TANKE BIOSCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Restated
|
|
|
Restated
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
5,941,470
|
|
|
$
|
3,354,927
|
|
Costs of sales
|
|
|
(3,515,066
|
)
|
|
|
(1,995,988
|
)
|
Gross profit
|
|
|
2,426,404
|
|
|
|
1,358,939
|
|
Selling expenses
|
|
|
(585,250
|
)
|
|
|
(433,314
|
)
|
Administrative expenses
|
|
|
(2,544,387
|
)
|
|
|
(108,429
|
)
|
Depreciation and amortization
|
|
|
(11,719
|
)
|
|
|
(11,468
|
)
|
(Loss) income from operations
|
|
|
(714,952
|
)
|
|
|
805,728
|
|
Other income/expense
|
|
|
|
|
|
|
|
|
Foreign exchange losses, net
|
|
|
(79,046
|
)
|
|
|
778
|
|
Interest income
|
|
|
1,390
|
|
|
|
1,678
|
|
Interest expense
|
|
|
(259,454
|
)
|
|
|
(425
|
)
|
Amortization of discount on notes
|
|
|
(759,234
|
)
|
|
|
-
|
|
Income before income taxes
|
|
|
(1,811,296
|
)
|
|
|
807,759
|
|
Income tax expense
|
|
|
(213,355
|
)
|
|
|
(103,135
|
)
|
Net (loss) income
|
|
|
(2,024,651
|
)
|
|
|
704,624
|
|
Non-controlling interest in earnings of subsidiary
|
|
|
-
|
|
|
|
(178,724
|
)
|
Net (loss) income available to shareholders
|
|
$
|
(2,024,651
|
)
|
|
$
|
525,900
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
(519,458
|
)
|
|
|
(45,006
|
)
|
Translation attributable to non-controlling interest
|
|
|
39,125
|
|
|
|
7,543
|
|
Comprehensive (loss) income
|
|
$
|
(2,504,984
|
)
|
|
$
|
488,437
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share available to common
|
|
|
|
|
|
|
|
|
shareholders:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.17
|
)
|
|
$
|
0.05
|
|
Diluted
|
|
$
|
(0.17
|
)
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,166,096
|
|
|
|
10,758,000
|
|
Diluted
|
|
|
12,166,096
|
|
|
|
10,758,000
|
|
See accompanying notes to the financial statements
TANKE BIOSCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Controlling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
Earnings
|
|
|
Income
|
|
|
Interest
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010, restated in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
terms of the Share Exchange Agreement
|
|
|
10,758,000
|
|
|
$
|
10,758
|
|
|
$
|
1,417,098
|
|
|
$
|
6,205,482
|
|
|
$
|
530,070
|
|
|
$
|
2,170,737
|
|
|
$
|
10,334,145
|
|
Effect of VIE Agreement with China Flying
|
|
|
|
|
|
|
|
|
|
|
2,133,917
|
|
|
|
|
|
|
|
(35,290
|
)
|
|
|
(2,170,737
|
)
|
|
|
(72,110
|
)
|
Effect of Share Exchange Agreement
|
|
|
399,180
|
|
|
|
399
|
|
|
|
54,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,599
|
|
Effect of Private Placement
|
|
|
|
|
|
|
|
|
|
|
6,125,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,125,195
|
|
Shares issued for consulting services
|
|
|
1,840,000
|
|
|
|
1,840
|
|
|
|
2,114,160
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,116,000
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,024,651
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,024,651
|
)
|
Foreign currency translation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(431,333
|
)
|
|
|
-
|
|
|
|
(431,333
|
)
|
Balance at March 31, 2011 (Unaudited)
|
|
|
12,997,180
|
|
|
$
|
12,997
|
|
|
$
|
11,844,570
|
|
|
$
|
4,180,831
|
|
|
$
|
63,447
|
|
|
$
|
-
|
|
|
$
|
16,101,845
|
|
See accompanying notes to the financial statements
TANKE BIOSCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(Unaudited)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Restated
|
|
|
Restated
|
|
Operating activities:
|
|
|
|
|
|
|
Net income
|
|
$
|
(2,024,651
|
)
|
|
$
|
704,624
|
|
Adjustments to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
11,719
|
|
|
|
26,000
|
|
Common stock issued for services
|
|
|
2,116,000
|
|
|
|
-
|
|
Amortization of discount on convertible notes payable
|
|
|
759,234
|
|
|
|
-
|
|
Amortization of capitalized offering costs
|
|
|
218,280
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
80,911
|
|
|
|
(93,552
|
)
|
Inventories
|
|
|
110,189
|
|
|
|
(472,585
|
)
|
Deferred tax assets
|
|
|
(17,977
|
)
|
|
|
-
|
|
Other receivables
|
|
|
(68,648
|
)
|
|
|
(444,191
|
)
|
Other current assets
|
|
|
(557,360
|
)
|
|
|
(15,357
|
)
|
Accounts payable
|
|
|
121,780
|
|
|
|
222,543
|
|
Other payables and accrued liabilities
|
|
|
122,215
|
|
|
|
276,701
|
|
Income tax payable and receivable
|
|
|
199,216
|
|
|
|
(262,966
|
)
|
Government grant
|
|
|
(33,525
|
)
|
|
|
(66,186
|
)
|
Advance from customer
|
|
|
(2,434
|
)
|
|
|
-
|
|
Net cash provided by (used in) operating activities
|
|
|
1,034,949
|
|
|
|
(124,969
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(211,130
|
)
|
|
|
(22,287
|
)
|
Change in restricted cash
|
|
|
(706,802
|
)
|
|
|
146,472
|
|
Payments for construction in progress
|
|
|
-
|
|
|
|
(33,558
|
)
|
Increase in cash from VIE agreement with China Flying
|
|
|
76,075
|
|
|
|
-
|
|
Net cash provided by (used in) investing activities
|
|
|
(841,857
|
)
|
|
|
90,627
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Note receivables-related parties
|
|
|
277,112
|
|
|
|
(30,028
|
)
|
Other receivable from State Administration of Foreign Exchange
|
|
|
(3,999,990
|
)
|
|
|
-
|
|
Net proceeds from issue of convertible notes
|
|
|
6,522,563
|
|
|
|
-
|
|
Increase (decrease) in bank borrowings
|
|
|
696,551
|
|
|
|
(219,708
|
)
|
Net cash provided by (used in) financing activities
|
|
|
3,496,236
|
|
|
|
(249,736
|
)
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency translation
|
|
|
40,741
|
|
|
|
468
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
3,730,069
|
|
|
|
(283,610
|
)
|
Cash, beginning of period
|
|
|
2,222,025
|
|
|
|
1,817,875
|
|
Cash, end of period
|
|
$
|
5,952,094
|
|
|
$
|
1,534,265
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
41,173
|
|
|
$
|
58,626
|
|
Cash paid for income taxes
|
|
$
|
21,956
|
|
|
$
|
133,049
|
|
|
|
|
|
|
|
See accompanying notes to the financial statements
TANKE BIOSCIENCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES
|
In these consolidated financial statements, unless the context requires otherwise, the terms “we”, “our”, “us” and the “Company” refer to Tanke Biosciences Corporation, a Nevada corporation formerly known as Greyhound Commissary, Inc. (“Greyhound”), as well as our direct and indirect subsidiaries, and our principal operating business, Guangzhou Tanke Industry Co., Ltd. (“Guangzhou Tanke”), a company organized under the laws of the People’s Republic of China (“China” or the “PRC”), which we control via a series of variable interest entity contractual agreements (the “VIE Agreements”) more fully described below.
We conduct our business through our subsidiaries, principally our wholly-owned subsidiary China Flying Development Limited (“China Flying”), a Hong Kong incorporated company, and its wholly-owned subsidiary Guangzhou Kanghui Agricultural Technology Co., Ltd. (“Kanghui Agricultural” or the “WFOE”), a wholly foreign owned enterprise incorporated as a limited liability company under the laws of the PRC. The Company operates and controls Guangzhou Tanke through Kanghui Agricultural and China Flying and in connection with the VIE Agreements.
