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| CNOA.OB > SEC Filings for CNOA.OB > Form 10-Q/A on 29-Apr-2009 | All Recent SEC Filings |
29-Apr-2009
Quarterly Report
The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Report on Form 10-Q. The following discussion contains forward-looking statements. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that may cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in "Risk Factors" and elsewhere in this Form 10-Q.
OVERVIEW
On March 15, 2007, China Organic Agriculture Inc. ("CNOA" or the "Company"), through a reverse merger, issued 27,448,776 shares of stock in exchange for all the outstanding shares of China Organic Agriculture Limited ("COA"), which contains the Company's operating units. Under accounting principles generally accepted in the United States, the share exchange is considered to be a capital transaction in substance, rather than a business combination. Thus the share exchange was equivalent to the issuance of stock by COA for the net monetary assets of CNOA, accompanied by a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the share exchange was identical to that resulting from a reverse acquisition, except no goodwill was recorded. Under reverse takeover accounting, the comparative historical financial statements issued after the acquisition of the legal acquirer, CNOA, are those of the legal acquiree, COA, which is considered to be the accounting acquirer, and thus represent a continuation of the financial statements of COA. Share and per share amounts stated have been retroactively adjusted to reflect the merger.
Until the October 2008 sale of Jilin Songyuan City ErMaPao Green Rice Ltd ("ErMaPao"), the Company was mainly engaged in the business of the production, processing, sale, trading and distribution of agricultural products. Our products have been sold only within the People's Republic of China. As a result of the sale of ErMaPao, the Company no longer grows or produces rice. Rather, it is primarily engaged in the acquisition and distribution of agricultural products. The Company reports its operations under three segments. The first of these is Ankang Agriculture (Dalian) Company Limited, which focuses on grain processing and trading. This company is 100% owned by Hong Kong Ankang Investment Co., Ltd. ("Ankang"), which is 100% owned by COA.
The second segment reflects our prior involvement in rice production through ErMaPao, which operates in Songyuan City of Jilin Province, abutting the Nen River in the Songyuan Plains, where it produces "green" and "organic" rice.
On February 29, 2008, CNOA purchased the Bellisimo Vineyard, the Company's third operating segment. This consists of a 153-acre vineyard located in Sonoma County, California. Bellisimo Vineyard has provided small quantities of Merlot, Chardonnay, and Cabernet Sauvignon grapes to wineries each year for both red and white wines.
In December 2007, the Company entered into a letter of intent to acquire the Dalian Huiming Industry Limited ("Dalian Huiming"). The Company subsequently determined to purchase 60% of the stock of Dalian Huiming. Dalian Huiming is engaged in grain procurement, trading, wholesale sales, and food delivery logistic services. It focuses on soybeans, corn, and cereal crops, which are major products from the northeastern part of China. Sales to consumers are made in regions including the provinces of Liaoning, Jilin, Heilongjiang, Sichuan, Fujian, and the cities of Beijing and Shanghai. On September 29, 2008, we and the shareholders of Dalian Huiming entered into a Share Purchase Agreement wherein we agreed to acquire 60% of the outstanding shares of Dalian Huiming. Pursuant to the Agreement, on October 31, 2008, for consideration of an aggregate of US$10,600,000, each of the Shareholders transferred to CNOA 60% of his or its shares of Dalian Huiming, comprising an aggregate 60% of the shares then outstanding. The Dalian Huiming acquisition is described in detail in the Report on Form 8-K filed by the Company on October 2, 2008, incorporated herein by reference.
On June 10, 2008, the Company established a new subsidiary, Far East Wine Holding Group Limited. This subsidiary will represent the Company's initiative to import and distribute California wines within China. The formation of this subsidiary represents a major component of the Company's recently launched strategic plan to capitalize on the fast-growing demand for premium California wines in China.
On September 30, 2008, CNOA entered into a Stock Transfer Agreement with Bothven Investments Limited, pursuant to which the Company sold to Bothven all of the shares of its subsidiary, Jilin Songyuan City ErMaPao Green Rice Limited for consideration of US $8,700,000. The Stock Transfer Agreement is described in detail in the Report on Form 8-K filed by the Company on October 2, 2008, and incorporated herein by reference.
