and placement agent | ||||||
(issued on June 7, 2010) | ||||||
Market price of common stock: | $ | 2.25 | $ | 2.00 | ||
Exercise price: | $ | 3.40 | $ | 3.40 | ||
Remaining contractual life (years): | 1.18 | 1.43 | ||||
Dividend yield: | − | − | ||||
Expected volatility: | 44.07% | 48.21% | ||||
Risk-free interest rate: | 0.20% | 0.16% | ||||
Fair value | $ | 87,123 | $ | 89,040 |
Series C Warrants to investors and placement agent | ||||||
(issued on June 28, 2010) | ||||||
Market price of common stock: | $ | 2.25 | 2.00 | |||
Exercise price: | $ | 3.40 | 3.40 | |||
Remaining contractual life (years): | 1.24 | 1.49 | ||||
Dividend yield: | − | − | ||||
Expected volatility: | 46.20% | 48.35% | ||||
Risk-free interest rate: | 0.21% | 0.17% | ||||
Fair value | $ | 61,317 | $ | 55,371 | ||
Total | $ | 148,440 | $ | 144,411 |
NOTE 4 | RESTRICTED CASH |
As of December 31, 2011, $4,170 in total was held in escrow according to the agreements in connection with the private placements consummated in June 2010. The remaining escrow funds were released as of March 31, 2012, which is further disclosed in Note 12.
Restricted cash consisted of the following:
March 31, | December 31, | |||||
2012 | 2011 | |||||
Restricted cash - compensation for Chief Financial Officer | $ | - | $ | 4,170 |
F-15
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 5 | ACCOUNTS RECEIVABLE, NET |
Accounts receivable consisted of the following:
March 31, | December 31, | |||||
2012 | 2011 | |||||
Accounts receivable | $ | 90,530 | $ | 82,516 | ||
Less: Allowance for doubtful debts | - | - | ||||
Accounts receivable, net | $ | 90,530 | $ | 82,516 |
No allowance was deemed necessary as of March 31, 2012 and December 31, 2011.
NOTE 6 | INVENTORIES |
Inventories by major categories are summarized as follows:
March 31, | December 31, | |||||
2012 | 2011 | |||||
Raw materials | $ | 518,807 | $ | 288,003 | ||
Work in progress | 557,963 | 394,029 | ||||
Finished goods | 254,891 | 216,839 | ||||
Total | $ | 1,331,661 | $ | 898,871 |
NOTE 7 | PREPAYMENTS AND OTHER RECEIVABLES |
Prepayments and other receivables consisted of the following:
March 31, | December 31, | |||||
2012 | 2011 | |||||
Prepayments for raw material purchasing | $ | 666,255 | $ | 1,182,880 | ||
Other receivables, net of $nil allowance | 11,598 | 11,586 | ||||
$ | 677,853 | $ | 1,194,466 |
F-16
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 8 | INTANGIBLE ASSETS, NET |
Intangible assets, net consisted of the following:
March 31, | December 31, | |||||
2012 | 2011 | |||||
Computer software, cost | $ | 1,578 | $ | 1,576 | ||
Exclusive right to use a secret process, cost | 4,768,131 | 4,763,137 | ||||
Less: Accumulated amortization | (2,862,209 | ) | (2,740,120 | ) | ||
$ | 1,907,500 | $ | 2,024,593 |
In April 2006, the Company purchased from a third party a ten-year exclusive right to use a secret process and method in the cultivation and growing of Cordyceps Militaris, which is widely used for traditional Chinese medicine, for a cash consideration of RMB30,000,000, payable over five years. The consideration had been paid off as of March 31, 2012. The exclusive right is amortized over its term of ten years using the straight-line method.
Amortization expense was $118,968 and $113,984 for the three months ended March 31, 2012 and 2011, respectively. The estimated expense of the intangible assets over each of the next five years will be:
Remainder of fiscal 2012 | $ | 357,648 | |
2013 | 476,864 | ||
2014 | 476,864 | ||
2015 | 476,864 | ||
2016 | 119,260 | ||
$ | 1,907,500 |
NOTE 9 | PROPERTY, PLANT AND EQUIPMENT, NET |
Property, plant and equipment, net consisted of the following:
March 31, | December 31, | |||||
2012 | 2011 | |||||
Cost: | ||||||
Buildings | $ | 14,917,295 | $ | 14,901,670 | ||
Office equipment | 28,297 | 28,267 | ||||
Machinery | 133,493 | 133,353 | ||||
Motor vehicles | 115,507 | 115,386 | ||||
Total cost | 15,194,592 | 15,178,676 | ||||
Less: Accumulated depreciation | (2,976,704 | ) | (2,783,109 | ) | ||
Net book value | $ | 12,217,888 | $ | 12,395,567 |
Depreciation expense for the three months ended March 31, 2012 and 2011 was $190,284 and $149,854, respectively.
F-17
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 10 | CONSTRUCTION IN PROGRESS |
Construction in progress consisted of the following:
March 31, | December 31, | |||||
2012 | 2011 | |||||
Construction of: | ||||||
Buildings (green houses and cold studios) | $ | 5,293,097 | $ | 5,271,609 |
NOTE 11 | OTHER PAYABLES, ACCRUALS AND TAXES PAYABLE |
Other payables and accruals consisted of the following:
March 31, | December 31, | |||||
2012 | 2011 | |||||
Accrued staff costs | $ | 1,057,623 | $ | 953,605 | ||
Other payables | 56,252 | 110,440 | ||||
$ | 1,113,875 | $ | 1,064,045 |
Taxes payable consisted of the following:
March 31, | December 31, | |||||
2012 | 2011 | |||||
Value added tax | $ | 316,825 | $ | 661,618 | ||
Income tax | 1,107,701 | 1,855,126 | ||||
Others | 69,261 | 68,994 | ||||
$ | 1,493,787 | $ | 2,585,738 |
F-18
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 12 | STOCKHOLDERS EQUITY |
Private Placement in 2010
On May 27, 2010, the
Company entered into a securities purchase agreement (the "Securities Purchase
Agreement") with certain investors, pursuant to which, the Company agreed to
issue and sell up to an aggregate of 250,000 units at a purchase price of $28.56
per unit, for an aggregate purchase price of up to $7,140,000 (the "Aggregate
Purchase Price"). Each unit consists of (i) one share of a newly designated
series A preferred stock, ("Series A Preferred Stock"), with an initial
one-to-ten conversion ratio convertible into shares of the Companys common
stock, ("Common Stock"), and (ii) warrants to purchase five shares of Common
Stock at an exercise price of $3.40 per share ("Warrants", together with the
shares of Series A Preferred Stock, the "Securities"). In addition, the Company
and the investors agreed, that the placement agent of this transaction, will
receive from the investors a fee equal to 2% of the Aggregate Purchase Price and
Warrants to purchase 2% of the aggregate number of shares of Common Stock that
shares of Series A Preferred Stock to be issued under the Securities Purchase
Agreement are convertible into.
On June 7, 2010, the Company consummated the first closing of the private placement transaction and issued approximately 123,403 units at a purchase price of $28.56 per unit for gross proceeds of $3,524,342.
On June 28, 2010, the Company consummated the second closing of the private placement transaction and issued approximately 74,303 units at a purchase price of $28.56 per unit for gross proceeds of $2,121,938.
Pursuant to the Securities Purchase Agreement, a written request was received from a holder holding a majority of Series A Preferred Stock on July 14, 2010 and the Company filed the Registration Statement on August 11, 2010. The Registration Statement was declared effective by the Securities and Exchange Commission (SEC) on September 15, 2010.
On August 24, 2011, the Board of Directors of the Company authorized a repurchase of up to $5 million of the Companys common stock over twelve months (the Repurchase Program). In connection with the adoption of the Repurchase Program, the Company entered into an amendment agreement (Amendment No. 1) with the investors to amend the Securities Purchase Agreement. Specifically, under Amendment No. 1, the Company may use the proceeds of the private placement for general corporate and working capital purposes and acquisition of assets, businesses or operations or for other purposes that the Board of Directors in good faith deems to be in the best interest of the Company, including the repurchase or redemption of shares of the Companys capital stock.
Also on August 24, 2011, the Company entered into a lock up agreement with the investors, pursuant to which the investors agreed not to sell, transfer or dispose of, directly or indirectly, any shares of Company common stock or any securities convertible into or exercisable or exchangeable for shares of Company common stock that it beneficially owns without a prior written consent of the Company for a period of six months.
During the three months ended March 31, 2012, the Company did not repurchase any common stock under the Repurchase Program. As of March 31, 2012, the Company had approximately $4.99 million available under the existing $5.00 million Repurchase Program.
