Zungui Haixi Corporation (TSX VENTURE:ZUN), a China-based manufacturer of
sportswear and casual footwear, today announced its financial results for the
three and nine months ended March 31, 2011. All amounts are in Canadian dollars
unless otherwise indicated.
"We are very pleased to report a continuation of our strong growth for the
quarter which is a product of the continued success the ZUNGUI brand is
realizing in new and existing markets," said Mr. Yanda Cai, Chief Executive
Officer. "In addition to continued strong revenue growth of 34%, we grew our
earnings per share and improved our gross margin while continuing to make
substantial investments in our future, including expending significant resources
in marketing our brand, developing our corporate store network and incentivizing
our distributors. We have begun construction on our new ten storey building and
are working diligently to complete the upgrades on our five existing productions
lines that will supplement our production capacity."
Highlights for the Third Quarter and Year-To-Date:
-- Diluted earnings per share ("EPS") of 9 cents for the quarter compared
to 8 cents for the same quarter last year;
-- Excluding the increased advertising expenses of $1.4 million and subsidy
provisions of $1.4 million, EPS would have been 12 cents or a 44%
increase over the same quarter last year;
-- Revenue increased 34% to $44.6 million for the quarter and 26% to $142.9
million for the year-to-date;
-- In RMB, revenue increased 36% to RMB 297.8 million for the quarter and
30% to RMB 941.0 million for the year-to-date;
-- Revenue before subsidies increased 38% to $46.2 million for the quarter
and 30% to $148.8 million for the year-to-date;
-- Gross margin improved to 27.2% for the quarter compared to 26.7% for the
same quarter last year;
-- Added 30 net new distributor owned retail outlets compared to 15 in the
same quarter last year;
-- Opened 3 net new corporate-owned retail outlets in the quarter;
-- Corporate-owned retail outlets reported third quarter revenue of $2.9
million ($5.2 million year-to-date) compared to $0.1 million ($0.3
million year-to-date) for the same quarter last year reflecting a start
up phase of development;
-- Selling expenses increased $3.2 million in the quarter compared to the
same quarter last year primarily due to increased advertising
expenditures of $1.4 million and operating expenses of the corporate
stores of $1.4 million;
-- Net income increased 4% to $5.4 million for the quarter and decreased 5%
to $17.4 million for the year-to-date on increased subsidy provisions to
distributors and selling expenses; and,
-- Diluted EPS of 28 cents for the year-to-date compared to 34 cents for
the same period last year on a 14% increase in the weighted average
number of shares outstanding in the period and increased advertising
expenses and subsidy provisions of $9.7 million which impacted the EPS
by 12 cents.
On a trailing 12 month basis, the Company's revenue was $193.5 million, net
income was $26.0 million and diluted EPS was 42 cents.
Conference Call
Zungui will host a conference call to discuss the first quarter results at 9am
(EDT) May 26, 2011. The details are as follows:
Dial-in number: 1-877-440-9795 or 416-340-8527
Taped rebroadcast (until midnight on June 9, 2011): 1-800-408-3053
Taped replay access passcode: 2366382
About Zungui Haixi
Zungui Haixi Corporation, through its wholly owned subsidiaries, is engaged in
the manufacture and sale of athletic footwear, apparel and accessories, and also
casual footwear, in the People's Republic of China. Both product lines are
marketed under the ZUNGUI brand. Zungui Haixi distributes its products to
consumers throughout China through an extensive network of retail outlets which
exclusively carry ZUNGUI branded products. There are 62,080,400 common shares
issued and outstanding. The corporate website is www.zunguihaixi.com.
Caution Regarding Forward-Looking Statements
Certain statements in this press release contain forward-looking information
that involve risk and uncertainties. Statements other than statements of
historical fact contained in this press release may be forward-looking
statements within the meaning of certain securities laws, including, without
limitation, statements involving management's expectations, intentions and
beliefs concerning the domestic PRC sportswear industry, the competitive
landscape in this industry and the general economy, statements regarding the
future financial position or results of the Company, business strategies,
proposed acquisitions, growth opportunities, budgets, litigation, projected
costs and plans and objectives of or involving the Company. Such statements
should be considered forward-looking statements, Wherever possible, words such
as "may", "would", "could", "will", "anticipate", "believe", "plan", "expect",
"intend", "estimate", "aim", "endeavour", "project", "continue" and similar
expressions have been used to identify forward-looking statements.
These forward-looking statements reflect management's current beliefs and
business judgement with respect to future events and are based on information
currently available to management. Forward-looking statements involve
significant known and unknown risks, uncertainties and assumptions, and you
should not place undue reliance on these forward-looking statements. Although
management believes its current beliefs and assumptions are reasonable, many
factors could cause Zungui's actual results, performance or achievements to be
materially different from any future results, performance or achievements that
may be expressed or implied by such forward-looking statements, including,
without limitation, those listed in the "Risk Factors" section of the Company's
other filings with Canadian securities regulatory authorities at www.sedar.com.
Should one or more of these risks or uncertainties materialize, or should
assumptions underlying the forward-looking statements prove incorrect, actual
results, performance or achievements could vary materially from those expressed
or implied by the forward-looking statements contained in this press release.
The forward-looking statements contained in this press release are expressly
qualified in their entirety by this cautionary statement. These forward-looking
statements are made as of and speak as of the date of this press release and the
Company does not intend to, or assume any obligation to, update or revise these
forward-looking statements to reflect new information, events, results or
circumstances or otherwise after the date on which such statement is made as to
reflect the occurrence of unanticipated events, except as required by law,
including securities laws.
Zungui Haixi Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operation
For the three and nine months ended March 31, 2011
All amounts in thousands of Canadian dollars unless otherwise stated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
The following management's discussion and analysis of financial condition and
results of operation (the "MD&A") of Zungui Haixi Corporation ("Zungui" or
"Company") is prepared for the three month and nine months ended March 31, 2011
with comparative figures for the three and nine months ended March 31, 2010.
Zungui became the parent company of Southern Trends International Holding
Company Limited ("Southern"), through a share exchange agreement completed in
conjunction with the completion of the Company's initial public offering on
December 21, 2009. All figures presented for periods prior to December 21, 2009
refer to Southern financial statements. The MD&A should be read in conjunction
with the audited consolidated financial statements for the year ended June 30,
2010, and the notes contained therein, and the unaudited consolidated financial
statements for the three and nine months ended March 31, 2011 and the notes
contained therein. The unaudited interim consolidated financial statements were
prepared in accordance with Canadian generally accepted accounting principles
("GAAP") and are presented in thousands of Canadian dollars unless otherwise
noted. Additional information relating to the Company can be found at
www.sedar.com.