On January 3, 2011, Guangzhou Tanke entered into a series of agreements with Kanghui Agricultural, pursuant to which Kanghui Agricultural effectively assumed management of the business activities of Guangzhou Tanke. Kanghui Agricultural is entitled to 100% of the net income of Guangzhou Tanke and is able to direct Guangzhou Tanke’s actions.
Also on January 3, 2011, our board of directors unanimously approved a resolution to enter into a Share Exchange Agreement with China Flying, and Golden Genesis Limited, a British Virgin Islands company ("Golden Genesis"), the sole stockholder of China Flying. Under the terms of the Share Exchange, Golden Genesis exchanged 100% of its capital stock in China Flying for 10,758,000 shares of authorized, but previously unissued Greyhound common stock, post-split as described below. Also, at the closing, we issued an aggregate of 1,840,000 shares (post split) of our authorized, but previously unissued common stock to a U.S. advisor. Following the closing of the agreement on February 9, 2011, China Flying became our wholly owned subsidiary.
Our board of directors further approved unanimously on January 3, 2011, a one share for 8.512 shares reverse split of our issued and outstanding common stock. The effective date of the split was established by our board on a date prior to the closing of the acquisition of China Flying.
The acquisition of China Flying was contingent upon the completion of our planned private placement in which we sold 6,669,627 units (the “Units”), with net proceeds of $6,522,563. Each Unit consisted of a $1.15 principal amount convertible note and a three year warrant to purchase one share of Greyhound common stock. On February 9, 2011, the Company entered into a Securities Purchase Agreement with individual investors relating to the private placement and completed the private placement transaction (see Notes 12 and 13). The proceeds from such sale have been transferred to Guangzhou Tanke and will be used to finance the operations and growth of Guangzhou Tanke.
At the time of the Share Exchange Agreement, Greyhound had 3,397,787 shares of common stock issued and outstanding. Following the reverse split, but prior to the issuance of shares pursuant to the acquisition of China Flying, the outstanding shares will be reduced to approximately 399,316 shares, without giving effect to the rounding up of fractional shares. Split shares issued in connection with the reverse stock split will be fully paid and non-assessable. The number of stockholders will remain unchanged as a result of the reverse split. The par value of our common stock remained unchanged.
As management of Guangzhou Tanke obtained control of the Company, the Share Exchange was treated as a reverse merger. Accordingly, for accounting purposes Guangzhou Tanke was the acquirer so historical financial information presented herewith is that of Guangzhou Tanke.
Pursuant to the VIE Agreements, Kanghui Agricultural has the right to advise, consult, manage and operate Guangzhou Tanke for a quarterly fee equal to Guangzhou Tanke’s net income. Additionally, the Tanke Shareholders pledged their rights, titles and equity interest in Guangzhou Tanke as security for Kanghui Agricultural to collect consulting and services fees provided to Guangzhou Tanke through an Equity Pledge Agreement. In order to further reinforce Kanghui Agricultural’s rights to control and operate Guangzhou Tanke, the Tanke Shareholders granted Kanghui Agricultural an exclusive right and option to acquire all of their equity interests in Guangzhou Tanke through an Option Agreement. Neither Tanke Biosciences nor Kangui Agricultural own the assets or are responsible for the liabilities of Guangzhou Tanke.
The VIE Agreements were necessary because without them, the shareholders of Tanke Biosciences would not have control of Guangzhou Tanke. With these in place, however, Guangzhou Tanke is contractually equivalent to a subsidiary of Tanke Biosciences.
Guangzhou Tanke has historically self financed, and has been a profitable enterprise. However, on February 9, 2011, Tanke Biosciences sold convertible notes payable (see Note 9 below) with net proceeds of $6,522,563. Such proceeds have been transferred to Guangzhou Tanke and will be used to finance the operations and growth of Guangzhou Tanke.
“RMB” and “Renminbi” refer to the legal currency of China and “$”, “US dollar” and “US$” refer to the legal currency of the United States.
Restatement
Management has determined to restate its financial statements for the period ended March 31, 2011, in order to provide a presentation that is more meaningful to investors. Specifically, management has determined that Guangzhou Tanke should be considered the predecessor of the Company for accounting purposes. As a result of this change, we are now presenting comparative financial information for Guangzhou Tanke, our sole operating entity.
Our basis for changing the presentation is recognition that while there was a change in control when Kanghui Agricultural entered into the VIE Agreements with Guangzhou Tanke, there was also a call option agreement (the "Call Option Agreement") between the Guangzhou Tanke shareholders, Golden Genesis and Ms. Wong Kwai Ho, the sole shareholder of Golden Genesis. The Call Option Agreement granted the Guangzhou Tanke shareholders the ability to acquire control over Tanke Biosciences, which has control of China Flying and Kanghui Agricultural, following the exercise of certain stock options. Therefore, by viewing the VIE Agreements and the Call Option Agreement as a single arrangement, Guangzhou Tanke obtained control and is the accounting acquirer in accordance with FASB ASC 805-10.
The impact of this restatement on the March 31, 2011 balances is as follows.
|
|
March 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
|
|
As Restated
|
|
|
As Previously
|
|
|
Change
|
|
|
|
|
|
|
Amended
|
|
|
|
|
Balance Sheet:
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
Additional paid in capital
|
|
$
|
11,844,570
|
|
|
$
|
15,917,425
|
|
|
$
|
(4,072,855
|
)
|
Retained earnings
|
|
|
4,180,831
|
|
|
|
107,976
|
|
|
|
4,072,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on bargain purchase of Tanke Bio-Tech
|
|
|
-
|
|
|
|
248,073
|
|
|
|
(248,073
|
)
|
Net loss
|
|
|
(2,024,651
|
)
|
|
|
(1,776,578
|
)
|
|
|
(248,073
|
)
|
Net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.17
|
)
|
|
|
(0.15
|
)
|
|
|
(0.02
|
)
|
Diluted
|
|
|
(0.17
|
)
|
|
|
(0.15
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,024,651
|
)
|
|
|
(1,776,578
|
)
|
|
|
(248,073
|
)
|
Gain on bargain purchase of Tanke Bio-Tech
|
|
|
-
|
|
|
|
(248,073
|
)
|
|
|
248,073
|
|
Depreciation and amortization
|
|
|
11,719
|
|
|
|
40,447
|
|
|
|
(28,728
|
)
|
Reorganization of the equity of the legal acquirer
|
|
|
-
|
|
|
|
148,108
|
|
|
|
(148,108
|
)
|
Amortization of capitalized offering costs
|
|
|
218,280
|
|
|
|
-
|
|
|
|
218,280
|
|
Other current assets
|
|
|
(557,360
|
)
|
|
|
181,287
|
|
|
|
(738,647
|
)
|
Net cash provided by investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash due to VIE Agreement with China Flying
|
|
|
76,075
|
|
|
|
2,222,025
|
|
|
|
(2,145,950
|
)
|
Net cash provided by financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issue of convertible notes
|
|
|
6,522,563
|
|
|
|
5,825,360
|
|
|
|
697,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overview of Our Business
Through Guangzhou Tanke, our principal operating business, we are an animal nutrition and feed additive provider in China. Our products are distinguished from traditional artificial feed additives in that they are environmentally-friendly and are designed to optimize the growth and health of livestock such as pigs and cattle, as well as farmed fish.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation
We have prepared the accompanying consolidated unaudited financial statements of the Company in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial statements and with instructions to Form 10-Q pursuant to the rules and regulations of Securities and Exchange Act of 1934, as amended (the "Exchange Act") and Article 8-03 of Regulation S-X under the Exchange Act. In the opinion of our management, we have included all adjustments considered necessary (consisting of normal recurring adjustments) for a fair presentation and for the financial statements to not be misleading.
Operating results for the three months ended March 31, 2011 are not indicative of the results that may be expected for the fiscal year ending December 31, 2011. You should read these unaudited consolidated financial statements in conjunction with the audited financial statements and the notes thereto included in the Company's Form 8-K/A for the year ended December 31, 2010 filed with the SEC on May 13, 2011.
