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Sunday, January 01, 2006

Sunwin International Nutraceuticals (SUWN) 10-K

hat tip to Joel for this one

SUWN yahoo sec website google
10-K amended Nov 7, 2005

6 Youpeng Road, Qufu, Shandong, China 273100
wholely owned foreign enterprise in PRC
(86) 537 442 4999
Period ending April 30, 2005
43,367,276 shares outstanding on Aug 1, 2005

All operations are within PRC. Reverse merger April 30, 2004. Sunwin owns 80% of Qufu Natural Green Engineering Company, Ltd. (a PRC company). The other 20% are owned by Shandong Shenwang Pharmaceutical Corp. Ltd. which is controlled by Shandong Shenwang Group Corp, whose president is Laiwang Zhang who owns 22% of SUWN. Ya got that?

March 2005, entered into letter of intent to acquire 55% of shares of Jining Stevia Manufacturing Co. Very early in the process as of the 10-K.

The amended filing is for
47 management and admin employees
250 manufacturing employees
9 R&D employees ($171K down from $192K prior year)
85 sales and marketing employees
most employees are in Qufu, PRC (pop 600K)

46% of their revenues are from selling stevioside, a natural sweetener renowed for its "adverse effects in the male reproductive system that could affect fertility" and for being a "genotoxin" which damages DNA. It's not allowed in the EU, US, Australia, Canada, Singapore, or even in Hong Kong. In the US, it's allowed as a dietary supplement but not as a food additive. There are accusations that it's not allowed as a food additive due to corporate lobbying efforts.
The false rumours are based on a nonsense experiment with rats. In that experiment, each rat was daily force-fed extracts from about 2.668 g of dry Stevia leaves per day, i.e. 5.34 % of the body weight!
Apparently nutrasweet is far worse. But the problem is not what should be, but rather what is. Sunwin has been making stevioside continuously since 1998. The capacity is increasing from 200 tons/year to 300 tons/year. Last year they produced 150 tons (8.3% of the global production according to the Chinese trade group). The plant was introduced to China in 1977 and it ramped up seriously in the mid-1980s. China now exports supposedly 80% of the world production. This goes mainly to Japan (where it is 40% of the sweetener market there) and South Korea. Sunwin claims demand is rising at 15% to 20% per year.
At present Japan, Korea, China, Taiwan, Indonesia, Israel, German Brazil and Paraguay permit the use of stevioside as a sweetener and food additive.
Here's a strange mistake in the 10-K:
In 2003, as a result of the overall economic decline in China due mainly to the SARS outbreak, our production and sales of stevioside decreased to 176 tons, however, during fiscal year ended April 30, 2004 the production recovered to the approximate sales levels of 2002. In fiscal year ended April 30, 2004, our stevioside production reached 150 tons....
Let me get this straight: production decreased to 176 tons, but then in the year ending April 30, 2004, it increased to 150 tons? That makes no sense.

Major customers (one 15%, one 10%):
They have some exclusive planting contracts with suppliers. 30% comes from growing contracts with several large plantations (277 acres). Pay 30% at planting time around March ($117K in March 2005) and 70% on delivery (Aug or early Sept). Raw material prices went up from $695/ton to $1,812/ton. They normally keep 200 tons in inventory and 1 month's sales of finsished product in inventory.

In this year, they manufactured 88 tons of finished product (upgrading and moving production caused a drop in output). They also purchased and resold 96 tons from 3rd party manufacturers (4 unaffiliated suppliers, largest supplier was 38 tons). In the prior year, they manufactured 150 tons and purchased 84 tons.

Major competitors (each with annual output greater than 100 tons per year)
Revenues for stevioside declined by $2.2 million in 2004 due to the plant upgrade and location move mentioned above.

Veterinary Products
Sunwin also sells veterinary products (28% of revenues).
According to the China Animal Health Association, we are one of the top
three companies in this product category in Shandong Province and one of the top 50 in the PRC.
They also make animal feed additives based on traditional Chinese medicies. These are desirable because they lack the drawbacks of antibiotics and other Western additives (although they are not as effective).

They sell a plant polysaccharid and flavanoid extraction compound feed additive which can be substituted for antibiotics and other chemical compounds normally added.