Disclosure contained in this MD&A is current to May 25, 2011 the date of
approval of the MD&A and financial statements by the Board of Directors.
Caution Regarding Forward-Looking Statements
Certain statements in this MD&A contain forward-looking information that involve
risk and uncertainties. Statements other than statements of historical fact
contained in this MD&A may be forward-looking statements within the meaning of
certain securities laws, including, without limitation, statements involving
management's expectations, intentions and beliefs concerning the domestic
People's Republic of China (PRC) sportswear industry, the competitive landscape
in this industry and the general economy, statements regarding the future
financial position or results of the Company, business strategies, proposed
acquisitions, growth opportunities, budgets, litigation, projected costs and
plans and objectives of or involving the Company. Such statements should be
considered forward-looking statements, Wherever possible, words such as "may",
"would", "could", "will", "anticipate", "believe", "plan", "expect", "intend",
"estimate", "aim", "endeavour", "project", "continue" and similar expressions
have been used to identify forward-looking statements.
These forward-looking statements reflect management's current beliefs and
business judgement with respect to future events and are based on information
currently available to management. Forward-looking statements involve
significant known and unknown risks, uncertainties and assumptions, and you
should not place undue reliance on these forward-looking statements. Although
management believes its current beliefs and assumptions are reasonable, many
factors could cause Zungui's actual results, performance or achievements to be
materially different from any future results, performance or achievements that
may be expressed or implied by such forward-looking statements, including,
without limitation, risks related to: failure to maintain or promote the ZUNGUI
brand; dependency on distributors and retailers for product sales and brand
promotion; difficulty in continuing to grow Zungui's distribution network;
dependency on certain of its key executives, design, technical and other
personnel; failure to effectively integrate additional corporate-owned and
managed retail outlets; strong competition; the loss, or decrease in, sales to
Zungui's major distributors; failure to successfully implement plans to expand
production capacity and improve production efficiency; failure to execute growth
strategy; reliance on subcontractors; fluctuations in the price, availability
and quality of raw materials; exposure to credit risks of distributors; selling
prices; failure to accurately track inventory levels or sales figures; failure
to maintain and cultivate key relationships; failure to optimize and adjust
product mix; failure to anticipate and respond in a timely manner to fashion
trends and changes in consumer tastes in the PRC; liability for unpaid
contributions to the social security insurance program; increases in labour
costs and labour disputes;
protection of trademarks and other proprietary rights; damage to administrative
or production facilities, fire or other calamities; proof of title; exposure to
environmental liability; exposure to product liability, property damage or
personal injury claims; closure of retail outlets; failure to obtain additional
financing; risks relating to holding companies; risks associated with dividends;
conflict of interests of directors and officers; limited recourse against
principal securityholder and existing shareholders; disclosure controls and
procedures and internal controls over financial reporting; language barriers
between certain directors and officers of the Company; influence by the majority
shareholder; future sales of common shares; risks associated with state
ownership; exposure to fluctuations in the economic conditions in the PRC;
fluctuations in foreign exchange rates; changes in Zungui's tax treatment;
limitations in the ability to repatriate profits or convert currency; limited
shareholders' rights in China; risks relating to a developing legal system;
intellectual property rights protection and enforcement; requirements for
permits and business licenses; risks relating to the appropriation of land used
in Zungui's operations; natural disasters; reliance on third-party sources and
industry publications; volatile market price; return on an investment in common
shares. Should one or more of these risks or uncertainties materialize, or
should assumptions underlying the forward-looking statements prove incorrect,
actual results, performance or achievements could vary materially from those
expressed or implied by the forward-looking statements contained in this MD&A.
The forward-looking statements contained in this MD&A are expressly qualified in
their entirety by this cautionary statement. These forward-looking statements
are made as of and speak as of the date of this MD&A and the Company does not
intend to, or assume any obligation to, update or revise these forward-looking
statements to reflect new information, events, results or circumstances or
otherwise after the date on which such statement is made as to reflect the
occurrence of unanticipated events, except as required by law, including
securities laws.
Contents of MD&A Page
Overview 3
Selected Financial Information 3
Factors Affecting the Results of Operations 4
Results of Operations 5
Summary of Quarterly Results 9
Liquidity and Capital Resources 9
Capital Structure 10
Off-Balance Sheet Arrangements 11
Use of Proceeds 12
Related Party Transactions 12
Financial Instruments and Other Instruments 13
Recent Accounting Changes 13
Outlook 14
Overview
Zungui is principally engaged in the manufacture and sale of athletic footwear,
apparel and accessories ("Sportswear Product Line") and casual leather footwear
("Casual Product Line") in the PRC. Both product lines are marketed under the
well-recognized ZUNGUI brand. As of March 31, 2011, Zungui distributes its
products to consumers through 103 corporate-owned retail outlets, 83 of which
offer the Sportswear Product Line and 20 of which offer the Casual Product Line,
and through 47 distributors, who in turn sell products via an extensive network
of 1,965 retail outlets, 1,555 of which offer the Sportswear Product Line and
410 of which offer the Casual Product Line. All retail outlets exclusively sell
products which carry the ZUNGUI brand.
Net new store openings
Q1 Q2 Q3 Total
----------------------------------------
Corporate 13 56 3 72
Distributor 120 53 30 203
During the three and nine months ended March 31, 2011, the Company focused on
revenue growth and increased profitability through the expansion of its retail
network. It provided services and training and accrued subsidies to distributors
to help meet customer needs and network expansion. As well the Company increased
its advertising expenditures by $4.9 million for the nine months ended March 31,
2011 to build brand recognition. For the three months ended March 31, 2011,
revenue grew 34% to $44.6 million from $33.3 million compared to same period
last year. In Renminbi ("RMB"), revenue grew 36% to RMB 297.8 million from RMB
218.7 million last year. The lower growth rate in Canadian dollars is
attributable to the fluctuations in the Chinese currency relative to the
Canadian dollar reporting currency in 2010 and 2011.