F-19
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 12 | STOCKHOLDERS EQUITY (CONTINUED) |
Allocation of Proceeds in the Private Placement
The
guidance provided in ASC 470-20-30-5 has been applied to the amount allocated to
the convertible Series A Preferred Stock, and the effective conversion price has
been used, to measure the intrinsic value, if any, of the embedded conversion
option. The fair value of the embedded conversion features of the Series A
Preferred Stock of $1,143,198 and $644,532 were calculated using the intrinsic
value model in accordance with the guidance provided in ASC Topic 470-20-30-6
(formerly EITF 00-27, Application of Issue No. 98-5 to Certain Convertible
Instruments) and limited to the amount of the proceeds allocated to the
convertible instrument on June 7, 2010 and June 28, 2010, respectively. The
intrinsic value of the beneficial conversion feature was calculated by comparing
the effective conversion price, which was determined based on the proceeds from
the private placement allocated to the convertible Series A Preferred Stock, and
the market price of the Companys common stock of $3.20 and $3.16 on June 7,
2010 and June 28, 2010, respectively. The fair value of $1,143,198 and $644,532
of the beneficial conversion feature has been recognized as a reduction to the
carrying amount of the convertible Series A Preferred Stock and an addition to
paid-in capital.
The following table sets out the allocation of the proceeds from the Private Placement:
Proceeds of the private placement on June 7, 2010 | $ | 3,524,342 | |
Allocation of proceeds to Series C Warrants to investors | (718,698 | ) | |
Allocation of proceeds to beneficial conversion feature | (1,143,198 | ) | |
Amortization of discount resulting from the accounting for a beneficial conversion feature | 1,143,198 | ||
Convertible Series A Preferred Stock (net of fees and expenses) at December 31, 2010 | $ | 2,805,644 | |
Preferred stock converted into common stock in 2011 | (85,546 | ) | |
Convertible Series A Preferred Stock at December 31, 2011 | $ | 2,720,098 | |
Preferred stock converted into common stock in the three months ended March 31, 2012 | (675,480 | ) | |
Convertible Series A Preferred Stock at March 31, 2012 | $ | 2,044,618 | |
Proceeds of the private placement on June 28, 2010 | $ | 2,121,938 | |
Allocation of proceeds to Series C Warrants to investors | (418,668 | ) | |
Allocation of proceeds to beneficial conversion feature | (644,532 | ) | |
Amortization of discount resulting from the accounting for a beneficial conversion feature | 644,532 | ||
Convertible Series A Preferred Stock (net of fees and expenses) at December 31, 2010 | $ | 1,703,270 | |
Preferred stock converted into common stock in 2011 | (1,052,162 | ) | |
Convertible Series A Preferred Stock at December 31, 2011 | $ | 651,108 | |
Preferred stock converted into common stock in the three months ended March 31, 2012 | (104,490 | ) | |
Convertible Series A Preferred Stock at March 31, 2012 | $ | 546,618 |
In accordance with ASC Topic 470-20-30-6, the discount on the Series A Preferred Stock resulting from the accounting for a beneficial conversion feature was amortized and charged to retained earnings, because the Series A Preferred Stock is immediately convertible upon issuance and has no stated redemption date. Amortization of the discount resulting from the accounting for a beneficial conversion feature is considered analogous to a return to holders of perpetual preferred stock and has been accounted for as a reduction to net income available to common stockholders for the purpose of calculation of earnings per share.
F-20
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 12 | STOCKHOLDERS EQUITY (CONTINUED) |
Preferred Stock
The Board of the Company is
authorized, without further action by the shareholders, to issue, from time to
time, up to 1,000,000 shares of preferred stock in one or more classes or
series. Similarly, the Board is authorized to fix or alter the designations,
powers, preferences and the number of shares which constitute each such class or
series of preferred stock. Such designations, powers or preferences may include,
without limitation, dividend rights (and whether dividends are cumulative),
conversion rights, if any, voting rights (including the number of votes, if any,
per share), redemption rights (including sinking fund provisions, if any), and
liquidation preferences of any unissued shares or wholly unissued series of
preferred stock.
On May 27, 2010, the Company created, from the authorized but unissued shares of its preferred stock, a series of preferred stock consisting of 300,000 shares and has designated this series of preferred stock as the Series A Preferred Stock of which the Company issued 197,706 shares upon the closings of the private placement in 2010.
The following are the principal terms of the Series A Preferred Stock:
Rank: The Series A Preferred Stock ranks senior to the Companys common stock, but junior to all indebtedness of the Company.
Dividend: Holders of the Series A Preferred Stock are entitled to a cumulative dividend at an annual rate of 6% of the Series A Preferred Stock, payable in additional shares of Series A Preferred Stock, compounded quarterly, and payable upon the occurrence of a Liquidation Event, Conversion, Mandatory Conversion or from time-to-time at the discretion of the Board. When dividends on the Series A Preferred Stock are paid, each such additional share of Series A Preferred Stock shall be valued at the Original Series A Purchase Price, which may be adjusted from time to time pursuant to a split, subdivision, combination or other similar events.
Optional Conversion: Shares of the Series A Preferred Stock are optionally convertible into fully paid and non-assessable shares of Common Stock at a conversion rate calculated by dividing (i) $28.00 per share plus any declared, accrued but unpaid dividends by (ii) the conversion price (the Conversion Price), which is initially $2.80 per share, subject to adjustment as provided in the Certificate. Initially, each share of Series A Preferred Stock is convertible into 10 shares of Common Stock.
Mandatory Conversion: All outstanding shares of the Series A Preferred Stock will automatically convert to shares of Common Stock, subject to the conversion restrictions set forth in the Certificate of Designation (the "Mandatory Conversion"), at the earlier to occur of (i) the Companys shares of Common Stock are listed on the New York Stock Exchange, the NYSE Amex, the NASDAQ Global Market, the NASDAQ Global Select Market or the NASDAQ Capital Market (each, a "National Stock Exchange") and the registration statement on Form S-1 or such other appropriate form promulgated by the SEC registering the Common Stock underlying the Securities pursuant to the Securities Purchase Agreement is declared effective by the Commission, and (ii) 12 months from the date that the Company's shares of Common Stock are first listed on a National Stock Exchange.
Adjustment to Conversion Price: If the Company shall issue any additional stock without consideration or for consideration per share less than the Conversion Price in effect immediately prior to the issuance of such additional stock, then such Conversion Price in effect immediately prior to such issuance shall be adjusted to a price determined by multiplying such Conversion Price by a fraction:
Sum of (x) the number of shares of Common Stock outstanding immediately prior to the issuance of such additional stock plus (y) the number of shares of Common Stock that the aggregate consideration received by the Company for the total number of such additional stock so issued would purchase at Conversion Price (divided by) (x) the number of shares of Common Stock outstanding immediately prior to the issuance of such additional stock plus (y) the number of shares of such additional stock so issued.
F-21
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 12 | STOCKHOLDERS EQUITY (CONTINUED) |
Preferred Stock (continued)
Voting: The holders of the Series A Preferred Stock will vote on an "as converted" basis, together with the Common Stock, as a single class, in connection with any proposal submitted to the Companys stockholders, except as required by Nevada law.
Liquidation Preference: The Series A Preferred Stock has a preference over the Companys common stock on the Companys liquidation, dissolution or winding up equal to $28 per share of the Series A Preferred Stock plus any accrued but unpaid dividends thereon, as of the date of liquidation.
Registration Rights: The holders of Series A Preferred Stock have the right to request the Company to file a Registration Statement to register Registrable Securities (which include the common stock into which the Series A Preferred Stock and Warrants are convertible). Upon such request, no later than 30 days upon receipt of such request (the Required Filing Date) the Company should use its commercially reasonable efforts to register the Common Stock underlying the Registrable Securities and have the Registration Statement declared effective by the SEC which is not later than the earlier of (x) 150 calendar days after the Required Filing Date, or (y) if the Registration Statement is not reviewed by the SEC, 5 business days after oral or written notice to the Company or its counsel from the SEC that there will not be a review.
Effect of failure to file and obtain and maintain effectiveness of Registration Statement the Company shall pay to each holder of Registrable Securities an amount in cash equal to 1% of the aggregate purchase price of the Securities owned by such holder as liquidated damages, but in no event shall liquidated damages exceed 8% of the Purchase Price.
Accounting for Series A Preferred Stock
The Company has evaluated the terms of the Series A Preferred Stock and determined that the Series A Preferred Stock, without embodying an obligation for the Company to repurchase or to settle by transferring assets, is not a liability in accordance with the guidance provided in ASC Topic 480, Distinguishing Liabilities from Equity.
Also, the Series A Preferred Stock has no redemption clause at all, it is not a mezzanine equity (out of permanent equity) in accordance with the requirement of ASC 480-10-S99.
The Series A Preferred Stock is not subject to redemption (except on liquidation) and the holders of the Series A Preferred Stock are entitled to vote together with common stock holders on an as-converted basis. The Series A Preferred Stock, excluding the embedded conversion option, are considered to be an equity instrument and accordingly, the embedded conversion option has not been separated and accounted for as a derivative instrument liability.
