Revenue by geography consisted of the
following as of June 30, 2013 and 2012:
The difference between the U.S. federal
statutory income tax rate and the Companys effective tax rate was as follows
for the periods ended June 30, 2013 and 2012:
Effective January 1, 2008, the PRC
government implemented a new 25% tax rate across the board for all enterprises
regardless of whether domestic or foreign enterprise without any tax holiday
which is defined as two-year exemption followed by three-year half exemption
hitherto enjoyed by tax payers. As a result of the new tax law of a standard 25%
tax rate, tax holidays were terminated as of December 31, 2007. However, PRC
government has established a set of transition rules to allow enterprises
already started tax holidays before January 1, 2008, to continue enjoying the
tax holidays until being fully utilized.
The Company has accrued a deferred tax
asset as a result of its net operating loss in and before June 30, 2013 because
the Company planned to setup operations in the United States. The company
anticipates that the operations within the United States will generate income in
the future so that it will be able to take full advantage of the accrued asset.
Accordingly the Company has not provided a valuation allowances for the accrued
tax asset.
The Companys has detailed the tax
rates for its subsidiaries for 2013 and 2012 in the following table.
During the period ended December 31,
2012 and 2011, the Company recorded a total of $503,493 and $644,243 stock
option and its related general and administrative expenses.
During the period ended June 30, 2013,
the Company did not grant any stock option.
The range of the exercise prices of the
stock options granted since inception of the plan are shown in the following
table:
No tax benefit has yet to be accrued or
realized. For the period ended June 30, 2013, the Company has yet to repatriate
its earnings. Accordingly it has not recognized any deferred tax assets or
liability in regards to benefits derived from the issuance of stock options.
The Company used the Black-Scholes
Model to value the warrants granted. The following shows the weighted average
fair value of the grants and the assumptions that were employed in the model:
The outstanding lease commitment for
the three greenhouses as of June 30, 2013 was $3,923,103.
ITEM 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
Caution Regarding Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking
statements. These statements involve known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements to
be materially different from any future results, performances or achievements
expressed or implied by the forward-looking statements. These risks and
uncertainties include, but are not limited to the factors described in the
section captioned Risk Factors in our Annual Report on Form 10-K for the year
ended December 31, 2012 filed with the Securities and Exchange Commission.
In some cases, you can identify forward-looking statements by
terms such as anticipates, believes, could, estimates, expects,
intends, may, plans, potential, predicts, projects, should,
would and similar expressions intended to identify forward-looking statements.
Forward-looking statements reflect our current views with respect to future
events and are based on assumptions and are subject to risks and uncertainties.
Given these uncertainties, you should not place undue reliance on these
forward-looking statements.
Also, forward-looking statements represent our estimates and
assumptions only as of the date of this report. You should read this report
completely and with the understanding that our actual future results may be
materially different from what we expect.
Except as required by law, we assume no obligation to update
any forward-looking statements publicly, or to update the reasons actual results
could differ materially from those anticipated in any forward-looking
statements, even if new information becomes available in the future.
Overview
We are an integrated food manufacturing company headquartered
in Shandong Province, China. We develop, manufacture and sell the following
types of food products:
.
|
chestnut products,
|
.
|
convenience foods (including ready-to-cook
foods, ready-to-eat foods, and meals ready-to-eat); and
|
.
|
frozen foods.
|
We conduct our production activities in China. Our products are
sold in domestic markets as well as exported to foreign countries and regions
such as Japan, Korea and Europe. We believe that we are the largest processed
chestnut foods manufacturer in China. We have developed brand equity for our
chestnut products in China, Japan and South Korea over the past 10 to 15 years.
We produced over 50 high value-added processed chestnut products in the second
quarter of 2013. We derive most of our revenues from sales in China, Japan and
South Korea. In 2013, our primary strategy is to continue building our brand
recognition in China through consistent marketing efforts towards supermarkets,
wholesalers, and significant customers, enhancing the cooperation with other
manufacturers and factories, and enhancing the turnover for our existing
chestnut, convenience and frozen food products. In addition, we are working to
expand our marketing efforts in Asia, Europe and the Middle East. We currently
have limited sales and marketing activity in the United States, although our
long-term plan is to significantly expand our activities there.
Sales in the second quarter of 2013 experienced a decline
mostly due to a slow down in domestic economy. International sales accounted for
26.2% for the first six months of 2013, as compared to 22.8% over same period of
last year. In the coming quarters, we anticipate higher demand for our
traditional chestnut product line along with our fast growing convenience
business line, including the bean products, lunch boxes, and pickle vegetables.
