SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. - SB-2/A - 20051103 - BUSINESS
BUSINESS
We sell stevioside, a natural sweetener, veterinary products and herbs used
in traditional Chinese medicine in the People's Republic of China. All of our
operations are located in the PRC. As an industry leader in agricultural
processing, we have built an integrated firm with the sourcing and production
capabilities to meet the needs of our customers. The Sunwin family works closely
with consumers to provide a quality, value, and a hybrid mix of agricultural
products and services that meet growing demand.
Our operations are organized into three main product groups:
o Stevioside - a natural sweetener,
o Veterinary medicines; and
o Traditional Chinese medicine formula extracts.
Stevioside - a natural sweetener
We manufacture and sell stevioside, a 100% natural sweetener which is
extracted from the leaves of the Stevia rebaudiana plant, a green herb plant of
the Aster/Chrysanthemum family. We also purchase and resell finished stevioside
product from third party manufacturers. For the fiscal year ended April 30, 2005
and the first quarter ended July 31, 2005 revenues from this product group
represented approximately 46% of our total net revenues.
We are one of the leading manufacturers of stevioside in the PRC. We have
been engaged in the continuous production of stevioside since 1998. Our present
capacity is approximately 200 tons annually, which will be increased to
approximately 300 tons annually in approximately September 2005 following the
completion of ongoing expansion of our manufacturing facilities According to the
2004 China Stevioside Sugar Association report, 300 tons annually will account
for approximately one sixth of the total capacity of the top 10 stevioside
manufacturers in the PRC.
We are a perennial member of China Stevioside Sugar Association, which was
established in November 1988. The association seeks to contribute its efforts,
and the strength of its members to harmonize the relationships among other
participants of this industry, to promote the technology innovation, to
supervise the quality control, to set self-discipline market prices, to assist
the association to set long-term goals, industrial policy and technical
standard, and to collect information on the domestic and foreign stevioside
industry and supply the information to its members.
The leaves of the Stevia rebaudiana plant have been used for centuries to
sweeten bitter beverages and to make tea in the plant's native Paraguay. In 1931
French chemists extracted the compounds which give stevia its sweet taste.
According to a testing report issued by one of our customers in Japan, these
extracts, called steviosides, were found to be 250 to 300 times sweeter than
sucrose (ordinary table sugar). Stevioside, the major sweetener present in the
leaf and stem tissue of the stevia rebaudiana plant, was first seriously
considered as a sugar substitute in the early 1970's by a Japanese consortium
formed for the purpose of commercializing stevioside and stevia extracts.
27
Stevia is grown commercially in Brazil, Paraguay, Uruguay, Central America,
Israel, Thailand and China. The Stevia rebaudiana plant was first introduced to
China in 1977 and wide planting of stevia started in the mid-1980's. There are
two major species of stevia grown in China; one is cultured by Chinese
researchers and the other was introduced from Japan. According to the China
Stevioside Sugar Association, China has grown into the world's largest exporting
country of stevioside, with a volume exceeding 80% of the overall amount of
stevioside used in the world. Most stevioside is exported by Chinese
manufacturers, primarily to Japan and South Korea. Japan consumes more stevia
than any other country and it is estimated that stevia accounts for 40% of the
sweetener market in Japan according to the China Stevioside Sugar Association.
We believe that the worldwide demand for healthy sugar is rising, and we
estimate that the demand for stevioside in recent years is increasing at a rate
of 15% to 20% every year. According to the China Stevioside Sugar Association,
in 2002, worldwide demand for stevioside exceeded 1,200 tons and China supplied
more than 1,000 tons, accounting for 80% of worldwide consumption of stevioside.
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, which according to the China Stevioside
Sugar Association, accounted for approximately 8.3% of the global production.
The use of stevioside
Generally, no large scale mechanized production has been established and
stevia sweeteners are not yet found in mainstream food products in most
countries of the world. Progress towards large scale commercialization has been
slow, largely due to difficulties in producing the crop, the poor quality of
stevia extracts and the absence of regulatory approvals essential for stevia
sweeteners in the North American and European markets.
While stevioside has been sanctioned by the Ministry of Health of China to
be used as a food additive, and is listed in the Sanitation Standard of Food
Additives (GB2760), the number of countries in the world which permit the use of
stevioside as a food additive is limited. At present Japan, Korea, China,
Taiwan, Indonesia, Israel, German Brazil and Paraguay permit the use of
stevioside as a sweetener and food additive. In these countries stevioside may
be used in a wide variety of products including soft drinks, Japanese-style
processed vegetable products, tabletop sweeteners, confectioneries, fruit
products and processed seafood products. The countries, however, which do not
permit the use of stevioside as a food additive include most Western nations.
While stevioside may be used as a dietary supplement in the U.S. since the
mid-1980's the United States Food and Drug Administration (FDA) has labeled
stevia as an "unsafe food additive." The FDA's position is that available
toxicological information on stevia is inadequate to demonstrate its safety as a
food additive or to affirm its status as generally recognized as safe. When sold
as a dietary supplement, dietary ingredients, including stevia, are not subject
to the food additive regulations of the FDA.
Canada and Australia also permit the use of stevioside as a dietary
supplement but not as a food additive. In 1999, the Canadian Food Inspection
Agency, the equivalent of the FDA, issued a notice of detention to companies in
Canada who attempt to move, sell or dispose of stevia products. Stevia is also
not approved for use in the European Union, Singapore or Hong Kong.
28
The Joint FAO/WHO Expert Committee on Food Additives is an international
scientific committee that is administered by the Food and Agriculture
Organization of the United Nations (FAO) and the World Health Organization
(WHO). Since 1956 the committee has evaluated the use of food additives as well
as other food hazards and is recognized as an international authority in the
risk assessment of food hazards. In 1998 the committee conducted an evaluation
of the safety of stevioside. As a result of incompleteness in search findings,
the committee has not yet reached a conclusion as to the safety of stevioside as
a food additive. In addition, the committee could not allocate an acceptable
daily intake to stevioside because of the shortcomings of the research findings.
The committee recommended that new studies should be performed before
re-reviewing the toxicity of stevioside and asked that additional information
regarding the pharmacological effects of stevioside on humans be provided by
2007.
In 1999, the Scientific Committee on Food of the European Commission (now
the European Union), citing both the findings of the Joint FAO/WHO Expert
Committee on Food Additives and its own conclusions that additional studies on
the safety of stevioside are needed, issued its opinion that stevioside is not
acceptable as a sweetener on the then presently available data. Countries in
both Central America and South America generally adhere to the European Union's
guidelines, as do the countries of the European Union.
In response to the request by the European Commission for more research on
the safety of stevioside, in 2003, Professors Jan Geuns of the Laboratory for
Functional Biology and Johan Buyse of the Laboratory of Physiology and
Immunology of Domestic Animals of the Katholieke Universiteit Leuven in Belgium
set up the European Stevia Research Centre at K.U. Leuven in order to coordinate
research on stevia and stevioside. One of the centre's goals is to develop a
European quality label for stevioside which would hopefully lead to the eventual
lifting of the European ban on stevioside. The European Stevia Research Centre
held the first international symposium on the safety of stevioside in April
2004. Foreign specialists and K.U. Leuven scientists were invited to give an
overview of the recent stevioside research. The proceeding of the symposium
reached the general conclusion that the use of stevioside as a sweetener is
safe. It is presently unknown, however, if or when the European Union will alter
its initial findings and determine that the use of stevioside as a food additive
is safe for humans.
Our customers
We sell stevioside on a wholesale basis to customers primarily located in
China and Japan. Our target market for customers of our stevioside product are
domestic food manufacturers and larger foreign trade companies which export the
products from the PRC to Japan, Korea and Southeast Asia. Our major customers
include China Minemetals Corporation, Shanghai Sanming Food Co., Ltd., Shandong
Pharmaceutical & Healthcare Co., Ltd., Shanghai Folo Trade Co., Ltd. Hangzhou
Tian-Mu-Shan Pharmaceutical Enterprises Co. Ltd. and Nanjing FenQin Bio-Chemical
Co. Ltd. For the fiscal year ended April 30, 2005 and first quarter ended July
31, 2005 revenues from two of our manufacturer customer represented
approximately 15% and approximately 10% of our total net revenues from this
product group. We do not have contracts with our customers and sales are made
under a purchase order arrangement with payment in full on the order due prior
to shipment. We will provide certain discounts to customers if a customer pays
us three months in advance. The discount ranges from 2% to 3%. In the fiscal
year of 2005, such discounts that Sunwin gave were minimal.
29
Raw materials
In China, Shandong Province where our operations are located is the main
stevioside planting and production base. To ensure the supply of raw material,
we acquire raw materials through a combination of exclusive planting contracts
with local farmers and purchases at market or from local farmers. Approximately
30% of our supply of stevia comes from growing contracts with several large
plantations in China covering approximately 277 acres used to grow stevioside
rebaudiana. Under the terms of these contracts we generally pay the farmer 30%
of the contract price at the time the seed is planted, generally in March of
each year, and the remaining 70% upon delivery of the leaves. We pay for leaves
purchased at market or from local farmers at the time of purchase. In order to
improve quality of the stevia and management to avoid degeneration, our company
has set up a fine breed base so that we can enhance the control and correspond
the prices of stevia raw material, seed and stevioside production.
Based upon our historical experience, the average price of dry leaves of
stevia generally ranged from RMB 5,500 to RMB 6,000 per ton, or approximately
$695 per ton, and the price of stevioside was approximately RMB 200,000 per ton,
or approximately $24,160 per ton. In the later half of 2003, the raw material
market in China was adversely affected by weather conditions. The South China
planting bases were adversely affected as a result of a drought in the Jiangxi
Province and excessive rains in the Henan, Jiangsu and Anhui Provinces. Certain
agriculture policies enacted in North China had the effect of limiting the
farmer's initiative to plant crops, including stevia. As a result, since
September 2003, declining supply of raw materials has resulted in a steady
increase in the market price of dry leaves and finished product. The cost of
stevioside went up, followed by the rising prices. Currently the price of stevia
leaves is approximately RMB 15,000 per ton, or approximately $1,812 per ton, and
the price of stevioside ranges from approximately RMB 270,000 to approximately
RMB 280,000 per ton, or approximately $33,220 per ton. As a result of the
planting contracts we have entered into with local farmers, and our inventory of
dry leaves at the time of the price increases, we have been able to ensure our
supply of stevia leaves at reasonable prices.
Stevioside products are graded by the quality and the prices vary from
different grades. Each grade has a national reference price which is fixed upon
the national average cost of goods sold for a certain period. Taking into
account the slight difference of producing cost at the same grade due to the
different manufacturing environment, the selling price of stevioside products at
the same grade may float within a 3% to 5% range based on the reference price.
As a representative of the whole industry and a member of National Price
Corresponding Team, our company also participants in the setting of the national
unitive reference price of the stevia seeds, dry leaves and stevioside.
Manufacturing, extraction and packaging; and resale distribution
We use the traditional extraction technology of a natural "aqueous
extraction" process which involves the use of purified water extraction and air
dehydration to produce our stevioside. This all natural method results in a pure
white stevia crystal, with no brownish coloring. We set our production schedules
based on the market demand and our capability. In 2001, we increased our annual
productivity of stevioside from 100 tons to 200 tons by utilizing an advanced
technology alteration that improves the purity and production of the stevioside.
We recently acquired new technology which enhances the extraction process
enabling us to increase the purity of our stevioside which results in a more
flavorful product. We are cooperating with the China Agriculture Institute and
other national research facilities to increase the output of stevioside by
improving the manufacturing protocol and developing new products.
The extraction process for stevioside generally takes seven days. The plant
leaves are first dried and then undergo a quality control inspection to ensure
only good quality leaves are used in the extraction process. We then use a
combined process involving a solid/liquid extraction step, followed by a
liquid/liquid-purifying step that is traditionally used to extract the
steviosides from stevia. Once the extraction process has been completed, the
final product is ready for packaging and shipment to our customers. We bulk
package our stevioside in 10 kilo packages, two per box.
30
We generally maintain an inventory of stevia leaves equal to approximately
one year of finished product as well as an inventory as we need approximately
200 tons of stevia leaves to maintain a regular production schedule. We
generally maintain an inventory of finished product equal to approximately one
month's average sales.
We also purchase and resell finished stevioside product from third party
manufacturers. For fiscal year ended April 30, 2005 we manufactured
approximately 88 tons and purchased and resold approximately 96 tons from third
party manufacturers. For fiscal year ended April 30, 2004 we manufactured
approximately 150 tons and purchased approximately 84 tons from third party
manufacturers.
We purchase the stevioside finished product directly from other
manufacturers. We have four unaffiliated suppliers to obtain the lowest cost. We
do not have any contracts with these suppliers. We generally place orders for
stevioside products with our suppliers based upon our internal estimates of the
amounts we can manufacture and the remaining amount we will need to fill an
order of a customer. During the fiscal year ended April 30, 2005, approximately
52% of our total net revenues from this product group were generated from
reselling approximately 96 tons of stevioside purchase from third party
manufacturers, of which our four suppliers supplied us with approximately 11
tons, 16 tons, 30 tons and 38 tons, respectively.
From June 2004 to September 2005 we were involved in upgrading and moving
our stevioside production to a different location which resulted in our not
being able to manufacture stevioside during such time. We have begun
manufacturing production. This manufacturing facility will provide us an
aggregate production capacity of 300 tons of stevioside per year. The main
facilities are comprised of extraction technology and spray towers for high
temperature drying. Until such time as the facility is fully operational, in the
event we receive orders for Stevioside in excess of our manufacturing capacity,
we intend to purchase from other manufacturers and resell these goods to our
customers to fill orders. During the first year of operations under the new
facility, we anticipate manufacturing no more than 200 tons of Stevia and
purchase and resell from other manufactures any amounts in excess thereof.
Veterinary medicines
We manufacture and sell a comprehensive group of veterinary medicines
including seven series of more than 200 products. For the fiscal year ended
April 30, 2005 and the first quarter ended July 31, 2005 sales of this product
group represented approximately 28% of our total net 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. We are a leading advocator of preparing the animal medicine from
Chinese herbs, especially in antivirus and feed additives. We are concentrating
our efforts in this product category on developing and producing medicines which
are relevant to the needs of the animal stock industry in the PRC, and
developing special veterinary medicines made from pure Traditional Chinese
medicines or combining Traditional Chinese medicine with Western medicine. Our
products in this group include veterinary medicine (Traditional Chinese medicine
and Western medicine), feed additives, feeds and disinfectors. These products
are sold to 28 Provinces of China.
We also manufacturer and sell animal feed additives. Historically,
antibiotics were added to animal feed in an effort to produce healthier animals.
However, scientists now believe that this practice can produce some unforeseen
and unwanted effects. Some studies indicate that the antibiotics and chemical
compound medicines that are contained in feeds will accumulate in the animal
body, and can possibly cause harm to human beings. Penicillin, streptomycin and
sulfanilamide medicines often emit allergic and abnormal reactions; aureomycin
can lead to allergic reactions; chloromycetin can arouse anti-regenerating
anemia, hemoblast reducing, and liver damnification; olaquindox can cause
abnormal gene development; and furazolidone can create cancerous cells in animal
organisms.
31
Scientists also believe that incorporating antibiotics into animal feeds
could, over a long period of time, convert some bacteria into antibiotic
resistant bacteria. Under this assumption, these antibiotic resistant bacteria
then spread the antibiotic resistant genes to other sensitive bacteria,
generating the resistance to some medicines which then inhibit or prevent the
cure of certain diseases that originally could be prevented and cured by such
medicines.
The use and/or abuse of antibiotics has affected countries around the
world. For example, in Belgium, France, Germany and Holland, dioxins polluted
the feeds and in turn caused damage to the livestock population. The outbreak of
bovine spongiform encephalopathy (BSE or Mad Cow disease) in Britain not only
decimated the British livestock markets but had a worldwide effect on beef
production. It was reasoned that a certain population of virus in these cows
might have developed a drug-resistant strain. In recent years, many countries
have regulated the use of antibiotics additives through legislation. In the
middle of the 1970's, the European Economic Council adopted regulations
prohibiting the use of penicillin and acheomycin as feed additives. In 1977,
U.S. Food and Drug Administration limited using bacteriophage as the feed
additive and regulated the zinc-bacitracin as the special feed additive for the
livestock and birds. Since olaquindox, furazolidone and chloromycetin were
forbidden as applications on edible animals in the European Community, the EU
began to forbid four antibiotics including zinc-bacitracin and tylosin to use in
feeds at the end of 1998.
Animal feed additives based upon Traditional Chinese medicine are
increasingly being regarded as desirable as they lack the drawbacks of chemical
compounds, even though these Traditional Chinese medicines may not be as potent
as chemical compounds in terms of stimulating growth of livestock. Many
Traditional Chinese medicines have double functions of nourishment and
medicament, which not only accelerate the sucrose metabolism of the organism and
synthesis of the protein and enzyme, but also increase the efficiency of the
antibody and the growth of the sex gland. The health growth of the sex gland
would in turn enhance muscular system development. The Traditional Chinese
medicines have the effect of sterilizing and resisting the bacteria and
adjusting the organism immunity function. As a result of these benefits, many
countries are developing and researching the natural Traditional Chinese
medicine feed additives.
Compared with antibiotics and chemical compounds feed additives, the
natural Traditional Chinese medicine feed additives have the following
advantages:
o non-diathesis antibacterial function which can not only sterilize and
resist bacteria, but also adjust organism immunity function;
o no or little harmful remains;
o pathogenic microbe can not generate the anti-medicine character
easily; and
o the materials are abundant and can be used locally.
We sell a plant polysaccharid and flavonoid extraction compound feed
additive that is all natural with no side effects and that can be substituted
for antibiotics and the chemical compounds which are added in animal feeds. We
believe our product provides a number of benefits, including resolving the
harmful remains problem of meat, eggs and milk that could be toxic to humans,
efficiently reducing the content of the fat and cholesterol, improving the taste
of livestock and birds and producing safe and healthy animal foods.
32
Some of the features of our polysaccharid and flavonoid extraction compound
are:
o Substitute the antibiotics and chemical compounds which reduce the
levels of medicines which are present in the remains of the livestock
and birds products.
o Improves growth and improve the disease-resistance of the animal.
o Balance the micro-circumstance of the animal intestines which in turn
prevents or aids in the resistance to diseases. The plant
Oligosaccharide which is contained in our product can greatly promote
the multiplication of the lactobacilli and bifidus and adjust the PH
parameter in intestines. Large molecules biologic active substances
such as plant alkaloid can restrain the growth of the pathogeny in
intestines and prevent the occurrence of intestines deceases
effectively.
o Increase anti-stimulation response ability. It can relax the
anti-stimulation action caused by high temperature and high density in
breeding and can stabilize the production capability.
o Reduce feeds cost. The product contains plant active substances such
as flavonoid, multi-hydroxybenzene, which can restrain the growth of
the mildew effectively, have an obvious function of food-luring. and
largely increase the amount of food-taking. So it can reduce the
dosage of the mildew-proof dose, acidification dose, anti-oxidizer,
food-luring dose in the feeds.
We also sell our brand of CIO2 food disinfector. ClO2, a chemical employed
in both industrial and commercial applications, was developed successfully in
1985 by American Baihexing Company. It was regarded as a food disinfector by the
European Environmental Protection Unit and the U.S. Environmental Protection
Agency and was sanctioned as a food additive by the U.S. Food and Drug
Administration. Japan, Australia, and the European countries followed and
regarded it as the fourth generation of safe disinfector and food additive that
substituted the chlorine serial disinfectors. Due to its good character, it was
regarded as the A-grade safe additive by the World Health Organization and was
strongly promoted on a global scale.
China began to expand the use of the ClO2 disinfector at the beginning of
the 1990s. In 1992, it was listed in health standard by the China National Food
Additive Standard Committee. On February 19, 2004, we attended the Bird Flu
convention conference organized by the Ministry of Agriculture in Beijing. The
Ministry of Agriculture sanctioned our new ClO2 disinfector as a Ministry
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. At present, this steady ClO2 disinfector
product has been used in a wide variety of disinfectant and sterilization
applications including waste and sewage disposal and sterilization of food
utensils.
During fiscal year 2005 and the first two quarters of fiscal year 2006 we
have been involved in reconstructing an additional veterinary production line
into a new building. We will continue to be involved in this reconstruction and
anticipate to move into our new facility during the third quarter of fiscal 2006
which may during such time disrupt our existing production. We do not anticipate
to be in full production until December 2005.
33
Our customers
We sell our veterinary medicine products on a wholesale and retail to
livestock and poultry farmers, retail veterinary product outlets and large scale
cultivating businesses. Our principal customers include Chengde Chengxing Animal
Hospital, Ha'erbin Donghui Veterinary Products Store, Xiantan Golddragon
Veterinary Co. Ltd., Gao'an Aquatic Bureau, Shandong Veterinary Supervision
Office and Hebei Veterinary Station. No customer accounts for more than 10% of
our net revenues in this product category. We do not have contracts with our
customers and sales are made under a purchase order arrangement. General payment
terms for our veterinary medicine products range from prepaid prior to shipment
to net 60. We will provide certain discounts to customers if a customer pays us
three months in advance. The discount ranges from 2% to 3%. In the fiscal year
of 2005 and first quarter ended July 31, 2005, such discounts that Sunwin gave
were minimal
Raw Materials
We purchase the raw materials for medicines and feed additives produced by
us on the open market from a number of suppliers to ensure best price and high
quality ingredients. For products which are based on traditional Chinese
medicines, we use extract formulas produced by our traditional Chinese medicine
formula extract group described below. We have not experienced any difficulty in
obtaining the necessary raw materials for our veterinary medicine products.
Traditional Chinese medicine formula extracts
Our third product group is the manufacturing and sale of traditional
Chinese medicine formula extracts. These extracts are used in products made for
use by both humans and animals. For fiscal year ended April 30, 2005 and the
first quarter ended July 31, 2005 this product group represented approximately
26% of our total net revenues.
Traditional Chinese medicine is based on a "five element theory" and those
elements are wood, earth, metal, fire, and water. Our bodies have two energy
channels (meridians) representing organ systems in each of those five elements
of nature. Optimally, these all work in balance and in synchronized harmony. In
the process of defending against diseases for thousands of years, Chinese herbal
medicine has been developed and systemized based upon theoretical principles as
a means of both the prevention and treatment of illness and disease. A complex
system of diagnostic methods take into consideration the person as a whole, not
just isolated symptoms. A "pattern of disharmony" is discovered and treated
accordingly. The aim is not necessarily to eliminate or alleviate symptoms. The
objective, rather, is to increase both the ability to function and the quality
of life. The restoration of harmony is integral to Chinese herbal medicine.