During the three months ended March 31, 2012 and 2011, 34,200 shares and 28,183 shares, respectively, of Series A Preferred Stock were converted into 342,000 shares and 281,830 shares of common stock, respectively, at a 1 for 10 ratio. In addition, during the three months ended March 31, 2012 and 2011, 33,380 shares and 10,980 shares of common stock were issued to the investors as settlement of stock dividends of $198,312 and $30,605, respectively.
F-22
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 12 | STOCKHOLDERS EQUITY (CONTINUED) |
Common Stock Purchase Warrants
Series C Warrants
In connection with the issuance of the Series A Preferred Stock, the Company issued Series C Warrants to the investors and the placement agent to purchase up to 592,327 and 24,681 shares, respectively, of common stock on June 7, 2010 and 356,634 and 14,859 shares, respectively, on June 28, 2010, respectively, all at an exercise price of $3.40 per share. The Series C Warrants have a term of exercise expiring 3 years from the issuance date. The Series C Warrants at the option of the holder, may be exercised by cash payment of the exercise price or, the holder may acquire the underlying shares of common stock through a "cashless exercise".
The Company will not receive any additional proceeds to the extent that the Series C Warrants are exercised by cashless exercise.
The exercise price and number of shares of common stock issuable upon exercise of the Series C Warrants may be adjusted for: 1) upon issuance of additional stock lower than the exercise price; 2) upon subdivision or combination of common stocks; or 3) upon distribution of assets and other dilutive events.
Accounting for Series A, Series B and Series C Warrants
Series A and Series B Warrants issued to certain investors on December 17, 2009 to purchase 500,000 shares of the Companys common stock remained outstanding at March 31, 2012 had a term of three years and exercise prices of $3.25 and $4.00 per share, respectively. These warrants contain standard anti-dilution provisions for stock dividends, stock splits, stock combination, recapitalization and a change of control transaction. Because these warrants do not contain any contingent exercise provisions and their settlement amount will equal the difference between the fair value of a fixed number of the Companys equity shares and a fixed strike price, these warrants, which are freestanding instruments, qualify for the scope exception under the guidance provided in ASC 815-40-15-5 through 815-40-15-8, and are considered indexed to the Companys own stock. Accordingly, Series A and Series B Warrants have been classified as equity.
Since the Series C Warrants issued to the investors and the placement agent in June 2010 contain reset exercise price provisions, the Company had determined to classify these warrants as derivative liabilities. The reset exercise provisions of the warrants issued to the investors and the placement agent in June 2010 were recorded at their relative fair values at issuance of $1,182,860 and will continue to be recorded at fair value at each subsequent balance sheet date. Any change in value between reporting periods will be recorded as other income (expense). These warrants will continue to be reported as a liability until such time when they are exercised or expire. The fair value of these warrants is estimated using Monte-Carlo simulation methods.
F-23
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 12 | STOCKHOLDERS EQUITY (CONTINUED) |
Accounting for Series A, Series B and Series C Warrants (continued)
As of March 31, 2012, the fair value of these outstanding Series C Warrants was determined to be $148,440. Accordingly, the Company recorded income (expense) of ($4,029) and $392,191 in other income related to the change in the fair value of the Series C Warrants during the three months ended March 31, 2012 and 2011, respectively. There is no cash flow impact for the warrant liability until the Series C Warrants are exercised.
The following table presents a reconciliation of the warrant liabilities measured at fair value on a recurring basis using Level 2 from January 1, 2011 to March 31, 2012:
Warrant liabilities | |||
Balance at December 31, 2010 | $ | 1,198,273 | |
Change in fair value included in earnings | (1,053,862 | ) | |
Balance at December 31, 2011 | $ | 144,411 | |
Change in fair value included in earnings | 4,029 | ||
Balance at March 31, 2012 | $ | 148,440 |
IR Warrants
On May 27, 2010, the
Company entered into an investor relations agreement with a consultant in which
the consultant would provide certain consulting services to the Company for a
term of one year. In exchange for the consulting services provided, the
consultant should receive (i) a cash fee of $100,000 and (ii) 100,000 warrants
(the IR Warrants) at an exercise price of $3.80 and a term of three years from
issuance date. The above 100,000 IR Warrants were issued on July 1, 2010. The
grant date fair value of these IR warrants was estimated at $89,435 using
Black-Scholes valuation model and nil and $22,359 were charged as general and
administrative expenses during the three months ended March 31, 2012 and 2011,
respectively.
Warrants issued and outstanding at March 31, 2012, and changes from January 1, 2011 to March 31, 2012 are as follows:
Weighted | |||||||||
Number of | Average | Average Remaining | |||||||
underlying | Exercise | Contractual Life | |||||||
shares | Price | (years) | |||||||
Balance, January 1, 2011 | 1,588,501 | $ | 3.50 | 2.29 | |||||
Granted | - | - | - | ||||||
Forfeited | - | - | - | ||||||
Exercised | - | - | - | ||||||
Outstanding at December 31, 2011 | 1,588,501 | $ | 3.50 | 1.29 | |||||
Granted | - | - | - | ||||||
Forfeited | - | - | - | ||||||
Exercised | - | - | |||||||
Outstanding at March 31, 2012 | 1,588,501 | $ | 3.50 | 1.04 | |||||
Exercisable at March 31, 2012 | 1,588,501 | $ | 3.50 | 1.04 |
F-24
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 13 | STATUTORY RESERVES |
In accordance with the PRC Companies Law, the Companys PRC subsidiaries and VIEs were required to transfer 10% of their profits after tax, as determined in accordance with accounting standards and regulations of the PRC, to the statutory surplus reserve and a percentage of not less than 5%, as determined by management, of the profits after tax to the public welfare fund. However, the Companys PRC subsidiaries and VIEs were not required to transfer any profit after tax to the statutory surplus reserve after the accumulated statutory surplus reserves reached 50% of registered capital of the Companys PRC subsidiaries and VIEs. With the amendment of the PRC Companies Law which was effective from January 1, 2006, enterprises in the PRC were no longer required to transfer any profit to the public welfare fund. Any balance of the public welfare fund brought forward from December 31, 2005 should be transferred to the statutory surplus reserve. The statutory surplus reserve is non-distributable.
NOTE 14 | SHARE-BASED COMPENSATION |
The Company was authorized for issuance an aggregate of 1,000,000 shares of its common stock under the 2009 Equity Incentive Plan (Plan) as equity awards of incentive stock options, non-statutory stock options, restricted stock, and other equity incentives to employees, officers, directors and consultants. The Plan expires in 2019 and as of March 31, 2012, there were 30,000 shares of common stock available for grant pursuant to the Plan.
Stock options granted to management
On July 16, 2010, the Company entered into a stock option agreement with Mr. Robert Tick (Mr. Tick), the Chief Financial Officer of the Company, under the Companys Plan. Pursuant to the terms of the stock option agreement, Mr. Tick was granted options to purchase an aggregate of 150,000 shares of common stock of the Company, consisting of an option to purchase 75,000 shares vested in 2011 with an exercise price of $5.00 per share, and an option to purchase 75,000 shares that will vest in 2012 with an exercise price of $7.00 per share. Each of these options expires three years after their respective vesting dates.
According to the stock option agreement, in the event Mr. Ticks employment with the Company is terminated for any reason except for death or disability, he may exercise these options only to the extent that these options would have been exercisable on the termination date and no later than three months after the termination date. If Mr. Ticks employment is terminated because of his death or disability, these options may be exercised only to the extent that these options would have been exercisable by Mr. Tick on the termination date and must be exercised by Mr. Tick no later than twelve months after the termination date. If the employment is terminated for Cause as defined in the stock option Agreement, these options will terminate immediately. In no event will these options be exercised later than December 31, 2015.
On January 24, 2011, the Compensation Committee of the Board approved the repricing of the options that the Company granted to Mr. Tick on July 16, 2010. As a result, each such option outstanding has an exercise price of $3.50 per share which is higher than the closing price of the Companys common stock on the OTC Bulletin Board on the date of repricing. In addition, the vesting schedules of the outstanding options granted to Mr. Tick were changed from vesting on an annual basis to vesting on a semi-annual basis.