Frozen foods sold primarily to select export markets in Europe
and supermarkets and wholesale customers in China contributed approximately
20.8% in revenues for the six months ended June 30, 2013 as compared to 18.3% in
the same period of 2012, primarily driven by strong sales of frozen vegetable
and fruit products.
Production Factors that Affect our Financial and
Operational Condition
Our business depends on obtaining a reliable supply of various
agricultural products, including chestnuts, vegetables, fruits, red meat, fish,
eggs, rice, flour and packaging products. During the second quarter of 2013, the
cost of our raw materials decreased from $29.5 million to $23.8 million, as
compared to the second quarter of 2012, for a increase of approximately 19.3% .
We may have to increase the number of our suppliers of raw materials and expand
our own agricultural operations in the future to meet growing production
demands. Despite our efforts to control our supply of raw materials and maintain
good relationships with our suppliers, we could lose one or more of our
suppliers at any time. The loss of several suppliers may be difficult to replace
and could increase our reliance on higher cost or lower quality suppliers, which
could negatively affect our profitability. In addition, if we have to increase
the number of our suppliers of raw materials in the future to meet growing
production demands, we may not be able to locate new suppliers who could provide
us with sufficient materials to meet our needs. Any interruptions to, or decline
in, the amount or quality of our raw materials supply could materially disrupt
our production and adversely affect our business and financial condition and
financial prospects.
33
Seasonality
Chestnut season in China lasts from September to January. We
purchase and produce raw chestnuts during these months and store them in our
refrigerated storage facilities throughout the year. Once we obtain a purchase
order during the rest of the year, we remove the chestnuts from storage, process
them and ship them within one day of production. Since most chestnuts are
produced and sold in the fourth quarter, the Company generally performs best in
the fourth quarter.
Uncertainties that Affect our Financial Condition
We spend a significant amount of cash on our operations,
principally to procure raw materials for our products. Many of our suppliers,
including chestnut, vegetable and fruit farmers, and suppliers of packaging
materials, require us to prepay for their supplies in cash or pay on the same
day that such supplies are delivered to us. However, some of the suppliers with
whom we have a long-standing business relationship allow us to pay on credit. We
fund the majority of our working capital requirements out of cash flow generated
from operations. If we fail to generate sufficient sales, or if our suppliers
stop offering us credit terms, we may not have sufficient liquidity to fund our
operating costs and our business could be adversely affected.
We funded approximately 30.5% of our working capital from the
proceeds of short-term loans from Chinese banks in the second quarter of 2013,
as compared to 30.3% over the same period last year. We expect to continue to
fund our working capital requirements with such loans in the future. Such loans
are generally secured by our fixed assets, receivables and/or guarantees by
third parties. Our balance of short-term bank loans as of June 30, 2013 was
approximately $36.6 million. The term of almost all such loans is one year or
less. Historically, we have rolled over such loans on an annual basis. However,
commencing 2010, the Chinese government is implementing more stringent credit
policies to curb inflation and soaring property prices, which could negatively
impact our ability to obtain or roll over these short term loans, and hence not
having sufficient funds available to pay all of our borrowings upon maturity.
Failure to roll over our short-term borrowings at maturity or to service our
debt could result in the imposition of penalties, including increases in rates
of interest, legal actions against us by our creditors, or even insolvency. In
addition, we completed two private placement financings in September 2010 and
October 2009 with net proceeds of $9.0 million and $10.9 million, respectively,
the proceeds of which were primarily used as working capital. We also secured a
$15 million loan from Deutsche Investitions- und Entwicklungsgesellshaft (DEG)
in May 2010, which we have fully drawn down as of December 2011.We can provide
no assurances that we will be able to enter into any future financing or
refinancing agreements on terms favorable to us, especially considering the
current instability of the capital markets.
We anticipate that our existing capital resources and cash
flows from operations and current and expected short-term bank loans will be
adequate to satisfy our liquidity requirements for the next 12 months. However,
if available liquidity is not sufficient to meet our operating and loan
obligations as they come due, our plans include obtaining alternative financing
arrangements or further reducing expenditures as necessary to meet our cash
requirements. However, there is no assurance that, if required, we will be able
to raise additional capital or reduce discretionary spending to provide the
required liquidity. Currently, the capital markets for small capitalization
companies are extremely difficult and banking institutions have become stringent
in their lending requirements. Accordingly, we cannot be sure of the
availability or terms of any third party financing.
The Companys operations in the PRC are subject to special
considerations and significant risks not typically associated with companies in
North America and Western Europe. These include risks associated with, among
others, the political, economic and legal environment and foreign currency
exchange. The Companys results may be adversely affected by changes in the
political and social conditions in the PRC, and by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures,
currency conversion, remittances abroad, and rates and methods of taxation,
among other things, as more fully described in the Companys Annual Report on
Form 10-K.