The Company’s consolidated financial statements have been stated in US dollars.
Basis of consolidation
The consolidated financial statements include the financial statements of the Company and its subsidiaries (collectively the “Group''). All significant inter-company balances and transactions within the Group have been eliminated.
Use of Estimates
In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of the amount due from related parties, the net realizable value of inventories, the estimation of useful lives of property and equipment, and intangible assets. Actual results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash and amounts due from related parties. The Company places its cash with financial institutions with high credit ratings and quality. In addition, the Company conducts periodic reviews of the related party financial conditions and payment practices.
Approximately 99% of the Company’s revenue is generated from buyers in mainland China.
Concentration of Suppliers
|
All the Company’s suppliers are located in mainland China.
|
Cash and Cash Equivalents
|
The Company considers all highly liquid investments with initial maturities of three months or less to be cash equivalents. The Company maintains bank accounts in the PRC only.
|
Deposits that are restricted in use are classified as restricted cash. At March 31, 2011, restricted cash includes amounts deposited in escrow to pay for interest on the convertible notes and investor relations over the upcoming year. As of December 31, 2010, there was no restricted cash.
|
Trade and Other Receivables
|
The Company periodically assesses its accounts receivable for collectability on a specific identification basis. If collectability of an account becomes unlikely, an allowance is recorded for that doubtful account. Once collection efforts have been exhausted, the account receivable is written off against the allowance. The Company does not require collateral for trade or other accounts receivable.
|
Included in other receivables is $3,999,990 which is a portion of the proceeds from the private placement that has been quarantined by the Chinese State Administration of Foreign Exchange. We received the funds in April 2011.
|
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the weighted average method. The cost of inventories includes the purchase cost and other costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale.
|
At March 31, 2011 and December 31, 2010, the Company did not make any provision for slow-moving or defective inventories.
|
Property and equipment are stated at cost less accumulation depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use.
|
Depreciation of property and equipment is calculated using the straight-line method over their estimated useful lives. The estimated useful lives are as follows:
|
Buildings
|
15-20 years
|
Plant and machinery
|
3-20 years
|
Motor vehicle
|
10 years
|
Office equipment
|
3-10 years
|
Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred.
|
Upon sale or disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount less the proceeds from disposal is charged or credited to income.
|
The intangible asset consists of land use rights which are recorded at cost less accumulated amortization. Amortization is provided over the term of the land use right agreement on a straight-line basis.
|
Impairment of Long-lived Assets
|
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company recognizes impairment of long-lived assets in the event that the net book values of such assets exceed the future undiscounted cash flows attributable to such assets.
Statutory and Discretionary Reserves
In accordance with the laws of the PRC, the Company segregates 10% of its net income as statutory surplus reserves to (a) cover any deficit, (b) increase production and (c) increase registered capital. To date, it has segregated $373,406 related to the statutory reserve requirements. Until the Company achieves an additional $708,243 of reserves, it is prohibited from paying dividends.
In addition, the Company segregates discretionary reserves, for which there is no specific amount required. These reserves are mainly for company development. To date, the Company has accrued $153,992 in discretionary reserves, but has not spent any of this reserve on Company development.
|
Revenue Recognition
|
The Company recognizes revenue in accordance with ASC 605-10, Revenue Recognition, and SEC Staff Accounting Bulletin No. 104. Pursuant to these pronouncements, revenue is recognized when all of the following criteria are met:
|
- Persuasive evidence of an arrangement exists;
|
- Delivery has occurred or services have been rendered;
|
- The seller's price to the buyer is fixed or determinable; and
|
- Collectability is reasonably assured.
|
The Company’s revenue is generated through the wholesale and retail sale of livestock feed including organic trace mineral additives, functional regulation additives, herbal medicinal additives and raw materials. Before the Company recognizes revenue on these product sales, written purchase orders and contracts are received in advance of all shipments of goods to customers. For sales within the Company’s own province, delivery is made by Company employees. Such delivery occurs on the same day as shipment. For delivery outside the province, shipment is made through a separate logistics company that assumes the risk of loss. Revenue is recognized upon shipment of goods to the customers. The Company typically does not incur bad debt losses because this type of loss is deducted from the salesperson’s compensation, thereby mitigating the loss to the Company. Therefore, collectability is reasonably assured.
|
Revenue is presented net of sales returns, which are not significant. However, the Company continually performs analyses of returns and records a provision at the time of sale if necessary. As of March 31, 2011 and December 31, 2010, it was determined that potential returns and allowances were not material so the Company did not record a provision for returns. The Company revisits this estimate regularly and adjusts it if conditions change.
|
Cost of revenue consists primarily of material cost, labor cost, rent of land allocated to production, overhead associated with the manufacturing process and directly related expenses.
|
Research and Development Costs
|
Research and development costs are charged to expense as incurred and are included in operating expenses.
Value Added Tax
Value added tax is recorded into operations on a gross basis, where the value added tax is included as part of the Company’s revenue and there is a corresponding expense for the amount due to the tax authorities. There is no value added tax included in the Company’s accounts receivable, but rather it is recorded gross on the balance sheet, with the asset being recorded in other assets and the liability included in the Company’s accounts payable.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes pursuant to ASC 740, “Income Tax”. Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and loss carry forwards and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
|
Comprehensive income is defined to include all changes in equity except those resulting from net income or loss, investments by owners and distributions to owners. The Company’s only component of other comprehensive income is the foreign currency translation adjustments.
|
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
Foreign Currency Translation
The Company and its subsidiaries maintain financial statements in the functional currency of each entity. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.
The financial statements of each entity are prepared using the functional currency, and have been translated into United States dollars (“US$” or “$”). Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates for the period. Stockholders’ equity is translated at historical exchange rates. Any translation adjustments are included as a foreign exchange adjustment in other comprehensive income, a component of stockholders’ equity.
RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.
Financial instruments
The carrying amounts of all financial instruments except the convertible notes approximate fair value. The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, due to/from related parties, notes payable, other payable and accrued liabilities and income tax payable approximate their fair values due to the short-term nature of these items. The carrying amounts of long-term borrowings other than the convertible notes approximate the fair value based on the Company’s expected borrowing rate for debt with similar remaining maturities and comparable risk.
Convertible notes are not carried at fair value due to the discounts for warrants and the beneficial conversion feature. As the interest on these notes approximates market interest, the fair value is their face value of $7,670,071.
It is management’s opinion that the Company is not exposed to significant interest, price or credit risks arising from these financial instruments.
Recent Accounting Updates
In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13 “Multiple-Deliverable Revenue Arrangements — a consensus of the FASB Emerging Issues Task Force” that provides amendments to the criteria for separating consideration in multiple-deliverable arrangements. As a result of these amendments, multiple-deliverable revenue arrangements will be separated in more circumstances than under existing U.S. GAAP. The ASU does this by establishing a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. A vendor will be required to determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. This ASU also eliminates the residual method of allocation and will require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates any discount in the overall arrangement proportionally to each deliverable based on its relative selling price. Expanded disclosures of qualitative and quantitative information regarding application of the multiple-deliverable revenue arrangement guidance are also required under the ASU. The ASU does not apply to arrangements for which industry specific allocation and measurement guidance exists, such as long-term construction contracts and software transactions. The ASU is effective beginning January 1, 2011. The adoption of this ASU did not have a material impact on the Company’s financial statements.
3. INVENTORIES
Inventories consisted of the following.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
804,351
|
|
|
$
|
653,212
|
|
Finished goods
|
|
|
256,874
|
|
|
|
182,631
|
|
Work in progress
|
|
|
154,452
|
|
|
|
472,060
|
|
Packaging material
|
|
|
41,553
|
|
|
|
46,379
|
|
|
|
$
|
1,257,231
|
|
|
$
|
1,354,282
|
|
4. ACCOUNTS RECEIVABLE
Account receivables consisted of the following.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
1,849,070
|
|
|
$
|
1,911,065
|
|
Less: Allowance for doubtful accounts
|
|
|
(144,544
|
)
|
|
|
(143,097
|
)
|
|
|
$
|
1,704,526
|
|
|
$
|
1,767,968
|
|
5. OTHER RECEIVABLES
The other receivables balance mainly consists of the amount of $3,999,990 quarantined by the Chinese State Administration of Foreign Exchange. It was the cash investment from China Flying to the Company’s PRC subsidiary Kanghui Agricultural, and the funds were received by Kanghui Agricultural as of April 12, 2011.