After a diagnosis is made, herbs are selected and combined, or a well-known
traditional formula is prescribed and the formula is adjusted to fit the
patient's symptoms and diagnosis.
Modern medical science is experiencing a change from biological research to
biological-psychological-social research with traditional medical science
playing a more important role than ever. Many modern chemical medicines contain
high toxicities and present numerous side-effects. Purely chemical medicines are
difficult, time consuming and expensive to develop. We believe that natural
Chinese traditional medicines represent advantages over chemical medicines and
that the process of combining herbal extraction and chemical medicines is
becoming a popular alternative, following the current trends of "natural" and
"green" products in a variety of industries.
34
According to our research, there are over 400 different commonly used types
of traditional Chinese medicine extracts. We manufacture and sell approximately
120 different extracts which can be divided into the following three categories:
o single traditional Chinese medicine extracts,
o compound traditional Chinese medicine extracts, and
o purified extracts, including active parts and monomer compounds such
as soy isoflavone.
The following formula extracts and single extracts are our main products.
Veterinary medicine products
o Epimedium powder which is used to tonify the kidney, invigorate yang,
strengthen muscles and bones and as anantiheumaitc,
o mixed powder which is used to prevent and cure chronic respiratory
failure caused by septicemia and infective bronchitis,
o Sihuang mixed powder which is used to cure colibacillois and
hypercathasis of poultry, and
o mixed powder used to cure seasonal febrile diseases of poultry and
bursa of fabricius and epiornitic,
Medium products for human medicine
o Astragalus root extracted powder which is used to replenish qi and
keep yang-qi ascending, to consolidate superficial resistance to cause
diuresis and to promote pus discharge and tissue regeneration,
o Scutellaria root extracted powder which is used to remove heat,
dampness and toxic substances, to purge intense heat and to prevent
miscarriage,
o Honeysuckle flower extracted powder which is used to remove heat and
toxic substance and to dispel wind-heat,
o Liquorice extracted powder which is used to tonify the middle-jiao and
replenish qi to remove heat and toxic substance, to moisturize the
lung and arrest cough, and to relieve spasm and pain, and
o Hawthorn fruit extracted powder which is used to remove food stagnancy
and blood stasis.
Our customers
We sell our traditional Chinese medicine formula extracts on a wholesale
basis to domestic traditional Chinese medicine manufacturers and large animal
pharmaceutical manufacturers. Our primary customers include Zhucheng Xinde
Foreign Trade Co., Ltd., Shangdong Liuhe Feed Co., Ltd., Najing Traditional
Chinese Medicine University, Taiyuan Hengfengqiang Bio-Tech Development Co.,
Ltd., Beijing Xiangshang Veterinary Factory and Hefei Huarui Co., Ltd. For the
fiscal year ended April 30, 2005 and first quarter ended July 31, 2005 revenues
from one of our customer represented approximately 10% of our total net revenues
from this product group. We do not have contracts with our customers and sales
are made under a purchase order arrangement. We generally require 10% to 30%
deposit at the time when the order is submitted, and offer payment terms of
between six months to one year for the balance of the order. The accounts
receivable generated by our veterinary medicine product group represents 70% to
80% of our total accounts receivable from time to time. We will provide certain
discounts to customers if a customer pays us three months in advance. The
discount ranges from 2% to 3%. In the fiscal year of 2005 and first quarter
ended July 31, 2005, such discounts that Sunwin gave were minimal.
Raw materials
The business of extraction of Chinese herbs is a fast growing industry in
China following its membership in the WTO. Many industries, including
pharmaceutical companies, chemical companies, health products companies,
biological engineering companies and research and development institutions, have
entered the field. A key factor to success in this industry is where the herb
grows. "San Qi", a very popular herb, grows in Yun Nan province so many
companies engaging in extraction have established operations there. For the same
reason, the companies in Inner Mongolia are focusing on production of "Gan Cao"
extraction, and most companies in Ji Lin province are preparing the extraction
of ginseng while in Xin Jiang province, companies are extracting the "Ma Huang
Su" and "Gan Cao".
Currently, most raw material purchases are from the country's well-known
herbal planting bases in the Shangluo Area of Shanxi Province which is located
in Qinlin Area and nicknamed the Chinese Traditional Medicine Treasury, as well
as the Haozhou Area of Anhui Province and the Anguo Area of Hebei Province,
which are the two largest herbal markets of China. We purchase raw materials
from a number of suppliers to ensure favorable pricing, steady supplies as well
as quality materials.
Formulation, Manufacturing and packaging
We manufacture approximately 120 extracts used in traditional Chinese
medicine. The production time is generally seven days. These formulas are either
commonly used formulas published in the National Medicine Dictionary or
utilizing the Shandong Province industry standards, as well as formulas which
may have been developed by university research scientists or internally
developed by our R & D personnel. Formulas developed by our company must first
be approved by the Shandong Bureau of Quality and Technical Supervision prior to
use in our products.
The raw materials are subjected to a combined process involving a
solid/liquid extraction step, followed by a liquid/liquid-purifying step to
obtain the purified extract. Once the purification process has been completed,
the extract is concentrated and re-filtering at which time it is ready for
packaging and shipment to our customers. The extracts are bulk packaged in 25
kilogram barrels. We utilize just in time manufacturing for our traditional
Chinese medicine extracts and do not maintain an inventory of finished products.
New Product Development
We engage in new product development both through our internal research
facilities and in partnership with a number of research facilities in the PRC
including:
o Shandong Medical University where are project is the joint development
of molecular absorption purified rutoside,
36
o Kelong Bio-Tech Co., Ltd. Biology and Physics Research Center of
Chinese Acedemy of Science where the project is the joint development
of soy bean oligosaccharide, and
o Tianfulai Bio-Tech Technology Co. Ltd. (Beijing) where the project is
the joint development of Traditional Chinese medicine polysaccharide
anthone extracted powder for forage.
We also utilize the research facilities of Beijing Medical University,
China Agriculture University and Taiwan Renshan Bio-Tech Co. We pay for the use
of these facilities on an as needed basis and the costs are included in our
research and development expenses. For the fiscal years ended April 30, 2005 and
2004 we spent approximately $171,000 and approximately $192,000, respectively,
on research and development.
Our research findings which were developed jointly with Kelong Bio-Tech Co.
Ltd., Biology and Physics Research Center of the Chinese Acedemy of Science and
other findings in Chinese traditional medicine have been industrialized one by
one. 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.
Competition
All of our product groups operate in highly competitive markets. There are
approximately 30 stevioside manufacturers in China, with only approximately 10
companies operating on a continuing basis. Of these 10 companies, our primary
competitors are Huaxian Stevia Factory and Julong Stevia Company who, like our
company, have an annual output of stevioside in excess of 100 tons. Other
companies periodically enter the industry depending upon the market demand in
that this part-time participant may choose to stop production when the market is
in its downturn and the raw material is not available. This sporadic oversupply
of product can adversely affect our market share. In addition to competing with
other Chinese companies, we also compete with growers and processors in Japan,
the world's largest market for stevioside. We believe we compete in this product
segment based upon our production capabilities and product quality. In order to
maintain our industry position and as we seek to increase our market share in
both the domestic and international market, we have undertaken certain personnel
reorganizations to improve our operations.
Our principal competitors in the sale of veterinary medicine products are
China Animal Husbandry Industry Co., Ltd., Qilu Animal Health Products Factory
Co., Ltd. and Shinjaizhuang Huamu Animal Husbandry Co. Ltd. In addition, as
China is a member of the WTO many good quality competitive products are imported
into the Chinese market at reasonable prices. We believe we hold certain
competitive advantages in this product segment based mainly on our manufacturing
capacity and advanced technology. We have developed a number of new products for
targeted markets and we have invested approximately RMB 10,000,000, or
approximately $1,208,000, during the last two years in improvements in our
manufacturing facility. We also focus on expanding our product offerings and
quality control. In order to maintain what we believe to be a competitive
position within this product segment we will need to change our existing product
delivery system from tablets and injections to sprays which increases the
convenience and accessibility for the end use. We also are challenged to broaden
our product line to meet consumer demand and compete with foreign made products.
37
The market in China for traditional medicine extracts is extremely
competitive. According to official statistics, at peak time, there are more than
500 companies engaged in herb extraction in China. Companies in many different
industries, including pharmaceutical companies, chemical companies, healthy
products companies, herb extraction companies, biological engineering companies
and research and development institutions, are now engaged in herb extraction.
Our major competitors include Anhui Xuancheng Baicao Plants Industry & Trade
Co., Ltd., Sichuan Shifangkangyuan Medicine Materials Co., Ltd. and Lanzhou
Lantai Bio-Engineering Tech Co., Ltd. Most products from these companies are
exported to overseas markets. Competitive factors primarily include price and
quality. We believe that we are able to effectively compete in our market
segment in China based upon the quality of the exclusive planting bases we have
under contract and our reputation in the market place. Globally, as demand for
our types of products expand we believe that we will be able to effectively
compete against similar companies from other countries as a result of the lower
costs of doing business in China, in particular the lower labor rates, and
China's soil and growing conditions which enable us to produce high quality
products.
However, because the barriers to entry in the market are relatively low and
the potential market is large, we expect continued growth in existing
competitors in all of our product groups and the entrance of new competitors in
the future. Many of our current and potential competitors have significantly
longer operating histories and significantly greater managerial, financial,
marketing, technical and other competitive resources, as well as greater name
recognition, than we do.
Intellectual Property
Our success depends in part on our ability to protect our intellectual
property which includes various raw materials purification technologies used in
our products. Qufu has registered the Shengwang trademark with China National
Patent, Trademark and Intellectual Property Office. To protect our proprietary
rights, we rely generally on confidentiality agreements with employees and third
parties, and agreements with consultants, vendors and customers, although we
have not signed such agreements in every case. Despite such protections, a third
party could, without authorization, utilize our propriety technologies without
our consent. We can give no assurance that our agreements with employees,
consultants and others who participate in the production of our products will
not be breached, or that we will have adequate remedies for any breach, or that
our proprietary technologies will not otherwise become known or independently
developed by competitors.
Registration of Qufu as a joint venture in China
Prior to our acquisition of Sunwin Tech in April 2004, in February 2004
Sunwin Tech, acquired 80% of the capital stock of Qufu from Shandong Shengwang
Pharmaceutical Corporation, Limited in exchange for shares of Sunwin Tech's
common stock. Management has determined that it wishes to update the status of
Qufu from a stock company to a joint venture which management believes will
provide Qufu with certain advantages in its business and operations as joint
ventures are generally perceived to be more financially stable enterprises. We
have received a temporary operating license from the Chinese governmental
agency. In order to complete the registration with the Chinese government, the
Chinese government must verify that a cash investment has been made from Sunwin
Tech (a foreign company) to Qufu equal to 80% of Qufu's registered capital which
is presently approximately $1,973,287 (18 million RMB) before the government
will grant Qufu the operating license as a joint venture. At July 31, 2005, Qufu
received approximately $877,500 from our private offerings for this purpose.
When the rest of funds of approximately $1,100,000 are available to Qufu, the
operating license will be granted, of which there are no assurances we will able
to receive the fund. The Chinese government may allow stock of a publicly traded
US company to be used for the formation of the joint venture. If this is a case,
the additional amount necessary for the formation of the joint venture is not
required. In case Qufu is unable to receive the funds, we may lower Qufu's
registered capital from $2,466,609 (20 million RMB) to $1,233,304 (10 million
RMB) to complete the registration process. We believe that whether we complete
the registration process or not will not materially affect our business
operation and financial performance.
38
Government Regulation
Our business and operations are located in the People's Republic of China.
We are subject to state and local environmental laws related to certification of
water release. We are subject to registration and inspection by The Ministry of
Agriculture of China with respect to the manufacture and distribution of
veterinary medicines and the State Food and Drug Administration of China (SFDA)
with respect to the manufacturing and distribution of traditional Chinese
medicine extracts. We are also licensed by the Shandong Provincial Government to
manufacture veterinary medicine and stevioside. We are in substantial compliance
with all provisions of those registrations, inspections and licenses and have no
reason to believe that they will not be renewed as required by the applicable
rules of the Central Government and the Shandong Province. In addition, our
operations must conform to general governmental regulations and rules for
private (non-state owned) companies doing business in China.
PRC legal system
Since 1979, many laws and regulations addressing economic matters in
general have been promulgated in the PRC. Despite development of its legal
system, the PRC does not have a comprehensive system of laws. In addition,
enforcement of existing laws may be uncertain and sporadic, and implementation
and interpretation thereof inconsistent. The PRC judiciary is relatively
inexperienced in enforcing the laws that exist, leading to a higher than usual
degree of uncertainty as to the outcome of any litigation. Even where adequate
law exists in the PRC, it may be difficult to obtain swift and equitable
enforcement of such law, or to obtain enforcement of a judgment by a court of
another jurisdiction. The PRC's legal system is based on written statutes and,
therefore, decided legal cases are without binding legal effect, although they
are often followed by judges as guidance. The interpretation of PRC laws may be
subject to policy changes reflecting domestic political changes. As the PRC
legal system develops, the promulgation of new laws, changes to existing laws
and the preemption of local regulations by national laws may adversely affect
foreign investors. The trend of legislation over the past 20 years has, however,
significantly enhanced the protection afforded foreign investors in enterprises
in the PRC. However, there can be no assurance that changes in such legislation
or interpretation thereof will not have an adverse effect upon our business
operations or prospects.
Economic Reform Issues
Since 1979, the Chinese government has reformed its economic systems.
Because many reforms are unprecedented or experimental, they are expected to be
refined and improved. Other political, economic and social factors, such as
political changes, changes in the rates of economic growth, unemployment or
inflation, or in the disparities in per capita wealth between regions within
China, could lead to further readjustment of the reform measures. We cannot
predict if this refining and readjustment process may negatively affect our
operations in future periods.
Over the last few years, China's economy has registered a high growth rate.
Recently, there have been indications that rates of inflation have increased. In
response, the Chinese government recently has taken measures to curb this
excessively expansive economy. These measures have included devaluations of the
Chinese currency, the RMB, restrictions on the availability of domestic credit,
reducing the purchasing capability of certain of its customers, and limited
re-centralization of the approval process for purchases of some foreign
products. These austerity measures alone may not succeed in slowing down the
economy's excessive expansion or control inflation, and may result in severe
dislocations in the Chinese economy. The Chinese government may adopt additional
measures to further combat inflation, including the establishment of freezes or
restraints on certain projects or markets.
39
To date reforms to China's economic system have not adversely impacted our
operations and are not expected to adversely impact operations in the
foreseeable future; however, there can be no assurance that the reforms to
China's economic system will continue or that we will not be adversely affected
by changes in China's political, economic, and social conditions and by changes
in policies of the Chinese government, such as changes in laws and regulations,
measures which may be introduced to control inflation, changes in the rate or
method of taxation, imposition of additional restrictions on currency conversion
and remittance abroad, and reduction in tariff protection and other import
restrictions.
China's Accession into the WTO
On November 11, 2001, China signed an agreement to become a member of the
World Trade Organization (WTO), the international body that sets most trade
rules, further integrating China into the global economy and significantly
reducing the barriers to international commerce. China's membership in the WTO
was effective on December 11, 2001. China has agreed upon its accession to the
WTO to reduce tariffs and non-tariff barriers, remove investment restrictions,
provide trading and distribution rights for foreign firms, and open various
service sectors to foreign competition. China's accession to the WTO may
favorably affect our business in that reduced market barriers and a more
transparent investment environment will facilitate increased investment
opportunities in China, while tariff rate reductions and other enhancements will
enable us to develop better investment strategies for our clients. In addition,
the WTO's dispute settlement mechanism provides a credible and effective tool to
enforce members' commercial rights.
Our History
We were incorporated in Nevada on August 27, 1987 under the name Network
USA, Inc. for the purposes of completing a merger or other business combination
with an operating entity. From our inception through April 2002 we did not
conduct business. On April 9, 2002, we acquired 20% of One Genesis, Inc., a
privately-held Texas real estate corporation, from one of our then principal
stockholders in exchange for approximately 4,333,332 shares of our common stock.
The shares of One Genesis, Inc. were sold on July 31, 2002 for $120,000 in cash.
Following this transaction, we continued to direct our efforts towards the
investment and development of real estate, initially in the Houston, Texas
market and also considered possible transactions in which a privately held
business would merge into our company in a transaction in which control of our
company would change hands. During fiscal 2003, we entered into a letter of
intent with Aerospace Technologies Limited, however, the letter of intent was
eventually terminated prior to the closing of any transaction.
Effective on April 30, 2004, we acquired 100% of the issued and outstanding
shares of Sunwin Tech Group, Inc., a newly-formed Florida corporation, ("Sunwin
Tech") from its shareholders, in exchange for approximately 17,000,000 shares of
our common stock which resulted in a change of control of our company.
Concurrent with the closing of this transaction, our officers and directors
resigned and our current officers and directors were appointed to their
positions. In connection with the transaction, Sunwin Tech purchased 4,500,000
shares of our common stock owned by our former principal stockholders for
$175,000, and, at the closing, Sunwin Tech distributed the 4,500,000 shares to
Messrs. Baozhong Yuan, Laiwang Zhang, Xianfeng Kong and Lei Zhang, pro-rata to
their ownership of Sunwin immediately prior to the closing. Following the
transactions, the former Sunwin Tech shareholders own approximately 68 % of our
issued and outstanding capital stock.
40
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.
In July 2004 following the transaction with Sunwin Tech, we changed the
name of our company from Network USA, Inc. to Sunwin International
Neutraceuticals, Inc.
Property
Our principal executive offices and research and development facilities are
located in a building we share with Shandong Shengwang Pharmaceutical
Corporation, Limited., an affiliate, under an oral agreement. The cost for this
facility is included in the annual management fee we pay Shandong Shengwang
Pharmaceutical Corporation, Limited.
In October 2002 Qufu entered into a lease agreement with Shandong Shengwang
Pharmaceutical Corporation, Limited, an affiliate, which covers the
approximately 54,000 square foot facilities used by our Traditional Chinese
medicine formula extract product group. This lease, which expires in October
2012, provides for an annual rent of RMB 160,000, or approximately US$20,000,
payable in a lump sum yearly.
In October 2002 Qufu entered into a lease agreement with Qufu LuCheng Chiya
Resident Commitment, an unaffiliated local governmental owned entity, which
covers the approximate 25,200 square foot facilities used by our veterinary
medicine product group. This lease, which expires in August 2012, provides for
annual rent of RMB 180,000, or approximately US$22,500, payable in a lump sum
yearly.
In April 2004 Qufu entered into a lease agreement with Qufu ShengDa
Industry Co., Ltd., an unaffiliated local governmental owned entity, which
covers the approximate 36,000 square foot facilities used by our stevioside
product group. This lease, which expires in April 2014, provides for annual rent
of RMB 30,000, or approximately US$3,750, for the first three years of the term
and thereafter increases to RMB 50,000, or approximately US$6,250 for the
balance of the lease term, payable in a lump sum yearly.
We believe that these facilities are sufficient for our needs.
41
Legal Proceedings
We are not a party to any pending legal proceeding, nor are we aware of any
legal proceedings being contemplated against us by any governmental authority.
We are not aware of any legal proceeding in which any of our officers,
directors, affiliates or security holders is a party adverse to us or in which
any of them have a material interest adverse to us.
Employees
As of October 31, 2005, we employed the following:
Function
(1) Management and administration 47
(2) Manufacturing (including quality control) and production 250
(3) Research and development 9
(4) Sales and marketing 85
Total 391
All employees are primarily based in Qufu, China while some managerial and
sales staff work occasionally in other Chinese cities or overseas for different
projects. Each full-time Chinese employee is a member of a local trade union.
Labor relations have remained positive and we have not had any employee strikes
or major labor disputes. Unlike trade union in western countries, trade unions
in most parts of China are organizations mobilized jointly by the government and
the management of the corporation.
42
MANAGEMENT
Directors and Executive Officers
The following table includes the names, positions held and ages of our
executive officers and directors.
Name Age Position
Laiwang Zhang 43 President and Chairman
Dongdong Lin 31 CEO, Secretary and director
Fanjun Wu 31 Chief Financial Officer
Chengxiang Yan 37 Director
Laiwang Zhang. Mr. Zhang has served as our President and Chairman since
April 30, 2004 and he has served as Chairman of our majority owned subsidiary
Qufu Natural Green Engineering Company, Limited since January 2003. Mr. Zhang
also serves as Chairman of Shandong Shengwang Pharmaceutical Corporation,
Limited, a company engaged in the sale and distribution of Chinese herb
medicines, since April 2000. Shandong Shengwang Pharmaceutical Corporation,
Limited is a minority shareholder of our majority owned subsidiary Qufu. In
1996, Mr. Zhang founded Shandong Shengwang Group Corporation, a holding company
with interests in companies operating in the areas of nutritional products,
Chinese herb extracts, package products, animal health products, animal medicine
and chemical products. Since April 1996 he has been General Manager of this
company. From April 1992 to April 1996 Mr. Zhang served as Manager of our
subsidiary Shengya Veterinary Drugs Factory (formerly Shangong Qufu Veterinary
Medicine Plant). From 1984 to 1992, Mr. Zhang served a President of Shandong
Qufu Amylum Plant, a company that manufactures amylum. Mr. Zhang graduated from
Shandong Technical University in 1984 with a Masters Degree in Engineering.
Dongdong Lin. Ms. Lin has served as our CEO, Secretary and a member of our
Board of Directors since February 2005. Ms. Lin served as Manager of the
Technology Information Department of Shandong Shengwang Pharmaceutical
Corporation, Limited, a company engaged in the sale and distribution of Chinese
herb medicines, from January 2003 to December 2004. Shandong Shengwang
Pharmaceutical Corporation, Limited is a minority shareholder of our majority
owned subsidiary Qufu. Ms. Lin joined Shandong Shengwang Group Corporation in
1996, serving as a supervisor from April 1998 to April 2000, and Manager of the
Department of Export and Import from April 2000 to December 2002. Ms. Lin holds
a Bachelors Degree in Technology English from Haerbing Industry University and a
Masters Degree in Economics from the China Academy of Social Science.
Fanjun Wu. Ms. Wu has been our Chief Financial Officer since April 30,
2004. Since 1997, she has been employed by our subsidiary Qufu Natural Green
Engineering Co., Ltd., serving as Director of Finance Section from 1997 to 1998
and thereafter as Chief Financial Officer. From 1992 to 1996, she was Director
of Finance Section for our subsidiary Shengya Veterinary Drugs Factory (formerly
Shandong Qufu Veterinary Medicine Plant).