The crisis of the financial and credit markets worldwide in the
second half of 2008 has led to a severe economic recession worldwide.
Furthermore, the European countries experienced severe debt crisis during 2010
and 2011 which further weighed on the global economy as well as the financial
market. The outlook for 2013 is still uncertain, but continuation or worsening
of unfavorable economic conditions, including the ongoing global economy and
capital markets disruptions, could have an adverse impact on our business,
operating results or financial condition in a number of ways. For example, we
may experience declines in revenues, profitability and cash flows as a result of
reduced orders, delays in receiving orders, delays or defaults in payment or
other factors caused by the economic problems of our customers and prospective
customers. We may experience supply chain delays, disruptions or other problems
associated with financial constraints faced by our suppliers and subcontractors.
In addition, changes and volatility in the equity, credit and foreign exchange
markets and in the competitive landscape make it increasingly difficult for us
to predict our revenues and earnings into the future.
In 2008 and 2009, some of our customers, including some of our
large supermarket customers, delayed their payments for up to 60 to 90 days
beyond their term. Our cash flow suffered while waiting for such payments.
Consequently, at times we had to delay payments to our suppliers and to postpone
business expansion as a result of these delayed payments. Starting in 2008 and
through 2012, we gradually shortened credit terms for many of our international
and domestic customers from between 30 and 180 days to between 30 and 60 days.
Our large customers may fail to meet these shortened credit terms, in which case
we may not have sufficient cash flow to fund our operating costs and our
business could be adversely affected.
34
Results of Operations
Three Months Ended June 30, 2013 Compared to Three Months
Ended June 30, 2012
The following table summarizes the results of our operations
during the three-month periods ended June 30, 2013 and June 30, 2012,
respectively and provides information regarding the dollar and percentage
increase or (decrease) from the three-month period ended June 30, 2013compared
to the three-month period ended June 30, 2012.
(All amounts, other than percentages, stated in U.S. dollar)
|
|
|
|
|
|
|
|
Increase
|
|
|
Increase
|
|
|
|
Three months ended June
30,
|
|
|
/
|
|
|
/
|
|
|
|
|
|
|
|
|
|
Decrease
|
|
|
Decrease
|
|
(In Thousands of USD)
|
|
2013
|
|
|
2012
|
|
|
($)
|
|
|
(%)
|
|
Net revenues
|
|
34,065
|
|
|
40,817
|
|
|
(6,752
|
)
|
|
-16.5%
|
|
Cost of revenues
|
|
27,034
|
|
|
32,316
|
|
|
(5,282
|
)
|
|
-16.3%
|
|
Gross profit
|
|
7,031
|
|
|
8,501
|
|
|
(1,470
|
)
|
|
-17.3%
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses
|
|
1,596
|
|
|
1,417
|
|
|
179
|
|
|
12.7%
|
|
General and administrative expenses
|
|
1,453
|
|
|
1,458
|
|
|
(5
|
)
|
|
-0.3%
|
|
Operating Income
|
|
3,981
|
|
|
5,626
|
|
|
(1,645
|
)
|
|
-29.2%
|
|
Government subsidy income
|
|
785
|
|
|
219
|
|
|
566
|
|
|
258.0%
|
|
Interest and other income
|
|
37
|
|
|
131
|
|
|
(94
|
)
|
|
-71.5%
|
|
Other expenses
|
|
(77
|
)
|
|
(341
|
)
|
|
264
|
|
|
-77.4%
|
|
Interest expense
|
|
(1,108
|
)
|
|
(665
|
)
|
|
(442
|
)
|
|
66.5%
|
|
Earnings before tax
|
|
3,618
|
|
|
4,969
|
|
|
(1,351
|
)
|
|
-27.2%
|
|
Income tax
|
|
1,041
|
|
|
1,407
|
|
|
(366
|
)
|
|
-26.0%
|
|
Income before minority interests
|
|
2,577
|
|
|
3,562
|
|
|
(985
|
)
|
|
-27.6%
|
|
Minority interests
|
|
78
|
|
|
232
|
|
|
(154
|
)
|
|
-66.5%
|
|
Net income
|
|
2,500
|
|
|
3,330
|
|
|
(830
|
)
|
|
-24.9%
|
|
35
Revenue
Net Revenues
. Our net revenue for the three months ended
June 30, 2013 amounted to $34.1 million, which represents an decrease of
approximately $6.7 million, or 16.5%, from the three-month period ended on June
30, 2012, in which our net revenue was $40.8 million. This decrease was
attributable to the decreased revenues from sales of each of our three product
segments, as reflected in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
|
(in thousands of U.S. dollars)
|
|
6/30/2013
|
|
|
6/30/2012
|
|
|
Increase
|
|
|
Increase
|
|
Chestnut
|
|
16,800,063
|
|
|
19,950,606
|
|
|
(3,150,543
|
)
|
|
(15.8%
|
)
|
Convenience food
|
|
10,470,096
|
|
|
14,915,661
|
|
|
(4,445,565
|
)
|
|
(29.8%
|
)
|
Frozen food
|
|
6,794,582
|
|
|
5,950,493
|
|
|
844,089
|
|
|
14.2%
|
|
Total
|
|
34,064,741
|
|
|
40,816,760
|
|
|
(6,752,019
|
)
|
|
(16.5%
|
)
|
Cost of Revenues.