Selected Financial Information
The following table sets forth selected financial information for the periods
indicated. The selected financial information has been derived from the
Company's unaudited interim consolidated financial statements for the three and
nine months ended March 31, 2011.
For the three months ended For the nine months ended
Earnings Data March 31 March 31
---------------------------------------------------------------------------
2011 2010 2011 2010
-------------------------------------------------------
Revenue $ 44,628 $ 33,342 $ 142,930 $ 113,332
Cost of sales 32,484 24,442 105,519 83,186
-------------------------------------------------------
Gross profit 12,144 8,900 37,411 30,146
Selling expenses 3,207 459 9,242 1,563
Research and
development
expenses 195 152 598 439
General and
administrative
expenses 1,359 1,091 3,679 2,495
Other expenses
(income), net (73) 15 9 (19)
Income tax expense 2,072 1,989 6,444 7,264
--------------------------------------------------------
Net income $ 5,384 $ 5,194 $ 17,439 $ 18,401
Earnings per share -
basic and diluted $ 0.09 $ 0.08 $ 0.28 $ 0.34
As at March 31, As at June 30,
Balance Sheet Data 2011 2010
----------------------------------------------------------------------------
Cash $ 65,258 $ 85,876
Inventories 12,582 3,498
Property, plant and equipment 9,193 6,470
Total assets 124,649 131,705
Working capital 99,050 89,532
Retained earnings 71,929 56,161
Total shareholders' equity 108,243 96,003
Factors Affecting Results of Operations
Foreign Currency
All of the Company's revenues and expenses, other than the corporate expenses,
are generated in the PRC. Accordingly, the results of operations are impacted by
the fluctuation of the RMB against the Canadian dollar when converted for
financial reporting purposes. The weighted average exchange rate for one RMB,
expressed in Canadian dollars, for the three months ended March 31, 2011 and
2010 was 0.1498 and 0.1524 and for the nine months ended March 31, 2011 and 2010
was 0.1485 and 0.1488. The movement of the Chinese currency relative to the
Canadian dollar in the three and nine months ended March 31, 2011 resulted in
the statement of operations in Canadian dollars being 2% less for the three
months ended March 31, 2011 than if the Company had used the average exchange
rate for the three month ended March 31, 2010 and 3% greater for the nine month
period ended March 31, 2011 if the Company had used the average exchange rate
for the nine month period ended March 31, 2010.
Financial Highlights in RMB
The following table sets forth selected financial information for the Company
for the periods indicated in RMB which is the Company's functional currency for
its wholly owned subsidiary in China. The Company's head office's functional
currency is Canadian dollars. The Company uses Canadian dollars as its reporting
currency. This information has been derived from the Company's records
supporting the unaudited interim consolidated financial statements for the three
and nine months ended March 31, 2011 and 2010, immediately prior to their
conversion to Canadian dollars.
For the three months For the nine months
ended ended
In RMB March 31 March 31
------------------------------------------------
2011 2010 2011 2010
------------------------------------------------
Revenue RMB 297,829 RMB 218,725 RMB 940,980 RMB 725,541
Cost of sales 216,777 160,339 694,605 532,612
------------------------------------------------
Gross profit 81,052 58,386 246,375 192,929
Net income 35,932 34,063 114,752 117,616
Weighted average exchange
rate for one RMB, expressed
in Canadian dollars 0.1498 0.1524 0.1485 0.1488
Revenues
The Company's revenues consist of sales from footwear, apparel and accessories
sold within the PRC. The Company provides sales rebates, advertising
contributions and subsidies to its distributors that are deducted from its gross
revenue to derive its net revenue.
Cost of Sales
The Company's cost of sales consists of internal and external production costs.
Internal production costs include raw materials, labour and manufacturing costs.
Outsourced production costs refer to the cost of procuring finished footwear,
apparel and accessories, which represents amounts paid to subcontracted
manufacturers in the PRC.
Seasonality
The results of the Company are generally not subject to seasonality although the
Company is modestly affected by the Chinese New Year typically held in the third
quarter of the fiscal year.
Results of Operations Three and Nine Months Ended March 31, 2011 compared to
March 31, 2010
(Amounts in thousands of dollars, unless specified otherwise)
Revenue
The Company derives its revenue from two distribution channels: distributors and
corporate-owned retail outlets. Total revenue increased 34% to $44.6 million for
the three months ended March 31, 2011 compared to the third quarter of last
year. In RMB, revenue increased 36% to RMB 297.8 million for the three months
ended March 31, 2011 compared to RMB 218.7 million for the same period last
year. The strengthening of the Canadian dollar during the quarter relative to
the RMB reduced the percentage increase in revenue reported in Canadian dollars.
Total revenue increased 26% to $142.9 million for the nine months ended March
31, 2011 compared to the same period last year. In RMB, revenue increased 30% to
RMB 941.0 million compared to the first nine months of last year. The
strengthening of the Canadian dollar for the nine months ended March 31, 2011
relative to the RMB reduced the percentage increase in revenue reported in
Canadian dollars.
Revenue by Product Line
For the three months ended March 31
----------------------------------------------------
2011 % of Total 2010 % of Total
----------------------------------------------------
Footwear $ 37,303 80.8 $ 27,982 83.7
Apparel and accessories 8,851 19.2 5,468 16.3
----------------------------------------------------
46,154 100.0 33,450 100.0
------------ ------------
Subsidy provision 1,526 108
-------------- --------------
Total $ 44,628 $ 33,342
-------------- --------------
-------------- --------------
For the nine months ended March 31
----------------------------------------------------
2011 % of Total 2010 % of Total
----------------------------------------------------
Footwear $ 126,557 85.0 $ 97,142 84.8
Apparel and accessories 22,290 15.0 17,372 15.2
----------------------------------------------------
148,847 100.0 114,514 100.0
------------
Subsidy provision 5,917 1,182
-------------- --------------
Total $ 142,930 $ 113,332
-------------- --------------
-------------- --------------
Total revenue before subsidy provision increased 38% to $46.2 million for the
three months ended March 31, 2011 compared to the third quarter of last year.