6. OTHER CURRENT ASSETS
Other current assets consisted of the following.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Prepayment to suppliers
|
|
$
|
172,372
|
|
|
$
|
115,078
|
|
Deferred expenses
|
|
|
66,392
|
|
|
|
49,768
|
|
Offering costs, net
|
|
|
1,405,722
|
|
|
|
-
|
|
|
|
$
|
1,644,486
|
|
|
$
|
164,846
|
|
Deferred expenses primarily consist of accrued input value added tax, or VAT which has not been declared to the tax bureau.
In connection with the private placement, the Company incurred $1,624,002 of closing costs. These costs have been reflected as other current assets and are being amortized using the interest method over the expected life of the related convertible notes payable. Amortization of these costs is recorded as interest expense. As of March 31, 2011, the remaining book value of these closing costs amounted to $1,405,722.
7. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
4,310,470
|
|
|
$
|
1,507,916
|
|
Plant and equipment
|
|
|
622,487
|
|
|
|
613,287
|
|
Motor vehicles
|
|
|
53,443
|
|
|
|
52,908
|
|
Office equipment
|
|
|
310,774
|
|
|
|
83,599
|
|
|
|
|
5,297,174
|
|
|
|
2,257,710
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation
|
|
|
750,883
|
|
|
|
703,121
|
|
|
|
$
|
4,546,291
|
|
|
$
|
1,554,589
|
|
The Group has buildings on the site it occupies, including factory buildings. Due to lack of a Land Use Right Certificate, the Group is unable to apply for the Property Ownership Certificate for the buildings. However, as the buildings are in use, the Group depreciates them over their expected useful lives. During the quarter ended March 31, 2011, the Company’s factory campus construction project was completed and the costs were moved from construction in process to the buildings account. Upon placement in service, the Company began depreciating them.
|
8. INTANGIBLE ASSET
The intangible asset is a land use right and consisted of the following.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Deposit for land use right
|
|
$
|
290,547
|
|
|
$
|
286,892
|
|
On November 21, 2003, the Group applied to the Government of Huaqiao Town, Huadu District, Guangzhou, for the land use right of No. 2 Industry Area of Huaqiao Town (i.e., Laohutou Lot, Wangongtang) covering an area of around 430,000 square feet. The total consideration for the land use right is $598,536. As of March 31, 2011, the Group has paid $290,547 of this amount.
While the final approval of the application of land use right is pending, the Group entered into an agreement on April 15, 2006 to lease the land from its beneficial owner until such time as a land use certificate is issued by the government or May 21, 2021, whichever occurs first. Until that time, the lease is at will and payments under the terms of the lease are $8,800 per year.
9.
|
OTHER PAYABLE AND ACCRUED LIABILITIES
|
Other payable and accrued liabilities consisted of the following.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Other payables
|
|
$
|
261,316
|
|
|
$
|
911
|
|
Staff welfare payable
|
|
|
66,849
|
|
|
|
96,417
|
|
Value added tax payable
|
|
|
5,820
|
|
|
|
50,230
|
|
Other tax payables
|
|
|
56,241
|
|
|
|
44,740
|
|
|
|
$
|
390,226
|
|
|
$
|
192,298
|
|
Other payables represent loans from third parties which are interest free, unsecured and repayable on demand.
10. LONG-TERM BORROWINGS
The details of the Company’s long-term borrowings are as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Bank loans (uncollateralized)
|
|
$
|
2,059,055
|
|
|
$
|
1,358,962
|
|
Less: Current portion
|
|
|
(915,135
|
)
|
|
|
(905,975
|
)
|
|
|
$
|
1,143,920
|
|
|
$
|
452,987
|
|
The bank loans consist of $1,296,443 (RMB8,500,000) and $762,613 (RMB5,000,000), bearing interest at 5.4% and 5.85% per annum, maturing on May 21, 2012 and January 30, 2013, respectively.
11. GOVERNMENT GRANT
The government grant liability represents an advance from the Chinese government for research and development projects. The Company has recorded the grants received as a government grant liability, and off-set the liability amount when the related research and development activities are performed
12. CONVERTIBLE NOTES PAYABLE
On February 9, 2011, the Company entered into a Securities Purchase Agreement with individual investors relating to a private placement transaction by the Company (the “Private Placement”) of 6,669,627 units. Each unit consisted of a $1.15 principal amount 8% Senior Convertible Note (the “Notes”) and a Common Stock Purchase Warrant (the “Warrants”) to purchase one share of the Company’s common stock at an exercise price of $1.40 per share.
As a result of the Private Placement, the Company offered and sold $7,670,071 worth of Notes convertible into 6,669,627 shares of common stock. The Notes are payable 24 months from February 9, 2011 with an interest rate of 8% per annum payable semiannually in arrears. The Company placed in escrow an amount of the proceeds of the Private Placement equal to one semi-annual interest payment on the Notes to secure prompt interest payments. Until such time as 75% of the Notes are converted into shares of Common Stock, if such escrow is depleted in order to make interest payments, the Company will replenish such escrow amount. At the option of the holder, the Notes may be converted into Common Stock at a price of $1.15 per share, which is subject to customary weighted average and stock based anti-dilution protection. The issuance of the Notes was not registered under the Securities Act as such issuance was exempt from registration under Section 4(2) of the Securities Act and Regulation D.
The Notes contain customary events of default and affirmative and negative covenants of the Company, including negative covenants which restrict the Company’s ability to do the following (among other things) without the consent of the investors: (i) incur, or permit to exist, any indebtedness for borrowed money in excess of (A) US$3,000,000 during the twelve (12) month period beginning on February 9, 2011, or (B) US$5,000,000 during the two-year period beginning on February 9, 2011 and ending on February 9, 2013 (the maturity date of the Notes), except in the ordinary course of the Company’s business; (ii) lend or advance money, credit or property to or invest in (by capital contribution, loan, purchase or otherwise) any person or entity in excess of US$1,000,000 except: (A) investments in United States Government obligations, certificates of deposit of any banking institution with combined capital and surplus of at least $200,000,000; (B) accounts receivable arising out of sales in the ordinary course of business; and (C) inter-company loans between and among the Company and its subsidiaries; (iii) pay dividends or make any other distribution on shares of the capital stock of the Company; (iv) create, assume or permit to exist, any lien on any of the Company’s property or assets now owned or hereafter acquired, subject to existing liens and certain exceptions; (v) assume guarantees, subject to certain exceptions; (vi) engage in “sale-leaseback” transactions, subject to certain exceptions; (vii) make capital expenditures in excess of US$5,000,000 in any fiscal year, subject to certain exceptions; and (viii) materially alter the Company’s business.
In connection with the issuance of the Notes, we entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the investors which sets forth the rights of the investors to have the shares of common stock underlying the Notes and Warrants registered with the SEC for public resale. Pursuant to the Registration Rights Agreement, we agreed to file, no later than April 11, 2011, a registration statement to register the shares underlying the Notes and the Warrants and to have such registration statement effective no later than September 18, 2011. If the registration statement was not filed by April 11, 2011 (the “Filing Failure”), is not effective by September 18, 2011 (the “Effectiveness Failure”) or if, after the effective date, sales of securities included in the registration statement cannot be made (including, without limitation, because of a failure to keep the registration statement effective, to disclose such information as is necessary for sales to be made pursuant to the registration statement, to register a sufficient number of shares of Common Stock or to maintain the listing of the Common Stock) (a “Maintenance Failure”) then, as liquidated damages (and in complete satisfaction and to the exclusion of any claims or remedies inuring to any holder of the securities) the Company is required to pay an amount in cash equal to 1% of the aggregate purchase price paid by the Investors on each of the following dates: (i) 20 days following the date of a Filing Failure; (ii) 30 days following the initial day of a Maintenance Failure; (iii) on every thirtieth day thereafter (pro-rated for periods totaling less than thirty days) until such failure is cured; (iv) on every thirtieth day after the day of an Effectiveness Failure and thereafter (pro rated for periods totaling less than thirty days) until such Effectiveness Failure is cured; (v) on every thirtieth day after the initial day of a Maintenance Failure and thereafter (pro rated for periods totaling less than thirty days) until such Maintenance Failure is cured. The payments to be made by the Company are limited to a maximum of 6% of the aggregate amount paid by the Investors ($460,204.29). As of March 31, 2011, the Company did not expect to incur any registration delay payments and has not accrued any such payments. The Company will continue to assess the likelihood of payments under this arrangement, and if necessary will recognize these estimates into earnings in the period in which they become likely in accordance with ASC 825-20,
Registration Payment Arrangements
.