They sell CIO2 food disinfectant. Developed in 1985 by American Baihexing Company. Accepted by the European Envionmental Protection Unit and the US EPA and sanctioned as a food additive by the US FDA. Japan, Australia, and EU followed. The Chinese Ministry of Agriculture sanctioned it as a recommended product for bird flu prevention.
Our Sunwin brand ClO2 disinfector is a steady ClO2 disinfector and can be
used directly without activation and dilution. The traditional ClO2 disinfector requires a stability dose to stabilize it after production and needs to be activated and diluted before use. If it is not used in time after activation, the effective substances will be depleted thoroughly in four to six hours. Our product can restrain the chemical activity of the activated ClO2 and can control the ClO2 to release the effective compounds slowly. The product has a storage life of 18 months after dilution.
They buy raw materials on the open market from several suppliers.

Customers (none 10% or more):
Terms are pre-paid up to net-60.

Major competitors:
Veterinary products revenues were up 33% for the year to $3.2 million. Gross margins decreased slightly to 35% due to raw materials costs. The Chinese central government issued a new rul that all manufacturers in this industry must conform to GMP production process standards by Oct 1, 2005.
Among over 2,700 manufacturers in China, we estimate that only approximately 800 could accomplish this requirement on time. A significant market vacancy will be left by the companies that do not conform and pass the standard. We will not only complete the construction and finish the inspection process on time; we will also have eight production lines. We expect to obtain a greater market share in the fiscal year of 2006.

Traditional Chinese Medicine Extracts
They also sell 120 (out of a possible 400) traditional Chinese medicine formula extracts (26% of total revenues). A lot of these are for veterinary medicine products (watch cash flow in case they don't remove intra-company sales).
Epimedium powder which is used to tonify the kidney, invigorate yang, strengthen muscles and bones and as anantiheumaitc
Hehe, they said "yang". Pretty much all of the explanations for why these things work are bogus. It may be that some of them work for unrelated reasons not associated with the five elements of wood, earth, metal, fire, and water (assuming wood elements are the ones for "invigorating yang").

The extracts are sold wholesale (bulk 25kg barrels). The main customers are (one 10% customer):
The sales terms are extremely generous. They require a 10% to 30% deposit at the time of order. The rest is paid between 6-months to one-year. This segment accounts for 70% to 80% of outstanding accounts receivable AR.

Raw materials come from various suppliers etc. They utilize just-in-time manufacturing and don't carry inventory.

Some R&D is done in partnership with research facilities in PRC:
Shandong Medical University (joint development of molecular absorption purified rutoside)
Kelong Bio-Tech Co., Ltd, Biology and Physics Research Center of Chinese Acadamy of Science (soy bean oligosaccharide)
Tianfulai Bio-Tech Technology Co. Ltd. in Beijing (polysaccharide anthone extracted powder for forage).

They also use the research facilities of Beijing Medical University, China Agricultural University, and Taiwan Renshan Bio-Tech Co. They pay for use on an as-needed basis. $171K in 2005 and $192K in 2004.
Since 2000 we have successfully developed more than 40 veterinary medicines used to treat infectious bursa of fabricius of poultry, prevention and cure of bird influent disease and infection of digestive canal, prevention and cure chronic respiratory failure caused by septicemic and infective bronchitis. We have an additional nine new medications under development aimed at treating diseases caused by protozoon and seasonal febrile diseases of poultry and bursa of fabricius and epiornitic. Our current research and development projects include saikosponin, a liquid used for headaches and a capsule for bursa.
This market is very competitive with over 500 producers.

Chinese extracts revenues were up by 325% last year: from $805K to $3.4 million. Gross margins are 39%, up grom 33%. This caused the receiveable to grow by 100%, but far lower than the growth in revenues.

The Chinese central government issued a new rule for this industry that all manufacturers must satisfy GMP standards before Oct 1, 2005.
We believe that we are the first facility in this industry to complete this requirement in China which will help us maintain the reputation in this field and acquire bigger market share. Next year, we will be adding new products into the market and plan to start a new products series, natural dietary health food.