Chjengxiang Yan. Mr. Yan has been a member of our Board of Directors since
April 30, 2004. Since 2001, he has served as a Director of Shandong Shenwang
Pharmaceutical Corporation Limited, a company engaged in the sale and
distribution of Chinese herb medicines. Shandong Shengwang Pharmaceutical
Corporation, Limited is a minority shareholder of our majority owned subsidiary
Qufu. From 1999 to 2004, he was the Director of the Marketing Department for
that company. From 1996 to 1998, Mr. Yan was Director of the Marketing
Department for Shandong Shengwang Group Corporation, a holding company with
interests in companies operating in the areas of nutritional products, Chinese
herb extracts, package products, animal health products, animal medicine and
chemical products, and from 1993 to 1996, he was Director of the Marketing
Section for our subsidiary Shengya Veterinary Drugs Factory (formerly Shangong
Qufu Veterinary Medicine Plant). Mr. Yan graduated from Shandong Agriculture
University in 1993 with a Bachelor's Degree in Farming.
44
There are no family relationships between any of our officers and
directors.
All of our current management is located in the PRC and no member of our
board of directors has previously served as an officer or a director of a U.S.
public company. As a result of both the cultural differences between doing
business in the PRC and doing business as a public company in the U.S. as well
as the lack of experience of our board of directors with laws, rules and
regulations which apply to public companies in the U.S., we are seeking to
expand our board of directors to include qualified individuals who are also
residents of the U.S.
U.S. Advisor
In May and June 2005, under two separate agreements, we engaged China
Direct Investments, Inc., which provides consulting and advisory services to
assist us with operation and regulatory framework applicable to U.S. public
companies. We selected China Direct Investments, Inc. in part because its staff
includes Chinese-speaking individuals with experience in operation and
regulatory framework applicable to U.S. public companies. The company has been
engaged to advise our management in areas related to marketing and operational
support in the U.S., media and public relations, financial advisory, SEC
disclosure compliance and translation of all necessary documents relating to the
foregoing. Under the terms of a two-month agreement we issued China Direct
Investments, Inc. warrants to purchase 500,000 shares of our common stock at an
exercise price of $.15 per share as compensation for their services relating to
this registration statement. Under the terms of a twelve-month agreement, China
Direct Investments, Inc. may receive an aggregate of 2,660,000 shares of our
common stock pursuant to our Equity Compensation Plan, paid on a quarterly basis
(August 31, November 30, February 28, and May 1) in arrears for services
rendered in the amount 665,000 shares (which are not earned until the last day
of the quarter) for so long as this agreement is in effect, as compensation for
their services relating to mergers and acquisitions, general operations and
regulatory framework applicable to U.S. public companies. James Wang, Marc
Siegel and David Stein are the officers, directors and shareholders of China
Direct Investments, Inc.
Director Independence, Audit Committee Of The Board Of Directors And Audit
Committee Financial Expert
None of the members of our Board of Directors are "independent" within the
meaning of definitions established by the Securities and Exchange Commission.
Our Board of Directors are presently comprised of individuals who were integral
in either the start-up of our company or business of our subsidiaries, in the
case of Mr. Zhang and Mr. Chjengxiang, or general business skills, in the case
of Ms. Lin. As a result of our limited operating history and minimal resources,
small companies such as ours generally have difficulty in attracting independent
directors. In addition, we will require additional resources to obtain directors
and officers insurance coverage which is generally necessary to attract and
retain independent directors. As we grow, in the future our Board of Directors
intends to seek additional members who are independent, have a variety of
experiences and backgrounds, who will represent the balanced, best interests of
all of our stockholders and at least one of which who is an "audit committee
financial expert" described below.
Our Board of Directors has also not yet established an Audit Committee, and
the functions of the Audit Committee are currently performed by the entire Board
of Directors. At such time as we expand our Board of Directors to include
independent directors, we intend to establish an Audit Committee of our Board of
Directors. We are not currently subject to any law, rule or regulation, however,
requiring that all or any portion of our Board of Directors include
"independent" directors, nor are we required to establish or maintain an Audit
Committee of our Board of Directors.
None of our directors is an "audit committee financial expert" within
the meaning of Item 401(e) of Regulation S-B. In general, an "audit committee
financial expert" is an individual member of the audit committee or Board of
Directors who:
|X| understands generally accepted accounting principles and financial
statements,
|X| is able to assess the general application of such principles in connection
with accounting for estimates, accruals and reserves,
|X| has experience preparing, auditing, analyzing or evaluating financial
statements comparable to the breadth and complexity to our financial
statements,
|X| understands internal controls over financial reporting, and
|X| understands audit committee functions.
Code of Ethics
In April 2005, we adopted a Code of Ethics applicable to our Chief
Executive Officer, principal financial and accounting officers and persons
performing similar functions. A Code of Ethics is a written standard designed to
deter wrongdoing and to promote:
o honest and ethical conduct,
o full, fair, accurate, timely and understandable disclosure in
regulatory filings and public statements,
o compliance with applicable laws, rules and regulations,
o the prompt reporting violation of the code, and
o accountability for adherence to the Code.
A copy of our Code of Ethics is filed as an exhibit to the registration
statement of which this prospectus forms a part, and we will provide a copy,
without charge, to any person desiring a copy of the Code of Ethics, by written
request to us at our principal offices.
45
EXECUTIVE COMPENSATION
Summary Compensation Table
The table below sets forth information relating to the compensation paid by
us during the past three fiscal years to: (i) the Chief Executive Officer; and
(ii) each other executive officer who earned more than $100,000 during last
three completed fiscal years ending April 30 (the "Named Executive Officers").
Annual Long-Term
Compensation Compensation
-------------------------------------------------------------------------------------------------------------------
Restricted Securities
Name and Other Annual Stock Underlying All
Principal Fiscal Salary Bonus Compensation Awards Options Other
Position Year ($) ($) ($) ($) SAR (#) Compensation
-------------------------------------------------------------------------------------------------------------------
Dongdong Lin (1) 2005 $ 6,000 -0- -0- -0- -0- -0-
Baozhong Yuan(2) 2005 $ 4,500 -0- -0- -0- -0- -0-
2004 $ 5,000 -0- -0- -0- -0- -0-
Richard J. Church(3) 2003 $ 6,000 -0- -0- -0- -0- -0-
(1) Ms. Lin has served as our Chief Executive Officer since February 2005. (2)
Mr. Yuan served as our Chief Executive Officer from April 30, 2004 to February
2005. (3) Mr. Church served as president from April 2002 to April 30, 2004.
The following table sets forth certain information with respect to
stock options granted in fiscal 2005 to the Named Executive Officers.
Option Grants in Year Ended April 30, 2005
(individual grants)
NO. OF SECURITIES % OF TOTAL OPTIONS/SARs
UNDERLYING OPTIONS GRANTED TO EMPLOYEES EXERCISE EXPIRATION
NAME SARs GRANTED IN FISCAL YEAR PRICE DATE
----------------- ------------------ ----------------------- -------- ----------
Dongdong Lin 0 n/a n/a n/a
Baozhong Yuan 0 n/a n/a n/a
The following table sets forth certain information regarding stock options
held as of April 30, 2005 by the Named Executive Officers.
Aggregate Option Exercises in Year Ended April 30, 2005
and Year-End Option Values
NO. OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED VALUE APRIL 30, 2005 April 30, 2005
ON REALIZED
NAME EXERCISE $ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- --------------
Dongdong Lin 0 n/a n/a n/a n/a n/a
Baozhong Yuan 0 n/a n/a n/a n/a n/a
STOCK OPTION PLAN
On March 23, 2005, our Board of Directors authorized and adopted our 2005
Equity Compensation Plan. The purpose of the plan is to encourage stock
ownership by our officers, directors, key employees and consultants, and to give
these persons a greater personal interest in the success of our business and an
added incentive to continue to advance and contribute to us. We have currently
reserved 5,000,000 of our authorized but unissued shares of common stock for
issuance under the plan, and a maximum of 5,000,000 shares may be issued, unless
the plan is subsequently amended (subject to adjustment in the event of certain
changes in our capitalization), without further action by our Board of Directors
and stockholders, as required. Subject to the limitation on the aggregate number
of shares issuable under the plan, there is no maximum or minimum number of
shares as to which a stock grant or plan option may be granted to any person.
Shares used for stock grants and plan options may be authorized and unissued
shares or shares reacquired by us, including shares purchased in the open
market. Shares covered by plan options which terminate unexercised will again
become available for grant as additional options, without decreasing the maximum
number of shares issuable under the plan, although such shares may also be used
by us for other purposes.
46
The plan is administered by our Board of Directors or an underlying
committee. The Board of Directors or the committee determines from time to time
those of our officers, directors, key employees and consultants to whom stock
grants or plan options are to be granted, the terms and provisions of the
respective option agreements, the time or times at which such options shall be
granted, the type of options to be granted, the dates such plan options become
exercisable, the number of shares subject to each option, the purchase price of
such shares and the form of payment of such purchase price. All other questions
relating to the administration of the plan, and the interpretation of the
provisions thereof and of the related option agreements, are resolved by the
Board or committee.
Plan options may either be options qualifying as incentive stock options
under Section 422 of the Internal Revenue Code of 1986, as amended, or
non-qualified options. Our officers, directors, key employees and consultants
are eligible to receive stock grants and non-qualified options under the plan;
only our employees are eligible to receive incentive options. In addition, the
plan allows for the inclusion of a reload option provision which permits an
eligible person to pay the exercise price of the option with shares of common
stock owned by the eligible person and receive a new option to purchase shares
of common stock equal in number to the tendered shares. Furthermore,
compensatory stock grants may also be issued.
Any incentive option granted under the plan must provide for an exercise
price of not less than 100% of the fair market value of the underlying shares on
the date of grant, but the exercise price of any incentive option granted to an
eligible employee owning more than 10% of our outstanding common stock must not
be less than 110% of fair market value on the date of the grant. The term of
each plan option and the manner in which it may be exercised is determined by
the Board of Directors or the committee, provided that no option may be
exercisable more than ten years after the date of its grant and, in the case of
an incentive option granted to an eligible employee owning more than 10% of the
common stock, no more than five years after the date of the grant. The exercise
price of non-qualified options shall be determined by the Board of Directors or
the Committee, but shall not be less than the par value of our common stock on
the date the option is granted. The per share purchase price of shares issuable
upon exercise of a Plan option may be adjusted in the event of certain changes
in our capitalization, but no such adjustment shall change the total purchase
price payable upon the exercise in full of options granted under the Plan.
All incentive stock options expire on or before the 10th anniversary of the
date the option is granted; however, in the case of incentive stock options
granted to an eligible employee owning more than 10% of the common stock, these
options will expire no later than five years after the date of the grant.
Non-qualified options expire 10 years and one day from the date of grant unless
otherwise provided under the terms of the option grant.
All plan options are nonassignable and nontransferable, except by will or
by the laws of descent and distribution, and during the lifetime of the
optionee, may be exercised only by such optionee. If an optionee dies while our
employee or within three months after termination of employment by us because of
disability, or retirement or otherwise, such options may be exercised, to the
extent that the optionee shall have been entitled to do so on the date of death
or termination of employment, by the person or persons to whom the optionee's
right under the option pass by will or applicable law, or if no such person has
such right, by his executors or administrators.
47
In the event of termination of employment because of death while an
employee or because of disability, the optionee's options may be exercised not
later than the expiration date specified in the option or one year after the
optionee's death, whichever date is earlier, or in the event of termination of
employment because of retirement or otherwise, not later than the expiration
date specified in the option or one year after the optionee's death, whichever
date is earlier. If an optionee's employment by us terminates because of
disability and such optionee has not died within the following three months, the
options may be exercised, to the extent that the optionee shall have been
entitled to do so at the date of the termination of employment, at any time, or
from time to time, but not later than the expiration date specified in the
option or one year after termination of employment, whichever date is earlier.
If an optionee's employment terminates for any reason other than death or
disability, the optionee may exercise the options to the same extent that the
options were exercisable on the date of termination, for up to three months
following such termination, or on or before the expiration date of the options,
whichever occurs first. In the event that the optionee was not entitled to
exercise the options at the date of termination or if the optionee does not
exercise such options (which were then exercisable) within the time specified
herein, the options shall terminate. If an optionee's employment shall terminate
for any reason other than death, disability or retirement, all right to exercise
the option shall terminate not later than 90 days following the date of such
termination of employment.
The plan provides that, if our outstanding shares are increased, decreased,
exchanged or otherwise adjusted due to a share dividend, forward or reverse
share split, recapitalization, reorganization, merger, consolidation,
combination or exchange of shares, an appropriate and proportionate adjustment
shall be made in the number or kind of shares subject to the plan or subject to
unexercised options and in the purchase price per share under such options. Any
adjustment, however, does not change the total purchase price payable for the
shares subject to outstanding options. In the event of our proposed dissolution
or liquidation, a proposed sale of all or substantially all of our assets, a
merger or tender offer for our shares of common stock, the Board of Directors
may declare that each option granted under the plan shall terminate as of a date
to be fixed by the Board of Directors; provided that not less than 30 days
written notice of the date so fixed shall be given to each participant holding
an option, and each such participant shall have the right, during the period of
30 days preceding such termination, to exercise the participant's option, in
whole or in part, including as to options not otherwise exercisable.
The Board of Directors or committee may amend, suspend or terminate the
plan at any time. However, no such action may prejudice the rights of any holder
of a stock grant or optionee who has prior thereto been granted options under
the plan. Further, no amendment to the plan which has the effect of increasing
the aggregate number of shares subject to the plan (except for adjustments due
to changes in our capitalization), or changing the definition of "eligible
person" under the plan, may be effective unless and until approved by our
stockholder in the same manner as approval of the plan was required. Any such
termination of the plan shall not affect the validity of any stock grants or
options previously granted thereunder. Unless the Plan is approved by the
Company's stockholders within one year of the Effective Date, all incentive
stock options shall automatically be converted into non-qualified stock options.
Unless the plan shall previously have been suspended or terminated by the Board
of Directors, the plan, as it relates to grants of incentive stock options,
terminates on March 23, 2015. As of October 31, 2005, 665,000 shares have been
issued under the Plan.
48
Limitation on Liability and Indemnification Matters
The Nevada Revised Statues allows us to indemnify each of our officers and
directors who are made a party to a proceeding if:
(a) the officer or director conducted himself or herself in good faith;
(b) his or her conduct was in our best interests, or if the conduct was
not in an official capacity, that the conduct was not opposed to our
best interests; and
(c) in the case of a criminal proceeding, he or she had no reasonable
cause to believe that his or her conduct was unlawful. We may not
indemnify our officers or directors in connection with a proceeding by
or in our right, where the officer or director was adjudged liable to
us, or in any other proceeding, where our officer or director are
found to have derived an improper personal benefit.
This provision limits our rights and the rights of our stockholders to
recover monetary damages against a director for breach of the fiduciary duty of
care except in the situations described above. This provision does not limit our
rights or the rights of any stockholder to seek injunctive relief or rescission
if a director breaches his duty of care. These provisions will not alter the
liability of directors under federal securities laws. Our by-laws require us to
indemnify directors and officers against, to the fullest extent permitted by
law, liabilities which they may incur under the circumstances described above.
Our articles of incorporation further provide for the indemnification of
any and all persons who serve as our director, officer, employee or agent to the
fullest extent permitted under Nevada law.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling Sunwin
pursuant to the foregoing provisions, we have been informed that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Act and is therefore unenforceable.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The minority shareholder of Qufu, which owns 20% of that company, is
Shandong Shengwang Pharmaceutical Corporation Limited. Shandong Shengwang
Pharmaceutical Corporation Limited is controlled by Shandong Shengwang Group
Corporation, and our President and Chairman, Laiwang Zhang is the control person
of both Shandong Shengwang Pharmaceutical Corporation Limited and Shandong
Shengwang Group Corporation. In addition, the remaining members of our
management have been employed by one of those two companies prior to or in
conjunction with their duties at Qufu and our company. From time to time we
engage in various financial and other transactions with these companies. At July
31, 2005 our balance sheet which appears elsewhere in this prospectus reflects
an amount due from related parties of $913,548 which represents the following
transactions:
~ We have advanced Shandong Shengwang Pharmaceutical Corporation, Limited
and Shangong Shengwang Group Corporation an aggregate of approximately $524,790
which relates to the construction and build-out of our new stevioside
manufacturing facility. Qufu holds the land use permit for the site and we rent
the building from Qufu ShengDa Industry Co., Ltd., an unaffiliated local
governmental owned entity Of this amount, approximately $442,916 was used for
the purchase of equipment installed at this new facility and approximately
$81,874 was used for leasehold improvements to the facility and certain material
purchases. The facility is completed, the equipment has been installed and
tested, and production has begun at the facility. As of September 2005, the
funds advanced for the purchase of equipment and leasehold improvements for this
facility will be reclassified on our balance sheet from due from related parties
to fixed assets. The funds advanced for raw material purchases, which total
$66,447.69 at July 31, 2005, will be reclassified on our balance sheet from due
from related parties to inventory upon receipt of the raw materials which is
expected to occur prior to the end of calander 2005. We advanced the funds to
these related parties for these purposes to permit us, in part, to take
advantage of lower prices available to us through the stronger buying power
provided by Shandong Shengwang Pharmaceutical Corporation, Limited and Shangong
Shengwang Group Corporation. These funds are not escrowed and we are not
entitled to any interest on the funds. If for any reason the raw materials are
not subsequently delivered to us, the funds advanced for raw material purchases
will be refunded to us by Shangong Shengwang Group Corporation. We presently
anticipate that the stevioside upgrade and facility will not require any
additional funds to complete.
49
~ We have advanced Shandong Shengwang Pharmaceutical Corporation, Limited
and Shangong Shengwang Group Corporation an aggregate of approximately $322,311
which relates to the construction and build-out of a new manufacturing facility
to be used for the production of veterinary medicine. Qufu holds the land use
permit for the site and we rent the building from Qufu LuCheng Chiya Resident
Committment. Of this amount, approximately $201,900 was used for the purchase of
equipment to be installed at this new facility and approximately $120,411 was
used for leasehold improvements to the facility and certain material purchases.
At such time as the facility is completed, the equipment has been installed and
tested, and the facility is ready for occupancy, which is presently estimated to
be in December 2005, the funds advanced for the purchase of equipment and
leasehold improvements will be reclassified on our balance sheet from due from
related parties to fixed assets. These funds are not escrowed and we are not
entitled to any interest on the funds. We presently anticipate that the
veterinary medicine upgrade and facility will require USD $34,000 in additional
capital from us.
In addition to the foregoing, we paid Shandong Shengwang Pharmaceutical
Corporation, Limited a management fee of $85,000 for the fiscal year ended April
30, 2005 which such amount is included in our general and administrative
expenses in the financial statements appearing elsewhere in this prospectus.
These management services include costs and services related to housing provided
to certain of our non-management employees, government mandatory insurance for
our employees and rent for our principal offices and the research and
development facilities we use.
Our management has great latitude in engaging in these related party
transactions and we cannot assure you that in every instance the terms of these
transactions are as beneficial to us as we may have received from non-affiliated
third parties.
In April and May 2005, under two separate agreements, we engaged China
Direct Investments, Inc., which provides consulting and advisory services, to
assist us with operation and regulatory framework applicable to U.S. public
companies. Under the terms of a two-month agreement we issued China Direct
Investments, Inc. warrants to purchase 500,000 shares of our common stock at an
exercise price of $.15 per share as compensation for their services relating to
this registration statement. Under the terms of a twelve-month agreement China
Direct Investments, Inc. may receive an aggregate of 2,660,000 shares of our
common stock pursuant to our Equity Compensation Plan, paid on a quarterly basis
(August 31, November 30, February 28, and May 1) in arrears for services
rendered in the amount 665,000 shares (which are not earned until the last day
of the quarter) for so long as this agreement is in effect, as compensation for
their services relating to mergers and acquisitions, general operations and
regulatory framework applicable to U.S. public companies. Marc Siegel, a 9.7%
shareholder of our company, James Wang and David Stein are an officers,
directors and principal shareholders of China Direct Investments, Inc.
50
PRINCIPAL SHAREHOLDERS
At October 31, 2005 we had 44,032,276 shares of common stock issued and
outstanding. The following table sets forth information known to us as of
October 31, 2005 relating to the beneficial ownership of shares of our common
stock by:
o each person who is known by us to be the beneficial owner of more than
five percent of our outstanding common stock;
o each director;
o each executive officer; and
o all executive officers and directors as a group.
Unless otherwise indicated, the address of each beneficial owner in the
table set forth below is care of 6 Youpeng Road, Qufu, Shandong, China. We
believe that all persons named in the table have sole voting and investment
power with respect to all shares of common stock shown as being owned by them.
Under securities laws, a person is considered to be the beneficial owner of
securities owned by him (or certain persons whose ownership is attributed to
him) and that can be acquired by him within 60 days from the that date,
including upon the exercise of options, warrants or convertible securities. We
determine a beneficial owner's percentage ownership by assuming that options,
warrants or convertible securities that are held by him, but not those held by
any other person, and which are exercisable within 60 days of the that date,
have been exercised or converted. Except as otherwise required by SEC rules
relating to beneficial ownership, the table does not give effect to the issuance
of up to 15,500,000 shares upon exercise of warrants.
Name and Address of Amount Percent
Beneficial Owner Beneficial Ownership of Class
Laiwang Zhang 9,592,302 21.8%
Dongdong Lin 0 n/a
Chengxiang Yan 0 n/a
Fanjun Wu 0 n/a
All officers and directors
as a group (five persons) 9,592,302 21.8%
Baozhang Yuan (1) 3,969,234 9%
Lei Zhang (2) 3,969,234 9%
Xianfeng Kong 3,969,234 9%
Alpha Capital Aktiengellschaft (4) 3,500,000 7.9%
Marc Siegel (5) 4,280,000 9.7%
* represents less than 1%
(1) Mr. Yuan served as our CEO and a member of our board of directors from
April 2004 until February 2005. Mr. Yuan's address is 6 Youpeng Road, Qufu,
Shandong, China.
(2) Mr. Zhang served as our Secretary from April 2004 until February 2005.
Mr. Zhang's address is 6 Youpeng Road, Qufu, Shandong, China.
(3) Mr. Kong served as our Treasurer and a member of our board of directors
from April 2004 until December 2004. Ms. Kong's address is 6 Youpeng Road, Qufu,
Shandong, China.