RESULTS OF OPERATIONS
The following tables present certain information from the consolidated statement
of operations of China Organic Agriculture, Inc. for three month and nine month
periods ended September 30, 2008 and 2007.
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Three months ended Three months ended Percentage
September 30, 2008 September 30, 2007 Change
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Net Sales 47,225,767 22,370,228 111.11%
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Cost of Net Sales 35,886,122 14,825,974 142.05%
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Gross Profit 11,339,645 7,544,254 50.31%
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General and Administrative 625,218 318,441 96.34%
expenses
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Income from operations 10,714,427 7,225,813 48.28%
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Gain on debt conversion 432,169 - -
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Interest expenses -83,460 -103 n/m*
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Other expense (income) - 2,305 -
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Provision for income taxes 2,804,192 - -
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Net Income 8,258,944 7,228,015 14.26%
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Nine months ended Nine months ended Percentage
September 30, 2008 September 30, 2007 Change
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Net Sales 58,449,653 28,804,210 102.92%
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Cost of Net Sales 43,924,262 18,676,637 135.18%
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Gross Profit 14,525,391 10,127,573 43.42%
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General and Administrative 1,923,255 504,915 280.91%
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expenses
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Income from operations 12,602,136 9,622,658 30.96%
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Gain on debt conversion 432,169 -
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Interest expenses -380,422 -103 n/m*
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Other expense (income) -35,124 5,120 n/m*
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Interest income 26,329 -
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Provision for income taxes 3,531,730 -
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Net Income 9,113,358 9,627,675 -5.34%
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* non-meaningful
Business Segment Information
Bellisimo Segment Corporate Consolidated
Ankang Ermapao Vineyard Total Cost Total
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Three Months Ended
September 30, 2008
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Net revenue $46,453,967 771,800 -- $47,225,767
Cost of goods sold 35,275,638 555,940 -- 35,831,578
Operations before Corporate
Costs 11,178,329 215,860 (124,630) 11,269,559 555,132 10,714,427
Three Months Ended
September 30, 2007
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Net revenue -- 22,370,228 -- 22,370,228
Cost of goods sold -- 14,825,974 -- 14,825,974
Operations before Corporate
Costs -- 7,544,254 -- 7,544,254 318,441 7,225,813
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Bellisimo Segment Corporate Consolidated
Ankang Ermapao Vineyard Total Cost Total
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Nine Months Ended
September 30, 2008
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Net revenue $53,890,711 4,536,142 22,800 58,449,653
Cost of goods sold 40,946,593 2,958,249 -- 43,904,842
Operations before Corporate
Costs 12,944,118 1,577,893 (468,337) 14,053,674 1,451,538 12,602,136
Nine Months Ended
September 30, 2007
---------------------------
Net revenue -- 28,804,210 -- 28,804,210
Cost of goods sold -- 18,676,637 -- 18,676,637
Operations before Corporate
Costs -- 10,127,573 -- 10,127,573 504,915 9,622,658
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Sales for the three months ending September 30, 2008 totaled $47,225,767 compared to $22,370,228 for the three months ending September 30, 2007. This increase of $24,855,539, or approximately 111%, is attributable to the Company's change of its operational strategy. During the third quarter of 2008, approximately $46,453,967 of sales was generated by the Company's Ankang segment, reflecting the new initiative of purchasing rice from other rice producers and then reselling this rice to retailers and wholesalers. For the nine months ending September 30, 2008, the Ankang segment recorded $53,890,711 of sales. During these nine months, the sales are mainly accounted for by two major customers. As the Ankang segment was established in 2008, there were no comparable sales in 2007.