Sunwin Tech Group acquired 80% of the capital stock of Qufu in exchange for shares of Sunwin Tech stock. Management wants to update this status to a joint venture, which requires a cash investment from Sunwin Tech (the foreign company) to Qufu of 80% of Qufu's registered capital: $2 million. A private offering was held resulting in $877K going to Qufu. The additional amount might not be required if Sunwin stock can be used for the capital requirement (not clear yet). Why would this not be clear? It must be a fairly common thing? If not, Qufu's registered capital might be lowered.
Sunwin Tech owns 80% of Qufu Natural Green Engineering Company, Limited, a PRC company ("Qufu"). Sunwin Tech was organized in January 2004 and before that date did not have any business and operations. Effective February 1, 2004 Sunwin Tech acquired 80% of the capital stock of Qufu from Shandong Shengwang Pharmaceutical Corporation, Limited in exchange for 32,500,000 shares of Sunwin Tech's common stock. Shandong Shengwang Pharmaceutical Corporation, Limited is a minority shareholder of Qufu.

Overall Business
Operating expenses these last two years increased from two years ago due to...
The repairs and maintenance and retooling should decrease in future periods and should all complete by Sept 2005.

There will be further increases in legal and accounting fees during 2005 with SOX compliance.

They contradict themselves (see below for explanation) about whether operating expenses went up or down:
Our operating expenses significantly increased for the year ended April 30, 2005 from the year ended April 30, 2004
but then on the same page they say this:
For the year ended April 30, 2005, total operating expenses were $2,110,340 as compared to $2,164,105 for the year ended April 30, 2004, a decrease of $53,765 or 2.5%.
The contradictory decrease in operating expenses was due to...
The contradiction is due to a cut-and-paste from the prior year's 10-K and a poorly edited update. Comparing the two we get:
Our operating expenses significantly increased [essentially changed 2004 to 2005] as a result of increased selling expenses, which was attributable to increased shipping costs and local tax costs associated with our increased revenues, as well as increased general and administrative costs which is primarily attributable to [removed detailed costs and added "increased operations and,"] increases in repairs and maintenance and retooling expenses associated with an upgrade of our manufacturing facilities [added "and increases in professional fees associated with our SEC filings"]. These expenditures for repairs and maintenance and facility upgrades during fiscal 2004 [added "and in fiscal 2005"] should decrease in future periods as we anticipate that this project will be completed in [changed Q2 05 to Sept 2005]. We anticipate further increases in legal and accounting fees during fiscal 2005 which are associated with our continued compliance with provisions of the Sarbanes-Oxley Act of 2002, including new provisions which will phase in during fiscal [changed 2005 to 2006] and beyond and fees and costs related to capital raising transactions. These increases could serve to further reduce our net income absent a significant increase in our revenues at the current gross profit margins.
so that's why.

Net income (before minority interest) increased 81.7%. Why? Here's their explanation...
primarily as a result of an approximate 2.0% increase in our gross profit margins for the year ended April 30, 2005 from 2004 period, together with the increase in total operating expense described above.
They forgot to mention the increase in revenues.

So for the year they had $828K of net income vs $465K in the prior year.

5 million shares reserved (and not issued) for stock options. No stock options granted yet.
15 million warrants are outstanding with a 15 cent strike price (most from April 12, 2005 private placement, some from July 2004). 13.5 million only have 2.85 years left.

So let's assume 20 million shares of dilution added to the existing 43 million shares (as of Aug 1, 2005) and I'd probably add another 5 million just to be safe: 68 million totally diluted shares

This results in 1.2 cents per totally diluted share for the year. A P/E of 15 on that would result in a stock price of 18 cents.

In mid-2005, they hired China Direct Investments, Inc. paying 500K warrants for help with SEC stuff. Total payment can be 2.7 million shares. Related party alert:
Marc Siegel, a 9.4% shareholder of our company, James Wang and
David Stein are officers, directors and or principal shareholders of China
Direct Investments, Inc.

No family relationships. Note the color coding of common companies in the bios below.