The warrants issued as a component of the units were valued using the Black-Scholes method using the following assumptions: (1) estimated life of warrants of 3 years, (2) annualized volatility of 100%, (3) fair value of stock as of grant date of $1.15, (4) exercise price of $1.40, (5) annual dividend rate of 0%, and (6) discount rate of 1.34%. Such calculation resulted in a warrant value of $4,470,536.
In accordance with ASC 470-20-25, the proceeds of the unit offering were allocated to the Notes and warrants based on their relative fair values on a weighted average basis, with the resulting allocated value of the warrants of $2,824,350 being classified to additional paid in capital. Such discount to the Notes is being amortized over their term of two years.
The beneficial conversion feature associated with the issuance of the above Notes, amounted to $2,824,350, which has also been recorded as a discount to the convertible notes payable and is being amortized over the life of the Notes.
As of March 31, 2011, the book value of the Notes amounted to $2,780,604, which consisted of the aggregate face value of $7,670,071, less the remaining discount of $4,889,467.
In connection with the Private Placement, the Company incurred $1,624,002 of closing costs. These costs have been reflected as other current assets and are being amortized over the life of the Notes. As of March 31, 2011, the remaining book value of these closing costs amounted to $1,405,722, that are reflected in other current assets in the accompanying consolidated balance sheet.
13. SHAREHOLDERS’ EQUITY
On February 9, 2011, the Company issued 666,973 warrants to purchase shares of common stock at an exercise price of $1.15 per share. The warrants were valued using the Black-Scholes method using the following assumptions: 1) estimated life of warrants of 3 years, 2) annualized volatility of 100%, 3) fair value of stock as of grant date of $1.15, annual dividend rate of 0%, and 4) discount rate of 1.34%. The warrants had a value of $476,494, which has been recorded in other current assets as a component of the Private Placement offering costs (see Note 11).
14. INCOME TAX
The Company is a “domestic enterprise” that is registered and operated in Guangzhou, the PRC.
The PRC's legislative body, the National People's Congress, adopted the unified Enterprise Income Tax ("EIT") Law on March 16, 2007. This new tax law replaces the existing separate income tax laws for domestic enterprises and foreign-invested enterprises and became effective on January 1, 2008. Under the new tax law, a unified income tax rate is set at 25% for both domestic enterprises and foreign-invested enterprises. However, there is a transition period for enterprises, whether foreign-invested or domestic, that are currently receiving preferential tax treatments granted by relevant tax authorities. Enterprises that are subject to an enterprise income tax rate lower than 25% may continue to enjoy the lower rate and will transit into the new rate over a five year period beginning on the effective date of the EIT Law. Enterprises that are currently entitled to exemptions for a fixed term may continue to enjoy such treatment until the exemption term expires. Income tax expense for the three months ended March 31, 2011 and 2010 represents the provision for current income tax expenses in the PRC.
Bio Co., a subsidiary of Guangzhou Tanke Co., is a joint venture with a foreign entity that received a full exemption from income taxes in 2007 and 2008 and half rate reduction for years 2009, 2010 and 2011 in accordance with the Law of the People's Republic of China on Income Tax of Enterprises with Foreign Investment and Foreign Enterprises and Notification of the State Council on Carrying out the Transitional Preferential Policies concerning Enterprise Income Tax (Guofa (2007) No. 39).
As of March 31, 2011 and December 31, 2010, the income tax payable for the Company amounted to $906,935 and $699,637, respectively. Upon the date of circulating Form 10-Q, the Company has not settled the income tax payables for the year ended December 31, 2010, the management of the Company decides to settle the income tax payable over the next three quarters of 2011.
Significant components of the Company’s deferred tax asset are as follows.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
|
Deferred tax asset
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
36,136
|
|
|
$
|
17,887
|
|
The Company is not subject to United States income tax. Furthermore, the Company is audited every year by an agency of the Chinese tax authority. Consequently, there are no uncertain tax positions requiring accrual or disclosure or timing differences in accordance with ASC 740-10,
Income Taxes.
15. RELATED PARTY TRANSACTIONS
Apart from the transactions and balances disclosed elsewhere in the financial statements, the Group had no material transactions with its related parties during the years presented.
16. SEGMENT INFORMATION
Tanke operates in four segments: organic trace mineral additives, functional regulation additives, herbal medicine additives and other revenues. Management oversees each of these operations separately.
Organic trace mineral additives constitute the largest and fastest growing area of our business. These are various minerals added to animal feed to provide a balanced diet. Functional feed additives are widely used to enhance the properties of other products, improve feed efficiency and stimulate the rapid maturation of the immune system. Chinese herbal feed additives utilize traditional Chinese medicine theory to improve an animal’s digestion and appetite and to regulate the yin and yang balance of an animal’s health. Other revenue consists of the reselling of raw materials to customers.
Property, equipment and other assets are shared and not tracked separately by segment. Following is a breakdown of revenue and costs of sales by segment
|
Three Months Ended March 31,
|
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
Segment revenues
|
|
|
|
|
|
|
|
|
Organic Trace Mineral Additives
|
|
$
|
4,862,113
|
|
|
$
|
2,699,478
|
|
Functional Regulation Additives
|
|
|
710,112
|
|
|
|
422,022
|
|
Herbal Medicinal Additives
|
|
|
1,252
|
|
|
|
92,099
|
|
Other
|
|
|
367,992
|
|
|
|
141,327
|
|
|
|
$
|
5,941,470
|
|
|
$
|
3,354,927
|
|
|
|
|
|
|
Segment costs of sales
|
|
|
|
|
Organic Trace Mineral Additives
|
|
$
|
2,879,446
|
|
|
$
|
1,596,410
|
|
Functional Regulation Additives
|
|
|
423,680
|
|
|
|
244,093
|
|
Herbal Medicinal Additives
|
|
|
796
|
|
|
|
29,943
|
|
Other
|
|
|
211,145
|
|
|
|
125,543
|
|
|
|
$
|
3,515,066
|
|
|
$
|
1,995,988
|
|
|
|
|
|
|
Segment gross profit
|
|
|
|
|
Organic Trace Mineral Additives
|
|
$
|
1,982,668
|
|
|
$
|
1,103,068
|
|
Functional Regulation Additives
|
|
|
286,432
|
|
|
|
177,929
|
|
Herbal Medicinal Additives
|
|
|
456
|
|
|
|
62,156
|
|
Other
|
|
|
156,848
|
|
|
|
15,785
|
|
|
|
$
|
2,426,404
|
|
|
$
|
1,358,939
|
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our financial statements and the related notes. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as its plans, objectives, expectations and intentions. Its actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements.
As a result of the Share Exchange and the VIE Agreements, the Company, through Kanghui Agricultural, its indirect wholly owned subsidiary, assumed management of the business activities of Guangzhou Tanke and has the right to appoint all executives and senior management and the members of the board of directors of Guangzhou Tanke. As used in this section, the terms “we”, “our”, “us” and the “Company” refer to the Company, our direct and indirect subsidiaries and Guangzhou Tanke, our principal operating business.
