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| CNOA.OB > SEC Filings for CNOA.OB > Form 10-Q on 17-Aug-2009 | All Recent SEC Filings |
17-Aug-2009
Quarterly Report
Forward Looking Statements
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 elsewhere in this Form10-Q and in "Risk Factors" in our December 31, 2008 Form 10-K.
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 was 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 September, 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, trading and distribution of agricultural products. ErMaPao is now treated as a Discontinued Operation and is no longer reported as a separate segment.
The Company reports its operations under two segments. The first segment is agricultural products, which focuses on the trading and distribution of agricultural products. The Company purchased 60% of the stock of Dalian Huiming in October, 2008 for $10.6 million. The Dalian Huiming acquisition is described in detail in the Report on Form 8-K filed by the Company on October 2, 2008, and in the Notes to the Consolidated Financial Statements appearing elsewhere in this Report. Dalian Huiming is engaged in grain procurement, trading, wholesale sales, and food delivery logistic services, and its operations are contained in the Agricultural Products Trading segment.
The second segment is the Wine Production segment that produces and acquires grapes to be converted into wine and ice wine.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Result of Operations
The following tables present certain information from the consolidated statement
of operations of China Organic Agriculture, Inc. for three and six months ended
June 30, 2009 and June 30, 2008.
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30 2009 JUNE 30 2008 % Change
Sales $ 30,018,428 $ 3,268,668 818 %
Cost of sales (23,089,593 ) (2,341,174 ) 886 %
Gross profit 6,928,835 927,494 647 %
Selling, general and administrative expenses (477,413 ) (569,688 ) -16 %
Income from operations 6,451,422 357,806 n/m
Other income 68,514 - n/m
Interest expense, net (398,283 ) (300,852 ) 32 %
Income from Continuing operations before
income taxes 6,121,653 56,954 n/m
Provision for income taxes (1,652,726 ) (228,797 ) 622 %
Net income (loss) from Continuing operations 4,468,927 (171,843 ) n/m
Discontinued operations:
Income from ErMaPao, net of tax - 50,651 n/m
Net Income (loss) 4,468,927 (121,192 ) n/m
Less Income attributed to
noncontrolling interest (1,987,837 ) -? n/m
Net Income attributable to CNOA $ 2,481,090 $ (121,192 ) n/m
Basic and diluted weighted average shares 73,157,232 51,548,776 42 %
Total Basic and Diluted Earnings per Share $ 0.03 $ - n/m
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30 2009 JUNE 30 2008 % Change
Sales $ 66,745,736 $ 7,459,225 795 %
Cost of sales (51,431,107 ) (5,655,331 ) 809 %
Gross profit 15,314,629 1,803,894 749 %
Selling, general and administrative expenses (842,149 ) (1,040,029 ) -19 %
Income from operations 14,472,480 763,865 1795 %
Other income 683,067 - n/m
Interest expense, net (565,574 ) (300,852 ) 88 %
Income from Continuing operations before
income taxes 14,589,973 463,013 n/m
Provision for income taxes (3,724,242 ) (448,755 ) 730 %
Net income (loss) from Continuing operations 10,865,731 14,258 n/m
Discontinued operations:
Income from ErMaPao, net of tax - 840,156 n/m
Net Income 10,865,731 854,414 1172 %
Less Income attributed to
noncontrolling interest (4,459,450 ) -? n/m
Net Income attributable to CNOA $ 6,406,281 $ 854,414 650 %
Basic and diluted weighted average shares 73,157,232 51,548,776 42 %
Total Basic and Diluted Earnings per Share $ 0.09 $ 0.02 428 %
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Business Segment Information
Ankang and Dalian Huiming constitute the segment for the trading of agricultural
products; Far East Wine, Ice Wine and Bellisimo Vineyard constitute the segment
for wine production.