51
(4) Alpha Capital Aktiengellschaft owns 3,500,000 shares of our common
stock and Class A Common Stock Purchase Warrants to purchase an additional
5,250,000 shares of our common stock at an exercise price of $0.15 per share.
The resale of all of these shares, including the shares underlying the warrant,
is covered by this prospectus. Alpha Capital Aktiengellschaft has agreed to
limit the number of shares of our common stock acquired by the holder upon
exercise of the warrants and is limited to the extent necessary to ensure that
following the exercise the total number of shares of our common stock
beneficially owned by the holder at any one time does not exceed 4.99% of our
issued and outstanding common stock subject to a waiver of this limitation by
the holder upon 61 days notice to us. Until such time as its holdings are below
this threshold or it waives this requirement, Alpha Capital Aktiengellschaft
cannot exercise the warrant. Accordingly, this amount does not include 5,250,000
shares issuable upon exercise of the warrant. Mr. Konrad Ackerman has voting and
dispositive control over securities owned by Alpha Capital Aktiengellschaft.
Alpha Capital Aktiengellschaft's address is Pradafant 7, 9490 Furstentums,
Vaduz, Lichtenstein.
(5) Includes:
o 850,000 shares of our common stock presently outstanding, 375,000
shares of our common stock issuable upon the exercise of Class A
Common Stock Purchase Warrants that have an exercise price of $0.15
per share and 600,000 shares of our common stock issuable upon the
exercise of outstanding common stock purchase warrants with an
exercise price of $0.17 per share owned by Edge Capital Partners Ltd.,
o 250,000 shares of our common stock presently outstanding, and 375,000
shares of our common stock issuable upon the exercise of Class A
Common Stock Purchase Warrants with an exercise price of $0.15 per
share which are owned by Marc Siegel IRA,
o 500,000 shares of our common stock issuable upon the exercise of Class
A Common Stock Purchase Warrants that have an exercise price of $0.15
per share owned by China Direct Investments, Inc.
o 665,000 shares of our common stock issued to China Direct Investments,
Inc. and 665,000 shares of our common stock issuable to China Direct
Investments, Inc. pursuant to our Equity Compensation Plan under the
terms of a Consulting Agreement with China Direct Investments, Inc.
Does not include 1,330,000 shares of our common stock issuable pursuant to
our Equity Compensation Plan under the terms of a Consulting Agreement with
China Direct Investments, Inc. which have not yet vested.
Mr. Siegel has voting and dispositive control over securities owned by each
of Edge Capital Partners Ltd., Marc Siegel IRA and China Direct Investments,
Inc. The number of shares beneficially owned by Mr. Siegel excludes any
securities owned by Alvin Siegel, Marc Siegel's father, or Progress Partners,
Inc., a company controlled by Alvin Siegel. Please see footnotes 7 and 19 to the
table appearing on pages 57 and 59 later in this prospectus under "Selling
Security Holders." Mr. Siegel's address is 5301 N. Federal Highway, Suite 120,
Boca Raton, FL 33487.
52
DESCRIPTION OF SECURITIES
General
The following description of our capital stock and provisions of our
Articles of Incorporation is a summary thereof and is qualified by reference to
our Articles of Incorporation, copies of which may be obtained upon request. Our
authorized capital consists of 200,000,000 shares of common stock, par value
$.001 per share, and 1,000,000 shares of preferred stock, par value $.001 per
share. As of October 31, 2005 44,032,276 shares of common stock and no shares of
preferred stock were issued and outstanding.
Common Stock
Holders of shares of common stock are entitled to share, on a ratable
basis, such dividends as may be declared by the board of directors out of funds,
legally available therefore. Upon our liquidation, dissolution or winding up,
after payment to creditors, our assets will be divided pro rata on a per share
basis among the holders of our common stock.
Each share of common stock entitles the holders thereof to one vote.
Holders of common stock do not have cumulative voting rights which means that
the holders of more than 50% of the shares voting for the election of directors
can elect all of the directors if they choose to do so, and, in such event, the
holders of the remaining shares will not be able to elect any directors. Our
By-Laws require that only a majority of our issued and outstanding shares need
be represented to constitute a quorum and to transact business at a
stockholders' meeting. Our common stock has no preemptive, subscription or
conversion rights and is not redeemable by us.
Preferred Stock
We are authorized to issue up to 1,000,000 shares of preferred stock having
such designations, rights, preferences, powers and limitations as may be
determined by the board of directors at the time of designation. Our board of
directors, without further stockholder approval, may issue preferred stock in
one or more series from time to time and fix or alter the designations, relative
rights, priorities, preferences, qualifications, limitations and restrictions of
the shares of each series. The rights, preferences, limitations and restrictions
of different series of preferred stock may differ with respect to dividend
rates, amounts payable on liquidation, voting rights, conversion rights,
redemption provisions, sinking fund provisions and other matters. Our board of
directors may authorize the issuance of preferred stock which ranks senior to
our common stock for the payment of dividends and the distribution of assets on
liquidation. In addition, our board of directors can fix limitations and
restrictions, if any, upon the payment of dividends on our common stock to be
effective while any shares of preferred stock are outstanding. The rights
granted to the holders of any series of preferred stock could adversely affect
the voting power of the holders of common stock and issuance of preferred stock
may delay, defer or prevent a change in our control.
No preferred stock has yet been designated or issued, and we have no plans
to issue any preferred stock at this time or in the near future.
53
Common Stock Purchase Warrants
Class A Common Stock Purchase Warrants
In April and May 2005, we issued Class A Common Stock Purchase Warrants to
purchase an aggregate of 14,000,000 shares of our common stock. The terms of
these warrants provide:
o they are exercisable for a period of five years at $0.15 per share,
o following the date of this prospectus and providing that the holder
can sell the shares underlying the warrants pursuant to this
prospectus, the exercise price of the warrants is payable only in
cash. Otherwise, the warrants may be exercised by the holder using the
optional cashless exercise provision which permits the holder, rather
than paying the exercise price in cash, the option of surrendering a
number of warrants equal to the exercise price of the warrants being
exercised,
o the number of shares issuable upon the exercise and the exercise price
per share are subject to adjustment in the event we issue additional
shares of common stock as a dividend or other distribution or for
stock splits or combinations,
o the number of shares of our common stock and the exercise price of the
warrant are also subject to adjustment in the event we issue
additional shares of our common stock or any other securities which
are convertible or exercisable into shares of our common stock at a
per share price less than the exercise price of the warrant, other
than in certain specific instances, in which event the exercise price
of the warrant would be reset to the lower price, and
o the holders contractually agreed to limit the exercise of the warrants
so that upon the exercise the holder's beneficial ownership would not
exceed 4.99% of our common stock outstanding at the time of exercise,
subject to a waiver of this limitation by the holder upon 61 days
notice to us, and
o if we fail to maintain an effective registration statement of which
this prospectus is a part for the time periods required by the
subscription agreement, or if the holder is unable to exercise the
warrant as a result of our failure to maintain an effective
registration statement, upon written demand by the holder we are
obligated to pay the holder a sum equal to the closing price of our
common stock on the trading day immediately preceding the notice, less
the original purchase price of $0.10 per share.
Other Outstanding Common Stock Purchase Warrants
In July 2004, we issued two-year common stock purchase warrants to purchase
an aggregate of 1,500,000 shares of our common stock with an exercise price of
$0.167 per share. These warrants contain standard anti-dilution protection for
the warrant holder in the event of stock splits, recapitalization or
reorganization by us.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Colonial Stock
Transfer Co., 66 Exchange Place, Salt Lake City, Utah 84111. Our transfer agent
may be reached by telephone at 801-355-5740.
54
SELLING SECURITY HOLDERS
June 2004 Offering
In July 2004, we sold 2.5 units to three accredited investors in a private
transaction resulting in gross proceeds to us of $120,000. Each unit consisted
of 600,000 shares of our common stock and two-year common stock purchase
warrants to purchase 600,000 shares of our common stock at an exercise price of
$0.167 per share. This transaction resulted in the issuance of an aggregate of
1,500,000 shares of our common stock and warrants to purchase an additional
1,500,000 shares. A description of the terms of the warrants is contained
earlier in this prospectus under "Description of Securities - Common Stock
Purchase Warrants - Other Outstanding Common Stock Purchase Warrants" beginning
on page 53.
The shares and warrants were sold to a total of three investors, each of
whom we had reasonable grounds to believe was an "accredited investor" within
the meaning of Rule 501 of Regulation D under the Securities Act. Each investor
was provided access to business and financial information about us and had such
knowledge and experience in business and financial matters that they were able
to evaluate the risks and merits of an investment in our company. Each
certificate evidencing securities issued to the investors included a legend to
the effect that the securities were not registered under the Securities Act and
could not be resold absent registration or the availability of an applicable
exemption from registration. No general solicitation or advertising was used in
connection with the transactions.
The issuance of the shares and warrants was exempt from the registration
requirements of the Securities Act by reason of Section 4(2) of the Securities
Act and the rules and regulations, including Regulation D thereunder, as
transactions by an issuer not involving a public offering.
March 2005 Offering
On April 12, 2005, we completed an $875,000 financing consisting of
8,750,000 shares of our common stock at $.10 per share, and Class A Common Stock
Purchase Warrants to purchase an additional 13,125,000 shares. Each warrant
entitles the holder to purchase one share of common stock for a period of five
years, at an exercise price of $.15 per share, subject to adjustment. A
description of the terms of the warrants is contained earlier in this prospectus
under "Description of Securities - Common Stock Purchase Warrants - Class A
Common Stock Purchase Warrants" beginning on page 53. The net proceeds from the
transaction will be used for general working capital purposes.
The shares and warrants were sold to a total of 12 investors, each of whom
we had reasonable grounds to believe was an "accredited investor" within the
meaning of Rule 501 of Regulation D under the Securities Act. Each investor was
provided access to business and financial information about us and had such
knowledge and experience in business and financial matters that they were able
to evaluate the risks and merits of an investment in our company. Each
certificate evidencing securities issued to the investors included a legend to
the effect that the securities were not registered under the Securities Act and
could not be resold absent registration or the availability of an applicable
exemption from registration. No general solicitation or advertising was used in
connection with the transactions. We paid unaffiliated finders a total of
$87,500, in cash, and issued certain finders Class A Common Stock Purchase
Warrants to purchase a total of 375,000 shares of common stock, exercisable at
$.15 per share, subject to adjustment. One of the investors in the private
offering received a finders fee and finders warrants. We also paid $15,000 in
legal fees to the investors' counsel.
The issuance of the shares and warrants was exempt from the registration
requirements of the Securities Act by reason of Section 4(2) of the Securities
Act and the rules and regulations, including Regulation D thereunder, as
transactions by an issuer not involving a public offering.
55
We agreed to file a registration statement covering the shares of common
stock and the shares issuable upon exercise of the Class A Common Stock Purchase
Warrants. This prospectus is part of that registration statement. In the event
the registration statement was not filed by May 23, 2005 or does not become
effective by October 5, 2005, we will be liable for the payment of liquidated
damages in the amount of $18,000 per month, until the deficiency is cured. The
transaction documents also provide for the payment of liquidated damages to the
investors in certain events, including our failure to maintain an effective
registration statement covering resale of the common stock or shares issuable
upon exercise of the warrants, and our failure to deliver un-legended shares to
the investors as and when required under the agreements. For the period ending
on the earlier of 365 days from the date of this prospectus or until all of the
shares purchased by the investors, including shares underlying the Class A
Common Stock Purchase Warrants, have been resold or transferred by the investors
either pursuant to this prospectus or under Rule 144 without regard to volume
limitations, we have agreed not to file any additional registration statements,
other than the registration statement of which this prospectus is a part,
without the consent of the investors.
For a period not to exceed one year from the date of this prospectus, we
have granted the investors a one-year preferential right to participate in any
proposed sale by us of our common stock on the same terms and conditions as are
offered by a third party, other equity securities, obligations convertible or
exercisable for equity securities or debt obligations except in connection with
certain specified excepted issuance set forth as follows:
o full or partial consideration in connection with a strategic merger,
consolidation or purchase of substantially all of the securities or
assets of a corporation or other entity,
o our issuance of securities in connection with a strategic license
agreement or other partnering agreement so long as the issuance is not
for the purpose of raising capital,
o our issuance of common stock or the issuance or grant of options to
purchase our common stock pursuant to stock option plans and employee
stock purchase plans which presently exist or may be adopted which
permit the issuance of up to 5,000,000 shares of our common stock, or
o the exercise of the Class A Common Stock Purchase Warrants.
If we should issue any shares of our common stock, or securities
convertible or exercisable into shares of our common stock at a price per common
share or exercise price per common share which is less than $0.10 per share, or
less than $0.15 per share in the instance of the Class A Common Stock Purchase
Warrants, without the consent of the investors who continue to own shares or
Class A Common Stock Purchase Warrants, we have agreed to issue the investors
additional shares and/or warrants to protect against our future issuance of
common stock or securities convertible into common stock at less than the $.10
per share purchase price of the common stock and/or $.15 per share exercise
price of the warrants, respectively. We have also agreed to file a registration
statement covering these additional shares of common stock within 45 days from
the issuance date of the shares.
Selling Security Holders
The following table sets forth:
o the name of each selling security holder;
o the number or shares of common stock beneficially owned by each
selling security holder as of the date of this prospectus, giving
effect to the exercise of the selling security holders' warrants;
o the number of shares being offered by each selling security holder;
and
o the number of shares to be owned by each selling security holder
following completion of this offering.
56
Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to securities and
includes any securities which the person has the right to acquire within 60 days
through the conversion or exercise of options, warrants, promissory notes and
any other security or other right. The information as to the number of shares of
our common stock owned by each selling security holder is based upon our records
and information provided by our transfer agent.
We may amend or supplement this prospectus from time to time to update the
disclosure set forth in the table. Because the selling security holders
identified in the table may sell some or all of the shares owned by them which
are included in this prospectus, and because there are currently no agreements,
arrangements or understandings with respect to the sale of any of the shares, no
estimate can be given as to the number of shares available for resale hereby
that will be held by the selling security holders upon termination of the
offering made hereby. We have therefore assumed, for the purposes of the
following table, that the selling security holders will sell all of the shares
owned by them that are being offered hereby, but will not sell any other shares
of our common stock that they presently own. We do not believe that any of the
selling security holders are broker-dealers or affiliated with broker-dealers.
The shares of common stock being offered have been registered to permit
public sales and the selling security holders may offer all or part of the
shares for resale from time to time. All expenses of the registration of the
common stock on behalf of the selling security holder are being borne by us. We
will receive none of the proceeds of this offering.
Number Percentage Shares Shares to Percentage
Name of Selling of shares owned before to be be owned owned after
Security Holder owned offering offered after offering offering
--------------- --------- ------------ --------- -------------- -----------
Lake Street Fund, L.P. (1) 2,500,000 5.6% 2,500,000 0 n/a
Fred L. Astman (2) 1,250,000 2.8% 1,250,000 0 n/a
George L. Williams I.R.A. (3) 1,250,000 2.8% 1,250,000 0 n/a
Monarch Capital Fund Ltd. (4) 2,500,000 5.6% 2,500,000 0 n/a
Richard J. Church (5) 2,599,196 5.9% 2,599,196 0 n/a
Edge Capital Partners Ltd. (6) 1,825,000 4.1% 1,825,000 0 n/a
Alvin Siegel (7) 625,000 1.4% 625,000 0 n/a
Paul Prager (8) 625,000 1.4% 625,000 0 n/a
Marc Siegel (9) 625,000 1.4% 625,000 0 n/a
Sharon Standowski (10) 625,000 1.4% 625,000 0 n/a
Osher Capital, Inc. (11) 737,500 1.7% 737,500 0 n/a
Alpha Capital Aktiengellschaft (12) 3,500,000 7.9% 8,750,000 0 n/a
Era Capital Management, Inc. (13) 175,000 * 175,000 0 n/a
China Direct Investments, Inc. (14) 1,830,000 3.9% 500,000 1,330,000 2.9%
CIIC Investment Banking
Services Company
(Shanghai), Limited (15) 1,000,002 2.3% 1,000,002 0 n/a
Genesis Technology Group, Inc. ((16)) 1,500,000 2.7% 1,500,000 0 n/a
Michael L. Mead ((17)) 275,806 * 275,806 0 n/a
Libra Finance, S.A. ((18)) 87,500 * 87,500 0 n/a
Progress Partners, Inc. ((19)) 750,000 1.7% 750,000 0 n/a
vFinance Investments, Inc. ((20)) 30,000 * 30,000 0 n/a
Yewen Xi (23) 1,050,000 2.4% 1, 050,000 0 n/a
-----------
29,280,004
* represents less than 1%
(1) The number of shares owned and offered includes 1,000,000 shares of our
common stock presently outstanding and 1,500,000 shares of our common stock
issuable upon the exercise of our Class A Common Stock Purchase Warrants which
have an exercise price of $0.15 per share. The number of shares of our common
stock acquired by the holder upon exercise of the warrants is limited to the
extent necessary to ensure that following the exercise the total number of
shares of our common stock beneficially owned by the holder at any one time does
not exceed 4.99% of our issued and outstanding common stock subject to a waiver
of this limitation by the holder upon 61 days notice to us. Mr. Scott Hood has
voting and dispositive control over securities owned by Lake Street Fund, L.P.
57
(2) The number of shares owned and offered includes 500,000 shares of our
common stock presently outstanding and 750,000 shares of our common stock
issuable upon the exercise of Class A Common Stock Purchase Warrants that have
an exercise price of $0.15 per share. The number of shares of our common stock
acquired by the holder upon exercise of the warrants is limited to the extent
necessary to ensure that following the exercise the total number of shares of
our common stock beneficially owned by the holder at any one time does not
exceed 4.99% of our issued and outstanding common stock subject to a waiver of
this limitation by the holder upon 61 days notice to us.
(3) The number of shares owned and offered includes 500,000 shares of our
common stock presently outstanding and 750,000 shares of our common stock
issuable upon the exercise of Class A Common Stock Purchase Warrants that have
an exercise price of $0.15 per share. The number of shares of our common stock
acquired by the holder upon exercise of the warrants is limited to the extent
necessary to ensure that following the exercise the total number of shares of
our common stock beneficially owned by the holder at any one time does not
exceed 4.99% of our issued and outstanding common stock subject to a waiver of
this limitation by the holder upon 61 days notice to us. Mr. George L. Williams
has voting and dispositive control over securities owned by George L. Williams
I.R.A.
(4) The number of shares owned and offered includes 1,000,000 shares of our
common stock presently outstanding and 1,500,000 shares of our common stock
issuable upon the exercise of Class A Common Stock Purchase Warrants that have
an exercise price of $0.15 per share. The number of shares of our common stock
acquired by the holder upon exercise of the warrants is limited to the extent
necessary to ensure that following the exercise the total number of shares of
our common stock beneficially owned by the holder at any one time does not
exceed 4.99% of our issued and outstanding common stock subject to a waiver of
this limitation by the holder upon 61 days notice to us. Solomon Eisenberg has
voting and dispositive control over securities owned by Monarch Capital Fund
Ltd.
(5) The number of shares owned and offered includes 1,474,196 shares of our
common stock presently outstanding, of which 724,196 shares were received as
compensation for business development and advisory services, and 1,125,000
shares of our common stock issuable upon the exercise of Class A Common Stock
Purchase Warrants that have an exercise price of $0.15 per share. The number of
shares of our common stock acquired by the holder upon exercise of the warrants
is limited to the extent necessary to ensure that following the exercise the
total number of shares of our common stock beneficially owned by the holder at
any one time does not exceed 4.99% of our issued and outstanding common stock
subject to a waiver of this limitation by the holder upon 61 days notice to us.
Mr. Church served as an executive officer and director of our company from May
2000 until April 2004.
(6) The number of shares owned and offered includes 850,000 shares of our
common stock presently outstanding, 375,000 shares of our common stock issuable
upon the exercise of Class A Common Stock Purchase Warrants that have an
exercise price of $0.15 per share and 600,000 shares of our common stock
issuable upon the exercise of outstanding common stock purchase warrants with an
exercise price of $0.167 per share. The number of shares of our common stock
acquired by the holder upon exercise of the Class A Common Stock Purchase
Warrants is limited to the extent necessary to ensure that following the
exercise the total number of shares of our common stock beneficially owned by
the holder at any one time does not exceed 4.99% of our issued and outstanding
common stock subject to a waiver of this limitation by the holder upon 61 days
notice to us. Mr. Marc Siegel has voting and dispositive control over securities
owned by Edge Capital Partners Ltd. The number of shares beneficially owned by
Edge Capital Partners Ltd. as disclosed in this footnote exclude any holdings of
Mr. Siegel individually or the holdings of Marc Siegel IRA or China Direct
Investments , entities over which he holds voting and dispositive power. See
footnotes 9 and 14to this table.
(7) The number of shares owned and offered includes 250,000 shares of our
common stock presently outstanding and 375,000 shares of our common stock
issuable upon the exercise of Class A Common Stock Purchase Warrants that have
an exercise price of $0.15 per share. The number of shares of our common stock
acquired by the holder upon exercise of the warrants is limited to the extent
necessary to ensure that following the exercise the total number of shares of
our common stock beneficially owned by the holder at any one time does not
exceed 4.99% of our issued and outstanding common stock subject to a waiver of
this limitation by the holder upon 61 days notice to us. The shares owned by Mr.
Siegel excludes securities owned by Progress Partners, Inc. as disclosed in
footnote 19 to this table.
(8) The number of shares owned and offered includes 250,000 shares of our
common stock presently outstanding and 375,000 shares of our common stock
issuable upon the exercise of Class A Common Stock Purchase Warrants that have
an exercise price of $0.15 per share. The number of shares of our common stock
acquired by the holder upon exercise of the warrants is limited to the extent
necessary to ensure that following the exercise the total number of shares of
our common stock beneficially owned by the holder at any one time does not
exceed 4.99% of our issued and outstanding common stock subject to a waiver of
this limitation by the holder upon 61 days notice to us.
58
(9) The number of shares owned and offered includes 250,000 shares of our
common stock owned by Marc Siegel IRA which are presently outstanding, 375,000
shares of our common stock issuable upon the exercise of Class A Common Stock
Purchase Warrants that have an exercise price of $0.15 per share. The number of
shares of our common stock acquired by the holder upon exercise of the warrants
is limited to the extent necessary to ensure that following the exercise the
total number of shares of our common stock beneficially owned by the holder at
any one time does not exceed 4.99% of our issued and outstanding common stock
subject to a waiver of this limitation by the holder upon 61 days notice to us.