Overview
We are one of the leading animal nutrition and feed additive providers in China and in 2001 were designated a certified high-tech company by the Guangzhou City Commission of Science and Technology as recognition for new technology developed by us in the agriculture industry. Our products optimize the growth and health of livestock such as pigs and cattle, as well as farmed fish, and seek to capitalize on China’s growing demand for safe and reasonably priced food. Feed additives are utilized in China at less than half the rate of the United States and Europe, and we have a significant growth opportunity as Chinese farmers and ranchers include a greater amount of increasingly sophisticated additive to their feed.
We have more than 150 employees, with 40 engaged in sale or sales-related activities. Our headquarters and manufacturing facilities are in a state-of-the-art 34,000 square-meter facility in the capital city of Guangzhou, in Guangdong province. We currently produce 21 branded feed additives, with each brand available in seven different mixes that correspond to different states of an animal’s life cycle.
Our major products address most key market categories within China’s animal feed additive industry including: Organic Trace Mineral Additives, which account for approximately 75% of our revenue, Feed Acidifiers, Seasonings and Flavor Enhancers, which account for approximately 17% of our revenue, and Herbal Medicinal Additives, which account for approximately 2% of our revenue. Our extensive distribution network reaches China’s top 10 feed producers and the 500 largest animal farming operations. We currently market 21 different brands of feed additives at various price points to meet the demands of existing and prospective customers. Within each brand there are seven different mixes that correspond to the different growth stages of an animal’s life cycle. While the majority of our sales are domestic, international sales, mainly in Southeast Asia, Latin American and other developing countries, currently account for approximately 1.64% of our total sales.
Critical Accounting Policies
While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Basis of Presentation
Our consolidated financial statements have been stated in US dollars and prepared in accordance with generally accepted accounting principles in the United States of America. All significant intercompany balances have been eliminated.
Use of Estimates
In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of due from related parties, the net realizable value of inventories, the estimation of useful lives of property and equipment, and intangible assets. Actual results could differ from those estimates.
Revenue Recognition
We recognize revenue in accordance with Accounting Standards Codification (“ASC”) 605-10,
Revenue Recognition,
and SEC Staff Accounting Bulletin No. 104. Pursuant to these pronouncements, revenue is recognized when all of the following criteria are met:
- Persuasive evidence of an arrangement exists;
- Delivery has occurred or services have been rendered;
- The seller's price to the buyer is fixed or determinable; and
- Collectability is reasonably assured.
Our revenue is generated through the wholesale and retail sale of feed additives for pigs and cattle as well as farmed fish, including organic trace mineral additives, functional regulation additives, herbal medicinal additives and raw materials. Before we recognize revenue on these product sales, written purchase orders and contracts are received in advance of all shipments of goods to customers. For sales within our own province, delivery is made by our employees. Such delivery occurs on the same day as shipment. For delivery outside the province, shipment is made through a separate logistics company that assumes the risk of loss. Revenue is recognized upon shipment of goods to the customers. We typically does not incur bad debt losses because this type of loss is deducted from the salesperson’s compensation, thereby mitigating the loss to the Company. Therefore, collectability is reasonably assured.
|
Revenue is presented net of sales returns, which are not significant. However, the Company continually performs analyses of returns and records a provision at the time of sale if necessary. As of March 31, 2011, it was determined that potential returns and allowances were not material so the Company did not record a provision for returns. The Company revisits this estimate regularly and adjusts it if conditions change.
|
Research and Development Costs
Research and development costs are charged as expense when incurred and included in operating expenses.
Foreign Currency Translation
The Company and its subsidiaries maintain financial statements in the functional currency of each entity. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.
The financial statements of each entity are prepared using the functional currency, and have been translated into United States dollars (“US$” or “$”). Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates for the period. Stockholders’ equity is translated at historical exchange rates. Any translation adjustments are included as a foreign exchange adjustment in other comprehensive income, a component of stockholders’ equity.
RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.
Results of Operations
Results of Operations for the Periods Ended March 31, 2011 versus 2010
Revenue, Costs of Sales and Gross Profit
We operate in four segments: (1) Organic Trace Mineral Additives, (2) Functional Regulation Additives, (3) Herbal Medicinal Additives and (4) Other. Management tracks each of these operations separately.
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Organic Trace Mineral Additives
|
|
$
|
4,862,113
|
|
|
$
|
2,699,478
|
|
|
$
|
2,162,635
|
|
|
|
80
|
%
|
Functional Regulation Additives
|
|
|
710,112
|
|
|
|
422,022
|
|
|
|
288,090
|
|
|
|
68
|
%
|
Herbal Medicinal Additives
|
|
|
1,252
|
|
|
|
92,099
|
|
|
|
(90,847
|
)
|
|
|
-99
|
%
|
Other
|
|
|
367,992
|
|
|
|
141,327
|
|
|
|
226,665
|
|
|
|
160
|
%
|
|
|
$
|
5,941,470
|
|
|
$
|
3,354,927
|
|
|
|
2,586,543
|
|
|
|
77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment costs of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Organic Trace Mineral Additives
|
|
$
|
2,879,446
|
|
|
$
|
1,596,410
|
|
|
$
|
1,283,036
|
|
|
|
80
|
%
|
Functional Regulation Additives
|
|
|
423,680
|
|
|
|
244,093
|
|
|
|
179,587
|
|
|
|
74
|
%
|
Herbal Medicinal Additives
|
|
|
796
|
|
|
|
29,943
|
|
|
|
(29,147
|
)
|
|
|
-97
|
%
|
Other
|
|
|
211,145
|
|
|
|
125,543
|
|
|
|
85,602
|
|
|
|
68
|
%
|
|
|
$
|
3,515,066
|
|
|
$
|
1,995,988
|
|
|
|
1,519,078
|
|
|
|
76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Organic Trace Mineral Additives
|
|
$
|
1,982,668
|
|
|
$
|
1,103,068
|
|
|
$
|
879,599
|
|
|
|
80
|
%
|
Functional Regulation Additives
|
|
|
286,432
|
|
|
|
177,929
|
|
|
|
108,503
|
|
|
|
61
|
%
|
Herbal Medicinal Additives
|
|
|
456
|
|
|
|
62,156
|
|
|
|
(61,700
|
)
|
|
|
-99
|
%
|
Other
|
|
|
156,848
|
|
|
|
15,785
|
|
|
|
141,063
|
|
|
|
894
|
%
|
|
|
$
|
2,426,404
|
|
|
$
|
1,358,939
|
|
|
|
1,067,465
|
|
|
|
79
|
%
|
Following is comparison of our revenue, costs of sales and gross profit by segment for the three months ended by March 31, 2011 and 2010.
Organic Trace Mineral Additives
Organic trace mineral additives constitute the largest and fastest growing area of our business. We are one of China’s largest domestic providers of organic trace mineral additives, specializing in the development and production of chelated organic trace mineral additives. Our current trace mineral manufacturing facility is the largest chelating facility in China and has the capacity to produce approximately 250 metric tons of organic trace minerals per week.
Revenue from organic trace mineral additives in the three months ended March 31, 2011 increased by $2,162,635 or 80% from the level of the same period in 2010, due to a volume variance. This revenue accounted for approximately 82% of our revenues for the three months ended March 31, 2011, up from 78% in the first quarter of 2010. Both periods carried a gross profit margin of approximately 41%.
We have adopted a lower pricing strategy as compared to its competitors and we are able to increase the volume of our sales. This strategy allowed us better market penetration, both to existing and new customers; and the increase in revenue from this segment is due entirely to the pricing strategy described above. Going forward, we will continue monitoring the selling prices to balance market penetration with profitability.
Functional Regulation Additives
Functional feed additives are widely used to enhance the properties of other products, improve feed efficiency and stimulate the rapid maturation of the immune system.
We currently produce two types of functional regulation additives: feed acidifiers and flavor enhancers. Feed acidifiers are used to prevent microbial degradation of raw materials or finished feeds and to maintain the quality of feed. Flavor enhancers are used to improve feed palatability, enhance animal appetite and stimulate saliva, gastric and pancreatic juices and other digestive juice secretion and gastrointestinal motility and ultimately feed consumption and yield from production animals.