The ErMaPao segment had a significant decrease in sales of both green and organic rice this quarter, which together declined to $771,800 as compared to $22,370,228 in the third quarter of 2007, reflecting the shift of the Company's primary focus to the trading opportunities in the agricultural industry and also increased amount of competition from other rice producers. ErMaPao sales for the nine months ending September 30, 2008 totaled $4,536,142 compared to $28,804,210 for the nine months ending September 30, 2007. This decrease of $24,268,068, or approximately 84.4%, is due to the same factors noted regarding the third quarter sales reduction.
There were no sales of grapes or wine during the first three quarters of this year as grapes will not be harvestable until the end of the third quarter 2008. As the Bellisimo Vineyard was acquired in February of 2008, there are no comparable figures for 2007.
The Company's sales revenues and tonnage of rice in the three and nine months ended September 30, 2008 and 2007 consisted of the following:
THREE MONTHS ENDED SEPTEMBER 30
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2008 2007
Units Units
Revenue (tons) Revenue (tons)
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Resale of Rice $38,996,314 55,830 -- --
Green Rice 7,840,981 558 20,000,293 25,624
Organic Rice 199,712 111 1,286,930 848
Green Paddy 187,636 600 -- --
Rice Byproducts 23,924 2 1,083,005 11,672
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Total $47,248,567 57,101 $22,370,228 38,144
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NINE MONTHS ENDED SEPTEMBER 30
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2008 2007
Units Units
Revenue (tons) Revenue (tons)
--------------------------------------------------------
Resale of Rice $46,433,058 67,574 -- --
Green Rice 10,002,185 3,894 23,469,386 32,636
Organic Rice 1,659,805 882 4,124,918 2,388
Green Paddy 187,636 600 -- --
Rice Byproducts 166,969 1,489 1,209,906 15,624
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Total $58,449,653 74,439 $28,804,210 50,648
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The Company's gross profit for the three months ending September 30, 2008 was $11,339,645 (or 24% of revenue) compared to $7,544,254 (or 34% of revenue) for the three months ending September 30, 2007. The increase in the gross profit in the 2008 period was due to the higher level of sales. The decrease in the gross profit margin is due to the lower profit margin on Ankang's trading activity, which did not exist in the 2007 period.
The gross profit for the nine months ending September 30, 2008 was $14,525,391 (or 25% of revenue) compared to $10,127,573 (or 35% of revenue) for the nine months ending September 30, 2007. This increase reflects the higher revenues in the 2008 nine month period, while the decrease in the gross profit margin is due to Ankang's lower margins.
Selling, General and Administrative Expense
Selling, general and administrative expenses for the three months ending September 30, 2008 totaled $625,218 or approximately 1.32% of sales, compared to $318,441or approximately 1.42% of sales for the three months ending September 30, 2007. This $306,777 increase is largely due to the amortization of warrant expense recorded in the 2008 quarter of $253,177 as well as increases in professional fees and expenses for the parent company and Vineyard expenses.
Selling, general and administrative expenses for the nine months ending September 30, 2008 totaled $1,923,255 or approximately 3.2% of sales, compared to $504,915 or approximately 1.8% for the nine months ending September 30, 2007. This increase of $1,418,340 is attributed to the warrant expenses amortization of $582,053 for the first nine months of 2008, increased professional fees and expenses of $489,827 and Vineyard expenses of approximately $456,013.
Interest Expense
Interest expenses were $83,460 and $380,422 for the three and nine month periods ending September 30, 2008. These expenses result from the debt incurred to finance the February 2008 acquisition of the Bellisimo Vineyard, which totals about $14.7 million.
Provision for Income Taxes
The Company's operations in the People's Republic of China (the "PRC") are governed by the income tax laws of the PRC. The Enterprise Income Tax to which it is subject to is now at a statutory rate of 25%. Until December 31, 2007, the Company enjoyed an exemption from this tax because of its participation in both agricultural production and in the PRC Urban Labor and Employment Services Program designed to encourage companies to increase their employment of target groups. Thus it did not record an expense for income taxes nor did it pay income taxes in 2007.
According to China's new tax policy, the Company no longer benefits from this tax exemption. For the three month and nine month periods ending September 30, 2008, the Company accrued $2,804,192 and $3,531,730in income taxes. The effective tax rates represented by these accruals are significantly higher than the statutory rate as expenses incurred in the US, including those pertaining to the Bellisimo Vineyard, are not deductible for PRC tax purposes.