During the three months ended June 30,
2013, we experienced an decrease in cost of revenue, which consists of raw
materials, direct labor and manufacturing overhead expenses, of $5.3 million, in
comparison to the three months ended June 30, 2012, from approximately $32.3
million to $27.0 million, reflecting an decrease of approximately 16.3% .
Approximately a decrease of $5.7 million was attributable to raw material costs,
which decreased from $29.5 million during the three months ended June 30, 2012
to $23.8 million during the three months ended June 30, 2013, for a decrease of
approximately 19.3% .
The other factors contributed to 0.4 million increase in cost
of revenues were: an increase in wage expense for factory workers, an increase
in depreciation expenses for capital equipment and an increase in the cost of
consumables used in conjunction with capital equipment.
36
Gross Profit
. Our gross profit decreased 1.5 million, or
17.3%, to $7.0 million for the three months ended June 30, 2013 from $8.5million
for the same period in 2012 as a result of lower revenues, offset by lower costs
of revenues, for the reasons indicated immediately above. Our gross margins
decreased slightly from 20.8% to 20.6% . Gross profit margins by product segment
for the three months ended June 30, 2013 were: 23-26% for chestnuts, 20-23% for
convenience foods and 16-18% for frozen foods.
Operating Expenses
Selling and Marketing Expenses
. Our selling and
marketing expenses increased $179,366, or 12.7%, to $1.6million in the second
quarter of 2013 as compared to $1.4million in the second quarter of 2012. The
following table reflects the main factors that contributed to this increase as
well as the dollar amount that each factor contributed to this increase.
|
|
Dollar
Increase
|
|
|
|
(in U.S.
dollars)
|
|
Wages (sales personnel)
|
|
50,696
|
|
Supermarket Fees
|
|
31,617
|
|
Transportation Fees
|
|
180,735
|
|
Selling and marketing expenses increased as we make continuous
efforts to expand our distribution channels in China as well as to build up our
brand recognition in the China market for our chestnut and convenience food
products.
General and Administrative Expenses.
We experienced a
decrease in general and administrative expense of $4,972 from $1.46 million to
approximately $1.45 million for the three months ended June 30, 2013, compared
to the same period in 2012. The following table reflects the main factors that
contributed to this decrease as well as the dollar amount that each factor
contributed to this decrease:
Factor
|
|
Dollar
Decrease
|
|
|
|
(in U.S.
dollars)
|
|
Repair fees
|
|
(61,202
|
)
|
Customer entertainment
|
|
(39,397
|
)
|
Office expenses
|
|
(46,698
|
)
|
The decreases listed in the table above were partially offset
by increases in dollar amount of other factors, including social Security,
consultancy and travel expenses, etc.
Income Before Taxation and Minority Interest
Income before taxation and minority interest decreased 1.3
million, or 27.2%, to $3.6 million for the three months ended June 30, 2013 from
$5.0 million for the same period of 2012. The decrease was mainly attributable
to the decrease of our sales revenue, partially offset by decrease in cost of
revenue and operating expenses in the three months ended June 30, 2013 as
compared to the three months ended June 30, 2012.
Income Taxes
Income taxes decreased $366,013, or 26.0%, to $1.0 million in
the second quarter of 2013, as compared to $1.4 million in the second quarter of
2012. This decrease was mainly attributable to lower earnings before tax in 2013
as compared to 2012.
Effective January 1, 2008, the PRC government implemented a new
25% tax rate across the board for all enterprises, without any tax holiday.
However, the PRC government has established a set of transition rules to allow
enterprises that already started tax holidays before January 1, 2008 to continue
utilizing such tax holidays until they are fully utilized.
37
The income tax rates applicable to our Chinese operating
subsidiaries in 2013 and 2012 are depicted in the following table:
|
2013
|
2012
|
Junan Hongrun
|
25%
|
25%
|
Luotian Lorain
|
25%
|
25%
|
Beijing Lorain
|
25%
|
25%
|
Shandong Lorain
|
25%
|
25%
|
Dongguan Lorain
|
25%
|
25%
|
Shandong Greenpia
|
25%
|
25%
|
Net Income
Net income decreased $830,484, or24.9%, to $2,499,595 for the
three months ended June 30, 2013 from $3,330,079 for the same period of 2012.