Mr. Siegel has voting and dispositive control over securities owned by Marc
Siegel IRA. The number of shares beneficially owned by Marc Siegel IRA, as
disclosed in this footnote exclude any holdings of Mr. Siegel individually or
the holdings of Edge Capital Partners Ltd. or China Direct Investments ,
entities over which he holds voting and dispositive power. See footnotes 6 and
14 to this table.
(10) The number of shares owned and offered includes 250,000 shares of our
common stock presently outstanding and 375,000 shares of our common stock
issuable upon the exercise of Class A Common Stock Purchase Warrants that have
an exercise price of $0.15 per share. The number of shares of our common stock
acquired by the holder upon exercise of the warrants is limited to the extent
necessary to ensure that following the exercise the total number of shares of
our common stock beneficially owned by the holder at any one time does not
exceed 4.99% of our issued and outstanding common stock subject to a waiver of
this limitation by the holder upon 61 days notice to us.
(11) The number of shares owned and offered includes 250,000 shares of our
common stock presently outstanding and 487,500 shares of our common stock
issuable upon the exercise of Class A Common Stock Purchase Warrants that have
an exercise price of $0.15 per share. Osher Capital Inc. received 112,500 of
these warrants as partial compensation for a finders' fee. The number of shares
of our common stock acquired by the holder upon exercise of the warrants is
limited to the extent necessary to ensure that following the exercise the total
number of shares of our common stock beneficially owned by the holder at any one
time does not exceed 4.99% of our issued and outstanding common stock subject to
a waiver of this limitation by the holder upon 61 days notice to us. Mr. Yisroel
Kluger has voting and dispositive control over securities owned by Osher Capital
Inc.
(12) Alpha Capital Aktiengellschaft owns 3,500,000 shares of our common
stock and Class A Common Stock Purchase Warrants to purchase an additional
5,250,000 shares of our common stock at an exercise price of $0.15 per share.
The number of shares of our common stock acquired by the holder upon exercise of
the warrants is limited to the extent necessary to ensure that following the
exercise the total number of shares of our common stock beneficially owned by
the holder at any one time does not exceed 4.99% of our issued and outstanding
common stock subject to a waiver of this limitation by the holder upon 61 days
notice to us. Accordingly, the number of share beneficially owned does not
include 5,250,000 shares issuable upon exercise of the warrant and the number of
shares to be offered does include 5,250,000 shares issuable upon exercise of the
warrant. Mr. Konrad Ackerman has voting and dispositive control over securities
owned by Alpha Capital Aktiengellschaft.
(13) The number of shares owned and offered includes 175,000 shares of our
common stock issuable upon the exercise of Class A Common Stock Purchase
Warrants that have an exercise price of $0.15 per share. Era Capital Management,
Inc. received these warrants as partial compensation for a finders' fee. The
number of shares of our common stock acquired by the holder upon exercise of the
warrants is limited to the extent necessary to ensure that following the
exercise the total number of shares of our common stock beneficially owned by
the holder at any one time does not exceed 4.99% of our issued and outstanding
common stock subject to a waiver of this limitation by the holder upon 61 days
notice to us. Lei Li has voting and dispositive control over securities owned by
Era Capital Management, Inc. Ms. Lei Li is the spouse of James Wang. Mr. Wang
disclaims beneficial ownership of all such shares.
(14) The number of shares owned and offered includes 500,000 shares of our
common stock issuable upon the exercise of Class A Common Stock Purchase
Warrants that have an exercise price of $0.15 per share. China Direct
Investments received these warrants as compensation under a consulting agreement
for advisory services rendered or to be rendered for a two-month period. Messrs.
James Wang, David Stein and Marc Siegel have voting and dispositive control over
securities owned by China Direct Investments. The number of shares owned
beneficially by China Direct Investments as disclosed in this footnote includes
665,000 share of common stock issued and 665,000 shares of common stock issuable
under the terms of a consulting agreement, and excludes any holdings of Messrs.
Wang, Stein or Siegel or other entities affiliated with them over which they
have voting and dispositive control, and excludes 1,330,000 shares of our common
stock issuable under the terms of a Consulting Agreement which have not yet been
earned. Please see footnotes 6, 9 and 13 to this table. China Direct Investments
is an advisor to our company. Please see "Management - U.S. Advisor" beginning
on page 43 of this prospectus.
(15) The number of shares owned and offered includes 1,000,002 shares of
our common stock which are presently outstanding and received in satisfaction of
a debt due CIIC Investment Banking Services Company (Shanghai) Limited by our
company. Professor Shan Ting Ting has voting and dispositive control over
securities owned by CIIC Investment Banking Services Company (Shanghai) Limited.
The shares beneficially owned by CIIC Investment Banking Services Company
(Shanghai) Limited excludes any securities owned by Genesis Technology Group,
Inc., a joint venture partner in this company. See footnote 18 to this table.
59
((16)) The number of shares owned includes 900,000 shares of our common
stock presently outstanding and 600,000 shares of our common stock underlying
common stock purchase warrants exercisable at $0.167 per share. Mr. Gary Wolfson
holds voting and dispositive power over securities held by Genesis Technology
Group, Inc. The number of shares beneficially owned by Genesis Technology Group,
Inc. excludes any securities owned by CIIC Investment Banking Services Company
(Shanghai) Limited, a company of which Genesis Technology Group, Inc. is a joint
venture partner. Please see footnote 15 to this table.
(17) The number of shares owned and offered includes 275,806 shares of our
common stock which are presently outstanding and received as compensation for
business development and advisory services. Mr. Mead served as an executive
officer and director of our company from May 2000 until April 2004.
(18) The number of shares owned and offered includes 87,500 shares of our
common stock issuable upon the exercise of Class A Common Stock Purchase
Warrants. Pacific Rim Partners, Inc. received these warrants as partial
compensation for a finder's fee. The number of shares of our common stock
acquired by the holder upon exercise of the warrants is limited to the extent
necessary to ensure that following the exercise the total number of shares of
our common stock beneficially owned by the holder at any one time does not
exceed 4.99% of our issued and outstanding common stock subject to a waiver of
this limitation by the holder upon 61 days notice to us. Seymour Braun has the
voting and dispositive control over securities owned by Libra Finance. S.A.
(19) The number of shares owned and offered includes 750,000 shares of our
common stock which are presently outstanding and received as compensation for
business development and advisory services. Mr. Alvin Siegel holds voting and
dispositive control over securities owned by Progress Partners, Inc. The
securities owned beneficially by Progress Partners, Inc. excludes securities
owned by Mr. Siegel individually. Please see footnote 7 above.
(20) The number of shares owned and offered includes 30,000 shares of our
common stock which are presently outstanding and received as compensation for
business development and advisory services. Leonard Sokolou has the voting and
dispositive control over securities owned by vFinance Investments, Inc.
(21) The number of shares owned and offered includes 750,000 shares of our
common stock which are presently outstanding, of which 450,000 shares were
received as compensation for business development and advisory services, and
300,000 shares of our common stock underlying common stock purchase warrants
with an exercise price of $0.167 per share.
None of the selling security holders are broker-dealers or affiliates of
broker-dealers, other than vFinance Investments, Inc., an investment banking
firm which is a member of the NASD, and received the securities as compensation
for business development and advisory services.
None of these firms or individuals have any arrangement with any person to
participate in the distribution of such securities. None of the selling security
holders has, or within the past three years has had, any position, office or
other material relationship with us or any of our predecessors or affiliates,
other than as described previously in this section.
60
PLAN OF DISTRIBUTION
The selling security holders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling security holders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales;
o broker-dealers may agree with the selling security holders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling security holders may also sell shares under Rule 144 under the
Securities Act of 1933, if available, rather than under this prospectus.
Broker-dealers engaged by the selling security holders may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling security holders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling security holders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
Broker-dealers may agree to sell a specified number of such shares at a
stipulated price per share, and, to the extent such broker-dealer is unable to
do so acting as agent for us or a selling stockholder, to purchase as principal
any unsold shares at the price required to fulfill the broker-dealer commitment.
Broker-dealers who acquire shares as principal may thereafter resell such shares
from time to time in transactions, which may involve block transactions and
sales to and through other broker-dealers, including transactions of the nature
described above, in the over-the-counter markets or otherwise at prices and on
terms then prevailing at the time of sale, at prices then related to the
then-current market price or in negotiated transactions. In connection with such
resales, broker-dealers may pay to or receive from the purchasers of such
shares, commissions as described above. In the event that shares are resold to
any broker-dealer, as principal, who is acting as an underwriter, we will file a
post-effective amendment to the registration statement of which this prospectus
forms a part, identifying the broker-dealer(s), providing required information
relating to the plan of distribution and filing any agreement(s) with such
broker-dealer(s) as an exhibit. The involvement of a broker-dealer as an
underwriter in the offering will require prior clearance of the terms of
underwriting compensation and arrangements from the Corporate Finance Department
of the National Association of Securities Dealers, Inc.
The selling security holders may, from time to time, pledge or grant a
security interest in some or all of the shares or common stock or warrants owned
by them and, if they default in the performance of their secured obligations,
the pledgees or secured parties may offer and sell the shares of common stock,
from time to time, under this prospectus, or under an amendment to this
prospectus under Rule 424 (b)(3) or other applicable provision of the Securities
Act of 1933 amending the list of selling security holders to include the
pledgee, transferee or other successors-in-interest as selling security holders
under this prospectus.
The selling security holders also may transfer the shares of common stock
in other circumstances, in which case the transferees, pledgees or other
successors-in-interest will be the selling beneficial owners for purposes of
this prospectus.
61
The selling security holders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act of 1933 in connection with such sales. In such
event, any commissions received by such broker-dealers or agents and any profit
on the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act of 1933. The selling security
holders have informed us that they do not have any agreement or understanding,
directly or indirectly, with any person to distribute the common stock.
We are required to pay all fees and expenses incident to the registration
of the shares. We have agreed to indemnify the selling security holders against
certain losses, claims, damages and liabilities, including liabilities under the
Securities Act of 1933.
SHARES ELIGIBLE FOR FUTURE SALE
As of October 31 2005, we had 44,032,276 shares of common stock issued and
outstanding. Of the issued and outstanding shares, approximately 33,117,276
shares of our common stock (21,920,004 of which are owned by our officers,
directors and principal stockholders) have been held for in excess of one year
and will be available for public resale pursuant to Rule 144 promulgated under
the Securities Act commencing 90 days following the date of this prospectus. As
of the date of this prospectus, the 13,780,004 shares being offered by selling
security holders can be publicly transferred. Not included in the foregoing are
15,500,000 shares issuable on exercise of outstanding warrants. They may be
resold by their holders as long as they are covered by a current registration
statement or under an available exemption from registration.
In general, Rule 144 permits a shareholder who has owned restricted shares
for at least one year, to sell without registration, within a three month
period, up to one percent of our then outstanding common stock. We must be
current in our reporting obligations in order for a shareholder to sell shares
under Rule 144. In addition, shareholders other than our officers, directors or
5% or greater shareholders who have owned their shares for at least two years
may sell them without volume limitation or the need for our reports to be
current.
We cannot predict the effect, if any, that market sales of common stock or
the availability of these shares for sale will have on the market price of the
shares from time to time. Nevertheless, the possibility that substantial amounts
of common stock may be sold in the public market could adversely affect market
prices for the common stock and could damage our ability to raise capital
through the sale of our equity securities.
LEGAL MATTERS
The legality of the securities offered by this prospectus will be passed
upon for us by Schneider Weinberger & Beilly LLP, Boca Raton, Florida.
EXPERTS
Our financial statements as of and for the years ended April 30, 2005 and
2004 included in this prospectus has been audited by Sherb & Co. LLP,
independent registered public accounting firm, as indicated in their report with
respect thereto, and have been so included in reliance upon the report of such
firm given on their authority as experts in accounting and auditing.
62
ADDITIONAL INFORMATION
We have filed with the SEC the registration statement on Form SB-2 under
the Securities Act for the common stock offered by this prospectus. This
prospectus, which is a part of the registration statement, does not contain all
of the information in the registration statement and the exhibits filed with it,
portions of which have been omitted as permitted by SEC rules and regulations.
For further information concerning us and the securities offered by this
prospectus, we refer to the registration statement and to the exhibits filed
with it. Statements contained in this prospectus as to the content of any
contract or other document referred to are not necessarily complete. In each
instance, we refer you to the copy of the contracts and/or other documents filed
as exhibits to the registration statement, and these statements are qualified in
their entirety by reference to the contract or document.
The registration statement, including all exhibits, and other materials we
file with the SEC, may be inspected without charge at the SEC's Public Reference
Room at 100 F Street, N.E., Washington, D.C. 20549. Copies of these materials
may also be obtained from the SEC's Public Reference at 100 F Street, N.E.,
Washington D.C. 20549, upon the payment of prescribed fees. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
We file annual and special reports and other information with the SEC.
Certain of our SEC filings are available over the Internet at the SEC's web site
at http://www.sec.gov. You may also read and copy any document we file with the
SEC at its public reference facilities:
Public Reference Room Office
100 F Street, N.E.
Washington, D.C. 20549
You may also obtain copies of the documents at prescribed rates by writing
to the Public Reference Section of the SEC at 100 F Street, N.E., Washington,
D.C. 20549. Callers in the United States can also call 1-800-732-0330 for
further information on the operations of the public reference facilities.
63
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations other than those contained in
this prospectus and, if given or made, such information or representation must
not be relied upon as having been authorized by the company or any of the
underwriters. This prospectus does not constitute an offer of any securities
other than those to which it relates or an offer to sell, or a solicitation of
any offer to buy, to any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this prospectus nor any
sale made hereunder shall, under any circumstances, create an implication that
the information set forth herein is correct as of any time subsequent to the
date hereof.
Until _________, 2005 (45 days after the date of this prospectus), all dealers
that effect transactions these securities, whether or not participating in this
offering, may be required to deliver a prospectus. This delivery requirement is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Report of Independent Registered Public Accounting Firm................ F-2
Consolidated Financial Statements:
Consolidated Balance Sheet
April 30, 2005................................................. F-3
Consolidated Statements of Operations
April 30, 2005.......................................... F-4 TO F-5
Consolidated Statements of Stockholders' Equity
April 30, 2005................................................. F-6
Consolidated Statements of Cash Flows
April 30, 2005................................................. F-7
Notes to Consolidated Financial Statements.................... F-8 to F-25
Financial Statements for the three months ended
July 31, 2005 and 2004 (unaudited)
Consolidated Balance Sheet
July 31, 2005 (Unaudited)..................................... F-26
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended July 31, 2005 and 2004............. F-27
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended July 31, 2005 and 2004............. F-28
Notes to Unaudited Consolidated Financial Statements...... F-29 to F-38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Sunwin International Neutraceuticals, Inc.
Shandong, China
We have audited the accompanying consolidated balance sheet of Sunwin
International Neutraceuticals, Inc. as of April 30, 2005, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended April 30, 2005 and 2004. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purposes of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining
on a test basis, evidence supporting the amount and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sunwin
International Neutraceuticals, Inc. and Subsidiaries as of April 30, 2005, and
the results of their operations and their cash flows for the years ended April
30, 2005 and 2004, in conformity with accounting principles generally accepted
in the United States of America.
/s/Sherb & Co., LLP
-----------------------------
Certified Public Accountants
Boca Raton, Florida
July 22, 2005
F-2
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
April 30, 2005
Restated -See Note 1
ASSETS
CURRENT ASSETS:
Cash $ 1,674,298
Accounts receivable
(net of allowance for doubtful accounts of $1,037,851) 1,814,820
Inventories, net 2,843,889
Due from related parties 66,447
Prepaid expenses and other 697,658
------------
Total Current Assets 7,097,112
PROPERTY AND EQUIPMENT
(net of accumulated depreciation of $1,754,457) 2,762,133
DUE FROM RELATED PARTIES 978,240
------------
Total Assets $ 10,837,485
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loans payable $ 592,541
Accounts payable and accrued expenses 1,876,529
Income taxes payable 515,412
Advances from customers 11,514
------------
Total Current Liabilities 2,995,996
OTHER PAYABLES 130,188
------------
Total Liabilities 3,126,184
------------
MINORITY INTEREST 1,933,149
------------
STOCKHOLDERS' EQUITY:
Preferred stock ($.001 Par Value; 1,000,000
Shares Authorized; No shares issued and outstanding) -
Common stock ($.001 Par Value; 200,000,000
Shares Authorized; 43,367,276 shares issued and outstanding) 43,367
Additional paid-in capital 1,265,687
Retained earnings 4,472,069
Other comprehensive loss - foreign currency (2,971)
-------------
Total Stockholders' Equity 5,778,152
-------------
Total Liabilities and Stockholders' Equity $ 10,837,485
=============
See notes to consolidated financial statements
F-3
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years
Ended April 30,
--------------------------------
2005 2004
-------------- --------------
NET REVENUES $ 12,114,006 $ 10,887,670
COST OF SALES 8,378,838 7,749,821
-------------- --------------
GROSS PROFIT 3,735,168 3,137,849
-------------- --------------
OPERATING EXPENSES:
Stock-based consulting expense 220,000 112,500
Selling expenses 923,114 1,007,466
General and administrative 967,226 1,044,139
-------------- --------------
Total Operating Expenses 2,110,340 2,164,105
-------------- --------------
INCOME FROM OPERATIONS 1,624,828 973,744
OTHER INCOME (EXPENSE):
Other income 59,094 48,349
Interest expense, net (62,054) (59,228)
-------------- --------------
Total Other Income (Expense) (2,960) (10,879)
-------------- --------------
INCOME BEFORE INCOME TAXES 1,621,868 962,865
PROVISION FOR INCOME TAXES (513,373) (352,713)
-------------- --------------
INCOME BEFORE MINORITY INTEREST 1,108,495 610,152
MINORITY INTEREST IN INCOME OF SUBSIDIARY (279,381) (144,842)
-------------- --------------
NET INCOME $ 829,114 $ 465,310
============== ==============
NET INCOME PER COMMON SHARE - BASIC AND DILUTED:
Net income per common share - basic $ 0.02 $ 0.03
============== ==============
Net income per common share - diluted $ 0.02 $ 0.03
============== ==============
Weighted Common Shares Outstanding - basic 34,987,824 17,040,051
============== ==============
Weighted Common Shares Outstanding - diluted 36,224,370 17,040,051
============== ==============
See notes to consolidated financial statements
F-4
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended April 30, 2005 and 2004
Restated - See Note 1
Common Stock, $.001 Par Value
------------------------------ Additional
Number of Paid-in Retained
Shares Amount Capital Earnings
----------- --------------- --------------- --------------
Balance, April 30, 2003 17,000,004 $ 17,000 $ 15,500 $ 3,177,645
Issuance of common stock pursuant to share exchange agreement 11,492,268 11,492 (106,492) -
Common stock issued for debt 1,000,002 1,000 99,000 -
Common stock issued for services 2,125,002 2,125 210,375 -
Net income for the year - - - 465,310
----------- --------------- --------------- --------------
Balance, April 30, 2004 31,617,276 31,617 218,383 3,642,955
Common stock issued for services 1,500,000 1,500 148,500 -
Contributed capital - - 6,489 -
Sales of common stock in private placement 10,250,000 10,250 892,315 -
Amortization of deferred compensation - - - -
Comprehensive income:
Net income for the year - - - 829,114
Foreign currency translation adjustment - - - -
----------- --------------- --------------- --------------
Balance, April 30, 2005 43,367,276 $ 43,367 $ 1,265,687 $ 4,472,069
=========== =============== =============== ==============
See notes to consolidated financial statements
F-5
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended April 30, 2005 and 2004
Restated - See Note 1
(CONTINUED)
Other Total
Deferred Comprehensive Stockholders'
Compensation Loss Equity
------------ --------------- ---------------
Balance, April 30, 2003 $ - $ - $ 3,210,145
Issuance of common stock pursuant to share exchange agreement - - (95,000)
Common stock issued for debt - - 100,000
Common stock issued for services (100,000) - 112,500
Net income for the year - - 465,310
------------ --------------- ---------------
Balance, April 30, 2004 (100,000) - 3,792,955
Common stock issued for services (150,000) - -
Contributed capital - - 6,489
Sales of common stock in private placement - - 902,565
Amortization of deferred compensation 250,000 - 250,000
Comprehensive income:
Net income for the year - - 829,114
Foreign currency translation adjustment - (2,971) (2,971)
------------ --------------- ---------------
Balance, April 30, 2005 $ - $ (2,971) $ 5,778,152
============ =============== ===============
See notes to consolidated financial statements
F-6
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Restated - See Note 1
For the Years
Ended April 30,
------------------------------
2005 2004
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 829,114 $ 465,310
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 291,415 510,667
Stock-based consulting 250,000 112,500
Minority interest 278,083 144,841
Allowance for doubtful accounts (539,048) 18,700
Changes in assets and liabilities:
Accounts receivable 1,347,264 (473,547)
Inventories 1,033,328 276,089
Prepaid and other current assets (117,128) 29,239
Due from related parties (66,447) -
Other assets 12,077 (12,077)
Accounts payable and accrued expenses (376,697) (154,834)
Income taxes payable 515,412 -
Advances to customers (1,018,862) 307,760
Accounts payable - long-term (102) -
------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,438,409 1,224,648
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment related to acquisition - (95,000)
Increase in due from related parties (464,455) (271,091)
Capital expenditures (981,634) (602,639)
------------- ------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (1,446,089) (968,730)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 902,565 -
Proceeds from loans payable - 1,184,300
Payments on loans payable (760,694) (1,045,690)
------------- ------------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 141,871 138,610
------------- ------------
EFFECT OF EXCHANGE RATE ON CASH (2,971) -
------------- ------------
NET INCREASE IN CASH 1,131,220 394,528
CASH - beginning of year 543,078 148,550
------------- ------------
CASH - end of year $ 1,674,298 $ 543,078
============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATON:
Cash paid for:
Interest $ 62,054 $ 59,228
============= ============
Income taxes $ - $ 406,084
============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATON:
Common stock issued for debt $ - $ 100,000
============= ============
Contributed capital paid for services $ 6,489 $ -
============= ============
See notes to consolidated financial statements.
F-7
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2005 and 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Sunwin International Neutraceuticals, Inc. (the "Company") was incorporated on
August 27, 1987 in the State of Nevada as Network USA, Inc. (Network). The
Company does not have any substantive operations of its own and substantially
all of its primary business operations are conducted through its 80%-owned
subsidiary, Qufu Natural Green Engineering Company Limited and its subsidiaries
("Qufu").