Net Income (Loss)
Net income was $8,258,944 for the three months ending September 30, 2008, compared to net income for $7,228,015for the three months ending September 30, 2007. This increase was due to the rapid expansion in sales of our Ankang segment and quarter three being the harvest period. Net income was $9,113,358 for the nine months ending September 30, 2008, compared to net income of $9,627,675 for the comparable 2007 period. These reductions in net income reflect the fact that the increase in sales revenue was less than the increases in selling, general and administrative costs, and the amount of interest expense and the new provision for income taxes. The Company did not incur significant interest or taxes in the prior year. The addition of the Bellisimo Vineyard decreased net income in the three month and nine month periods ending September 30, 2008 by about $335,580 and $871,559 respectively, as it incurred expenses but generated no income during these periods.
Liquidity and Capital Resources
Operational and liquidity needs are funded primarily through cash flows from operations and short-term borrowings. As of September 30, 2008, Cash and cash equivalents were $2,620,021, current assets totaled $66,395,035, and current liabilities were $40,711,305. Working capital at September 30, 2008 was $25,683,730, as compared to 9,898,496 as of September 30, 2007.
The components of the $7,077,772 decrease in cash and cash equivalents from $9,697,793 as of December 31, 2007 to $2,620,021 as of September 30, 2008 are reflected below.
Cash Flow
NINE MONTHS ENDED SEPTEMBER 30
2008 2007
-------------------------------------------------------------------------------
Net cash provided (used) by operating activities ($10,579,919) $942,053
Net cash used by investing activities ($14,599,080) ($344,845)
Net cash provided by financing activities $17,273,895 $2,056,529
Effects of exchange rates on cash $824,332 $26,529
===============================================================================
Net change in cash and cash equivalents ($7,077,772) $2,680,432
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Net Cash Used by Operating Activities
During the nine months ended September 30, 2008, we had negative cash flow from operating activities of $10,579,919, primarily attributable to the increase in purchase deposits of approximately $13.3 million relating to $10,642,609 deposited to a commonly controlled bank account with the Reilong Company for the acquisition of Dalian Huiming and $2,714,286 paid to the Huanyatong Investment Company Ltd. for future acquisition activities. The higher account receivables of $43,307,234 were generated from the increase in Ankang's revenues. These negative cash flow factors were partially offset by higher accounts payable and accrued expenses of $32,178,847 which resulted from higher levels of purchases by Ankang and $5,983,811 in reduced ErMaPao inventory levels due to that segment's reduced level of operations, as well as the $9,113,358 of net income for the nine months ending September 30, 2008.
Net Cash Used in Investing Activities and Financing Activities
The Company used $14,599,080 largely to purchase the property and equipment of the Bellisimo Vineyard during the first quarter of 2008 as discussed in Note 4 of the Consolidated Financial Statements.
In connection with the acquisition of the assets of Bellisimo Vineyard we incurred two debt obligations, the first in the amount of $8,515,000 for which we granted the lender a first lien on the Vineyard's assets. This debt bears interest at an initial rate of 7.7% per annum and is repayable over a period of 20 years. The second obligation is a note payable from a related party (a shareholder) of $6,216,000, which bears 4% annual interest over its five year term, with both principal and interest payable in February, 2013. This note was converted into 18,282,353 shares of our common stock on September 4, 2008. In addition the Company received an $800,000 interest-free advance from two affiliates of a shareholder, which is payable on demand.
We anticipate that our available funds and cash flows generated from operations will be sufficient to meet our anticipated on-going operating needs for the next twelve months. However, we will likely need to raise additional capital in order to fund our acquisitions and any large construction projects. We expect to raise those funds through credit facilities obtained from lending institutions, the issuance of equity, or a combination of both. However, there can be no guarantee that we will be able to obtain such funding, whether through the issuance of debt or equity, on terms satisfactory to management and our board of directors.
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