The decrease was primarily attributable to decreased sales revenue, and was
partially offset by decreased cost of goods sold, and lower income tax in the three months ended June 30,
2013 as compared to the three months ended June 30, 2012.
Six Months Ended June 30, 2013 Compared to Six Months Ended
June 30, 2012
The following table summarizes the results of our operations
during the six-month periods ended June 30, 2013 and June 30, 2012, respectively
and provides information regarding the dollar and percentage increase or
(decrease) from the six-month period ended June 30, 2013 compared to the
six-month period ended June 30, 2012.
(All amounts, other than percentages, stated in U.S. dollar)
|
|
Six months ended June
30,
|
|
|
Increase /
|
|
|
Increase
/
|
|
|
|
|
|
|
|
|
|
Decrease
|
|
|
Decrease
|
|
(In
Thousands
of USD)
|
|
2013
|
|
|
2012
|
|
|
($)
|
|
|
(%)
|
|
Net revenues
|
|
68,875
|
|
|
77,958
|
|
|
(9,083
|
)
|
|
-11.7%
|
|
Cost of revenues
|
|
54,447
|
|
|
61,999
|
|
|
(7,552
|
)
|
|
-12.2%
|
|
Gross profit
|
|
14,428
|
|
|
15,958
|
|
|
(1,531
|
)
|
|
-9.6%
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses
|
|
3,387
|
|
|
2,788
|
|
|
600
|
|
|
21.5%
|
|
General and administrative expenses
|
|
2,875
|
|
|
2,761
|
|
|
115
|
|
|
4.2%
|
|
Operating Income
|
|
8,165
|
|
|
10,410
|
|
|
(2,245
|
)
|
|
-21.6%
|
|
Government subsidy income
|
|
1,103
|
|
|
854
|
|
|
249
|
|
|
29.1%
|
|
Interest and other income
|
|
231
|
|
|
243
|
|
|
(13
|
)
|
|
-5.2%
|
|
Other expenses
|
|
(84
|
)
|
|
(18
|
)
|
|
(67
|
)
|
|
376.8%
|
|
Interest expense
|
|
(2,169
|
)
|
|
(1,575
|
)
|
|
(594
|
)
|
|
37.7%
|
|
Earnings before tax
|
|
7,246
|
|
|
9,915
|
|
|
(2,669
|
)
|
|
-26.9%
|
|
Income tax
|
|
2,055
|
|
|
2,594
|
|
|
(539
|
)
|
|
-20.8%
|
|
Income before minority interests
|
|
5,191
|
|
|
7,321
|
|
|
(2,130
|
)
|
|
-29.1%
|
|
Minority interests
|
|
173
|
|
|
409
|
|
|
(236
|
)
|
|
-57.7%
|
|
Net income
|
|
5,018
|
|
|
6,912
|
|
|
(1,894
|
)
|
|
-27.4%
|
|
38
Revenue
Net Revenues
. Our net revenue for the six months ended
June 30, 2013 amounted to $68.9 million, which represents a decrease of $9.1
million, or 11.7%, over the same period ended on June 30, 2012
where we had revenue of $78.0million. This decrease was attributable to the
decreased revenues from sales of each of our three product segments, as
reflected in the following table:
|
|
Six months ended
|
|
|
|
|
|
|
|
(in thousands of U.S. dollars)
|
|
6/30/2013
|
|
|
6/30/2012
|
|
|
Increase
|
|
|
Increase
|
|
Chestnut
|
|
33,454,950
|
|
|
35,955,765
|
|
|
(2,500,815
|
)
|
|
-7.0%
|
|
Convenience food
|
|
21,090,739
|
|
|
27,758,470
|
|
|
(6,667,731
|
)
|
|
-24.0%
|
|
Frozen food
|
|
14,328,968
|
|
|
14,243,556
|
|
|
85,412
|
|
|
0.6%
|
|
Total
|
|
68,874,657
|
|
|
77,957,791
|
|
|
(9,083,134
|
)
|
|
-11.7%
|
|
Cost of Revenues.
Our cost of revenues, which consists
of raw materials, direct labor and manufacturing overhead expenses, was $54.4
million for the six month period ended June 30, 2013, representing a decrease of
$7.6million, or 12.2%, as compared to $62.0 million for the six month period
ended June 30, 2012. Approximately a decrease of $9.0 million was attributable
to raw material costs, which decreased from $56.3 million during the six months
ended June 30, 2012 to $47.3 million during the six months ended June 30, 2013,
for a decrease of approximately 16.0% .