Revenue from functional regulation additives accounted for approximately 12% and 13% of Tanke’s revenues in the three months ended March 31, 2011 and 2010, respectively; and it carried a gross profit margin of approximately 40% in 2011, compared to 42% in 2010.
In three months ended March 31, 2011, revenue from functional regulation additives increased by $288,090, or 68% from the level in the same period of 2010 due primarily to increases in sales to existing customers. Like the increase in organic trace mineral additive revenue, our revenue from functional regulation additives increased mainly due to our lower pricing strategy in which we price the product less than our competitors. The gross profit margins for the three months ended March 31, 2011 and 2010 are 40% and 42%, respectively.
Herbal Medicinal Additives
Chinese herbal feed additives utilize traditional Chinese medicine theory to improve an animal’s digestion and appetite and to regulate the yin and yang balance of an animal’s health.
Herbal medicines come from plants, plant extracts, fungal and bee products, minerals, shells and certain animal parts. Compared to synthetic antibiotics or inorganic chemicals, these naturally-derived products are less toxic, residue free and thought to be ideal feed additives in food animal production.
Revenue from herbal medicinal additives accounted for approximately 0.02% of our revenues in the three months ended March 31, 2011, down from 3% in that of 2010, and carried a gross profit margin of approximately 36%, down from 67% in the same period of 2010.
In the three months ended March 31, 2011, revenue from herbal medicinal additives decreased by $90,874, or 99% from that in the same period of 2010. This is due to shrinkage of market demand, as well as us focusing more on the organic trace mineral additive products. Compared with the comparable period in 2010, the gross profit from this segment decreased by $61,700, or 99% due to the decreased sales.
Other (raw materials)
Other revenue mainly consists of buying and then reselling raw materials, which for the period ended March 31, 2011 amounted to $355,290. We also earned a government subsidy of $12,702.
Revenue from raw material sales accounted for approximately 6% of our revenue in the three months ended March 31, 2011, up from 4% in the same period of 2010, and carried a gross profit margin of approximately 39%, compared to 11% of that in the first quarter of 2010.
During the first quarter of 2011, revenue from raw materials increased by $213,963, or 151% from the level in the same period of 2010. As described above in the descriptions of activity in our other product lines, there was a large fluctuation for the price of raw materials in 2010 and 2011. As the raw material is imported and resold to other feed manufacturers, the profit margins in general are lower. But with increased demand, there is more opportunity to increase the profit margin.
We evaluate the performance of our operating segments based on segment revenue and gross profit, and management uses aggregate segment gross profit as a measure of the overall performance of the business. We believe that information about aggregate segment gross profit assists investors by allowing them to evaluate changes in the gross profit of our various offerings separate from factors other than product offerings that affect net income. The following table reconciles aggregate segment gross profit to income before income taxes.
|
|
Three Months ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
Increase / (Decrease)
|
|
|
2011
|
|
|
2010
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate segment gross profit
|
|
$
|
2,426,404
|
|
|
$
|
1,358,939
|
|
|
$
|
1,067,465
|
|
|
|
78.6
|
%
|
Selling expenses
|
|
|
585,250
|
|
|
|
433,314
|
|
|
|
151,936
|
|
|
|
35.1
|
%
|
Administrative expenses
|
|
|
2,544,387
|
|
|
|
108,429
|
|
|
|
2,435,958
|
|
|
|
2246.6
|
%
|
Depreciation and amortization
|
|
|
11,719
|
|
|
|
11,468
|
|
|
|
251
|
|
|
|
2.2
|
%
|
Income from operations
|
|
|
(714,952
|
)
|
|
|
805,728
|
|
|
|
(1,520,680
|
)
|
|
|
-188.7
|
%
|
Foreign exchange gains/(losses), net
|
|
|
(79,046
|
)
|
|
|
778
|
|
|
|
(79,824
|
)
|
|
|
-10260.2
|
%
|
Interest income
|
|
|
1,390
|
|
|
|
1,678
|
|
|
|
(288
|
)
|
|
|
-17.2
|
%
|
Amortization of discount on notes
|
|
|
(759,234
|
)
|
|
|
-
|
|
|
|
(759,234
|
)
|
|
|
N/A
|
|
Interest expense
|
|
|
(259,454
|
)
|
|
|
(425
|
)
|
|
|
(259,029
|
)
|
|
|
60948.0
|
%
|
Income before income taxes
|
|
|
(1,811,296
|
)
|
|
|
807,759
|
|
|
|
(2,619,055
|
)
|
|
|
-324.2
|
%
|
Income tax expense
|
|
|
213,355
|
|
|
|
103,135
|
|
|
|
110,220
|
|
|
|
106.9
|
%
|
Net (loss) income
|
|
$
|
(2,024,651
|
)
|
|
$
|
704,624
|
|
|
|
(2,729,275
|
)
|
|
|
-387.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest in earnings of subsidiary
|
|
|
-
|
|
|
|
(178,699
|
)
|
|
|
178,699
|
|
|
|
-100.0
|
%
|
Net (loss) income available to shareholders
|
|
$
|
(2,024,651
|
)
|
|
$
|
525,925
|
|
|
|
(2,550,576
|
)
|
|
|
-485.0
|
%
|
Selling and Administrative Expenses
Selling expenses for the three months ended March 31, 2011 amounted to $585,250 compared with $433,314 in 2010, an increase of $151,936 or 35.1%. The increase in selling expenses was in line with the percentage increase of sales, which was mainly attributed to an increase in travel and meeting expenses for sales department staff to develop new customers and expand the market. The number of salespeople in 2011 was the same as 2010. Selling expenses primarily include travel expense, salaries, and transportation expense, which covers approximately 35%, 27%, and 9% of the total selling expenses, respectively.
Administrative expenses for the three months ended March 31, 2011 amounted to $2,544,387 compared with $108,429 for the same period of 2010, an increase of $2,435,958 and 2,246.6%. The increase in administrative expenses is primarily due to the issuance of 1,840,000 shares of common stock for consulting services provided, which resulted in additional expenses of $2,116,000, as well as increased expenses associated with our public filings.
Our selling, general and administrative expenses may fluctuate in the future due to a variety of factors, including, but not limited to:
|
|
Additional expenses as a result of becoming a reporting company including, but not limited to, director and officer insurance, compensation for the director, SEC reporting and compliance, transfer agent fees, additional staffing, professional fees and similar expenses;
|
|
|
Expenses resulting from developing new products or expansion of new markets, including travel and entertainment and advertising expenses.
|
Foreign Exchange Gains, Interest Income and Expense
Our foreign exchange loss for the three months ended March 31, 2011 was $79,046, as compared to a gain of $778 in 2010, representing a decrease of $79,824. The decrease in the loss was primarily due to the appreciated value of RMB compared to the USD during 2011.
Interest income remained consistent in the three months ended March 31, 2011 as compared to that of 2010 as our average cash savings remained approximately the same in each year. Interest expense increased during the three month ended March 31, 2011 by $40,749 and 9588% as compared to 2010, is mainly due to the issuance of convertible notes in February 2011 and the new long-term borrowing in January 2011.
The amortization of the discount on notes arose in 2011 is entirely due to the issuance of convertible note.
Our interest expense increased in 2011 due to the amortization of $218,280 of offering costs capitalized as a result of the private placement transaction entered into on February 9, 2011, as well as interest expense on the convertible notes payable issued in 2011.
Income Tax Expense
All of our income was generated from mainland China and was generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments, except for one subsidiary, Guangzhou Tanke Bio-Tech Co. Ltd, which obtained tax exemption on April 2007 from the State Tax Bureau of Huadu District, Guangzhou. Guangzhou Tanke Bio-Tech was a joint venture enterprise and was eligible for tax reduction and exemption, which enjoys the “two year exempt, three years half” benefits. These benefits are the result of a new tax law passed by the National People’s Congress of China in 2007. It means Tanke was exempt from tax for the first two years, which ended in 2008, and now pays one half the 25% tax rate for the next three years, through 2012.