F-25
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 14 | SHARE-BASED COMPENSATION (CONTINUED) |
Stock options granted to management (continued)
Summary of options issued and outstanding at March 31, 2012 and the movements during the three months then ended are as follows:
Weighted- | ||||||||||||
Number of | Average | Aggregate | Weighted- Average | |||||||||
Underlying | Exercise Price | Intrinsic | Contractual Life | |||||||||
Shares | Per Share | Value (1) | Remaining in Years | |||||||||
Outstanding at January 1, 2011 | 150,000 | $ | 6.00 | $ | - | 4.50 | ||||||
Granted | - | - | - | - | ||||||||
Exercised | - | - | - | - | ||||||||
Expired | - | - | - | - | ||||||||
Forfeited | - | - | - | - | ||||||||
Outstanding at December 31, 2011 | 150,000 | $ | 3.50 | $ | - | 3.25 | ||||||
Granted | - | - | - | - | ||||||||
Exercised | - | - | - | - | ||||||||
Expired | - | - | - | - | ||||||||
Forfeited | - | - | - | - | ||||||||
Outstanding at March 31, 2012 | 150,000 | $ | 3.50 | $ | - | 3.00 | ||||||
Exercisable at March 31, 2012 | 75,000 | $ | 3.50 | $ | - | 2.50 |
(1) |
The market value of the Companys common stock at March 31, 2012 was $2.25 per share. The outstanding options to Mr. Tick had no intrinsic value at March 31, 2012. |
In accordance with the guidance provided in ASC Topic 718, Stock Compensation, the compensation costs associated with these options are recognized, based on the grant-date fair values of these options, over the requisite service period, or vesting period. Also in accordance with ASC Topic 718, incremental compensation cost is measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified. Accordingly, the Company recognized compensation expense of $21,882 and $16,310 in relation to the options granted to Mr. Tick for the three months ended March 31, 2012 and 2011, respectively.
F-26
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 14 | SHARE-BASED COMPENSATION (CONTINUED) |
Restricted shares granted to management
On July 16, 2010, the Company also entered into a restricted shares grant agreement (the "Restricted Shares Grant Agreement") under the Companys Plan with Mr. Tick. Pursuant to the terms of the Restricted Shares Grant Agreement, the Company granted to Mr. Tick 150,000 restricted shares (the Restricted Shares) of the Companys common stock subject to the vesting schedule therein. If Mr. Ticks service with the Company ceases for any reason other than Mr. Ticks (a) death, (b) disability, (c) retirement, or (d) termination by the Company without cause, any unvested restricted shares will be automatically forfeited to the Company.
The Restricted Shares vest under the following schedule:
Number of Shares | Vesting Date |
25,000 | December 31, 2010 |
25,000 | June 30, 2011 |
25,000 | December 31, 2011 |
25,000 | June 30, 2012 |
25,000 | December 31, 2012 |
25,000 | June 30, 2013 |
The Company recognizes compensation cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service period for the entire award, provided that the compensation cost recognized at any date must at least equal the portion of the grant-date value of the award that is vested at that date. No compensation cost is recognized for instruments that are forfeited by the Company because a service condition or a performance condition is not satisfied.
Accordingly, the Company recognized compensation expense of $35,000 and $37,500, related to the restricted shares granted to Mr. Tick for the three months ended March 31, 2012 and 2011, respectively, based on the estimated grant-date fair value of the Companys common stock of $3.00.
Restricted shares granted to independent directors
On October 5, 2010, the Company entered into separate restricted shares grant agreements with the Companys newly elected independent directors Mr. Henry Ngan, Ms. Virginia Pan and Mr. Jianbing Zhong. Pursuant the agreements, the Company granted, under the Companys Plan, to Mr. Ngan 40,000 restricted shares of the Companys common stock, Ms. Pan 30,000 restricted shares and Mr. Zhong 20,000 restricted shares, as compensation for the services to be provided by them as independent directors.
F-27
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 14 | SHARE-BASED COMPENSATION (CONTINUED) |
Restricted shares granted to independent directors (continued)
On January 24, 2011, the Company entered into an independent director contract and an indemnification agreement with Mr. Kurtzig, whereby the Company agreed to grant, under the Companys Plan, to Mr. Kurtzig 20,000 restricted shares of the Companys common stock as compensation for the services to be provided by him and indemnify Mr. Kurtzig against expenses, judgments, fines, penalties or other amounts actually and reasonably incurred by Mr. Kurtzig in connection with any proceeding if Mr. Kurtzig acted in good faith and in the best interests of the Company.
On August 11, 2011, the Company entered into a restricted shares grant agreement with Mr. Kurtzig, whereby the Company agreed to grant, under the Companys Plan, to Mr. Kurtzig 10,000 restricted shares of the Companys common stock as compensation for the services to be provided by him.
The restricted shares granted to independent directors will vest in equal installments on a semi-annual basis over a two-year period. If the independent directors service with the Company ceases for any reason other than the independent directors (a) death, (b) disability, (c) retirement, or (d) termination by the Company without cause, any unvested restricted shares will be automatically forfeited to the Company.
Accordingly, the Company recognized a total compensation expense of $44,601 and $38,943 related to the restricted shares granted to the directors for the three months ended March 31, 2012 and 2011 based on the estimated grant-date fair values of the Companys common stock of $2.98 on October 5, 2010, $3.28 on January 24, 2011 and $2.41 on August 11, 2011.
NOTE 15 | INCOME TAXES |
The Companys VIEs and subsidiaries incorporated in the PRC are subject to PRC enterprise income tax (EIT). Before January 1, 2008, the PRC EIT rate was generally 33%. In March 2007, the PRC government enacted a new PRC Enterprise Income Tax Law, or the New EIT Law, and promulgated related regulations, Implementation Regulations for the PRC Enterprise Income Tax Law. The New EIT Law and Implementation Regulations became effective on January 1, 2008. The New EIT Law, among other things, imposes a unified income tax rate of 25% for both domestic and foreign invested enterprises registered in the PRC.
F-28
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 15 | INCOME TAXES (CONTINUED) |
Daqing Shuaiyi, Harbin Shuayi and Heilongjiang Shuaiyi are subject to an EIT rate of 25% for the years ended December 31, 2012 and 2011. No provision for PRC taxes was made for Heilongjiang Shuaiyi which had no taxable income in the PRC.
Harbin Baixin has been subject to an EIT rate of 25% since its incorporation. No provision for PRC taxes was made as Harbin Baixin had no taxable income in the PRC.
No provision for other overseas taxes is made as none of Nutrastar, New Resources and Oriental Global has any taxable income in the U.S., British Virgin Islands or Hong Kong, respectively.
The Companys income tax expense consisted of:
For the Three Months | ||||||
Ended March 31, | ||||||
2012 | 2011 | |||||
Current income tax PRC | $ | 1,151,402 | $ | 942,413 | ||
Deferred | - | - | ||||
$ | 1,151,402 | $ | 942,413 |
A reconciliation of the provision for income taxes determined at the U.S. federal corporate income tax rate to the Companys effective income tax rate is as follows:
For the Three Months | ||||||
Ended March 31, | ||||||
2012 | 2011 | |||||
Pre-tax income | $ | 4,100,980 | $ | 3,950,184 | ||
U.S. federal corporate income tax rate | 34% | 34% | ||||
Income tax computed at U.S. federal corporate income tax rate | 1,394,333 | 1,343,063 | ||||
Reconciling items: | ||||||
Loss not recognized as deferred tax assets | 102,800 | 57,380 | ||||
Change in fair value of warrants | 1,370 | (133,345 | ) | |||
Rate differential for PRC earnings | (396,653 | ) | (341,399 | ) | ||
Non-deductible expenses and non-reportable income | 49,552 | 16,714 | ||||
Effective tax expense | $ | 1,151,402 | $ | 942,413 |
F-29
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 15 | INCOME TAXES (CONTINUED) |
The Company had deferred tax assets as follows:
March 31, | December 31, | |||||
2012 | 2011 | |||||
Net operating losses carried forward | $ | 889,674 | $ | 786,873 | ||
Less: Valuation allowance | (889,674 | ) | (786,873 | ) | ||
Net deferred tax assets | $ | - | $ | - |
As of March 31, 2012 and December 31, 2011, Nutrastar had $2,616,687 and $2,314,333 net operating loss carryforwards available to reduce future taxable income, respectively, which will expire in various years through 2031. Management believes it is more-likely-than-not that the Company will not realize these potential tax benefits as the Companys U.S. operations will not generate any operating profits in the foreseeable future. Therefore, the Company recorded a full valuation allowance on its deferred tax assets.
As of March 31, 2012 and December 31, 2011, the Company has no material unrecognized tax benefits which would favorably affect the effective income tax rate in future periods and does not believe that there will be any significant increases or decreases of unrecognized tax benefits within the next twelve months. No interest or penalties relating to income tax matters have been imposed on the Company during the three months ended March 31, 2012 and 2011, and no provision for interest and penalties is deemed necessary as of March 31, 2012 and December 31, 2011.
According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or its withholding agent. The statute of limitations extends to five years under special circumstances, which are not clearly defined. In the case of a related party transaction, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion.