Footwear revenue increased 33% to $37.3 million for the three months ended March
31, 2011 compared to the same period last year, and was comprised of $31.4
million (Q3 2010 - $24.0 million) in revenue from athletic footwear and $5.9
million (Q3 2010 - $4.0 million) from casual footwear. Footwear units sold
during the quarter increased to 2.6 million compared to 2.1 million for the same
quarter last year. Apparel and accessories revenue increased 62% to $8.9 million
for the three months ended March 31, 2011 compared to the same period of last
year. The growth in revenue was the result of increased number of retail outlets
(2,068 retail outlets in total compared to 1,734 at March 31, 2010), increased
consumer demand and selling price increases implemented at the end of March 31,
2010.
Total revenue before subsidies increased 30% to $148.8 million for the nine
months ended March 31, 2011 compared to the same period last year. Footwear
units sold during the nine months ended March 31, 2011 increased to 9.0 million
compared to 7.2 million for the same period last year.
In RMB, the Company's revenue per average number of retail outlets increased 18%
to RMB 0.2 million during the three months ended March 31, 2011 compared to the
same period last year. For each of the three months ended March 31, 2011 and
2010, 93.7% and 99.7% of the Company's revenue was derived from its wholesale
distribution channel, respectively. The corporate stores contributed $2.9
million of revenue for the three months ended March 31, 2011 and $5.2 million
for the nine months ended March 31, 2011.
Cost of Sales
For the three months ended March 31
------------------------------------------------
2011 % of Total 2010 % of Total
------------------------------------------------
Footwear (internal
production)
Raw materials $ 7,403 22.8 $ 9,780 40.0
Labour 1,083 3.3 1,423 5.8
Manufacturing costs 594 1.8 628 2.6
------------------------------------------------
Subtotal 9,080 27.9 11,831 48.4
Footwear (outsourced
production) 17,084 52.6 8,588 35.1
Apparel and accessories
(outsourced production) 6,320 19.5 4,023 16.5
------------------------------------------------
Total $ 32,484 100.0 $ 24,442 100.0
------------------------------------------------
------------------------------------------------
For the nine months ended March 31
------------------------------------------------
2011 % of Total 2010 % of Total
------------------------------------------------
Footwear (internal
production)
Raw materials $ 32,117 30.5 $ 29,966 36.0
Labour 4,361 4.1 3,634 4.4
Manufacturing costs 2,412 2.3 1,643 2.0
------------------------------------------------
Subtotal 38,890 36.9 35,243 42.4
Footwear (outsourced
production) 50,661 48.0 35,140 42.2
Apparel and accessories
(outsourced production) 15,968 15.1 12,803 15.4
------------------------------------------------
Total $ 105,519 100.0 $ 83,186 100.0
------------------------------------------------
------------------------------------------------
During the three months ended March 31, 2011, cost of sales increased 33% to
$32.5 million compared to last year. In RMB, cost of sales increased 35% to RMB
216.8 million for the three months ended March 31, 2011. Employee labour rates
increased 10% in February, 2011 for production workers, however, labour costs
represent 12% of internal production costs and are not expected to have a
significant impact on the Company's gross margin. Outsourced production
accounted for 65% of the footwear units sold compared to 42% for the same
quarter last year.
During the nine months ended March 31, 2011, cost of sales increased 27% to
$105.5 million compared to the first nine months of fiscal 2010. In RMB, cost of
sales increased 30% to RMB 694.6 million. Outsourced production accounted for
57% of the footwear units sold during the nine months ended March 31,
2011compared to 53% for the same period last year.
The Company expects to have additional increased production capacity in June
2011 when the installation and testing of the existing five production lines
will be completed.
Gross Profit
For the three months ended March 31
--------------------------------------------------
Gross
Margin Gross
2011 % 2010 Margin %
--------------------------------------------------
Footwear $ 9,905 27.5 $ 7,478 26.8
Apparel and accessories 2,239 26.2 1,422 26.1
--------------- ---------------
Total $ 12,144 27.2 $ 8,900 26.7
--------------- ---------------
--------------- ---------------
For the nine months ended March 31
--------------------------------------------------
Gross Gross
Margin Margin
2011 % 2010 %
--------------------------------------------------
Footwear $ 31,954 26.3 $ 25,755 26.8
Apparel and accessories 5,457 25.5 4,391 25.5
--------------- ---------------
Total $ 37,411 26.2 $ 30,146 26.6
--------------- ---------------
--------------- ---------------
The gross margin improved for the three months ended March 31, 2011 compared to
the same quarter last year on a positive impact of 2.4 percentage points from
the corporate stores which have a higher gross margin. Excluding the corporate
stores, the gross margin declined to 24.8% (26.8% for the same quarter last
year) based on increased cost of goods sold and a subsidy provision of $1.5
million for the three months ended March 31, 2011.
Excluding the corporate stores, the gross margin declined to 24.9% (26.8% for
the same period last year) based on increased cost of goods sold and a subsidy
provision of $5.9 million for the nine months ended March 31, 2011.
Selling Expenses
For the three months ended For the nine months ended
March 31 March 31
------------------------------------------------------------
2011 2010 Increase 2011 2010 Increase
------------------------------------------------------------
Selling expenses $ 3,207 $ 459 600% $ 9,242 $ 1,563 492%
The Company spent $1.8 million ($6.3 million for the year to date) on
advertising during the three months ended March 31, 2011 compared to $0.4
million ($1.4 million for the year to date) for the same quarter last year as
the Company continued with its advertising campaign to increase brand
recognition predominantly through television commercials and outdoor billboard
advertising. Selling expenses were increased by $1.4 million on the operating
expenses of the corporate owned retail outlets which are currently still in the
start up phase of operations. Selling expenses represented 7.2% and 1.4% of
total revenue for the three months ended March 31 2011 and 2010, respectively,
and were 6.5% and 1.4% of total revenue for the nine months ended March 31 2011
and 2010, respectively.
Research and Development Expenses
For the three months ended For the nine months ended
March 31 March 31
------------------------------------------------------------
2011 2010 Increase 2011 2010 Increase
------------------------------------------------------------
Research and
development
expenses $ 195 $ 152 29% $ 598 $ 439 36%
Research and development expenses increased during the three and nine months
ended March 31, 2011 as the Company invested additional funds on expanding its
research and development centre and the number of new products being developed.