The other factors contributed to 1.4 million increase in cost
of revenues were: an increase in wage expense for factory workers, an increase
in depreciation expenses for capital equipment and an increase in the cost of
consumables used in conjunction with capital equipment.
39
Gross Profit
. Our gross profit decreased $1.5 million,
or 9.6% to $14.4 million for the six months ended June 30, 2013 from $16.0
million for the same period in 2012 as a result of decreased sales revenue,
offset by lower cost as described above. Our gross margins increased slightly
from 20.5% to 20.9% because our product mix in the period ended June 30, 2013
consisted of more chestnuts foods. Gross profit margins by product segment for
the six months ended June 30, 2013 were: 23-26% for chestnuts, 20-23% for
convenience foods and 16-18% for frozen foods.
Operating Expenses
Selling and Marketing Expenses
. Selling and marketing
expenses increased $599,575, or 21.5% to $3.4 million for the six months ended
June 30, 2013 from $2.8 million for the same period in 2012. Selling and
marketing expenses increased as we continue to expand our distribution channels
and build up brand recognition for our products in China.
General and Administrative Expenses.
General and
administrative expenses increased $114,857, or 4.2% to $2.9 million for the six
months ended June 30, 2013 from $2.8 million for the same period of 2012.
Income Before Taxation and Minority Interest
Income before taxation and minority interest decreased $2.7
million, or 26.9%, to $7.2 million for the six months ended June 30, 2013 from
$9.9 million for the same period of 2012. The decrease was primarily a result of
the lower sales revenue, partially offset by lower cost of revenue during the
six month period ended on June 30, 2013 as compared to 2012.
Income Taxes
Income taxes decreased $538,825, or 20.8%, to $2.1 million for
the six months ended June 30, 2013 from $2.6 million for the same period of
2012. The decrease of tax paid was primarily a result of the decrease of income
in the first six months ended June 30, 2013, as compared to the same period in
2012.
Net Income
Net income decreased $1.9 million, or 27.4% to $5.0 million for
the six months ended June 30, 2013 from $6.9 million for the same period of
2012. The decrease was primarily a result of lower sales revenue, partially
offset by lower cost of goods sold and lower income tax in the six months ended
June 30, 2013 as compared to the three months ended June 30, 2012
Liquidity and Capital Resources
As of June 30, 2013, we had cash and cash equivalents
(excluding restricted cash) of $34.4 million. Our cash and cash equivalents
increased by approximately $2.0 million from December 31, 2012, primarily due to
cash generated from operating activities and financing activities. The following
table provides detailed information about our net cash flow for all financial
statements periods presented in this report.
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
Net cash provided by (used in) operating
activities
|
|
816
|
|
|
11,952
|
|
Net cash provided by (used in) investing activities
|
|
(6,643
|
)
|
|
(2,048
|
)
|
Net cash provided by (used in) financing
activities
|
|
6,432
|
|
|
(8,093
|
)
|
Net cash flow (outflow)
|
|
604
|
|
|
1,811
|
|
Operating Activities
Net cash provided by operating activities was $0.8 million for
the six months period ended June 30, 2013 and net cash provided in operating
activities in the first two quarters of 2012 was approximately $12.0 million.
The decrease of approximately $11.1 million in net cash flows provided by
operating activities in the first half of fiscal 2013 was primarily a result of
higher increase in prepayment of approximately $2.1 million and higher increase
in inventory of approximately $5.9 million.
Investing Activities
Our main uses of cash for investment activities are payments
for the acquisition of property, plants and equipment.
Net cash used in investing activities for the six months period
ended June 30, 2013 was $6.6million, which represents an increase of $4.6
million from $2.0 million net cash used in investing activities for the same
period of 2012. The increase was primarily due to purchases of equipment and
plant in 2013 and increase in deposit.
Financing Activities
Net cash provided by financing activities for the six months
period ended June 30, 2013 was $6.4 million, which represents an increase of
$14.5 million from $8.1 million net cash used in financing activities during the
same period in 2012. The increase of the net cash provided by financing
activities was primarily a result of increased net short term bank borrowing in
2013.
40
Loan Facilities
As of June 30, 2013, the amounts and maturity dates for our
short-term bank loans are as set forth in the Notes to the Financial Statements.
The total amounts outstanding were $36.6 million as of June 30, 2013, compared
with $28.7 million as of December 31, 2012. In addition, we are also carrying a
long term loan of $15 million from DEG due in March 2016, with eight equal
semi-annual principal payments commencing September 2012.
We believe that our currently available working capital, after
receiving the aggregate proceeds of the credit facilities referred to above,
should be adequate to sustain our operations at our current levels through at
least the next twelve months.