NOTE 16 | EARNINGS PER SHARE |
The following table is a reconciliation of the net income and the weighted average shares used in the computation of basic and diluted earnings per share for the periods presented:
For the Three Months | ||||||
Ended March 31, | ||||||
2012 | 2011 | |||||
Income available to common stockholders: | ||||||
- Net income | $ | 2,949,578 | $ | 3,007,771 | ||
Less: Preferred stock dividend | (65,144 | ) | (118,485 | ) | ||
Income available to common stockholders (Basic) | $ | 2,884,434 | $ | 2,889,286 | ||
Add: Preferred stock dividend | 65,144 | 118,485 | ||||
Income available to common shareholders (Diluted) | 2,949,578 | 3,007,771 | ||||
Weighted average number of shares: | ||||||
- Basic | 15,361,458 | 14,513,470 | ||||
- Effect of dilutive preferred stock | 1,151,400 | 1,751,728 | ||||
- Effect of dilutive restricted stock units | - | 8,985 | ||||
- Diluted | 16,512,858 | 16,274,183 | ||||
Net income per share | ||||||
- Basic | $ | 0.19 | $ | 0.20 | ||
- Diluted | $ | 0.18 | $ | 0.18 |
F-30
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 16 | EARNINGS PER SHARE (CONTINUED) |
Diluted earnings per share is calculated by adjusting the weighted average number of common shares outstanding to assume the issuance of all dilutive potential common shares upon conversion.
The diluted earnings per share calculation for the three months ended March 31, 2012 did not include the warrants, management options and restricted shares to purchase up to 1,588,501 shares, 150,000 shares and 115,000 shares of common stock, respectively, because their effect was anti-dilutive.
The diluted earnings per share calculation for the three months ended March 31, 2011 did not include the warrants and management options to purchase up to 1,558,501 and 150,000 shares of common stock, respectively, because their effect was anti-dilutive.
NOTE 17 | RELATED PARTY TRANSACTIONS |
Other than disclosed elsewhere in these financial statements, the Company also had the following related party balances and transactions:-
(a) |
Due to related parties |
March 31, | December 31, | |||||
2012 | 2011 | |||||
Due to Ms. Lianyun Han, Chairperson, CEO and President of the Company | $ | 80,723 | $ | 80,648 |
The amount due to Ms. Han was non-interest bearing, unsecured and without a fixed repayment date. | |
(b) |
Lease of land |
For the three months ended March 31, 2012 and 2011, the Company paid rental expense of $14,328 and $2,335 for the land leased from Heilongjiang Shuaiyi Technology Development Co., Ltd. (Shuaiyi Technology), respectively. Shuaiyi Technology and the Company are under common control and management. | |
(c) |
Acquisition of corporate headquarter premise |
On April 15, 2011, Heilongjiang Shuaiyi entered into an asset transfer agreement (the Transfer Agreement) with Ms. Han. Pursuant to the Transfer Agreement, Heilongjiang Shuiayi acquired an office building located at 54-1 Ganshui Road, Xiangfang District, Harbin, with a construction area of 1,854.1 square meters, from Ms. Han at a cash consideration of RMB 12.75 million (approximately $1.95 million including other incidental costs), which was fully paid in April 2011. The purchase price was determined based on a real property valuation report issued by an independent appraisal firm, Harbin Guoxin Real Estate Appraisal and Consulting Co., Limited on November 11, 2010. Management believes the terms of the purchase transaction and the consideration that the Company paid in connection with this transaction were comparable to the terms available and the amounts that would be paid in an arms-length transaction. | |
Management intends to move the Company headquarters to this office building in 2012. |
F-31
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 18 | CONCENTRATION RISK |
(a) |
Concentration of credit risk |
As of March 31, 2012 and December 31, 2011, almost all of the Companys cash including cash on hand and deposits in bank accounts were maintained within the PRC where there is currently no rule or regulation in place for obligatory insurance to cover bank deposits in the event of bank failure. However, the Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.
For the three months ended March 31, 2012 and 2011, all of the Companys sales arose in the PRC. In addition, all accounts receivable as of March 31, 2012 and December 31, 2011 also arose in the PRC.
The following individual customer accounted for 10% or more of the Companys revenues for the three months ended March 31, 2012 and 2011:
2012 | 2011 | |||||
Lai En Century Co. Ltd | 24% | 37% |
Individual customer amounts receivable that represented 10% or more of total accounts receivable as of March 31, 2012 and December 31, 2011 were as follows:
Percentage of accounts receivable as of | ||||||
March 31, | December 31, | |||||
2012 | 2011 | |||||
Great Northern Wilderness Grain and Oil Warehouse Market | 52% | 56% | ||||
Tianjin GuangFeng Pharmacy | 18% | 16% | ||||
Beijing Green Grass Hall Biotechnology Co., Ltd | 17% | - | ||||
Shandong Jinan Qingjie Ltd | 13% | - | ||||
Shenzhen South Ocean Gift Trade Co., LTD | - | 14% | ||||
Shandong Province, Linyi City HongYun Commodity | - | 14% |
(b) |
Concentration of operating risk |
Substantially all of the Companys operations are conducted in China. The Companys operations are subject to various political, economic, and other risks and uncertainties inherent in China. Among other risks, the Companys operations are subject to the risks of restrictions on transfer of funds; export duties, quotas, and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations.
F-32
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 19 | COMMITMENTS AND CONTINGENCIES |
(a) |
Operating leases |
The Company has entered into tenancy agreements for the leases of an exhibition hall and land with a third party and a related company, Shuaiyi Technology (see Note 17(b)), respectively, for the purposes of the operation of its VIEs. The Companys commitments for minimum lease payments under these operating leases for the next five years and thereafter as of March 31, 2012 are as follows:
Related Parties | Non-related Parties | Total | |||||||
Remainder of fiscal year ending December 31, 2012 | $ | 43,075 | $ | 36,452 | $ | 79,527 | |||
Fiscal year ending December 31, 2013 | 57,433 | 28,597 | 86,030 | ||||||
Fiscal year ending December 31, 2014 | 57,433 | - | 57,433 | ||||||
Fiscal year ending December 31, 2015 | 57,433 | - | 57,433 | ||||||
Fiscal year ending December 31, 2016 | 57,433 | - | 57,433 | ||||||
Thereafter | 798,580 | - | 798,580 | ||||||
Total | $ | 1,071,387 | $ | 65,049 | $ | 1,136,436 |
During the three months ended March 31, 2012 and 2011, rental expenses under operating leases amounted to $26,850 and $15,247, respectively.
(b) |
Capital commitments contracted but not provided for: |
March 31, | December 31, | |||||
2012 | 2011 | |||||
Acquisition or construction of buildings - within one year | $ | 7,943,695 | $ | 7,935,374 |
(c) |
PRC employee costs |
According to the prevailing laws and regulations of the PRC, the Companys subsidiaries and VIEs in the PRC are required to cover its employees with medical, retirement and unemployment insurance programs. Management believes that due to the transient nature of its employees, they do not need to provide all employees with such social insurances, and have not paid the social insurances for all employees.
In the event that any current or former employee files a complaint with the PRC government, the Company's subsidiaries and VIEs may be subject to making up the social insurances as well as administrative fines. As the Company believes that these fines would not be material, no provision has been made in this regard.
F-33
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 19 | COMMITMENTS AND CONTINGENCIES (CONTINUED) |
(d) |
Indemnification agreement |
On October 5, 2010, the Company entered into an indemnification agreement with each of its newly elected independent directors, Mr. Henry Ngan, Ms. Virginia Pan and Mr. Jianbing Zhong, pursuant to which the Company agreed to indemnify the independent directors against expenses, judgments, fines, penalties or other amounts actually and reasonably incurred by the Independent directors in connection with any proceeding if the independent directors acted in good faith and in the best interests of the Company.
Also on October 5, 2010, the Company entered into an indemnification agreement with Mr. Tick pursuant to which the Company agreed to indemnify Mr. Tick against expenses, judgments, fines, penalties or other amounts actually and reasonably incurred by Mr. Tick in connection with any proceeding if Mr. Tick acted in good faith and in the best interests of the Company.
On January 24, 2011, the Company entered into an indemnification agreement with Mr. Joshua Kurtzig, its newly elected independent director, pursuant to which the Company agreed to indemnify Mr. Kurtzig against expenses, judgments, fines, penalties or other amounts actually and reasonably incurred by the independent director in connection with any proceeding if the independent director acted in good faith and in the best interests of the Company.
NOTE 20 | SEGMENT INFORMATION |
The Company operates in three business segments identified by product, Cordyceps Militaris, beverages and organic and specialty food products. The Cordyceps Militaris segment consists of the growing and sales of Cordyceps Militaris, which business is conducted through Daqing Shuaiyi. The beverages segment consists of the manufacturing of functional health beverages featuring the Cordyceps Militaris as a core ingredient, which business is also conducted through Daqing Shuaiyi and was launched in the fourth quarter of 2010. The organic and specialty food products segment consists of the sales of rice, flour, silage corn and other agricultural products which business is mainly conducted through Harbin Shuaiyi.
During the three months ended March 31, 2012 and 2011, all of the Companys operations were carried out in one geographical segment - China.