General and Administrative Expenses
For the three months ended For the nine months ended
March 31 March 31
------------------------------------------------------------
2011 2010 Increase 2011 2010 Increase
------------------------------------------------------------
General and
administrative
expenses $ 1,359 $ 1,091 24% $ 3,679 $ 2,495 47%
Corporate expenses related to being a public company, including salaries,
directors fees, audit fees and stock compensation expenses totalled $0.5 million
and $1.4 million during the three and nine months ended March 31, 2011 compared
to $0.4 million and $0.7 million for the same periods of the prior year. General
and administrative expenses represented 3.0% and 3.3% of total revenue for the
three months ended March 31, 2011 and 2010, respectively and 2.6% and 2.2% of
total revenue for the nine months ended March 31, 2011.
Other Expenses (Income), net
For the three months ended For the nine months ended
March 31 March 31
------------------------------------------------------------
2011 2010 Increase 2011 2010 Decrease
------------------------------------------------------------
Other expense
(income), net $ (73) $ 15 587% $ 9 $ (19) 147%
Other expenses, net include interest income of $0.06 million for the three
months ended March 31, 2011. For the nine months ended March 31, 2011, the net
expense includes a loss of $0.2 million on the disposition of several buildings
that were demolished during the first quarter as part of preparation of the new
building construction.
Income Tax Expense
For the three months ended For the nine months ended
March 31 March 31
------------------------------------------------------------
2011 2010 Increase 2011 2010 Decrease
------------------------------------------------------------
Income tax
expense $ 2,072 $ 1,989 4% $ 6,444 $ 7,264 11%
The statutory income tax rate in the PRC is 25% and in Canada is 33%. During the
first quarter, the Company implemented procedures to reduce the level of
non-deductible expenses in the PRC which lowered the effective tax rate in the
quarter to 26% compared to 28% for the same quarter last year. Tax losses in
Canada for which no accounting benefit has been recognized further increased the
effective tax rate tax to 27% for the three months ended March 31, 2011 compared
to 28% last year.
Net Income
For the three months ended For the nine months ended
March 31 March 31
------------------------------------------------------------
2011 2010 Increase 2011 2010 Decrease
------------------------------------------------------------
Net income $ 5,384 $ 5,194 4% $ 17,439 $ 18,401 5%
Net income increased 4% to $5.4 million for the three months ended March 31,
2011 compared to the same period last year. In RMB, net income increased 6% to
RMB 35.9 million for the three months ended March 31, 2011 compared to RMB 34.1
million in the third quarter of last year. Revenue growth before subsidy
provisions increased 38% over the third quarter of 2010 and subsidy provisions
increased $1.4 million over the same period last year. A combination of
increased sales to distributors and revenues from corporate owned stores
generated an additional $3.2 million of gross profit which was offset by
increases in selling expenses of $2.7 million (primarily operating costs of
corporate stores and advertising expenses) and general and administrative
expenses of $0.3 million resulting in higher net income by $0.2 million or 4%.
Net income decreased 5% to $17.4 million for the nine months ended March 31,
2011 compared to the nine months ended March 31, 2010. Revenue growth before
subsidy provision increased 30% over the nine months ended March 31, 2010 and
subsidy provisions increased $4.7 million over the same period last year. A
combination of increased sales to distributors and revenues from corporate owned
stores generated an additional $7.3 million of gross profit which was offset by
increases in selling expenses of $7.7 million (primarily operating costs of
corporate stores and advertising expenses), increased general and administrative
expenses of $1.2 million (primarily corporate head office expenses) and lower
income taxes of $0.8 million resulting in a lower net income by $1.0 million or
5%.
Basic and Diluted Earnings Per Share
Basic and diluted earnings per share was 9 cents for the three months ended
March 31, 2011 compared to 8 cents for the same quarter last year and was 28
cents for the nine months ended March 31, 2011 compared to 34 cents for the
first nine months of fiscal 2010. There were 62,080,400 shares issued and
outstanding as at March 31, 2011. The weighted average number shares outstanding
during the three months ended March 31, 2011 and 2010 was 62,114,261 and
62,166,672, respectively and for the nine months ended March 31, 2011 and 2010
was 62,157,742 and 54,508,112 respectively. As a result of the application of
continuity of interest accounting, all periods prior to the initial public
offering completed on December 21, 2009 are deemed to have 50,000,000 shares
issued and outstanding for the purpose of determining earnings per share.
Summary of Quarterly Results
The following table is a summary of the selected quarterly financial information
for each of the eight quarters ended March 31, 2011. The results over the last
eight quarters are impacted by the fluctuation of the RMB against the Canadian
dollar. Revenue has increased over the past eight quarters as a result of the
expansion of the number of distributor and corporate owned retail outlets by 33%
from 1,557 retail outlets at April 1, 2009 to 2,068 retail outlets as at March
31, 2011.
Mar 31 Dec 31 Sept 30 June 30
Quarter Ended 2011 2010 2010 2010
----------------------------------------------------
Revenue $ 44,628 $ 47,877 $ 50,425 $ 50,553
Net income 5,384 4,999 7,056 8,575
Earnings per share -
basic and diluted $ 0.09 $ 0.08 $ 0.11 $ 0.14
Mar 31 Dec 31 Sept 30 June 30
Quarter Ended 2010 2009 2009 2009
----------------------------------------------------
Revenue $ 33,342 $ 36,960 $ 43,030 $ 44,349
Net income 5,194 5,550 7,657 7,597
Earnings per share -
basic and diluted $ 0.08 $ 0.11 $ 0.15 $ 0.15
Liquidity and Capital Resources
Liquidity
The purpose of liquidity management is to ensure there is sufficient cash to
meet all of the Company's financial commitments and obligations as they fall
due. The Company believes that it has the flexibility to obtain, from current
cash holdings and ongoing operations, the funds needed to fulfill its cash
requirements during the current financial year. The Company's main source of
funds is from the sales of its products to distributors and cash on hand. The
Company's use of funds is primarily for its operating expenses including the
payment for its production of footwear and outsourced production to third party
suppliers.
The Company has been expanding and utilizing cash to increase its brand
recognition, support its' growth in retail outlets and shorten the payment
cycle. As a result, the cash on hand has decreased from $85.9 million as at June
30, 2010 to $65.3 million as at March 31, 2011. The cash on hand is expected to
decrease next quarter as the Company anticipates beginning construction of its
new building which will be financed from existing cash on hand and operating
cash flow.