On April 30, 2004, under a Share Exchange Agreement, the Company issued
17,000,004 shares of the Company's common stock for the acquisition of all of
the outstanding capital stock of Sunwin Tech Group, Inc., ("Sunwin") a Florida
corporation, from its four shareholders: Baozhong Yuan, Laiwang Zhang, Xianfeng
Kong and Lei Zhang. For financial accounting purposes, the exchange of stock was
treated as a recapitalization of Sunwin with the former shareholders of the
Company retaining 11,492,268 or approximately 36.3% of the outstanding stock.
The consolidated financials statements reflect the change in the capital
structure of the Company due to the recapitalization and the consolidated
financial statements reflect the operations of the Company and its subsidiaries
for the periods presented.
In connection with the transaction, Sunwin purchased 4,500,000 shares of the
common stock of Network USA owned by the former principal shareholders of
Network for $175,000, and, at the closing, Sunwin distributed the 4,500,000
shares to Baozhong Yuan, Laiwang Zhang, Xianfeng Kong and Lei Zhang, pro-rata to
their ownership of Sunwin immediately prior to the closing.
Effective July 27, 2004 Network changed its name to Sunwin International
Neutraceuticals, Inc. The Company filed an amendment to its Articles of
Incorporation on July 12, 2004 to change its name, and to increase the number of
shares of common stock it is authorized to issue to 200,000,000 shares, $.001
par value per share.
Also, effective July 27, 2004, the Company effected a six for one (6:1) forward
stock split of its issued and outstanding common stock. Each stockholder of
record at the close of business on July 27, 2004 will receive five additional
shares of common stock for each share of common stock held. All share and
per-shares information has been restated to reflect this forward stock split.
On January 26, 2004, effective February 1, 2004, the Company entered into a
Stock Purchase Agreement with Shandong Shengwang Pharmaceutical Group
Corporation ("Shandong"), a 90% shareholder of Qufu and its subsidiaries. Qufu
is a Chinese limited liability company with principal offices in Qufu City,
Shandong, China. Qufu was founded in July 1999 and was re-registered in January
2004 in order to change its capital structure. Under this agreement, Shandong
exchanged 80% of the issued and outstanding capital stock of Qufu in exchange
for 100% of the issued and outstanding capital stock of Sunwin Tech Group, Inc.
("Sunwin") with a fair market value of $95,000. The Stock Purchase Agreement has
been accounted for as a reverse acquisition under the purchase method for
business combinations. Accordingly, the combination of the two companies is
recorded as a recapitalization of Qufu, pursuant to which Sunwin is treated as
the continuing entity.
F-8
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2005 and 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company (Continued)
The Company has an 80% ownership in Qufu Natural Green Engineering Company,
Limited ("Qufu"), a company organized under the laws of the Peoples Republic of
China. Qufu is engaged in the areas of essential traditional Chinese medicine,
100 percent organic herbal medicine, nutraceutical products, natural sweetener
(steviaside), and animal medicine prepared from 100% organic herbal ingredients.
Basis of presentation
The consolidated statements include the accounts of Sunwin International
Neutraceuticals, Inc and its wholly and partially-owned subsidiaries. All
significant inter-company balances and transactions have been eliminated.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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 revenue and expenses during the reporting period. Actual
results could differ from those estimates. Significant estimates in 2005 and
2004 include the allowance for doubtful accounts and the useful life of
property, plant and equipment.
Cash and cash equivalents
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid instruments purchased with a maturity of three months or less
and money market accounts to be cash equivalents.
Accounts receivable
Accounts receivable are reported at net realizable value. The Company has
established an allowance for doubtful accounts based upon factors pertaining to
the credit risk of specific customers, historical trends, and other information.
Delinquent accounts are written-off when it is determined that the amounts are
uncollectible. At December 31, 2004, the allowance for doubtful accounts was
$1,037,851.
Inventories
Inventories, consisting of raw materials and finished goods related to the
Company's products are stated at the lower of cost or market utilizing the
first-in, first-out method.
F-9
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2005 and 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair value of financial instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosures of information about the
fair value of certain financial instruments for which it is practicable to
estimate the value. For purpose of this disclosure, the fair value of a
financial instrument is the amount at which the instrument could be exchanged in
a current transaction between willing parties, other than in a forced sale or
liquidation.
The carrying amounts reported in the balance sheet for cash, accounts
receivable, accounts payable and accrued expenses, loans and amounts due from
related parties approximate their fair market value based on the short-term
maturity of these instruments.
Income taxes
The Company files federal and state income tax returns in the United States for
its domestic operations, and files separate foreign tax returns for the
Company's Chinese subsidiaries. Income taxes are accounted for under Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
is an asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.
Income per Share
Net income per common share for the years ended April 30, 2005 and 2004 is based
upon the weighted average common shares and dilutive common stock equivalents
outstanding during the year as defined by Statement of Financial Accounting
Standards, Number 128 "Earnings Per Share." As of April 30, 2005, there were
warrants to purchase 15,000,000 shares of common stock, which dilute future
earnings per share.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method over the estimated economic lives of the
assets, which are from five to twenty years. Expenditures for major renewals and
betterments that extend the useful lives of property and equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense as
incurred. In accordance with Statement of Financial Accounting Standards (SFAS)
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the
Company examines the possibility of decreases in the value of fixed assets when
events or changes in circumstances reflect the fact that their recorded value
may not be recoverable.
F-10
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2005 and 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Customer Deposits
Customer deposits at April 30, 2005 of $11,514 consist of a prepayment to the
Company for merchandise that had not yet shipped. The Company will recognize the
deposits as revenue as customers take delivery of the goods, in compliance with
its revenue recognition policy.
Foreign currency translation
Transactions and balances originally denominated in U.S. dollars are presented
at their original amounts. Transactions and balances in other currencies are
converted into U.S. dollars in accordance with Statement of Financial Accounting
Standards (SFAS) No. 52, "Foreign Currency Translation," and are included in
determining net income or loss.
For foreign operations with the local currency as the functional currency,
assets and liabilities are translated from the local currencies into U.S.
dollars at the exchange rate prevailing at the balance sheet date. Revenues and
expenses are translated at weighted average exchange rates for the period to
approximate translation at the exchange rates prevailing at the dates those
elements are recognized in the financial statements. Translation adjustments
resulting from the process of translating the local currency financial
statements into U.S. dollars are included in determining comprehensive loss.
The functional and reporting currency is the U.S. dollar. The functional
currency of the Company's Chinese subsidiary, Qufu, is the local currency. The
financial statements of the subsidiaries are translated into United States
dollars using year-end rates of exchange for assets and liabilities, and average
rates of exchange for the period for revenues, costs, and expenses. Net gains
and losses resulting from foreign exchange transactions are included in the
consolidated statements of operations and were not material during the periods
presented because the Chinese dollar (RMB) fluctuates with the United States
dollar. The cumulative translation adjustment and effect of exchange rate
changes on cash at April 30, 2004 and 2003 was not material.
On July 21, 2005, China let the Chinese RMB to fluctuate ending its decade-old
valuation peg to the U.S. dollar. The new RMB rate reflects an approximately 2%
increase in value against the U.S. dollar. Historically, the Chinese government
has benchmarked the RMB exchange ratio against the U.S. dollar, thereby
mitigating the associated foreign currency exchange rate fluctuation risk. The
Company does not believe that its foreign currency exchange rate fluctuation
risk is significant, especially if the Chinese government continues to benchmark
the RMB against the U.S. dollar.
Comprehensive loss
The Company uses Statement of Financial Accounting Standards No. 130 (SFAS 130)
"Reporting Comprehensive Income". Comprehensive income is comprised of net loss
and all changes to the statements of stockholders' equity, except those due to
investments by stockholders', changes in paid-in capital and distributions to
stockholders.
F-11
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2005 and 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and trade accounts receivable. The
Company places its cash with high credit quality financial institutions in the
United States and China. As of April 30, 2005, bank deposits in the United
States exceeded federally insured limit by $407,277. At April 30, 2005, the
Company had approximately $1,167,021 in China bank deposits, which may not be
insured. The Company has not experienced any losses in such accounts through
April 30, 2005. Almost all of the Company's sales are credit sales which are
primarily to customers whose ability to pay is dependent upon the industry
economics prevailing in these areas; however, concentrations of credit risk with
respect to trade accounts receivables is limited due to generally short payment
terms. The Company also performs ongoing credit evaluations of its customers to
help further reduce credit risk.
Stock based compensation
The Company accounts for stock options issued to employees in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price. Such
compensation amounts, if any, are amortized over the respective vesting periods
of the option grant. The Company adopted the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for
Stock-Based Compensation -Transition and Disclosure", which permits entities to
provide pro forma net income (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants as if the fair-valued based method
defined in SFAS No. 123 had been applied. The Company accounts for stock options
and stock issued to non-employees for goods or services in accordance with the
fair value method of SFAS 123.
Research and development
Research and development costs are expensed as incurred and amounted to $171,335
and $192,257 for the years ended April 30, 2005 and 2004, respectively, and are
included in general and administrative expenses on the accompanying statements
of operations.
Revenue recognition
The Company follows the guidance of the Securities and Exchange Commission's
Staff Accounting Bulletin 104 for revenue recognition. In general, the Company
records revenue when persuasive evidence of an arrangement exists, services have
been rendered or product delivery has occurred, the sales price to the customer
is fixed or determinable, and collectability is reasonably assured. The
following policies reflect specific criteria for the various revenues streams of
the Company:
The Company's revenues from the sale of products are recorded when the goods are
shipped, title passes, and collectibility is reasonably assured.
F-12
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2005 and 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising
Advertising is expensed as incurred. Advertising expenses for the years ended
April 30, 2005 and 2004 totaled approximately $212,865 and $150,203,
respectively.
Minority Interest
Under generally accepted accounting principles when losses applicable to the
minority interest in a subsidiary exceed the minority interest in the equity
capital of the subsidiary, the excess is not charged to the majority interest
since there is no obligation of the minority interest to make good on such
losses. The Company, therefore, has included losses applicable to the minority
interest against its interest since the minority owners have no obligation to
make good on the losses. If future earnings do materialize, the Company shall be
credited to the extent of such losses previously absorbed.
Shipping and costs
Shipping costs are included in selling and marketing expenses and totaled
$273,992 and $194,430 for the years ended April 30, 2005 and 2004, respectively.
Recent accounting pronouncements
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of
ARB No. 43, Chapter 4. SFAS No. 151 amends the guidance in ARB No.43, Chapter 4,
Inventory Pricing, to clarify the accounting for abnormal amounts of idle
facility expense, freight, handing costs, and spoilage. This statement requires
that those items be recognized as current period charges regardless of whether
they meet the criterion of "so abnormal" which was the criterion specified in
ARB No. 43. In addition, this Statement requires that allocation of fixed
production overheads to the cost of production be based on normal capacity of
the production facilities. This pronouncement is effective for the Company
beginning October 1, 2005. The Company does not believe adopting this new
standard will have a significant impact to its consolidated financial
statements.
In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
companies to recognize in the statement of operations the grant- date fair value
of stock options and other equity-based compensation issued to employees. FAS
No. 123R is effective beginning in the Company's second quarter of fiscal 2006.
The Company is in process of evaluating the impact of this pronouncement on its
financial position.
F-13
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2005 and 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent accounting pronouncements (continued)
In December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of
Non-monetary Assets." The Statement is an amendment of APB Opinion No. 29 to
eliminate the exception for non-monetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. The Company believes that the adoption of
this standard will have no material impact on its financial statements.
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments." The EITF reached a consensus about the
criteria that should be used to determine when an investment is considered
impaired, whether that impairment is other-than-temporary, and the measurement
of an impairment loss and how that criteria should be applied to investments
accounted for under SFAS No. 115, "Accounting In Certain Investments In Debt and
Equity Securities." EITF 03-01 also included accounting considerations
subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. Additionally, EITF 03-01 includes new
disclosure requirements for investments that are deemed to be temporarily
impaired. In September 2004, the Financial Accounting Standards Board (FASB)
delayed the accounting provisions of EITF 03-01; however the disclosure
requirements remain effective for annual reports ending after June 15, 2004. The
Company believes that the adoption of this standard will have no material impact
on its financial statements.
Restatement of 2005 and 2004
For the year ending April 30, 2005 and 2004, the Company revised certain
accounting treatment related to an error in the classification of certain
amounts due from related parties which were related to the purchase of
equipment. The Company initially classified $978,240 of amounts due from related
parties as a current asset but has determined that this amount should have been
classified as a long-term asset. Additionally, the Company revising certain
accounting treatment related to an error in an elimination entry related to
amounts the Company had advanced a company prior to our acquisition of that
company. The Company initially eliminated the investment of $95,000 on the
balance sheet through retained earnings but have determined that the elimination
should have been against additional paid-in capital. Accordingly, the
adjustments to the financial statements for the two reclassifications were as
follows:
1. Balance Sheet:
Other current assets decreased by $978,240 to $7,097,112 from $8,075,352 and
other assets increased by $978,240. Additional paid-in capital decreased by
$95,000 and retained earnings increased by $95,000.
F-14
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2005 and 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Restatement of 2005 (continued)
2. Statement of Cash Flows:
For the year ended April 30, 2005, net cash flows provided by operating
activities increased by $464,455 and net cash used in investing activities
increased by $464,455. For the year ended April 30, 2004, net cash flows
provided by operating activities increased by $271,091 and net cash used in
investing activities increased by $271,091.
NOTE 2 - INVENTORIES
At April 30, 2005, inventories consisted of the following:
Raw materials $ 1,798,607
Finished goods 1,106,600
-------------
2,905,207
Less: reserve for obsolete inventory (61,318)
-------------
$ 2,843,889
=============
NOTE 3 - PROPERTY AND EQUIPMENT
At April 30, 2005, property and equipment consisted of the following:
Estimated Life
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
-------------
4,516,590
Less: Accumulated Depreciation (1,754,457)
-------------
$ 2,762,133
=============
For the years ended April 30, 2005 and 2004, depreciation expense amounted to
$291,415 and $510,667, respectively.
F-15
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2005 and 2004
NOTE 4 - RELATED PARTY TRANSACTIONS
Due from related parties
The minority shareholder of Qufu, which owns 20% of that company, is Shandong
Shengwang Pharmaceutical Corporation Limited. Shandong Shengwang Pharmaceutical
Corporation Limited is controlled by Shandong Shengwang Group Corporation, and
the Company's President and Chairman, Laiwang Zhang, is the control person, of
both Shandong Shengwang Pharmaceutical Corporation Limited and Shandong
Shengwang Group Corporation. In addition, the remaining members of the Company's
management have been employed by one of those two companies prior to or in
conjunction with their duties at Qufu and our company.
From time to time the Company advance funds to Shandong Shengwang Pharmaceutical
Corporation, Limited and certain of its affiliated entities to effectuate the
purchase of equipment and hiring of construction services for the Company at
advantageous prices through the buying power provided by Shandong Shengwang
Pharmaceutical Corporation, Limited in connection with the Company building an
additional manufacturing line. At April 30, 2005, Shandong Shengwang
Pharmaceutical Corporation, Limited owed the Company $978,240 for advances we
made that corporation for the purchase of equipment and hiring of construction
services on the Company's behalf and for the purchase on inventory of $66,447.
All amounts due from related parties are due upon demand.
NOTE 5 - ACQUISITIONS
On January 26, 2004, effective February 1, 2004, the Company entered into a
Stock Purchase Agreement with Shandong Shengwang Pharmaceutical Group
Corporation ("Shandong"), a 90% shareholder of Qufu Natural Green Engineering
Company Limited and its subsidiaries ("Qufu"). Qufu is a Chinese limited
liability company with principal offices in Qufu City, Shandong, China. Under
this agreement, Shandong exchanged 80% of the issued and outstanding capital
stock of Qufu in exchange for 100% of the issued and outstanding capital stock
of Sunwin Tech Group, Inc. with a fair market value of $95,000. The Company
accounted for this acquisition using the purchase method of accounting. The
Stock Purchase Agreement has been accounted for as a reverse acquisition under
the purchase method for business combinations. Accordingly, the combination of
the two companies is recorded as a recapitalization of Qufu, pursuant to which
Sunwin is treated as the continuing entity.
F-16
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2005 and 2004
NOTE 6 - LOANS PAYABLE
Loans payable consisted of the following at April 30, 2005:
Note to Bank of China dated February 8, 2005, due in monthly $ 247,390
installments through February 8, 2006. Interest rate at 6.90%. Secured
by equipment
Note to Qufu City Credit Union dated August 14, 2004, due in monthly
installments on August 15, 2005. Interest rate at 6.34%. Secured by
equipment 114,644
Note to Yao Town Credit Union dated July 3, 2004, due on July 2, 2005.
Interest rate at 5.58%. Secured by equipment 6,034
Note to Qufu City Department of Treasury dated June 29, 2004, due on
Jun 28, 2006. Interest rate at 5.58%. Secured by equipment 103,795
Note to Bank of China dated August 24, 2004, due in monthly installments through
August 23, 2005. Interest rate at 6.6750%.
Secured by equipment 120,678
--------------
$ 592,541
Total ==============
NOTE 7 - INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" "SFAS 109". SFAS 109 requires
the recognition of deferred tax assets and liabilities for both the expected
impact of differences between the financial statements and the tax basis of
assets and liabilities, and for the expected future tax benefit to be derived
from tax losses and tax credit carryforwards. SFAS 109 additionally requires the
establishment of a valuation allowance to reflect the likelihood of realization
of deferred tax assets. The Company's subsidiaries in China are governed by the
Income Tax Law of the People's Republic of China concerning Foreign Investment
Enterprises and Foreign Enterprises and local income tax laws (the "PRC Income
Tax Law"). Pursuant to the PRC Income Tax Law, wholly-owned foreign enterprises
are subject to tax at a statutory rate of 33% (30% state income tax plus 3%
local income tax).
The Company has a minimal net operating loss carryforward for tax purposes at
April 30, 2005 expiring through the year 2025. Internal Revenue Code Section 382
places a limitation on the amount of taxable income that can be offset by
carryforwards after a change in control (generally greater than a 50% change in
ownership).
F-17
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2005 and 2004
NOTE 7 - INCOME TAXES (continued)
The table below summarizes the differences between the Company's effective tax
rate and the statutory federal rate as follows for years ended April 30, 2005
and 2004:
2005 2004
---------- ----------
Computed "expected" tax expense 34.0 % 34.0 %
State income taxes 5.0 % 5.0 %
Other permanent differences (39.0)% (39.0)%
Foreign income taxes 32.0 % 36.0%
---------- ----------
Effective tax rate 32.0 % 36.0%
========== ==========
NOTE 8 - STOCKHOLDERS' EQUITY
Preferred stock
The Company is authorized to issue 1,000,000 shares of Preferred Stock, par
value $.001, with such designations, rights and preferences as may be determined
from time to time by the Board of Directors.
Common Stock
On July 27, 2004, the Company's board of directors approved a 6 for 1 forward
stock split. All per share data included in the accompanying consolidated
financial statement have been adjusted retroactively to reflect the forward
split.
On April 30, 2004, the Company issued 1,000,002 shares of common stock for debt.
The Company valued these shares at the quoted trading price on the date of grant
of $0.10 per common share. In connection with these shares, the Company reduces
a loan payable by $100,000.
On April 30, 2004, the Company granted 2,125,002 shares of common stock to
consultants for business development and marketing services. The Company valued
these shares at the quoted trading price on the date of grant of $0.10 per
common share. In connection with these shares, for the years ended April 30,
2005 and 2004, the Company recorded stock-based consulting expense of $100,000
and $112,500, respectively.
On May 1, 2004, the Company entered into three one-year consulting agreements
with third party consultants for business development services and for
management services relating to the payment of professionals for legal and
accounting services. In connection with these consulting agreements, the Company
granted an aggregate of 1,500,000 shares of common stock. The Company valued
these shares at the quoted trading price on the date of grant of $0.10 per
common share. For the year ended April 30, 2005, in connection with these
shares, the Company recorded stock-based consulting expense of $120,000 and
professional fees of $30,000 (included in general and administrative expense).
F-18
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2005 and 2004
NOTE 8 - STOCKHOLDERS' EQUITY (continued)
Common Stock (continued)
On July 27, 2004, the Company's board of directors approved a 6 for 1 forward
stock split. All per share data included in the accompanying consolidated
financial statement have been adjusted retroactively to reflect the forward
split.
In July 2004, the Company sold 2.5 units to three accredited investors in a
private transaction exempt from registration under the Securities Act of 1933 in
reliance on an exemption available under Regulation D. Each unit consists of
600,000 shares of our common stock and two-year common stock warrants to
purchase 600,000 shares of our common stock at an exercise price of $0.167 per
share. As of July 15, 2004, the Company issued 1,500,000 shares of common stock
and granted 1,500,000 warrants for net proceeds of $120,000.
On April 12, 2005, the Company completed an $875,000 financing consisting of
8,750,000 shares of our common stock at $.10 per share, and Class A Common Stock
Purchase Warrants to purchase an additional 13,125,000 shares. Each warrant
entitles the holder to purchase one share of common stock for a period of five
years, at an exercise price of $.15 per share, subject to adjustment. In
connection with this financing, the Company received net proceeds of $780,000.
Stock Options
On March 23, 2005, the Company's Board of Directors authorized and adopted the
2005 Equity Compensation Plan. The purpose of the plan is to encourage stock
ownership by the Company's officers, directors, key employees and consultants,
and to give these persons a greater personal interest in the success of its
business and an added incentive to continue to advance and contribute to the
Company. The Company has currently reserved 5,000,000 of our authorized but
unissued shares of common stock for issuance under the plan, and a maximum of
5,000,000 shares may be issued, unless the plan is subsequently amended (subject
to adjustment in the event of certain changes in our capitalization), without
further action by the Board of Directors and stockholders, as required. Subject
to the limitation on the aggregate number of shares issuable under the plan,
there is no maximum or minimum number of shares as to which a stock grant or
plan option may be granted to any person. Shares used for stock grants and plan
options may be authorized and unissued shares or shares reacquired by the
Company, including shares purchased in the open market. Shares covered by plan
options which terminate unexercised will again become available for grant as
additional options, without decreasing the maximum number of shares issuable
under the plan, although such shares may also be used by the Company for other
purposes. The plan is administered by the Company's Board of Directors or an
underlying committee. The Board of Directors or the committee determines from
time to time those of our officers, directors, key employees and consultants to
whom stock grants or plan options are to be granted, the terms and provisions of
the respective option agreements, the time or times at which such options shall
be granted, the type of options to be granted, the dates such plan options
become exercisable, the number of shares subject to each option, the purchase
price of such shares and the form of payment of such purchase price. All other
questions relating to the administration of the plan, and the interpretation of
the provisions thereof and of the related option agreements are resolved by the
Board or committee.