F-34
NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Unaudited) |
NOTE 20 | SEGMENT INFORMATION (CONTINUED) |
The Companys segment revenue and results for the three months ended March 31, 2012 and 2011 are as follows:
Three Months Ended March 31, 2012 | |||||||||||||||
Organic and | |||||||||||||||
Cordyceps | Specialty Food | Corporate | |||||||||||||
Militaris | Beverages | Products | Unallocated | Consolidated | |||||||||||
Segment revenue from external customers | $ | 5,458,121 | $ | 855,659 | $ | 547,238 | $ | - | $ | 6,861,018 | |||||
Segment income before income taxes | $ | 3,826,059 | $ | 601,924 | $ | 32,712 | $ | (359,715 | ) | $ | 4,100,980 | ||||
Income before income taxes | $ | 4,100,980 | |||||||||||||
Segment assets | $ | 69,195,481 | $ | 70,041 | $ | 6,613,479 | $ | 2,635,578 | $ | 78,514,579 | |||||
Total assets | $ | 78,514,579 | |||||||||||||
Other segment information: | |||||||||||||||
Depreciation and amortization | $ | 280,390 | $ | 1,354 | $ | 1,356 | $ | 26,152 | $ | 309,252 | |||||
Expenditure for segment assets | $ | - | $ | - | $ | 15,927 | $ | - | $ | 15,927 |
Three Months Ended March 31, 2011 | |||||||||||||||
Organic and | |||||||||||||||
Cordyceps | Specialty Food | Corporate | |||||||||||||
Militaris | Beverages | Products | unallocated | Consolidated | |||||||||||
Segment revenue from external customers | $ | 5,083,488 | $ | 230,315 | $ | 482,439 | $ | - | $ | 5,796,242 | |||||
Segment income before Income taxes | $ | 3,581,442 | $ | 182,338 | $ | 27,818 | $ | 158,586 | $ | 3,950,184 | |||||
Income before income taxes | $ | 3,950,184 | |||||||||||||
Segment assets | $ | 46,210,964 | $ | 72,452 | $ | 1,312,566 | $ | 11,156,788 | $ | 58,752,770 | |||||
Total assets | $ | 58,752,770 | |||||||||||||
Other segment information: | |||||||||||||||
Depreciation and amortization | $ | 260,161 | $ | 1,298 | $ | 1,300 | $ | 1,079 | $ | 263,838 | |||||
Expenditure for segment assets | $ | 1,168 | $ | - | $ | - | $ | - | $ | 1,168 |
F-35
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Special Note Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q, including the following Managements Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that are based on the beliefs of our management, and involve risks and uncertainties, as well as assumptions, that, if they ever materialize or prove incorrect, could cause actual results to differ materially from those expressed or implied by such forward-looking statements. The words believe, expect, anticipate, project, targets, optimistic, intend, aim, will or similar expressions are intended to identify forward-looking statements. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including statements regarding new and existing products, technologies and opportunities; statements regarding market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; uncertainties related to conducting business in China; and any statements of belief or intention. As such, they are subject to risks and uncertainties that could cause our results to differ materially from those expressed or implied by such forward looking statements. Such risks and uncertainties include any of the factors and risks mentioned in the Risk Factors sections of the Quarterly Report and our Annual Report on Form 10-K for the year ended December 31, 2011 and subsequent SEC filings, and any statements of assumptions underlying any of the foregoing. All forward-looking statements included in this report are based on information available to us on the date of this report. We assume no obligation and do not intend to update these forward-looking statements, except as required by law.
Certain Terms
Except as otherwise indicated by the context, references in this report to:
- BVI refers to the British Virgin Islands;
- China, Chinese and PRC refer to the Peoples Republic of China;
- Exchange Act refers to the Securities Exchange Act of 1934, as amended.
- Nutrastar, we, us, our company and our refer to Nutrastar International Inc., a Nevada corporation, its subsidiaries, and, in the context of describing our operations and business and consolidated financial information, include our VIE Entities;
- Renminbi and RMB refer to the legal currency of China;
- SEC refers to the United States Securities and Exchange Commission;
- Securities Act refers to the Securities Act of 1933, as amended;
- U.S. dollars, dollars and $ refer to the legal currency of the United States; and
- VIE Entities means our consolidated variable interest entities, including Heilongjiang Shuaiyi New Energy Development Co., Ltd. and its subsidiaries as depicted in our organizational chart included in our Annual Report on Form 10-K for the year ended December 31, 2011.
Overview of Our Business
We are a leading China based producer and supplier of premium branded consumer products including commercially cultivated Cordyceps Militaris (aka Chinese Golden Grass), organic and specialty food products and functional health beverages.
Our primary product is Cordyceps Militaris, also known as Chinese Golden Grass. Cordyceps Militaris is a species of parasitic fungus that is typically found in north-eastern China. It is a precious ingredient in traditional Chinese medicine, as Cordyceps Militaris is widely believed in China to offer high medical and health benefits by nourishing the yin, boosting the yang, and invigorating the meridians of the lungs and kidneys. According to Georges Halpern's Healing Mushrooms, certain research has shown that Cordyceps Militaris may boost the immune system, and can be used as a supplement for combating certain effects of fatigue and aging, the occurrences of certain tumors, and combating arteriosclerosis and certain gastrointestinal disorders, as well as reducing blood pressure. In addition, Cordyceps Militaris has significantly high economic values and according to Halpern, wild Cordyceps Militaris can cost as much as $10,000 per kilogram. Due to the extremely sensitive growing conditions of Cordyceps Militaris, it is very difficult to grow the plant in a man-made environment. After several years of laboratory tests, we developed a technology to commercially grow and produce Cordyceps Militaris in 2006. Through Daqing Shuaiyi, we generated 79.6% and 87.7% of our revenues from Cordyceps Militaris for the first quarter of 2012 and 2011, respectively. We plan to continue to focus on Cordyceps Militaris related based consumer products, which is our fastest growing product line with the greatest market demand and a significantly higher profit margin.
1
We also sell organic and specialty food products through our VIE, Harbin Shuaiyi, which was formed in 2001. After years of development, we believe that we have become the largest wholesale distributor of organic and specialty food in Heilongjiang Province, China. We plan to increase our focus in organic and specialty food products business, including efforts to become a producer and increase our distribution capabilities.
We introduced the Cordyceps Militaris based functional health beverages in the fourth quarter of 2010. The non-carbonized beverage products were developed internally and contain the Cordyceps Militaris as a key ingredient. The products are currently being marketed directly to consumers in select cities in Jiangsu and Anhui Province through various distribution channels. We produce and distribute our functional health beverages through Daqing Shuaiyi.
First Quarter Financial Performance Highlights
We continued to experience strong demand for our products and services during the first quarter of 2012, which resulted in continued growth in our revenues and operating profit.
The following are some financial highlights for the first quarter of 2012:
-
Net Revenue: Our net revenue was approximately $6.86 million for the first quarter of 2012, an increase of 18.4% from the same quarter of last year.
-
Gross Margin: Gross margin was 74.1% for the first quarter of 2012, as compared to 76.4% for the same period in 2011.
-
Operating Profit: Operating profit was approximately $4.04 million for the first quarter of 2012, an increase of 15.5% from $3.50 million of the same period last year.
-
Net Income: Net income was approximately $2.95 million for the first quarter of 2012, a decrease of 1.9% from the same period of last year.
-
Basic and fully diluted earnings per share were $0.19 and $0.18 for the first quarter of 2012.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011
The following table sets forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of our revenue.
Three Months Ended | Three Months Ended | |||||||||||
March 31, 2012 | March 31, 2011 | |||||||||||
As a | As a | |||||||||||
percentage of | percentage of | |||||||||||
In Thousands | revenues | In Thousands | revenues | |||||||||
Net Revenue | $ | 6,861 | 100 % | $ | 5,796 | 100% | ||||||
Cost of goods sold | (1,779 | ) | (25.9) % | (1,370 | ) | (23.6)% | ||||||
Gross Profit | 5,082 | 74.1 % | 4,426 | 76.4% | ||||||||
Selling expenses | (382 | ) | (5.6) % | (410 | ) | (7.1)% | ||||||
General and administrative expenses | (665 | ) | (9.7) % | (521 | ) | (9.0)% | ||||||
Income from operations | 4,035 | 58.8% | 3,495 | 60.3% | ||||||||
Other income and (expenses): | ||||||||||||
Interest income | 67 | 1.0% | 40 | 0.7% | ||||||||
Foreign exchange differences | 3 | 0.04% | 23 | 0.4% | ||||||||
Change in fair value of warrants | (4 | ) | (0.06)% | 392 | 6.8% | |||||||
Total other income | 66 | 1.0% | 455 | 7.9% | ||||||||
Income before income tax | 4,101 | 59.8% | 3,950 | 68.2% | ||||||||
Provision for income tax | (1,151 | ) | (16.8)% | (942 | ) | (16.3)% | ||||||
Net income | $ | 2,950 | 43.0% | 3,008 | 51.9% |
2
Net Revenue. Net revenue is generated from the sale of our products. Net revenue increased approximately $1.06 million, or 18.4%, to approximately $6.86 million for the three months ended March 31, 2012, from approximately $5.80 million for the same period in 2011. This increase was mainly attributable to the increase in sales volume of our core product, Cordyceps Militaris by $0.37 million and the increase in sales volume of our beverage products by $0.63 million. The increase in sales of our products was mainly driven by the continued increase in market demand for our products.