Taking into consideration the new tax law, the effective statutory tax rate for Guangzhou Tanke Bio-Te Co. Ltd was 12.5% both for three months ended March 31, 2011 and 2010.
The income tax expense amounted to $213,355 for the three months ended March 31, 2011, an increase of $110,220 and 106.9% compared to the three months ended March 31, 2011, was attributed to the increase of taxable income for the three months ended March 31, 2011.
Liquidity and Capital Resources
As of March 31, 2011, and 2010 we had cash balances of $5,952,094 and $1,534,265, respectively. The following table provides detailed information about our net cash flow for all financial statement periods presented in this report. To date, we have financed our operations primarily by cash from operations, issuance of convertible notes and capital contribution by our stockholders.
The following table sets forth a summary of our cash flows for the periods indicated.
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|
Three Months ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
Net cash provided by (used in) operating activities
|
|
$
|
1,034,949
|
|
|
$
|
(124,969
|
)
|
Net cash provided by (used in) investing activities
|
|
|
(841,857
|
)
|
|
|
90,627
|
|
Net cash provided by (used in) financing activities
|
|
|
3,496,236
|
|
|
|
(249,736
|
)
|
Effects of exchange rate change on cash
|
|
|
40,741
|
|
|
|
468
|
|
Net increase (decrease) in cash
|
|
$
|
3,730,069
|
|
|
$
|
(283,610
|
)
|
Operating Activities
Net cash provided by operating activities was $1,034,949 for the three months ended March 31, 2011 compared to cash used of $124,689 for the three months ended March 31, 2010. Although we had a net loss of $2,024,651, this was mostly driven by non-cash expenses of $2,116,000 for common stock issued for services, as well as $759,234 for the amortization of discounts recorded on convertible notes payable issued during the quarter ended March 31, 2011. Excluding the impact of these non-cash expenses, our net income related to cash activities increased as compared to the same period in 2010, which is the main driver in improving the cash flows from operations.
Investing Activities
Net cash used in investing activities was $841,857 for the three months ended March 31, 2011 compared to cash provided in 2010 of $96,627, a change of $932,484. The increase in cash used in investing activities in 2011 was mainly due to the purchase of plant and equipment of $211,130, along with the additional restricted cash amounts of $706,802, resulting from a portion of the proceeds placed in escrow from our private placement transaction on March 31, 2011. The investment spending was offset by $76,075 in cash provided from the VIE agreement with China Flying.
Financing Activities
Net cash provided by financing activities was $3,496,236 for the three months ended March 31, 2011 compared to cash used in 2010 of $249,736, a change of $3,745,972. Although we had net proceeds of $6,522,563 from the issuance of convertible note, and the increase of bank borrowing of $696,551, there was a schedule payment from the shareholder of $277,112, the cash investment from China Flying to Kanghui of $3,999,990 was quarantined by the State Administration of Foreign Exchange as of March 31, 2011, and the fund was received by Kanghui as at April 12, 2011.
Going forward, we have no plans to borrow more from the bank, but rather will continue paying off the existing facility. Certain shareholders of the Company have signed a promissory note agreeing to repay $3,265,559 to us by June 30, 2012. As of March 31, 2011, the total outstanding balance relating to these promissory notes amounted to $2,760,060 of which $2,089,184 is scheduled to be collected during the subsequent twelve months, and the remaining $670,876 is scheduled for collection in 2012.
We have historically funded our operation primarily through cash generated from operations. Over the next twelve months, we intend to pursue organic and acquisitive growth and increase our market share in mainland China. We believe that our cash on hand and cash flow from operations will meet our present operating cash needs for the next 12 months. However, we will require additional cash resources to meet the cash requirements of our planned growth.
Additionally, we may require additional cash resources due to changed business conditions, implementation of our strategy to ramp up our marketing efforts and increase brand awareness, or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity, securities, convertible notes or warrants in the future.
Effect of Changes in the Foreign Exchange Rate
Upon translation of our financial statements into US Dollars for the purpose of financial reporting in the United States, the exchange rate between the Chinese Renminbi and the US Dollar can have an impact on the amount of reported cash on hand.
However all of our revenue is generated in China, and currently over 90% of its cost is within China. As a result, from an operational standpoint, a change in the exchange rate has relatively little impact on us. Such change is not expected to affect our liquidity in any significant way.
Economy and Inflation
Inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.
We have not experienced any significant cancellation in orders due to the downturn in the economy. Furthermore, we have also had only a small number of customer-requested delays in delivery or production.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements that have, or are reasonably likely to have a current or future effect on our financial statements.
Seasonality
Our operating results and operating cash flows historically have not been subject to significant seasonal variations. However, sales around Chinese New Year will be comparatively lower than other months. This pattern may change as a result of new market opportunities or new product introduction.
Recent Accounting Pronouncements
See Part 1 of the accompanying consolidated financial statements for a description of recent accounting pronouncements.
We do not anticipate that the adoption of these recent accounting pronouncements will have a material impact on our financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
Item 4
.
Controls and Procedures.
Disclosure Controls and Procedures.
We maintain disclosure controls and procedures as required under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of March 31, 2011, our management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures.
Based on that assessment, management identified material weaknesses in internal control over financial reporting related to the maintenance of our books and records in accordance with GAAP used in the Peoples’ Republic of China, and the conversion of those books and records to GAAP used in the United States of America. Specifically, the material weaknesses related to (1) our process for periodic financial reporting, including documentation of procedures and timely review of financial reports and statements, particularly as it relates to the conversion from Chinese to US GAAP, (2) adequate qualified staff necessary to effectively apply the process, and (3) methods and practices employed to report unusual transactions such as our reverse merger. A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Based on this assessment, management concluded that the Company's internal control over financial reporting was not effective as of March 31, 2011. Our management has discussed the material weakness described above with our audit committee.
In an effort to remediate the identified material weaknesses, we have hired a new Chief Financial Officer. We also plan to document our process and procedures governing our internal reporting. Furthermore, we plan to implement additional changes to our internal control over financial reporting, including (1) timely review of reports prior to issuance, (2) a re-evaluation of our staffing needs, and (3) analysis of unusual transactions as they are occurring to allow adequate time for multiple levels of review.
Our internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. There is no assurance that our disclosure controls or our internal controls over financial reporting can prevent all errors. An internal control system, no matter how well designed and operated, has inherent limitations, including the possibility of human error. Because of the inherent limitations in a cost-effective control system, misstatements due to error may occur and not be detected. We monitor our disclosure controls and internal controls and make modifications as necessary. Our intent in this regard is that our disclosure controls and our internal controls will improve as systems change and conditions warrant.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The nature of our business exposes us to the potential for legal proceedings related to labor and employment, personal injury, property damage, and environmental matters. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including our assessment of the merits of each particular claim, as well as our current reserves and insurance coverage, we do not expect that any known legal proceeding will in the foreseeable future have a material adverse impact on our financial condition or the results of our operations.
There has been no material change to our Risk Factors from those presented in our Form 10-K for the fiscal year ended December 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
None.
Item 5. Other Information.
None.
(a) Exhibits
31.1
|
Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer of the Company.
|
|
|
31.2
|
Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of the Company.
|
|
|
32.1
|
Section 1350 Certification of the Chief Executive Officer.
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|
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32.2
|
Section 1350 Certification of the Chief Financial Officer.
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In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Tanke Biosciences Corporation
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October 20, 2011
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By:
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/s/ Giuxiong Qiu
|
|
Guixiong Qiu
Chief Executive Officer
(Principal Executive Officer)
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|
|
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October 20, 2011
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By:
|
/s/ Gilbert Kwong-Yiu Lee
|
|
Gilbert Kwong-Yiu Lee
Chief Financial Officer
(Principal Accounting Officer)
|
Exhibit Index
31.1
|
Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer of the Company.
|
|
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31.2
|
Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of the Company.
|
|
|
32.1
|
Section 1350 Certification of the Chief Executive Officer
|
|
|
32.2
|
Section 1350 Certification of the Chief Financial Officer
|