The Company commences its manufacturing or outsourcing of most products at the
time that it enters into a binding sales contract with the distributor. Finished
goods inventory increased to $12.6 million as at March 31, 2011 compared to $4.1
million as at March 31, 2010. Finished goods inventory was higher as at March
31, 2011 as a result of the timing of outsourced manufacturing orders. The other
components of inventory decreased 50% to $0.9 million.
Accounts receivable decreased to $33.3 million as at March 31, 2011 compared to
$34.1 million as at June 30, 2010 and $23.7 million as at March 31, 2010. The
days sales outstanding is 63 days for the three months ended March 31, 2011
compared to 60 days for the year ended June 30, 2010 and 71 days for the three
months ended March 31, 2010. The Company has not experienced any increase in bad
debts or increased provision for allowance for doubtful accounts.
Accounts payable decreased to $12.1 million as at March 31, 2011 compared to
$30.3 million as at June 30, 2010 and $15.9 million as at March 31, 2010. The
Company has been shortening the payment terms to its supplier.
At present, there are no known demands, commitments, events or uncertainties
that would adversely affect the trends and expected fluctuations in the
Company's liquidity. The Company believes it has the funds required to meet its
business objectives and working capital and other cash requirements for at least
twelve months. However, there can be no assurances that these funds will be
sufficient and the Company may have to evaluate additional means of financing,
including additional debt or equity financing.
Net cash used by operating activities for the three and nine months ended March
31, 2011 was $14.1 million and $11.6 million, respectively compared to net cash
provided of $10.6 million and $13.7 million for the comparable periods of fiscal
2010. During the three months ended March 31, 2011, the increased inventory of
finished goods, the disbursement of subsidy payments and the reduction of
accounts payable increased the use of cash in the quarter. No dividends were
paid out during the three or nine months ended March 31, 2011 and 2010. Net cash
provided/(used) during the three months ended March 31, 2011 and 2010 was
($16.4) million and $10.2 million, respectively. During the nine months ended
March 31, 2011 and 2010, net cash provided/(used) was ($20.6) million and $44.5
million. The Company's initial public offering raised cash of $34.0 million
during the nine months ended March 31, 2010 which the Company has been
disbursing in fiscal 2011.
Working capital increased from $89.5 million (RMB 572.5 million) as at June 30,
2010 to $99.0 million (RMB 667.0 million) as at March 31, 2011 as a result of
the growth in revenue and profitability.
Capital Expenditures
The Company's capital expenditures primarily relate to its investment in
equipment to upgrade its production lines and leasehold improvements for the
corporate-owned retail outlets. The Company will complete the installation and
testing of its upgraded five existing production lines in June, 2011. The
Company has recently commenced construction of a new ten storey building. The
Company expects to complete construction of the building and installation of two
new production lines by the end of the fourth quarter of fiscal 2012, barring
any construction delays, at a cost of approximately $7 million. Additional
research and development and quality control equipment will also be installed at
a cost of approximately $3 million.
Capital Structure
Shares Outstanding
As of March 31, 2011, the Company has 62,080,400 common shares issued and
outstanding. As of May 25, 2011, the date of this MD&A, the Company has
62,080,400 common shares issued and outstanding.
Normal Course Issuer Bid
On September 17, 2010 the Company announced approval from the TSX Venture
Exchange to proceed with a normal course issuer bid. The Company can purchase
for cancellation, at market prices, up to 3,112,975 of its issued and
outstanding common shares, representing 5% of the 62,259,500 common shares
outstanding as at September 29, 2010. The Bid commenced on October 4, 2010 and
will terminate on October 3, 2011, or on such earlier date as the Bid is
completed or otherwise terminated by Zungui.
During the three months ended March 31, 2011, the Company repurchased 47,700
shares at an average price of $2.67 for total proceeds of $0.1 million. During
the nine months ended March 31, 2011, the Company repurchased 179,100 shares at
an average price of $2.78 for total proceeds of $0.5 million. All of the
repurchased shares have been cancelled.
Reorganization and Share Capital
On December 21, 2009, the Company completed a share exchange agreement with
Southern whereby the 10,000 issued and outstanding common shares of Southern
were exchanged for 50,000,000 common shares of the Company. On June 25, 2009,
Southern, an investment holding company, acquired 100% ownership interest in
Honorable Int'l Investment Co., Limited ("Honorable") which is an investment
holding company based in Hong Kong. Honorable acquired 100% interest in
Mengshida Shoes Co., Ltd Shishi City ("Mengshida") on July 25, 2008. Mengshida
manufactures and sells athletic footwear and related apparel and accessories as
well as leisure leather shoes in the PRC.
These reorganization transactions were accounted for on a continuity of interest
basis of accounting whereby the various assets and liabilities are accounted for
at the carrying value in the combining companies' records. Current and
comparative consolidated financial results are presented as if the companies
have always been combined. The number of common shares outstanding has been
restated for the purpose of determining earnings per share to reflect the
reorganization.
Initial Public Offering
On December 21, 2009, the Company completed its initial public offering ("IPO")
by issuing 11,500,000 common shares at a price of $3.25 per common share,
resulting in net proceeds of $33,040 after deducting the underwriters' fees and
other related expenses of the offering of $4,355.
The Company granted the underwriters an over-allotment option exercisable for a
period of 30 days from closing of the IPO to purchase up to an additional
1,725,000 common shares at the issue price. No stock based compensation was
recorded for this option. On January 12, 2010, the underwriters exercised the
over-allotment option and purchased 759,500 common shares at $3.25. Net proceeds
of $2,278 were received after deducting the underwriters' fees and related
expenses of $190.
In addition, the underwriters received compensation options entitling them to
acquire up to 7% of the number of common shares issued under the IPO including
any shares exercised under the over-allotment option. On December 21, 2009, the
underwriters received an option to purchase 805,000 common shares ("compensation
options") at $3.25 for a period of 24 months. On January 12, 2010, the
underwriters received a further 53,165 compensation options in conjunction with
the exercise of the over-allotment that will be exercisable for common shares at
$3.25 per share until January 12, 2012.
Stock Options
On December 13, 2010, the Company granted 150,000 stock options to employee and
non-employee directors at an exercise price of $2.65 and an expiry date of
December 13, 2015. As of March 31, 2011, none of these stock options have vested
nor are exercisable.