Business Segment Information
Our business operations can be categorized into three segments based on the type of products we produce and sell, specifically (i) Cordyceps Militaris, (ii) functional health beverages and (iii) organic and specialty food products. The following table illustrates the revenue from each of these three segments as well as the change of percentage for the periods indicated:
Net Revenue by Product Segments |
(all amounts, other than percentages, in thousands of U.S. dollars) |
Three Months Ended March 31, | Percent | ||||||||
2012 | 2011 | Change | |||||||
Components of Net Revenue | |||||||||
Cordyceps Militaris | $ | 5,458 | $ | 5,084 | 7.4% | ||||
Functional Health Beverages | 856 | 230 | 271.5% | ||||||
Organic and Specialty Food Products | 547 | 482 | 13.4% | ||||||
Total revenues | $ | 6,861 | $ | 5,796 | 18.4% |
We expect that majority of our revenue for 2012 will continue to be generated from our Cordyceps Militaris products, with an increase in percentage of revenue coming from the functional health beverages as we are expanding our distribution channel of such products. We also expect to increase our business development activities in the organic and specialty food products on a going forward basis. We anticipate that sales and marketing related costs associated with branding, marketing and advertising of the functional health beverages will increase as a percentage of revenue.
Additional information regarding our products can be found at Note 20, Segment Information in our unaudited condensed consolidated financial statements contained under Part I, Item I FINANCIAL STATEMENTS above.
Cost of Goods Sold. Our cost of goods sold is primarily comprised of the costs of our raw materials, labor and overhead. Our cost of goods sold increased by $0.41 million, or 29.8%, to approximately $1.78 million for the three months ended March 31, 2012 from approximately $1.37 million during the same period in 2011. This increase was commensurate with the increase in production costs associated with the functional health beverages products and the increase in sales of Cordyceps Militaris. As a percentage of net revenue, the cost of goods sold increased to 25.9% for the three months ended March 31, 2012 from 23.6% during the same period in 2011. Such increase of cost of goods sold as a percentage of net revenue was mainly attributable to the increased production costs associated with the functional health beverages as our functional health beverages generally have a lower margin than our Cordyceps Militaris products because we outsource the production of the beverages to a third party bottler.
3
Gross Profit. Gross product is equal to the difference between net revenue and cost of goods sold. Our gross profit increased by approximately $0.66 million, or 14.8%, to approximately $5.08 million for the three months ended March 31, 2012 from approximately $4.43 million during the same period in 2011. Gross profit as a percentage of net revenue, or gross margin, was 74.1% for the three months ended March 31, 2012, a decrease of 2.3% from 76.4% during the same period in 2011. Such percentage decrease was mainly due to the increase in the sales of functional health beverages in the product mix which have a lower gross margin as compared to our Cordyceps Militaris products.
Selling Expenses. Our selling expenses include sales commissions, cost of advertising and promotional materials, salaries and fringe benefits of sales personnel, and other sales related costs. Selling expenses decreased approximately $0.03 million, or 6.7%, to approximately $0.38 million for the three months ended March 31, 2012 from approximately $0.41 million during the same period in 2011. The decrease in selling expenses in terms of dollars for the three months ended March 31, 2012 was mainly attributable to decrease in selling and marketing expenses incurred relating to the rollout of our functional health beverages product line to additional distribution channels as well as costs associated with the opening of our specialty stores to sell our products compared with same period 2011. As a percentage of net revenue, selling expenses decreased to 5.6% for the three months ended March 31, 2012 from 7.1% for the same period in 2011. The percentage decrease was mainly due to the increase in net revenue which outpaced the increase in selling expenses.
General and Administrative Expense. General and administrative expenses include the costs associated with staff and support personnel who manage our business activities, depreciation charge for fixed assets, and professional fees paid to third parties. General and administrative expenses increased approximately $0.14 million, or 27.5%, to approximately $0.66 million for the three months ended March 31, 2012 from approximately $0.52 million for the same period in 2011. The increase in terms of dollars was mainly attributable to the increase in payments for third party professional services. As a percentage of net revenue, general and administrative expenses were 9.7% for the three months ended March 31, 2012 as compared to 9.0% for the same period of 2011. The percentage increase was mainly due to the increase in general and administrative expenses outpaced the increase in net revenue.
Income Before Income Tax. Income before income tax increased approximately $0.15 million, or 3.8%, to approximately $4.10 million during the three months ended March 31, 2012 from approximately $3.95 million during the same period in 2011. As a percentage of net revenue, income before income tax decreased to 59.8% during the three months ended March 31, 2012 from 68.2% during the same period in 2011. The decrease of income before income tax as a percentage of net revenue is mainly attributable to the increase in costs associated with production of our functional health beverages and decrease in other income of $0.39 million mainly as a result of the change in fair value of outstanding warrants.
Income Taxes. Nutrastar International Inc. is subject to United States federal income tax at a tax rate of 34%. No provision for income taxes in the United States has been made as Nutrastar International Inc. had no income taxable in the United States for the three months ended March 31, 2012 and 2011. New Resources was incorporated in the BVI and under the current laws of the BVI, is not subject to income taxes. Oriental Global was formed in Hong Kong and under the current laws of Hong Kong, is not subject to income taxes. Our PRC subsidiary and the VIEs are subject to national and local income taxes within China at the applicable tax rate on the taxable income as reported in their PRC statutory financial statements in accordance with relevant income tax laws. China passed a new Enterprise Income Tax Law, or the New EIT Law, and its implementing regulations, both of which became effective on January 1, 2008.
Both Daqing Shuaiyi and Harbin Shuaiyi have been subject to an income tax rate of 25% since 2011.
Income tax increased approximately $0.21 million to approximately $1.15 million for the three months ended March 31, 2012 from approximately $0.94 million for the same period in 2011. Income tax expense for the three months ended March 31, 2012 increased because of the increase in sales and taxable income.
Net Income. Net income decreased by approximately $0.06 million, or 1.9% to approximately $2.95 million for the three months ended March 31, 2012 from approximately $3.01 million for the same period of 2011, as a result of the factors described above.
4
Liquidity and Capital Resources
General
As of March 31, 2012, we had cash and cash equivalents of approximately $57 million. The following table provides detailed information about our net cash flow for all financial statement periods presented in this report.
Cash Flow
(All amounts in thousands of U.S.
dollars)
Three Months Ended March 31, | ||
2012 | 2011 | |
Net cash provided by operating activities | $2,392 | $3,823 |
Net cash used in investing activities | (15) | (1) |
Net cash provided by financing activities | 4 | 45 |
Foreign currency translation adjustment | 59 | 391 |
Net cash flow | $2,440 | $4,258 |
Operating Activities
Net cash provided by operating activities was approximately $2.39 million for the three-month period ended March 31, 2012, which is a decrease of approximately $1.43 million from approximately $3.82 million net cash provided by operating activities for the same period of 2011. The decrease in the cash provided by operating activities was mainly attributable to the increase in income taxes payment in the amount of $1.68 million.
Investing Activities
Our primary uses of cash for investing activities are payments for the acquisition of property, plant and equipment.
Net cash used in investing activities for the three-month period ended March 31, 2012 was approximately $15,000, an increase of approximately $14,000 from net cash used in investing activities of approximately $1,000 for the same period of 2011. Our primary uses of cash for investing activities are payments for the acquisition of property, plant and equipment.
Financing Activities
Net cash provided by financing activities for the three-month period ended March 31, 2012 was approximately $4,000, a decrease of approximately $41,000 from approximately $45,000 net cash provided by financing activities for the same period of 2011. The decrease of the cash provided by financing activities was mainly due to the release of restricted cash from an escrow account during the first quarter of 2012.
We believe that our cash on hand and cash flow from operations will meet our expected capital expenditure and working capital requirements for the next 12 months. We are in the process of significantly expanding our organic and specialty food consumer products business. We expect that the expansion will require capital expenditures of approximately $8.06 million over the next 12 to 18 months, which will be funded from our cash on hand and cash generated from operations. However, we may in the future require additional cash resources due to changed business conditions, implementation of our strategy to expand our production capacity or other investments 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 or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.
5
Effects of 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. However, our management will closely monitor the price change and continually maintain effective cost control in operations.
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 condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures or capital resources that is material to an investor in our securities.
Seasonality
The production and sale of our primary product, Cordyceps Militaris, historically have not been subject to material seasonal variations. However since a majority of our sales are in China, the timing of the various Chinese holidays such as Lunar Chinese New Year, May and October holidays may have some impact on our operating results and operating cash flows.
Critical Accounting Policies
Managements discussion and analysis of its financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Our financial statements reflect the selection and application of accounting policies, which require management to make significant estimates and judgments. See Note 2 to our condensed consolidated financial statements, Summary of Significant Accounting Policies. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe that the following reflect the more critical accounting policies that currently affect our financial condition and results of operations.