Critical Accounting Policies
The preparation of financial statements in conformity with
United States generally accepted accounting principles requires our management
to make assumptions, estimates and judgments that affect the amounts reported in
our financial statements, including the notes thereto, and related disclosures
of commitments and contingencies, if any. We consider our critical accounting
policies to be those that require significant judgments and estimates in the
preparation of financial statements, including the following:
Method of Accounting --
We maintain our general ledger
and journals with the accrual method accounting for financial reporting
purposes. Accounting policies adopted by us conform to generally accepted
accounting principles in the United States and have been consistently applied in
the presentation of our financial statements, which are compiled on the accrual
basis of accounting.
Use of estimates --
The preparation of the financial
statements in conformity with generally accepted accounting principles in the
United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Management makes
these estimates using the best information available at the time the estimates
are made; however, actual results could differ materially from those estimates.
Principles of consolidation --
Our consolidated
financial statements, which include information about our company and our
subsidiaries, are compiled in accordance with generally accepted accounting
principles in the United States. All significant inter-company accounts and
transactions have been eliminated. Our consolidated financial statements include
100% of assets, liabilities, and net income or loss of our wholly-owned
subsidiaries. Ownership interests of minority investors are recorded as minority
interests.
As of June 30, 2013, the details pertaining to our subsidiaries
were as follows:
|
|
Place of
|
|
|
Attributable equity
|
|
|
Registered
|
|
Name of Company
|
|
incorporation
|
|
|
interest %
|
|
|
capital
|
|
|
|
|
|
|
|
|
|
$
|
|
Shandong Lorain Co., Ltd
|
|
PRC
|
|
|
80.2
|
|
|
12,837,397
|
|
Luotian Lorain Co., Ltd
|
|
PRC
|
|
|
100
|
|
|
4,019,743
|
|
Junan Hongrun Foodstuff Co., Ltd
|
|
PRC
|
|
|
100
|
|
|
47,483,773
|
|
Beijing Lorain Co., Ltd
|
|
PRC
|
|
|
100
|
|
|
1,587,024
|
|
Shandong Greenpia Foodstuff Co.,Ltd
|
|
PRC
|
|
|
100
|
|
|
2,437,670
|
|
Dongguan Lorain Co,,Ltd
|
|
PRC
|
|
|
100
|
|
|
158,702
|
|
International Lorain Holding Inc.
|
|
Cayman Islands
|
|
|
100
|
|
|
49,386,219
|
|
Accounting for the Impairment of Long-Lived Assets
--
The long-lived assets held and used by us are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of assets
may not be recoverable. It is reasonably possible that these assets could become
impaired as a result of technology or other industry changes. Determination of
recoverability of assets to be held and used is by comparing the carrying amount
of an asset to future net undiscounted cash flows to be generated by the assets.
If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.
During the reporting period, there was no impairment loss.
Revenue recognition --
Our revenue recognition policies
are in compliance with Staff Accounting Bulletin (SAB) 104. Sales revenue is
recognized at the date of shipment to customers when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, no other
significant obligations of ours exist and collectability is reasonably assured.
Payments received before all of the relevant criteria for revenue recognition
are satisfied are recorded as unearned revenue.
Our revenue consists of invoiced value of goods, net of a
value-added tax. No product return or sales discount allowance is made as
products delivered and accepted by customers are normally not returnable and
sales discount is normally not granted after products are delivered.
41
Recent Accounting Pronouncements
In January 2013, the FASB issued ASU No. 2013-01,
Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities
(ASU 2013-01).
The Update clarifies that ordinary trade receivables and
receivables are not in the scope of Accounting Standards Update No. 2011-11,
Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.
Specifically, Update 2011-11 applies only to derivatives, repurchase agreements
and reverse purchase agreements, and securities borrowing and securities lending
transactions that are either offset in accordance with specific criteria
contained in
FASB Accounting Standards Codification®
or subject to a
master netting arrangement or similar agreement. The amendments in this Update
are effective for fiscal years, and interim periods within those years,
beginning on or after January 1, 2013. Management does not expect the adoption
of this standard has a significant effect on the Companys consolidated
financial position or results of operations.
For public entities, the amendments that are subject to the
transition guidance is effective for fiscal periods beginning after December 15,
2012. Management does not expect the adoption of this standard has a significant
effect on the Companys consolidated financial position or results of
operations.