In addition, there are 700,000 stock options outstanding granted to consultants
and 950,000 stock options outstanding previously granted to employees and
non-employee directors. The stock options have the same terms and conditions and
were granted on December 21, 2009 at an exercise price of $3.25 and an expiry
date of December 21, 2014. As of March 31, 2011, one-third of these stock
options are vested but not have been exercised.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Use of Proceeds
The Company completed its initial public offering on December 21, 2009 and
received net cash proceeds of $34,759 after deducting the underwriter fees but
prior to the issue costs of $1,719. On January 12, 2010, the Company received a
further $2,278 of net cash proceeds from the exercise of the over-allotment
option.
Balance to be
Disbursed as disbursed as
of March 31 of March 31
Intended Use of Proceeds As disclosed 2011 2011
---------------------------------------------
Retail and Distribution Network
Expansion $ 16,000 $ 8,775 $ 1,545
Increase Production Capacity -
Building and Equipment 7,000 1,841 5,159
Brand Recognition, Awareness
and Image 9,000 8,273 727
Working Capital 2,800
------------
Net Proceeds $ 34,800
------------
------------
The disbursement of the network expansion proceeds is expected to continue to
increase during the next quarter of fiscal 2011 as distributors achieve the
criteria for payment of the subsidies. The Company does not expect to utilize
approximately $5.7 million of the network expansion proceeds for the original
350 new retail outlets opened in calendar 2010. The Company expects to spend $10
million on a new building and equipment which is $3 million more than forecasted
in the initial public offering. The savings achieved on the network expansion
more than offset the increase in cost for the new building and equipment and,
accordingly, this will not affect the Company's ability to achieve its business
objectives and milestones. While the Company intends to use the net proceeds as
stated above, circumstances may arise where, for sound business reasons and in
order to account for currency fluctuations, a reallocation of monies may be
necessary or advisable.
Related Party Transactions
Directors of Mengshida have jointly provided personal guarantees to indemnify
Mengshida on certain potential tax exposures including related interest and
penalties for periods prior to 2006. As a result, the Company has recorded an
other receivables from the directors of $1.3 million as at March 31, 2011 and
June 30, 2010.
A loan was received from a director of Honorable for $0.4 million as at March
31, 2011 and June 30, 2010. The loan is not secured, is interest free and
payable on demand.
Directors of Mengshida have jointly made personal guarantees to indemnify the
Company for any premiums for social insurance in arrears in excess of RMB
4,465,000 relating to periods prior to December 31, 2009. One of the Directors
has pledged 2,000,000 common shares of the Company owned by him for any
potential liability that may become payable under this undertaking.
A corporation owned 50% by one of Zungui's Directors received $400,000 in cash
and 700,000 stock options of the Company in trust for various parties as
consideration for services rendered in connection with the initial public
offering. The stock options were granted at $3.25 and vest in equal amounts over
three years. A company controlled by the same Director received 440,000 of the
700,000 stock options granted by the Company. The above transactions were
conducted in the normal course of business and are measured at the exchange
amount, which is the amount of consideration established and agreed to by the
parties.
On January 5, 2011, the Company entered into a consulting contract with a China
based firm to provide management training, over a two year period, to the 50
most senior executives at Mengshida. The consideration for these services is an
option on 800,000 common shares of the Company at an exercise price of $2.60 per
share. The options have been granted and will be settled upon exercise through
the transfer of shares of the Company from the holdings of the Chairman and
controlling shareholder. The options have an expiry date of January 5, 2013. The
Company has the right to terminate this agreement by July 1, 2011 and require
the consultant to return the option on 800,000 common shares of the Company if
it is not satisfied with the services provided. The Company recorded a stock
based compensation expense for the services rendered for the three months ended
March 31, 2011 of $56 with a credit to contributed surplus.
Financial Instruments and Other Instruments
The Company held cash of $65.3 million on its balance sheet as at March 31,
2011. The Company does not have any cash equivalents or invested assets. The
Company does not currently utilize any other instruments such as derivative
financial instruments to reduce its exposure to interest rate risk. The
Company's location in the Fujian Province is in close proximity to a large
number of suppliers of raw materials required in the manufacturing of the
Company's products creating procurement efficiency and, as a result, the Company
does not need to enter into any forward future contracts to purchase raw
materials. All of the Company's financial assets and financial liabilities are
short term in nature and are measured on an ongoing basis at fair value or
amortized cost.
Adoption of New Accounting Policies
The Company has a stock based compensation plan. The Company estimates the fair
value of options granted to employees, non-employees directors and consultants
using the Black-Scholes option pricing model. The Company recognizes the fair
value as a compensation expense over the period that the stock options vest,
with a corresponding increase to contributed surplus. When these stock options
are exercised, the amount of the proceeds together with the amount recorded in
contributed surplus, is recorded in share capital.
The Canadian Institute of Chartered Accountants ("CICA") has amended Handbook
Section 3862 to require enhanced disclosure on the fair value of certain
financial instruments. The Company adopted these recommendations effective June
30, 2010 and the required disclosures are included in the note 16 to the
unaudited interim consolidated financial statements. The Company does not have
any financial instruments measured at fair value that require disclosure of the
hierarchy levels. These amendments did not impact the company's results of
operations or financial position.
Future Accounting Changes
Transition to IFRS
Canada's Accounting Standards Board ratified a strategic plan that will result
in Canadian GAAP, as used by public companies, being evolved and converged with
International Financial Reporting Standards ("IFRS") over a transitional period
to be complete by 2011. The Company will be required to report using IFRS
effective for interim and annual financial statements relating to the fiscal
year ended June 30, 2012. The Company will issue its financial statement in the
first quarter of 2012 in accordance with IFRS including comparative data for
2011.
The Company expects the transition to IFRS to have an impact on financial
reporting, business processes and information systems. The Company began a
preliminary assessment during the year ended June 30, 2010. During the second
quarter of 2011, the Company engaged an external advisor to assist with the
initial assessment phase of the process and develop a conversion plan for the
detailed assessment, design and implementation phase of the project. The Company
has completed its initial analysis of key areas for which changes to accounting
policies may be required and is currently in the detailed analysis phase of the
project reviewing all relevant IFRS requirements and identification of areas
requiring accounting policies changes or those with accounting policy
alternatives. The Company will continue to assess the first-time adoption
requirements and alternatives (IFRS 1) throughout the next quarter and finalize
the first-time adoption alternatives prior to June 30, 2011. The Company expects
the more significant areas of impact to be in relation to the IFRS1 policy
choices to reset foreign currency translation differences to zero on transition
and in relation to stock based compensation. The Company will review the impact
on information technology, internal controls and contractual arrangements during
the next quarter. The Company will invest in training and resources through the
transition process to facilitate a timely conversion.