Principle of consolidation
The accompanying
condensed consolidated financial statements include the financial statements of
Nutrastar and its wholly owned subsidiaries, New Resources, Oriental Global and
Harbin Baixin, and its VIEs Heilongjiang Shuaiyi, Daqing Shuaiyi and Harbin
Shuaiyi. All significant inter-company balances or transactions have been
eliminated on consolidation.
We have evaluated the relationship with Heilongjiang Shuaiyi, Daqing Shuaiyi and Harbin Shuaiyi and based on the result of the evaluation, believe that these entities are variable interest entities and that we are the primary beneficiary of these entities. Consequently, we have included the results of operations of these variable interest entities in the condensed consolidated financial statements. Our relationships with Heilongjiang Shuaiyi, Daqing Shuaiyi and Harbin Shuaiyi are governed by a series of contractual arrangements. Under PRC laws, Heilongjiang Shuaiyi, Daqing Shuaiyi and Harbin Shuaiyi are independent legal persons and none of them is exposed to liabilities incurred by the other parties.
The accounts of Heilongjiang Shuaiyi, Daqing Shuaiyi and Harbin Shuaiyi are consolidated in the accompanying condensed financial statements pursuant to the Financial Accounting Standards Board Accounting Standard Codification (ASC) Topic 810 and related subtopics related to the consolidation of variable interest entities. We do not have any non-controlling interests in net income and accordingly, did not subtract any net income in calculating the net income attributable to us. Because of the contractual arrangements, we had a pecuniary interest in the VIEs that require consolidation of our and the VIEs financial statements.
Inventories
Inventories are stated at the
lower of cost, determined on a weighted average basis, or market. Costs of
inventories include purchase and related costs incurred in bringing the products
to their present location and condition. Market value is determined by reference
to selling prices after the balance sheet date or to managements estimates
based on prevailing market conditions. Management will write down the
inventories to market value if it is below cost. Management also regularly
evaluates the composition of its inventories to identify slow-moving and
obsolete inventories to determine if a valuation allowance is required.
Derivative financial instruments
We evaluate
all its financial instruments to determine if such instruments are derivatives
or contain features that qualify as embedded derivatives. For derivative
instruments that are accounted for as liabilities, the derivative instrument is
initially recorded at its fair value and is then revalued at each
reporting date, with changes in the fair value reported in the consolidated
statements of income. For stock-based derivative financial instruments, we use
Monte-Carlo simulation methods to value the derivative instruments at inception
and on subsequent valuation dates.
6
Revenue recognition
Revenue is recognized
when the following four revenue criteria are met: persuasive evidence of an
arrangement exists, delivery has occurred, the selling price is fixed or
determinable, and collectability is reasonably assured.
Sales revenue is recognized net of value added and sales related taxes, sales discounts and returns at the time when the merchandise is delivered to the customer. Based on historical experience, management estimates that sales returns are immaterial and has not recorded an allowance for estimated sales returns.
Share-based payments
We account for
share-based compensation awards to employees in accordance with FASB ASC Topic
718, Compensation Stock Compensation, which requires that share-based payment
transactions with employees be measured based on the grant-date fair value of
the equity instrument issued and recognized as compensation expense over the
requisite service period.
We account for share-based compensation awards to non-employees in accordance with FASB ASC Topic 718 and FASB ASC Subtopic 505-50, Equity-Based Payments to Non-employees. Under FASB ASC Topic 718 and FASB ASC Subtopic 505-50, stock compensation granted to non-employees has been determined as the fair value of the consideration received or the fair value of equity instrument issued, whichever is more reliably measured and is recognized as expense as the goods or services are received.
Income taxes
We are subject to income taxes in
the United States and other foreign jurisdictions where it operates. We account
for income taxes in accordance with FASB ASC Topic 740, Income Taxes. FASB ASC
Topic 740 requires an asset and liability approach for financial accounting and
reporting for income taxes and allows recognition and measurement of deferred
tax assets based upon the likelihood of realization of tax benefits in future
years. Under the asset and liability approach, deferred taxes are provided for
the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. A valuation allowance is provided for deferred tax assets
if it is more likely than not these items will either expire before we are able
to realize their benefits, or that future deductibility is uncertain.
Foreign currency
We use the United States
dollar (US Dollar or US$ or $) for financial reporting purposes. Our PRC
subsidiaries and VIEs maintain their books and records in their functional
currency, Chinese Renminbi (RMB), being the lawful currency in the PRC. Assets
and liabilities of the PRC subsidiaries and VIEs are translated from RMB into US
Dollars using the applicable exchange rates prevailing at the balance sheet
date. Items on the statements of income and cash flows are translated at average
exchange rates during the reporting period. Equity accounts are translated at
historical rates. Adjustments resulting from the translation of our financial
statements are recorded as accumulated other comprehensive income.
The exchange rates used to translate amounts in RMB into US Dollars for the purposes of preparing the consolidated financial statements are based on the rates as published on the website of Peoples Bank of China and are as follows:
March 31, 2012 | December 31, 2011 | |||||
Balance sheet items, except for equity accounts | US$1=RMB6.2943 | US$1=RMB6.3009 |
Three months ended March 31, | ||||||
2012 | 2011 | |||||
Items in the statements of income and cash flows | US$1=RMB6.3074 | US$1=RMB6.5832 |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures.
7
Our management, with the participation of our chief executive officer and chief financial officer, Ms. Lianyun Han and Mr. Robert Tick, respectively, evaluated the effectiveness of our disclosure controls and procedures. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this report, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, Ms. Lianyun Han and Mr. Robert Tick concluded that as of March 31, 2012, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting.
During the fiscal quarter ended March 31, 2012, there were no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
8
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. We are currently not aware of any legal proceedings or claims that would require disclosure under Item 103 of Regulation S-K. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
ITEM 1A. RISK FACTORS
Our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 contains a detailed discussion of risk factors that could materially adversely affect our business, our operating results, or our financial condition. The following risk factor should be read in conjunction with that discussion. Except for the addition of this risk factor, there are no material changes from the risk factors previously disclosed in Item 1A Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2011.
Our auditor, like other independent registered public accounting firms operating in China and to the extent their audit clients have operations in China Hong Kong, is not permitted to be subject to inspection by the Public Company Accounting Oversight Board and, as such, you may be deprived of the benefits of such inspection.
Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as auditors of companies that are traded publicly in the United States and a firm registered with the US Public Company Accounting Oversight Board (United States) (the PCAOB), is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards.
Because our operations are solely located in the Peoples Republic of China, a jurisdiction where PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditor, like other independent registered public accounting firms operating in China and to the extent their audit clients have operations in China Hong Kong, is currently not inspected by the PCAOB.
Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct full inspections of auditors operating in China makes it more difficult to evaluate our auditors audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
We have not sold any unregistered equity securities during the fiscal quarter ended March 31, 2012 that were not previously disclosed in a current report on Form 8-K that was filed during that period.
Purchases of Equity Securities By the Company
On August 24, 2011, our Board of Directors authorized a repurchase of up to $5 million of our common stock over twelve (12) months pursuant to a stock repurchase program (the Repurchase Program). Under the terms of the Repurchase Program, we may repurchase shares through open market, negotiated private or block transactions. The Repurchase Program does not obligate us to repurchase any dollar amount or number of shares of its common stock, and the program may be extended, modified, suspended or discontinued at any time.
During the three-month period ended March 31, 2012, there were no repurchases of our common stock pursuant to the Repurchase Program.
No repurchase plans expired or were terminated during the first quarter of fiscal 2012, nor do any plans exist under which we intend to make further purchases.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
EXHIBITS. | |
31.1* | |
| |
31.2* | |
| |
32.1* | |
| |
32.2* | |
| |
101 |
The following financial information from The Nutrastar International Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at March 31, 2012 and December 31, 2011, (ii) Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2012 and 2011, (iii) Condensed Consolidated Statements of Stockholders Equity, (iv) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011, and (iv) the Notes to Condensed Consolidated Financial Statements. |
* Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DATED: May 15, 2012
NUTRASTAR INTERNATIONAL INC. | ||
By: /s/ Lianyun Han | ||
Lianyun Han | ||
Chief Executive Officer | ||
(Principal Executive Officer) | ||
By: /s/ Robert Tick | ||
Robert Tick | ||
Chief Financial Officer | ||
(Principal Financial Officer) |
EXHIBIT INDEX
Exhibit | |
Number | Description |
31.1* | |
| |
31.2* | |
| |
32.1* | |
| |
32.2* | |
| |
101 |
The following financial information from The Nutrastar International Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at March 31, 2012 and December 31, 2011, (ii) Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2012 and 2011, (iii) Condensed Consolidated Statements of Stockholders Equity, (iv) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011, and (iv) the Notes to Condensed Consolidated Financial Statements. |
* Filed herewith.