F-19
SUNWIN INTERNATIONAL NEUTRCEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2005 and 2004
NOTE 8 - STOCKHOLDERS' EQUITY (continued)
Stock Options (continued)
Plan options may either be options qualifying as incentive stock options under
Section 422 of the Internal Revenue Code of 1986, as amended, or non-qualified
options. The Company's officers, directors, key employees and consultants are
eligible to receive stock grants and non-qualified options under the plan; only
its employees are eligible to receive incentive options. In addition, the plan
allows for the inclusion of a reload option provision which permits an eligible
person to pay the exercise price of the option with shares of common stock owned
by the eligible person and receive a new option to purchase shares of common
stock equal in number to the tendered shares. Furthermore, compensatory stock
grants may also be issued.
Any incentive option granted under the plan must provide for an exercise price
of not less than 100% of the fair market value of the underlying shares on the
date of grant, but the exercise price of any incentive option granted to an
eligible employee owning more than 10% of our outstanding common stock must not
be less than 110% of fair market value on the date of the grant. The term of
each plan option and the manner in which it may be exercised is determined by
the Board of Directors or the committee, provided that no option may be
exercisable more than ten years after the date of its grant and, in the case of
an incentive option granted to an eligible employee owning more than 10% of the
common stock, no more than five years after the date of the grant. The exercise
price of non-qualified options shall be determined by the Board of Directors or
the Committee, but shall not be less than the par value of our common stock on
the date the option is granted. The per share purchase price of shares issuable
upon exercise of a Plan option may be adjusted in the event of certain changes
in our capitalization, but no such adjustment shall change the total purchase
price payable upon the exercise in full of options granted under the Plan.
All incentive stock options expire on or before the 10th anniversary of the date
the option is granted; however, in the case of incentive stock options granted
to an eligible employee owning more than 10% of the common stock, these options
will expire no later than five years after the date of the grant. Non-qualified
options expire 10 years and one day from the date of grant unless otherwise
provided under the terms of the option grant.
Common stock warrants
In July 2004, in connection with a private placement, the Company granted
two-year common stock purchase warrants to purchase an aggregate of 1,500,000
shares of the Company's common stock with an exercise price of $0.167 per share.
These warrants contain standard anti-dilution protection for the warrant holder
in the event of stock splits, recapitalization or reorganization by the Company.
On April 12, 2005, in connection with a private placement, the Company granted
Class A Common Stock Purchase Warrants to purchase an aggregate of 13,125,000
shares of the Company's common stock. Each warrant entitles the holder to
purchase one share of common stock for a period of five years, at an exercise
price of $.15 per share, subject to adjustment. Additional, in connection with
this private placement, the Company granted Class A Common Stock Purchase
Warrants to purchase an aggregate of 375,000 shares of the Company's common
stock as a placement fee.
F-20
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2005 and 2004
NOTE 8 - STOCKHOLDERS' EQUITY (continued)
Common stock warrants (continued)
The number of shares issuable upon the exercise and the exercise price per share
are subject to adjustment in the event the Company issues additional shares of
common stock as a dividend or other distribution or for stock splits or
combinations.
The number of shares of the Company's common stock and the exercise price of the
warrant are also subject to adjustment in the event the Company issues
additional shares of its common stock or any other securities which are
convertible or exercisable into shares of its common stock at a per share price
less than the exercise price of the warrant, other than in certain specific
instances, in which event the exercise price of the warrant would be reset to
the lower price.
If the Company fails to maintain an effective registration statement for the
time periods required by the subscription agreement, or if the holder is unable
to exercise the warrant as a result of the Company's failure to maintain an
effective registration statement, upon written demand by the holder, the Company
is obligated to pay the holder a sum equal to the closing price of the Company's
common stock on the trading day immediately preceding the notice, less the
original purchase price of $0.10 per share.
A summary of the status of the Company's outstanding stock warrants granted as
of April 30, 2005 and changes during the period is as follows:
Weighted
Average
Exercise
Shares Price
-------------- ----------
Outstanding at April 30, 2004 - $ -
Granted 15,000,000 0.151
Exercised - -
Forfeited - -
-------------- ----------
Outstanding at April 30, 2005 15,000,000 $ 0.151
============== ==========
Warrants exercisable at end of period 15,000,000 $ 0.151
============== ==========
Weighted-average fair value of warrants
granted during the period $ 0.151
The following information applies to all warrants outstanding at April 30, 2005:
Warrants Outstanding Warrants Exercisable
---------------------------- -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Shares Life (Years) Price Shares Price
------------------------ ----------- ------------ ----------- -------------- ----------
$0.167 1,500,000 9.75 $ 0.167 1,500,000 0.167
$0.15 13,500,000 2.85 $ 0.15 13,500,000 0.15
F-21
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2005 and 2004
NOTE 9 - COMMITMENTS
Operating Leases
The Company leases office and manufacturing space under operating leases in
Shandong, China that expire through 2011. The Company has a lease with Shandong
Shengwang Pharmaceutical Corporation Limited, a 20% minority interest
shareholder, for an annual rent of approximately $19,000 through October 1,
2012. Future minimum rental payments required under these operating leases are
as follows:
Period Ended April 30, 2006 $ 44,686
Period Ended April 30, 2007 $ 44,887
Period Ended April 30, 2008 $ 47,101
Period Ended April 30, 2009 $ 47,101
Period Ended April 30, 2010 $ 47,101
Thereafter $ 80,012
Rent expense for the years ended April 30, 2005 and 2004 amounted to $42,479 and
$29,167, respectively.
NOTE 10 - LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceeding. No federal, state or
local governmental agency is presently contemplating any proceeding against the
Company. No director, executive officer or affiliate of the Company or owner of
record or beneficially of more than five percent of the Company's common stock
is a party adverse to the company or has a material interest adverse to the
Company in any proceeding.
NOTE 12 - OPERATING RISK
(a) Country risk
Currently, the Company's revenues are mainly derived from sale of herbs,
steviaside and veterinary products in the Peoples Republic of China (PRC). The
Company hopes to expand its operations to countries outside the PRC, however,
such expansion has not been commenced and there are no assurances that the
Company will be able to achieve such an expansion successfully. Therefore, a
downturn or stagnation in the economic environment of the PRC could have a
material adverse effect on the Company's financial condition.
(b) Products risk
In addition to competing with other companies, the Company could have to compete
with larger US companies who have greater funds available for expansion,
marketing, research and development and the ability to attract more qualified
personnel if access is allowed into the PRC market. If US companies do gain
access to the PRC markets, they may be able to offer products at a lower price.
There can be no assurance that the Company will remain competitive should this
occur.
F-22
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2005 and 2004
NOTE 12 - OPERATING RISK
(c) Exchange risk
The Company can not guarantee that the current exchange rate will remain steady,
therefore there is a possibility that the Company could post the same amount of
profit for two comparable periods and because of a fluctuating exchange rate
actually post higher or lower profit depending on exchange rate of Chinese
Remnibi converted to US dollars on that date. The exchange rate could fluctuate
depending on changes in the political and economic environments without notice.
(d) Political risk
Currently, PRC is in a period of growth and is openly promoting business
development in order to bring more business into PRC. Additionally PRC allows a
Chinese corporation to be owned by a United States corporation. If the laws or
regulations are changed by the PRC government, the Company's ability to operate
the PRC subsidiaries could be affected.
(e) Key personnel risk
The Company's future success depends on the continued services of executive
management in China. The loss of any of their services would be detrimental to
the Company and could have an adverse effect on business development. The
Company does not currently maintain key-man insurance on their lives. Future
success is also dependent on the ability to identify, hire, train and retain
other qualified managerial and other employees. Competition for these
individuals is intense and increasing.
(f) Performance of subsidiaries risk
Currently, a majority of the Company's revenues are derived via the operations
of the subsidiaries. Economic, governmental, political, industry and internal
company factors outside of the Company's control affect each of the
subsidiaries. If the subsidiaries do not succeed, the value of the assets and
the price of our common stock could decline. Some of the material risks relating
to the partner companies include the fact that three of the subsidiaries are
located in China and have specific risks associated with that and the
intensifying competition for the Company's products and services and those of
the subsidiaries
F-23
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2005 and 2004
NOTE 13- SEGMENT INFORMATION
The following information is presented in accordance with SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information. In the
periods ended April 30, 2005 and 2004, the Company operated in two reportable
business segments - (1) the sale of essential traditional Chinese medicine, 100
percent organic herbal medicine, nutraceutical products, and animal medicines
prepared from 100% organic herbal ingredients and (2) sale of natural sweetener
(steviaside). The Company's reportable segments are strategic business units
that offer different products. They are managed separately based on the
fundamental differences in their operations. Condensed information with respect
to these reportable business segments for the year ended April 30, 2005 and 2004
is as follows:
Year Ended Year Ended
April 30, 2005 April 30, 2004
---------------------- ---------------------
(Unaudited) (Unaudited)
Net revenues:
Chinese Medicines and Animal Medicines $ $
6,573,440 3,177,097
Natural Sweetener (steviaside) 5,540,566 7,710,573
---------------------- ---------------------
Consolidated Net Revenue 12,114,006 10,887,670
---------------------- ---------------------
Cost of sales and operating expenses:
Chinese Medicines and Animal Medicines 5,520,830 2,745,289
Natural Sweetener (steviaside) 4,475,656 6,697,016
Other 284,510 112,520
Depreciation:
Chinese Medicines and Animal Medicines 12,859 15,740
Natural Sweetener (steviaside) 195,323 343,361
Interest expense:
Chinese Medicines and Animal Medicines 46,914 40,130
Natural Sweetener (steviaside) 11,240 19,098
Other 3,900 -
Net income (loss):
Chinese Medicines and Animal Medicines
614,703 229,543
Natural Sweetener (steviaside) 502,821 348,287
Other (288,410) (112,520)
---------------------- ---------------------
Net Income $ 829,114 $ 465,310
====================== =====================
Total Assets at April 30, 2005 and 2004:
Chinese Medicines and Animal Medicines $ 4,249,534 $ 4,088,448
Natural Sweetener (steviaside) 5,687,174 6,028,209
Other 900,777 104,980
---------------------- ---------------------
Consolidated Asset Total $ 10,837,485 $ 10,221,637
====================== =====================
F-24
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2005 and 2004
NOTE 14 - SUBSEQUENT EVENTS
On May 1, 2005, the Company entered into a two-month agreement with China Direct
Investments, Inc., a related party, to provide consulting and advisory services
to assist the Company. Marc Siegel, a 7.6% shareholder of the Company, is an
officer, director and principal shareholder of China Direct Investments, Inc.
The consultant received an aggregate of 500,000 Class A Common Stock Purchase
Warrants to purchase shares of the Company's common stock at an exercise price
of $0.15 per share for five years. The fair value of this warrant grant was
estimated at $0.067 per warrant on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions dividend
yield of -0- percent; expected volatility of 45 percent; risk-free interest rate
of 4.00 percent and an expected holding periods of 5.00 years. In connection
with these warrants, the Company recorded stock-based consulting expense of
$33,428.
On June 11, 2005, the Company entered into a one-year agreement with China
Direct Investments, Inc. to provide business development and management
services, effective May 1, 2005. Marc Siegel, a 7.8% shareholder of the Company,
is an officer, director and principal shareholder of China Direct Investments,
Inc. In connection with this agreement, the Company shall issue 665,000 shares
of the Company's common stock payable on a quarterly basis on August 31, 2005,
November 30, 2005, February 28, 2006 and May 1, 2006 for a total of 2,660,000.
The Company will value these services using the fair value of common shares
issuable at the end of each month of the service period.
F-25
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
July 31, 2005
Restated - See Note 1
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 1,980,096
Accounts receivable
(net of allowance for doubtful accounts of $1,164,339) 1,692,324
Inventories, net 1,710,679
Due from related parties 66,447
Prepaid expenses and other 1,161,924
--------------
Total Current Assets 6,611,470
PROPERTY AND EQUIPMENT
(net of accumulated depreciation of $1,816,260) 3,648,998
DUE FROM RELATED PARTIES 847,101
--------------
Total Assets $ 11,107,569
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loans payable $ 481,800
Accounts payable and accrued expenses 1,544,798
Income taxes payable 631,396
Advances from customers 82,203
--------------
Total Current Liabilities 2,740,197
OTHER PAYABLES 132,929
--------------
Total Liabilities 2,873,126
--------------
MINORITY INTEREST 2,057,963
--------------
STOCKHOLDERS' EQUITY:
Preferred stock ($.001 Par Value; 1,000,000 shares authorized;
No shares issued and outstanding) -
Common stock ($.001 Par Value; 200,000,000 shares authorized;
43,367,276 shares issued and outstanding) 43,367
Additional paid-in capital 1,299,114
Retained earnings 4,727,445
Other comprehensive income - foreign currency 106,554
--------------
Total Stockholders' Equity 6,176,480
--------------
Total Liabilities and Stockholders' Equity $ 11,107,569
==============
See notes to consolidated financial statements
F-26
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Restated - See Note 1
For the Three Months
Ended July 31,
-----------------------------------
2005 2004
---------------- ----------------
(Unaudited) (Unaudited)
NET SALES $ 3,171,087 $ 3,299,134
COST OF SALES 2,240,689 2,249,913
---------------- ----------------
GROSS PROFIT 930,398 1,049,221
---------------- ----------------
OPERATING EXPENSES:
Stock-based consulting expense 33,427 87,500
Selling expenses 366,710 331,616
General and administrative 230,401 316,816
---------------- ----------------
Total Operating Expenses 630,538 735,932
---------------- ----------------
INCOME FROM OPERATIONS 299,860 313,289
OTHER INCOME (EXPENSE):
Other income 150,427 26,606
Interest expense (9,212) (19,565)
---------------- ----------------
Total Other Income (Expense) 141,215 7,041
---------------- ----------------
INCOME BEFORE PROVISION INCOME TAXES 441,075 320,330
PROVISION FOR INCOME TAXES (103,166) (164,238)
---------------- ----------------
INCOME BEFORE MINORITY INTEREST 337,909 156,092
MINORITY INTEREST IN INCOME OF SUBSIDIARY (82,533) (59,733)
---------------- ----------------
NET INCOME 255,376 96,359
OTHER COMPREHENSIVE INCOME:
Unrealized foreign currency translation 109,525 -
---------------- ----------------
COMPREHENSIVE INCOME $ 364,901 $ 96,359
================ ================
NET INCOME PER COMMON SHARE - BASIC AND DILUTED:
Net income per common share - basic $ 0.01 $ 0.00
================ ================
Net income per common share - diluted $ 0.01 $ 0.00
================ ================
Weighted Common Shares Outstanding - basic 43,367,276 33,361,841
================ ================
Weighted Common Shares Outstanding - diluted 43,367,276 34,861,841
================ ================
See notes to consolidated financial statements
F-27
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Restated - See Note 1
For the Three Months
Ended July 31,
-----------------------------------
2005 2004
---------------- ----------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 255,376 $ 96,359
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 24,345 89,157
Stock-based consulting 33,427 87,500
Minority interest 82,533 59,734
Allowance for doubtful accounts 102,475 6,805
Changes in assets and liabilities:
Accounts receivable 54,924 106,487
Inventories 1,168,491 889,758
Prepaid and other current assets (440,303) (445,700)
Due from related parties - -
Other assets - 6,038
Accounts payable and accrued expenses (363,507) (31,897)
Income taxes payable 102,962 166,279
Advances to customers 68,994 (11,897)
---------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,089,717 1,018,623
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in due from related parties - (424,617)
Capital expenditures (704,071) (229,094)
---------------- ----------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (704,071) (653,711)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock - 120,000
Payments on loans payable (120,678) (475,628)
---------------- ----------------
NET CASH FLOWS USED IN FINANCING ACTIVITIES (120,678) (355,628)
---------------- ----------------
EFFECT OF EXCHANGE RATE ON CASH 40,830 -
---------------- ----------------
NET INCREASE IN CASH 305,798 9,284
CASH - beginning of year 1,674,298 543,078
---------------- ----------------
CASH - end of period $ 1,980,096 $ 552,362
================ ================
See notes to consolidated financial statements.
F-28
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Sunwin International Neutraceuticals, Inc. (the "Company") was incorporated on
August 27, 1987 in the State of Nevada as Network USA, Inc. (Network). The
Company does not have any substantive operations of its own and substantially
all of its primary business operations are conducted through its 80%-owned
subsidiary, Qufu Natural Green Engineering Company Limited and its subsidiaries
("Qufu"), a company organized under the laws of the Peoples Republic of China.
Qufu is engaged in the areas of traditional Chinese medicine, 100 percent
organic herbal medicine, neutraceutical products, natural sweetener
(Stevioside), and animal medicine prepared from 100% organic herbal ingredients.
On January 26, 2004, effective February 1, 2004, Sunwin Tech Group, Inc. a
Florida corporation that is now a wholly-owned subsidiary of the Company
("Sunwin Tech") entered into a Stock Purchase Agreement with Shandong Shengwang
Pharmaceutical Group Corporation ("Shandong"), a 90% shareholder of Qufu and its
subsidiaries. Qufu is a Chinese limited liability company with principal offices
in Qufu City, Shandong, China. Qufu was founded in July 1999 and was
re-registered in January 2004 in order to change its capital structure. Under
this agreement, Shandong exchanged 80% of the issued and outstanding capital
stock of Qufu in exchange for 100% of the issued and outstanding capital stock
of Sunwin Tech with a fair market value of $95,000. The Stock Purchase Agreement
has been accounted for as a reverse acquisition under the purchase method for
business combinations. Accordingly, the combination of the two companies is
recorded as a recapitalization of Qufu, pursuant to which Sunwin is treated as
the continuing entity.
On April 30, 2004, under a Share Exchange Agreement, the Company issued
17,000,004 shares of the Company's common stock for the acquisition of all of
the outstanding capital stock of Sunwin Tech from its four shareholders:
Baozhong Yuan, Laiwang Zhang, Xianfeng Kong and Lei Zhang. For financial
accounting purposes, the exchange of stock was treated as a recapitalization of
Sunwin Tech with the former shareholders of the Company retaining 11,492,268 or
approximately 36.3% of the outstanding stock. The consolidated financial
statements reflect the change in the capital structure of the Company due to the
recapitalization and the consolidated financial statements reflect the
operations of the Company and its subsidiaries for the periods presented.
In connection with the Share Exchange Agreement, Sunwin Tech purchased 4,500,000
shares of the common stock of Network owned by the former principal shareholders
of Network for $175,000, and, at the closing, Sunwin distributed the 4,500,000
shares to Baozhong Yuan, Laiwang Zhang, Xianfeng Kong and Lei Zhang, pro-rata to
their ownership of Sunwin Tech immediately prior to the closing.
The Company filed an amendment to its Articles of Incorporation on July 12, 2004
to change its name, and to increase the number of shares of common stock it is
authorized to issue to 200,000,000 shares, $.001 par value per share.
F-29
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company (Continued)
Also, effective July 27, 2004, the Company effected a six for one (6:1) forward
stock split of its issued and outstanding common stock. Each stockholder of
record at the close of business on July 27, 2004 received five additional shares
of common stock for each share of common stock held. All share and per-share
information has been restated to reflect this forward stock split.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). The accompanying consolidated
financial statements for the interim periods are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the periods presented. The consolidated
financial statements include the accounts of the Company and its wholly and
partially owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. These consolidated financial statements
should be read in conjunction with the financial statements for the year ended
April 30, 2005 and notes thereto contained on Form 10-KSB of the Company as
filed with the Securities and Exchange Commission. The results of operations for
the three months ended July 31, 2005 are not necessarily indicative of the
results for the full fiscal year ending April 30, 2006.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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 revenue and expenses during the reporting period. Actual
results could differ from those estimates. Significant estimates in 2005 and
2004 include the allowance for doubtful accounts and the useful life of
property, plant and equipment.
Net income per share
Net income per common share for the years ended April 30, 2005 and 2004 is based
upon the weighted average common shares and dilutive common stock equivalents
outstanding during the year as defined by Statement of Financial Accounting
Standards, Number 128 "Earnings Per Share." As of July 31, 2005, there were
warrants to purchase 15,500,000 shares of common stock, which dilute future
earnings per share.
F-30
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2005
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Inventories
Inventories, consisting of raw materials and finished goods related to the
Company's products are stated at the lower of cost or market utilizing the
first-in, first-out method.
Advances from customers
Advances from customers at July 31, 2005 of $82,203 consist of a prepayment to
the Company for merchandise that had not yet shipped to the customer. The
Company will recognize the deposits as revenue as customers take delivery of the
goods, in compliance with its revenue recognition policy.
Foreign currency translation
Transactions and balances originally denominated in U.S. dollars are presented
at their original amounts. Transactions and balances in other currencies are
converted into U.S. dollars in accordance with Statement of Financial Accounting
Standards (SFAS) No. 52, "Foreign Currency Translation," and are included in
determining net income or loss.
For foreign operations with the local currency as the functional currency,
assets and liabilities are translated from the local currencies into U.S.
dollars at the exchange rate prevailing at the balance sheet date. Revenues and
expenses are translated at weighted average exchange rates for the period to
approximate translation at the exchange rates prevailing at the dates those
elements are recognized in the financial statements. Translation adjustments
resulting from the process of translating the local currency financial
statements into U.S. dollars are included in determining comprehensive loss.
The reporting currency is the U.S. dollar. The functional currency of the
Company's Chinese subsidiary, Qufu, is the local currency. The financial
statements of the subsidiaries are translated into United States dollars using
year-end rates of exchange for assets and liabilities, and average rates of
exchange for the period for revenues, costs, and expenses. Net gains and losses
resulting from foreign exchange transactions are included in the consolidated
statements of operations and were not material during the periods presented
because the Chinese dollar (RMB) fluctuates with the United States dollar. The
cumulative translation adjustment and effect of exchange rate changes on cash at
July 31, 2005 was approximately $40,800.
On July 21, 2005, China allowed the Chinese RMB to fluctuate ending its
decade-old valuation peg to the U.S. dollar. The new RMB rate reflects an
approximately 2% increase in value against the U.S. dollar. Historically, the
Chinese government has benchmarked the RMB exchange ratio against the U.S.
dollar, thereby mitigating the associated foreign currency exchange rate
fluctuation risk. The Company does not believe that its foreign currency
exchange rate fluctuation risk is significant, especially if the Chinese
government continues to benchmark the RMB against the U.S. dollar.