In February 2013, the FASB issued ASU No. 2013-02, Reporting
of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU
2013-02). The amendments require an organization to:
a.
|
Present (either on the face of the statement where net
income is presented or in the notes) the effects on the line items of net
income of significant amounts reclassified out of accumulated other
comprehensive incomebut only if the item reclassified is required under
U.S. GAAP to be reclassified to net income in its entirety in the same
reporting period.
|
|
|
b.
|
Cross-reference to other disclosures currently required
under U.S. GAAP for other reclassification items (that are not required
under U.S. GAAP) to be reclassified directly to net income in their
entirety in the same reporting period. This would be the case when a
portion of the amount reclassified out of accumulated other comprehensive
income is initially transferred to a balance sheet account (e.g.,
inventory for pension-related amounts) instead of directly to income or
expense.
|
The amendments are effective for reporting periods beginning
after December 15, 2012, for public companies. Management does not expect the
adoption of this standard has a significant effect on the Companys consolidated
financial position or results of operations.
In February 2013, the FASB issued ASU No. 2013-03, Clarifying
the Scope and Applicability of a Particular Disclosure to Nonpublic Entities
(ASU 2013-03). The amendment clarifies that the requirement to disclose the
level of the fair value hierarchy within which the fair value measurements are
categorized in their entirety (as Level 1, Level 2, or Level 3) does not apply
to private companies and nonpublic not-for-profits for items that are not
measured at fair value in the statement of financial position, but for which
fair value is disclosed. The amendments are effective upon issuance. Management
does not expect the adoption of this standard has a significant effect on the
Companys consolidated financial position or results of operations.
In March 2013, the FASB issued ASU No. 2013-04, Obligations
Resulting from Joint and Several Liability Arrangements for Which the Total
Amount of the Obligation Is Fixed at the Reporting Date (ASU 2013-04). The
update provides guidance for the recognition, measurement, and disclosure of
obligations resulting from joint and several liability arrangements for which
the total amount of the obligation within the scope of this ASU is fixed at the
reporting date, except for obligations addressed within existing guidance in US
GAAP. The guidance requires an entity to measure those obligations as the sum of
the amount the reporting entity agreed to pay on the basis of its arrangement
among its co-obligors and any additional amount the reporting entity expects to
pay on behalf of its co-obligors. The guidance in this ASU also requires an
entity to disclose the nature and amount of the obligation as well as other
information about those obligations. The amendments in this ASU are effective
for fiscal years, and interim periods within those years, beginning after
December 15, 2013. Management does not expect the adoption of this standard will
have a significant effect on the Companys consolidated financial position or
results of operations.
In March 2013, the FASB issued ASU No. 2013-05, Parents
Accounting for the Cumulative Translation Adjustment upon Derecognition of
Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an
Investment in a Foreign Entity (ASU 2013-05). The ASU clarifies that when a
parent entity ceases to have a controlling financial interest in a subsidiary or
group of assets that is a nonprofit activity or a business (other than a sale of
in substance real estate or conveyance of oil and gas mineral rights) within a
foreign entity, the parent is required to apply the guidance in Accounting
Standards Codification 830-30 to release any related cumulative translation
adjustment into net income. The ASU provides that the cumulative translation
adjustment should be released into net income only if the sale or transfer
results in the complete or substantially complete liquidation of the foreign
entity in which the subsidiary or group of assets had resided. The amendments
take effect prospectively for public companies for fiscal years beginning after
December 15, 2013, and interim reporting periods within those years. Management
does not expect the adoption of this standard will have a significant effect on
the Companys consolidated financial position or results of operations.
42
In March 2013, the FASB issued ASU No. 2013-07, Liquidation
Basis of Accounting (ASU 2013-07). The ASU requires an entity to prepare its
financial statements using the liquidation basis of accounting when liquidation
is imminent. Liquidation would be considered imminent when the likelihood is
remote that the reporting entity would return from liquidation and either: (a) a
plan for liquidation has been approved by the person or persons with the
authority to make such a plan effective and the likelihood is remote that the
execution of the plan will be blocked by other parties or the entity will return
from liquidation, or (b) a plan for liquidation is imposed by other forces, and
the likelihood is remote that the entity will return from liquidation. If a plan
for liquidation was specified in an entity's governing documents at its
inception (for example, limited-life entities), then liquidation would be
imminent only if the approved plan for liquidation differs from the plan
specified at the entitys inception. The amendments take effect for all entities
reporting under U.S. GAAP, except investment companies that are regulated under
the Investment Company Act of 1940. The standard is effective for annual
reporting periods beginning after December 31, 2013, and interim reporting
periods therein. Early adoption is permitted. Management does not expect the
adoption of this standard will have a significant effect on the Companys
consolidated financial position or results of operations.
As of June 30, 2013, there are no other recently issued
accounting standards not yet adopted that would have a material effect on the
Companys consolidated financial statements
Off-Balance Sheet Arrangements
We do not have any off-balance arrangements.