Laiwang Zhang. President and Chairman since April 30, 2004. Owns 22.1% of the company. Served as Chairman of subsidiary Qufu since January 2003. Also Chairman of Shandong Shengwang Pharmaceutical Corp (minority shareholder in Qufu), since April 2000. Founded Shandong Shengwang Group Corporation (holding company). Since April 1996 he has been General Manager of SUWN. 1992-1996 Manager of subsidiary Shengya Veterinary Drugs Factory. 1984-1992, President of Shandong Qufu Amylum Plant. Graduated from Shandong Technical University 1984, Masters in Engineering.

Dongdong Lin. CEO, Secretary and Director since February 2005. Manager of
Technology Info Dept of Shandong Shengwang Pharmaceutical Corp from January 2003 to December 2004. Ms. Lin joined Shandong Shengwang Group Corporation in 1996, as a supervisor from April 1998 to April 2000, and Manager of the Department of Export and Import from April 2000 to December 2002. Bachelors in Technology English from Haerbing Industry University. Masters in Economics from the China Academy of Social Science.

Fanjun Wu. CFO since reverse merger. Since 1997 employed by subsidiary Qufu as Director of Finance Section from 1997 to 1998 and thereafter as CFO. From 1992 to 1996, she was Director of Finance Section for our subsidiary Shengya Veterinary Drugs Factory.

Chjengxiang Yan. Director since reverse merger. Since 2001 Director of Shandong Shenwang Pharmaceutical Corp, and 1999-2004 Director of Marketing. 1996-1998 Director of the Marketing for Shandong Shengwang Group Corp. Director of Marketing for subsidiary Shengya Veterinary Drugs Factory 1993-1996. Graduated Shandong Agriculture University in 1993 with bachelor's in farming.

Baozhang Yuan owns 9.2% of the stock. He was CEO and board member from April 2004 until Feb 2005.

Lei Zhang owns 9.2% of the stock. Was Secretary from April 2004 until Feb 2005. He has the same address as Baozhang Yuan.

Xianfeng Kong owns 9.2% of the stock. Was Treasurer and board member from April 2004 to Dec 2004. He has the same address as Baozhang Yuan.

Alpha Capital Aktiengellschaft (of Lichtenstein) owns 8.1% of the stock and warrants to purchase 5.3 million shares. There's some complicated limitations on this.

Marc Siegel (Edge Capital, hopefully not this Edge Capital) owns 9.4% of the stock (including warrants). He has voting and dispositive control over the SUWN stock/warrants owned by China Direct Investments. His father, Alvin Siegel is part of Progress Partners (lawsuit). James Wang and David Stein are also officers of China Direct Investments.

The highest salary is $6,000 per year.

These people all come from all the same prior companies.

None of the board members are independent. No audit committee. No audit committee financial expert. It will cost money to get such things.

There is $1 million due from related parties. $655K was advanced to Shandong Shenwang Group Corp. for the construction and build-out of a new mfg facility for stevioside production. Qufu holds the land use permit. SUWN rents the building from Qufu ShengDa Industry Co (unrelated local government owned entity). Nearly all the money went to equipment and $82K went to leasehold improvements. SUWN will rent the facility, terms not yet negotiated. Will start up in Sept 2005 when the assets will shift from "due from related parties" to fixed assets. Funds for purchase of raw materials purchase will shift to inventory when the materials are received before the end of fiscal 2005. This whole thing was to take advantage of lower prices through stronger buying power via Shandong Shenwang and Shangong Shengwang Group Corp. No escrow.

$389K advanced to Shangdong Shengwang Pharm Corp and Shangong Shengwang Group Corp for new manufacturing facility for veterinary medicine mfg. Again, Qufu holds the land use permit, the building is rented from Qufu LuCheng Chiya Resident Committment. The assets will be shifted to fixed assets. No escrow. Will probably require another $34K.

$85K paid to Shandong Shengwang Parm Corp for management services for housing employees (in the 1980s I watched a company outsource to Hyundai and the employees lived in barracks in a fairly harsh lifestyle by modern western standards) government insurance for employees, and rent for certain facilities.

Audited Results
Auditors are Sherb & Co. who audit about 50 companies based on this list which makes them a fairly large auditor despite what this page says. Sherb seems to be involved in some lawsuits: Scott+Scott against Spear & Jackson along with Sherb and Dennis Crowley. Apparently there was also a lawsuit with Light Management Group (LMGR sec) on May 1, 2002 although they did put a going concern qualifier on it in the last 10-K and the one before that. and they weren't even the auditors in the prior year. Then there's ProNetLink class action suit.