F-31
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2005
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Stock-based compensation
The Company accounts for stock options issued to employees in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price. Such
compensation amounts, if any, are amortized over the respective vesting periods
of the option grant. The Company adopted the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for
Stock-Based Compensation -Transition and Disclosure", which permits entities to
provide pro forma net income (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants as if the fair-valued based method
defined in SFAS No. 123 had been applied. The Company accounts for stock options
and stock issued to non-employees for goods or services in accordance with the
fair value method of SFAS 123.
Revenue recognition
The Company follows the guidance of the Securities and Exchange Commission's
Staff Accounting Bulletin 104 for revenue recognition. In general, the Company
records revenue when persuasive evidence of an arrangement exists, services have
been rendered or product delivery has occurred, the sales price to the customer
is fixed or determinable, and collectability is reasonably assured. The
following policies reflect specific criteria for the various revenues streams of
the Company:
The Company's revenues from the sale of products are recorded when the goods are
shipped, title passes, and collectibility is reasonably assured.
Restatement of 2005 and 2004
For the three months ending July 31, 2005 and 2004, the Company revised certain
accounting treatment related to an error in the classification of certain
amounts due from related parties which were related to the purchase of
equipment. The Company initially classified $847,101 of amounts due from related
parties as a current asset but has determined that this amount should have been
classified as a long-term asset. Additionally, the Company revised certain
disclosure and accounting treatment related to 2,660,000 shares of common stock
that were incorrectly calculated as issued and outstanding at the time of the
report. Accordingly, the adjustments to the financial statements for the
reclassifications and adjustment were as follows:
F-32
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2005
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Restatement of 2005 and 2004
1. Balance Sheet:
a) Other current assets decreased by $847,101 to $6,611,470 from $7,458,571
and other assets increased by $847,101 related to the reclassification of
amounts due from related parties.
b) Accounts payable and accrued expenses increased by $37,075 which
increased total current liabilities and total liabilities by same amount.
Commons tock decreased by $2,660, additional paid-in capital decreased by
$289,941 and deferred compensation decreased by $255,525 for a net stockholders'
equity decrease of $37,075 and related to the revision of certain disclosure and
accounting treatment related to 2,660,000 shares of common stock that were
incorrectly calculated as issued and outstanding at the time of the report.
2. Statement of Operations:
b) Stock-based consulting expense decreased by $21,076 and general and
administrative expenses increased by $21,075 due to the reclassification of
certain stock-based expenses to professional fees.
3. Statement of Cash Flows:
a) For the three months ended July 31, 2005, net cash flows provided by
operating activities decreased by $131,882 and net cash used in investing
activities decreased by $131,882. For the three months ended July 31, 2004, net
cash flows provided by operating activities increased by $424,617 and net cash
used in investing activities increased by $424,617.
NOTE 2 - INVENTORIES
At July 31, 2005, inventories consisted of the following:
Raw materials $ 1,132,413
Finished goods 640,876
-------------
1,773,289
Less: reserve for obsolete inventory (62,610)
-------------
$ 1,710,679
=============
F-33
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2005
(UNAUDITED)
NOTE 3 - RELATED PARTY TRANSACTIONS
Due from related parties
The minority shareholder of Qufu, which owns 20% of that company, is Shandong
Shengwang Pharmaceutical Corporation Limited. Shandong Shengwang Pharmaceutical
Corporation Limited is controlled by Shandong Shengwang Group Corporation.
Laiwang Zhang, President and Chairman of the Company, is the control person, of
both Shandong Shengwang Pharmaceutical Corporation Limited and Shandong
Shengwang Group Corporation. In addition, the remaining members of the Company's
management have been employed by one of those two companies prior to or in
conjunction with their duties at Qufu and our Company.
From time to time the Company advances funds to Shandong Shengwang
Pharmaceutical Corporation, Limited and certain of its affiliated entities to
effectuate the purchase of equipment and hiring of construction services for the
Company at advantageous prices through the buying power provided by Shandong
Shengwang Pharmaceutical Corporation, Limited in connection with the Company
building an additional manufacturing line. At July 31, 2005, Shandong Shengwang
Pharmaceutical Corporation, Limited owed the Company $847,101 for advances we
made to that corporation for the purchase of equipment and hiring of
construction services on the Company's behalf and for the purchase on inventory
of $66,447.00.
Consulting agreement
On June 11, 2005, the Company entered into a one-year agreement with China
Direct Investments, Inc. to provide business development and management
services, effective May 1, 2005. Marc Siegel, a 7.8% shareholder of the Company,
is an officer, director and principal shareholder of China Direct Investments,
Inc. In connection with this agreement, the Company shall issue 665,000 shares
of the Company's common stock payable on a quarterly basis on August 31, 2005,
November 30, 2005, February 28, 2006 and May 1, 2006 for a total of 2,660,000.
The Company valued these services using the fair value of common shares issuable
at the end of each month of the service period at approximately $.11 per share
and recorded consulting expense of $21,075 and professional fees of $16,000.
NOTE 4 - STOCKHOLDERS EQUITY
Common stock warrants
On May 1, 2005, the Company entered into a two-month agreement with China Direct
Investments, Inc., a related party, to provide consulting and advisory services
to assist the Company. Marc Siegel, a 6.2% shareholder of the Company, is an
officer, director and principal shareholder of China Direct Investments, Inc.
The consultant received an aggregate of 500,000 Class A Common Stock Purchase
Warrants to purchase shares of the Company's common stock at an exercise price
of $0.15 per share for five years.
F-34
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2005
(UNAUDITED)
NOTE 4 - STOCKHOLDERS EQUITY (continued)
The fair value of this warrant grant was estimated at $0.067 per warrant on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions dividend yield of -0- percent; expected volatility
of 45 percent; risk-free interest rate of 4.00 percent and an expected holding
period of 5 years. In connection with these warrants, the Company recorded
stock-based consulting expense of $33,428.
A summary of the status of the Company's outstanding stock warrants granted as
of July 31, 2005 and changes during the period is as follows:
Weighted
Average
Exercise
Shares Price
---------- ----------
Outstanding at April 30, 2005 15,000,000 $ 0.151
Granted 500,000 0.150
Exercised - -
Forfeited - -
---------- ----------
Outstanding at July 31, 2005 15,500,000 $ 0.151
========== ==========
Warrants exercisable at end of period 15,500,000 $ 0.151
========== ==========
Weighted-average fair value of warrants
granted during the period $ 0.15
The following information applies to all warrants outstanding at July 31, 2005:
Warrants Outstanding Warrants Exercisable
--------------------------- --------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Shares Life (Years) Price Shares Price
------------------------ ---------- ------------ ----------- ---------- -----------
$ 0.167 1,500,000 0.96 $ 0.167 1,500,000 0.167
$ 0.15 14,000,000 4.67 $ 0.15 14,000,000 0.15
F-35
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2005
(UNAUDITED)
NOTE 5- SEGMENT INFORMATION
The following information is presented in accordance with SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information. In the
periods ended July 31, 2005 and 2004, the Company operated in two reportable
business segments - (1) the sale of essential traditional Chinese medicine, 100
percent organic herbal medicine, neutraceutical products, and animal medicines
prepared from 100% organic herbal ingredients and (2) sale of natural sweetener
(stevioside). The Company's reportable segments are strategic business units
that offer different products. They are managed separately based on the
fundamental differences in their operations. Condensed information with respect
to these reportable business segments for the three months ended July 31, 2005
and 2004 is as follows:
Three Months Ended Three Months Ended
July 31, 2005 July 31, 2004
---------------------- ---------------------
(Unaudited) (Unaudited)
Net revenues:
Chinese Medicines and Animal Medicines $ 1,856,556 $ 1,643,092
Natural Sweetener (stevioside) 1,314,531 1,656,042
---------------------- ---------------------
Consolidated Net Revenue 3,171,087 3,299,134
---------------------- ---------------------
Cost of sales and operating expenses:
Chinese Medicines and Animal Medicines 1,627,511 1,345,459
Natural Sweetener (stevioside) 1,144,615 1,408,649
Other 74,756 142,580
Depreciation:
Chinese Medicines and Animal Medicines 3,215 19,006
Natural Sweetener (stevioside) 21,130 70,151
Interest expense:
Chinese Medicines and Animal Medicines 7,869 13,743
Natural Sweetener (stevioside) 1,343 5,822
Net income (loss):
Chinese Medicines and Animal Medicines
205,384 142,905
Natural Sweetener (stevioside) 124,748 96,034
Other (74,756) (142,580)
---------------------- ---------------------
Net Income $ 255,376 $ 96,359
====================== =====================
Total Assets at July 31, 2005 and 2004:
Chinese Medicines and Animal Medic $ 4,307,108 $ 4,321,484
Natural Sweetener (stevioside) 5,922,591 5,785,703
Other 877,870 124,900
---------------------- ---------------------
Consolidated Asset Total $ 11,107,569 $ 10,232,087
====================== =====================
F-36
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2005
(UNAUDITED)
NOTE 6 - OPERATING RISK
(a) Country risk
Currently, the Company's revenues are mainly derived from sale of herbs, beet
sugar and veterinary products in the Peoples Republic of China (PRC). The
Company hopes to expand its operations to countries outside the PRC, however,
such expansion has not been commenced and there are no assurances that the
Company will be able to achieve such an expansion successfully. Therefore, a
downturn or stagnation in the economic environment of the PRC, or other factors
affecting the political, economic or social conditions in the PRC could have a
material adverse effect on the Company's financial condition.
(b) Products risk
In addition to competing with other companies, the Company could have to compete
with larger US companies who have greater funds available for expansion,
marketing, research and development and the ability to attract more qualified
personnel if access is allowed into the PRC market. If US companies do gain
access to the PRC markets, they may be able to offer products at a lower price.
There can be no assurance that the Company will remain competitive should this
occur.
(c) Exchange risk
The Company cannot guarantee that the current exchange rate will remain steady,
therefore there is a possibility that the Company could post the same amount of
profit or loss for two comparable periods and because of a fluctuating exchange
rate actually post higher or lower profit or loss depending on exchange rate of
Chinese Renminbi (RMB) converted to US dollars on that date. The exchange rate
could fluctuate depending on changes in the political and economic environments
without notice.
(d) Political risk
Currently, PRC is in a period of growth and is openly promoting business
development in order to bring more business into PRC. Additionally PRC allows a
Chinese corporation to be owned by a United States corporation. If the laws or
regulations are changed by the PRC government, the Company's ability to operate
the PRC subsidiaries could be affected.
F-37
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2005
(UNAUDITED)
NOTE 6 - OPERATING RISK (continued)
(e) Key personnel risk
The Company's future success depends on the continued services of executive
management in China. The loss of any of their services would be detrimental to
the Company and could have an adverse effect on business development. Moreover,
the Company is dependent upon a consultant who has been engaged to act as the
Company's representative in the United States and who is primarily responsible
for serving as the United States liaison with the Company's legal and accounting
professionals. The Company does not currently maintain key-man insurance on
their lives. Future success is also dependent on the ability to identify, hire,
train and retain other qualified managerial and other employees and consultants.
Competition for these individuals is intense and increasing.
(f) Performance of subsidiaries' risk
Currently, a majority of the Company's revenues are derived via the operations
of the subsidiaries. Economic, governmental, political, industry and internal
company factors outside of the Company's control affect each of the
subsidiaries. If the subsidiaries do not succeed, the value of the assets and
the price of our common stock could decline. Some of the material risks relating
to the partner companies include the fact that three of the subsidiaries are
located in China and have specific risks associated with that and the
intensifying competition for the Company's products and services and those of
the subsidiaries.
F-38
TABLE OF CONTENTS
Page
Prospectus Summary..........................
Risk Factors................................
Use of Proceeds.............................
Market for Common Stock 29,280,004 SHARES
and Dividend Policy......................
Forward-Looking Statements.................. SUNWIN INTERNATIONAL
Management's Discussion and NEUTRACEUTICALS, INC.
Analysis or Plan of Operation.............
Business....................................
Management..................................
Executive Compensation......................
Certain Transactions........................ PROSPECTUS
Principal Shareholders......................
Description of Securities...................
Selling Security Holders....................
Plan of Distribution........................ ______________, 2005
Shares Eligible for Future Sale.............
Legal Matters...............................
Experts.....................................
Additional Information......................
Financial Statements........................ F-1
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Nevada Revised Statutes allows us to indemnify each of our officers and
directors who are made a party to a proceeding if:
(a) the officer or director conducted himself or herself in good faith;
(b) his or her conduct was in our best interests, or if the conduct was not
in an official capacity, that the conduct was not opposed to our best interests;
and
(c) in the case of a criminal proceeding, he or she had no reasonable cause
to believe that his or her conduct was unlawful. We may not indemnify our
officers or directors in connection with a proceeding by or in our right, where
the officer or director was adjudged liable to us, or in any other proceeding,
where our officer or director are found to have derived an improper personal
benefit.
Our by-laws require us to indemnify directors and officers against, to the
fullest extent permitted by law, liabilities which they may incur under the
circumstances described above.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, the registrant has been informed that, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as express in the act and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the distribution of the securities
being registered, all of which are payable by Sunwin, are as follows:
SEC Registration and Filing Fee..................................... $ 523
Legal Fees and Expenses*............................................ 25,000
Accounting Fees and Expenses*....................................... 10,000
Financial Printing*................................................. 5,000
Transfer Agent Fees*................................................ 1,000
Blue Sky Fees and Expenses*......................................... 2,500
Miscellaneous*......................................................
TOTAL..................................................... $ 44,023
==========
----------------
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Following are all issuances of securities by the small business issuer
during the past three years which were not registered under the Securities Act
of 1933, as amended (the "Securities Act"). In each of these issuances the
recipient represented that he was acquiring the shares for investment purposes
only, and not with a view towards distribution or resale except in compliance
with applicable securities laws. The recipients had access to business and
financial information concerning our company. No general solicitation or
advertising was used in connection with any transaction, and the certificate
evidencing the securities that were issued contained a legend restricting their
transferability absent registration under the Securities Act or the availability
of an applicable exemption therefrom. Unless specifically set forth below, no
underwriter participated in the transaction and no commissions were paid in
connection with the transactions.
II-1
In April 2002, we acquired 20% of One Genesis, Inc., a privately-held Texas
real estate corporation, from one of our then principal stockholders in exchange
for 4,333,332 shares of our common stock.
Effective on April 30, 2004, we acquired 100% of the issued and outstanding
shares of Sunwin Tech from its shareholders, in exchange for approximately
17,000,000 shares of our common stock which resulted in a change of control of
our company. In connection with the transaction, Sunwin Tech purchased 4,500,000
shares of our common stock owned by our former principal shareholders, and, at
the closing, Sunwin Tech distributed the 4,500,000 shares to Messrs. Baozhong
Yuan, Xianfeng Kong and Lei Zhang (former officers and directors) and Laiwang
Zhang, pro-rata to their ownership of Sunwin Tech immediately prior to the
closing. The securities were issued in reliance on an exemption from
registration provided by Section 4(2) of the Securities Act.
On April 30, 2004, we issued 1,000,002 shares of our common stock to an
unaffiliated third party in satisfaction of $100,000 due that party by our
company. We valued these shares at $0.10 per share. The securities were issued
in reliance on an exemption from registration provided by Section 4(2) of the
Securities Act.
On April 30, 2004, we also issued an aggregate of 2,125,002 shares of our
common stock to eight individuals and entities as compensation for business
development and advisory services under agreements for services rendered or to
be rendered for a six-month period. We valued these shares at $0.10 per share,
resulting in consulting expense of $112,500 for fiscal 2004 and deferred
consulting expense of $100,000. These issuances included 709,680 shares issued
to Mr. Richard J. Church and 290,322 shares issued to Mr. Michael L. Mead,
former officers and directors of our company. The securities were issued in
reliance on an exemption from registration provided by Section 4(2) and
Regulation D of the Securities Act.
On May 1, 2004, we issued an aggregate of 1,500,000 shares of our common
stock to two companies and one individual as compensation under one year
consulting agreements. Included in these issuances were 300,000 shares of our
common stock issued to Genesis Technology Group, Inc. as compensation for their
services to us as an advisor to our company, which services were terminated
December 2004. The securities were issued in reliance on an exemption from
registration provided by Section 4(2) of the Securities Act. We valued these
shares at $150,000.
In July 2004, we sold 2.5 units to three accredited investors in a private
transaction exempt from registration under the Securities Act of 1933 in
reliance on an exemption available under Section 4(2) and Regulation D of the
Securities Act. Each unit consists of 600,000 shares of our common stock and
two-year common stock purchase warrants to purchase 600,000 shares of our common
stock at an exercise price of $0.167 per share. This transaction resulted in the
issuance of an aggregate of 1,500,000 shares of our common stock and warrants to
purchase an additional 1,500,000 shares. We received gross proceeds of $120,000.
In April 2005, we sold 8,750,000 shares of our common stock at $.10 per
share, and issued five year common stock purchase warrants to purchase an
additional 13,125,000 shares at an exercise price of $0.15 per share to 12
accredited investors in a private transaction exempt from registration under the
Securities Act in reliance on an exemption provided by Section 4(2) of the
Securities Act and the rules and regulations, including Regulation D thereunder,
as transactions by an issuer not involving a public offering. We paid
unaffiliated finders a total of $87,500, in cash, and issued certain finders
five-year warrants to purchase a total of 375,000 shares of common stock,
exercisable at $.15 per share, subject to adjustment. The net proceeds from the
transaction will be used for general working capital purposes.
II-2
In May 2005, we issued five-year warrants to purchase 500,000 shares of our
common stock, at an exercise price of $.15 per share, to China Direct
Investments, Inc. as compensation under a consulting agreement for advisory
services rendered or to be rendered for a two month period. We valued these
shares at $39,221. The securities were issued in reliance on an exemption from
registration provided by Section 4(2) of the Securities Act.
On August 31, 2005, we issued 665,000 shares of our common stock, to China
Direct Investments, Inc. as compensation under a consulting agreement for
advisory services rendered. We valued these shares at $73,150. The securities
were issued in reliance on an exemption from registration provided by Section
4(2) of the Securities Act.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit No Description of Document
3.1 Articles of Incorporation (1)
3.2 Certificate of Amendment to Articles of Incorporation (2)
3.3 By-Laws (1)
4.1 Form of Class A Common Stock Purchase Warrant **
4.2 Form of $0.167 common stock purchase warrant**
5.1 Opinion of Schneider Weinberger & Beilly LLP **
10.1 Share Exchange Agreement dated April 30, 2004 between Network
USA, Inc. and the shareholders of Sunwin Tech Group, Inc. (3)
10.2 Intentionally Omitted
10.3 Consulting Agreement with Genesis Technology Group, Inc. (4)
10.4 Form of Stevia rebaudiana Planting Agreement (4)
10.5 Stock Purchase Agreement between Sunwin Tech Group, Inc., Qufu
Natural Green Engineering Company, Limited and Shandong Shengwang
Pharmaceutical Group Corporation (4)
10.6 2005 Equity Compensation Plan (5)
10.7 Form of Subscription Agreement **
10.8 Consulting Agreement with China Direct Investments, Inc.**
10.9 Consulting Agreement with China Direct Investments, Inc. (6)
10.10 Lease agreement dated October 1, 2002 between Shandong Shengwang
Pharmaceutical Corporation and Qufu Natural Green Engineering
Co., Ltd.(7)
10.11 Lease agreement dated October 6, 2002 between Qufu LuCheng Chiya
Resident Commitment and Qufu Natural Green Engineering Co., Ltd.(7)
10.12 Lease agreement dated April 1, 2004 between Qufu ShengDa
Industry Co., Ltd. and Qufu Natural Green Engineering Co., Ltd. (7)
14.1 Code of Ethics **
21 Subsidiaries**
23.1 Consent of Sherb & Co. LLP *
23.2 Consent of Schneider Weinberger & Beilly LLP
(included in Exhibit 5.1)**
* filed herewith
** previously filed
II-3
(1) Incorporated by reference to the Form 10-KSB for the fiscal year ended
April 30, 2000
(2) Incorporated by reference to the Form 8-K/A as filed with the SEC on
July 30, 2004.
(3) Incorporated by reference to the Report on Form 8-K as filed with the
SEC on May 12, 2004.
(4) Incorporated by reference to the Annual Report on Form 10-KSB for the
fiscal year ended April 30, 2004.
(5) Incorporated by reference to the Report on Form 8-K as filed with the
SEC on April 28, 2005.
(6) Incorporated by reference to the Annual Report on Form 10-KSB for the
fiscal year ended April 30, 2005.
(7) Incorporated by reference to the Annual Report on Form 10-KSB/A for
the fiscal year ended April 30, 2005.
ITEM 28. UNDERTAKINGS
The undersigned Registrant also undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to section 13 or section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-4
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission (the "Commission") such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or preceding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this amendment to
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Qufu, Shandong, China on October 31, 2005.
SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC.
By: /s/ Dongdong Lin
-----------------------------------------
Dongdong Lin,
Principal Executive Officer
By: /s/ Fanjun Wu
-----------------------------------------
Fanjun Wu,
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to Form SB-2 registration statement has been signed by the following persons in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- --------------------------------- ----------------
/s/ Laiwang Zhang President and Chairman,
--------------------------------- October 31, 2005
Laiwang Zhang
/s/ Dongdong Lin CEO, principal executive officer,
--------------------------------- Secretary and director October 31 2005
Dongdong Lin
/s/ Fanjun Wu Chief Financial Officer and
--------------------------------- principal accounting officer October 31, 2005
Fanjun Wu
/s/ Chengxiang Yan Director
--------------------------------- October 31, 2005
Chengxiang Yan
Exhibit 23.1
2700 N. Military Trail, Suite 200
Boca Raton, Florida 33431
Tel. 561-939-1275
Fax. 561-826-8100
e-mail:info@sherbcpa.com
Offices in New York and Florida
Certified Public Accountants
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We consent to the incorporation in this Registration Statement on Form SB-2/A,
of our report dated July 22, 2005 for the period ended April 30, 2005 relating
to the balance sheet of Sunwin International Neutraceuticals, Inc. and
Subsidiaries as of April 30, 2005 and the related statements of operations,
stockholders' equity, and cash flows for the years ended April 30, 2005 and
2004. We also consent to the reference to our firm under the caption "Experts"
in the Prospectus.
/s/Sherb & Co, LLP
-------------------------------------
Sherb & Co., LLP
Certified Public Accountants
Boca Raton, Florida
November 2, 2005
Next Section
Previous Section