Three months ended June 30, 2009
Agricultural
products Wine production Others(2) Total
Sales, net $ 30,018,428 - - 30,018,428
Cost of sales $ 23,089,593 ) - - (23,089,593 )
Gross profit $ 6,928,835 - - 6,928,835
Depreciation and
amortization $ (50,056 ) (50,313 ) - (100,369 )
Other income - 68,514 - 68,514
Segment profit (loss) $ 6,608,316 (438,539 ) (48,124 ) 6,121,653
Total assets $ 98,966,961 28,788,454 - 127,755,415
Three months ended June 30, 2008 (1)
Agricultural
products Wine production Others (2) Total
Sales, net $ 3,268,668 - - 3,268,668
Cost of sales $ (2,341,174 ) - - (2,341,174 )
Gross profit $ 927,494 - - 927,494
Depreciation and
amortization $ (2,242 ) (50,313 ) - (52,555 )
Segment profit (loss) $ 904,996 (500,855 ) (347,187 ) 56,954
Total assets $ 5,798,343 15,645,774 - 21,444,117
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Business Segment Information
Six months ended June 30, 2009
Agricultural
products Wine production Others(2) Total
Sales, net $ 66,745,736 - - 66,745,736
Cost of sales $ (51,431,107 ) - - (51,431,107 )
Gross profit $ 15,314,629 - - 15,314,629
Depreciation and
amortization $ (94,806 ) (100,626 ) - (195,432 )
Other income - 683,067 - 683,067
Segment profit (loss) $ 14,830,179 (148,082 ) (92,124 ) 14,589,973
Total assets $ 98,966,961 28,788,454 - 127,755,415
Six months ended June 30, 2008 (1)
Agricultural
products Wine production Others (2) Total
Sales, net $ 7,459,225 - - 7,459,225
Cost of sales $ (5,655,331 ) - - (5,655,331 )
Gross profit $ 1,803,894 - - 1,803,894
Depreciation and
amortization $ (2,242 ) (67,084 ) - (69,326 )
Segment profit (loss) $ 1,795,023 (535,979 ) (796,031 ) 463,013
Total assets $ 5,798,343 15,645,774 - 21,444,117
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1. The ErMaPao segment is now reclassified as discontinued operations and as such is not reflected in this table.
2. Others included the warrant expenses, option expenses and CNOA corporate expenses.
Sales
Sales for the three months ending June 30, 2009 totaled $30,018,428 compared to $3,268,668 for the three months ending June 30, 2008, an increase of $26,749,760, or approximately 818%. Sales for the six months ending June 30, 2009 totaled $66,745,736 compared to $7,459,225 for the six months ending June 30, 2008, an increase of $59,286,511 or approximately 795%. These increases are attributable to the Company's acquisition of Dalian Huiming in October, 2008. During the three months ending June 30, 2009, all sales were generated by the Company's Agricultural Products Trading segment, reflecting the Company's new initiative of purchasing grains from producers and then reselling this to retailers and wholesalers.
Bellisimo Vineyard generated $123,375 of property rental revenue during the six months ended June 30, 2009, compared to $22,800 in the same period last year. Bellisimo's revenues to date have been generated from the rental of buildings on the property. In the future there should also be revenues from grape sales. The Company is currently under contract to sell its grapes to two wineries until 2011. The Company has been in negotiations with several wineries, including our current purchasers, to produce wine under the Company's label.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Gross Profit
The Company's gross profit for the three months ending June 30, 2009 was $6,928,835 (or 23% of revenue) compared to $927,494 (or 28% of revenue) for the three months ending June 30, 2008. The gross profit for the six months ending June 30, 2009 was $15,314,629 (or 23% of revenue) compared to $1,803,894 (or 24% of revenue) for the six months ending June 30, 2008. The increases in gross profit were attributable to the acquisition of Dalian Huiming in the 2008.
Selling, General and Administrative Expense
Selling, general and administrative expense for the three and six months ending June 30, 2009 reflected decreases of $92,275 and $197,880, respectively from the comparable 2008 periods. These decreases are largely due to lower professional fees and expenses for corporate activities in 2009.
Interest Expense
Interest expenses were $398,283 and $565,574 for the three and six month periods ending June 30, 2009, and represented increases of $97,431 and $264,722 as compared to the corresponding 2008 periods. These increases mainly result from the additional bank debt incurred to support the increased working capital needs associated with the addition of Dalian Huiming's operations and revenue growth, particularly the increase in receivables.
Provision for Income Taxes
The Company is subject to the income tax laws of the People's Republic of China ("PRC"). The PRC's Enterprise Income Tax is now at a statutory rate of 25%. For the three and six month periods ending June 30, 2009, the Company accrued $1,652,726 and $3,724,242 in income taxes. The effective tax rates of 27% and 25.5% represented by these accruals are 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
Discontinued Operations
The following table summarizes the operating results of the discontinued
operations of ErMaPao for the three months and six months ended June 30, 2008
respectively:
Three Months Six Months
ended June ended June
30, 2008 30, 2008
Sales $ 433,622 $ 3,764,661
Cost of sales (263,679 ) (2,417,933 )
Gross profit 169,943 1,346,728
Operating expenses (103,656 ) (227,789 )
Income from Discontinued
operations before income tax 66,287 1,118,940
Income tax (15,636 ) (278,784 )
Net Income from Discontinued operations, net of tax $ 50,651 $ 840,156
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Net Income (Loss)
Net income was $4,468,927 for the three months ending June 30, 2009, compared to net loss of $121,192 for the three months ending June 30, 2008. Net income was $6,418,753 for the six months ending June 30, 2009, compared to net income of $1,712,826 for the comparable 2008 period. These increases in net income were due to the acquisition of Dalian Huiming. As the Company owns only 60% of Dalian Huiming, 40% of total net income from Dalian Huiming was recorded as income attributed to noncontrolling interest.
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