The good news is that Serb left Feldman Sherb (can't find actual website that has this stale quote):
...the firm was founded in 2002 when Steven Sherb, Howard Brodman and Gary Singer left Feldman Sherb & Co., PC in order to better serve their clients.
There's also VoiceFlash (VFNX sec) This old 10-K says this:
Feldman was merged into Grassi & Co., CPA's, P.C., ("Grassi") and the
principal accountants who had been responsible for the Company's audit during the years ended July 31, 2001 and 2000 left and started their own firm called Sherb & Co.
So I'm a bit concerned about these auditors.

Audit opinion mentions that financial statements have been restated.
$978K classified as due from related parties should have been a long-term asset (I think I mentioned this above with the shift in equity, too).

visual display
Balance Sheet
Cash ................. ***************
AR ................... ****************
Allowance ............ xxxxxxxxx
Inventories .......... **************************
Due from relat party.. *
Prepaid and other..... ******
Total Current Assets.. *****************************************************************

PP&E ................. **************************
depreciation ......... xxxxxxxxxxxxxxxx
Due from relat party.. *********

Loans Payable ........ *****
AP and accrued exp ... *********
Income tax payable ... *****
Total Current Liab ... ***************************

Minority interest .... ******************
Equity ............... ******************************************************
Allowance for doubtful accounts is huge.

Income Statement
Revenues: $12 million (up from $10.9 million)
Gross margins: 31% (up from 28%)
Operating margins: 13% (up from 9%)
Taxes: 32% of income (down from 37% of income)
Minority interest: 25% (up from 24%)
Net margin: 6.9% (up from 4.3%)
Net income: $829K (up from $465K)
Net income per totally diluted share: 1.2 cents
Stock price for a P/E of 15: 18 cents

Equity Statement
1.5 million shares issued for services
10.3 million shares issued in private placement
Ending share count: 43 million

Cash Flow Statement

Free Cash Flow ....... *********** (cash from ops - minority interest and capex)
Net Income ........... ++++++++
Deprec and Amort ..... +++
Stock-based consulting ++
Minority interest +++
Allowance for doubtful accts -----
Accounts receivable +++++++++++++
Inventories ++++++++++
Prepaid and other current assets -
Accounts payable ----
Income taxes payable *****
Advances to customers ----------
Net cash from ops .... ************************

Capital expenditures.. ----------
Due from Rel Part .... -----

Proceeds selling stock +++++++++
Loan payable --------

Net increase in cash ***********

I've already covered most of the stuff in the notes.

No explanation for the huge AR.
Asset/liability method for taxes (which results in deferred tax assets and liabilities)

$500K US cash ($400K in excess of FDIC guarantee)
$1.2 million RMB cash left, however:
concentrations of credit risk with respect to trade accounts receivables is limited due to generally short payment terms.
What the hell, the terms go out to 1 year.

Advertising expense: $213K (up from $150K).

Currently evaluating share based payment, FASB statement 123R.

Inventories are about half raw materials and half finished goods. Reserve for obsolete inventory is only $61K out of $2.8 million.

Office Furniture                 7 Years           $     1,989
Auto and Truck 10 Years 3,802
Manufacturing Equipment 7 Years 2,958,019
Building 20 Years 430,810
Office Equipment 5 Years 58,750
Construction in Process - 1,063,220

Loans payable
$247K to Bank of China, 6.9%, secured by equipment, due in monthly payments through Feb 2006.
$115K to Qufu City Credit Union, 6.34%, secured by equipment, due in monthly payments through Aug 2005.
$104K to Qufu City Dept of Treasury, 5.58%, secured by equipment, due in monthly payments through June 2006.
$120K to Bank of China, 6.68%, secured by equipment, due in monthly payments through Aug 2005.

33% tax rate. Operating leases are less than $48K per year. No legal proceedings

They provide segment financial info, but I pretty much already captured it above. Assets are fairly evenly split between Steviaside and the other two parts with $900K other.

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you can also visit Nutraceuticals Singapore for more Nutraceuticals in Singapore.
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