The Company will cease to prepare its consolidated financial statements in
accordance with Canadian GAAP and will apply IFRS as its basis of accounting.
Consequently, future accounting changes to Canadian GAAP that are effective for
periods beginning on or after July 1, 2011 are not discussed in these interim
financial statements.
Outlook
The PRC domestic footwear market remains a high growth industry consistent with
the growth of the PRC's economy. Zungui's focus is on the domestic market and
the Company allocates its resources and efforts to meet the demands of China's
growing local markets. Zungui is currently working to increase its presence in
Tier 2 and 3 Cities, with populations ranging up to 5 million people, throughout
the PRC, where both population and disposable income are growing. This increased
presence will be achieved by opening additional corporate-owned retail outlets
and by assisting distributors in expanding their retail presence.
Corporate-owned retail outlets typically offer higher margins than sales through
distributors as well as greater operating flexibility. By increasing the number
of corporate-owned retail outlets, Zungui believes it can focus its growth
strategy in certain regions while complementing its current distribution
network. Through to June 30, 2011, the Company expects to open an additional 30
corporate-owned retail outlets and 70 distributor retail outlets.
Zungui Haixi Corporation
Consolidated Balance Sheets
(Unaudited)
(Expressed in thousands of Canadian Dollars)
March 31, June 30,
2011 2010
Current assets
Cash $ 65,258 $ 85,876
Accounts receivable, net 33,328 34,128
Prepaid expenses 2,497 343
Inventories (Note 4) 12,582 3,498
Other receivables (Note 13) 1,296 1,331
Future income taxes 495 58
------------------------------
Total current assets 115,456 125,234
Property, plant and equipment (Note 5) 9,193 6,470
------------------------------
Total assets $ 124,649 $ 131,705
------------------------------
------------------------------
Current liabilities
Accounts payable and accrued liabilities $ 12,146 $ 30,288
Taxes payable 3,836 4,974
Due to related party (Note 13) 424 440
------------------------------
Total current liabilities 16,406 35,702
Shareholders' equity
Share capital (Note 7) 33,355 33,451
Contributed surplus (Note 7) 3,695 3,282
Surplus reserve funds (Note 9) 6,043 4,774
Retained earnings 71,929 56,161
Accumulated other comprehensive income (loss) (6,779) (1,665)
------------------------------
Total shareholders' equity 108,243 96,003
------------------------------
Total liabilities and shareholders' equity $ 124,649 $ 131,705
------------------------------
------------------------------
Subsequent Event (Note 17)
The accompanying notes are an integral part of these consolidated financial
statements.
Approved By the Board
Michael W. Manley, Director
Patrick A. Ryan, Director
Zungui Haixi Corporation
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
(Expressed in thousands of Canadian Dollars, except per share data)
Three Months Ended Nine Months Ended
March 31, March 31,
2011 2010 2011 2010
------------------------------------------------------------
Revenue (Note
11) $ 44,628 $ 33,342 $ 142,930 $ 113,332
Cost of sales 32,484 24,442 105,519 83,186
------------------------------------------------------------
Gross profit 12,144 8,900 37,411 30,146
------------------------------------------------------------
Selling expenses 3,207 459 9,242 1,563
Research and
development
expenses 195 152 598 439
General and
administrative
expenses 1,359 1,091 3,679 2,495
Foreign exchange
loss (gain) (10) - 22 -
Other expenses
(income), net (63) 15 (13) (19)
------------------------------------------------------------
4,688 1,717 13,528 4,481
------------------------------------------------------------
Income before
income taxes 7,456 7,183 23,883 25,665
Income tax
expense (Note
12) 2,072 1,989 6,444 7,264
------------------------------------------------------------
Net income 5,384 5,194 17,439 18,401
------------------------------------------------------------
Other
comprehensive
loss:
Unrealized
loss on
foreign
currency
translation
of self-
sustaining
operations (1,710) (2,016) (5,114) (5,966)
------------------------------------------------------------
Comprehensive
income $ 3,674 $ 3,178 $ 12,325 $ 12,435
------------------------------------------------------------
------------------------------------------------------------
Basic and
diluted
earnings per
share (Note
7(b)) $ 0.09 $ 0.08 $ 0.28 $ 0.34
------------------------------------------------------------
Weighted average
number of
shares
outstanding 62,114,261 62,166,672 62,157,742 54,508,112
------------------------------------------------------------
------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Zungui Haixi Corporation
Consolidated Statements of Shareholders' Equity
(Unaudited)
(Expressed in thousands of Canadian Dollars)
Three Months Ended Nine Months Ended
March 31, March 31,
2011 2010 2011 2010
--------------------------------------------------------
Share Capital
Balance, beginning
of period $ 33,380 $ 31,224 $ 33,451 $ -
Issuance of share
capital, net - 2,278 - 35,318
Repurchased for
cancellation (25) - (96) -
Stock based
compensation
expense - (51) - (1,867)
--------------------------------------------------------
Balance, end of
period $ 33,355 $ 33,451 $ 33,355 $ 33,451
Contributed Surplus
Balance, beginning
of period $ 3,512 $ 3,003 $ 3,282 $ 1,174
Stock based
compensation
expense 183 165 413 1,994
--------------------------------------------------------
Balance, end of
period $ 3,695 $ 3,168 $ 3,695 $ 3,169
Surplus Reserve
Funds
Balance, beginning
of period $ 6,043 $ 1,938 $ 4,774 $ 1,938
Transfer from
retained earnings - - 1,269 -
--------------------------------------------------------
Balance, end of
period $ 6,043 $ 1,938 $ 6,043 $ 1,938
Retained Earnings
Balance, beginning
of period $ 66,648 $ 45,228 $ 56,161 $ 32,021
Net income 5,384 5,194 17,439 18,401
Repurchase of shares
for cancellation (103) - (402) -
Transfer to surplus
reserve funds - - (1,269) -
--------------------------------------------------------
Balance, end of
period $ 71,929 $ 50,422 $ 71,929 $ 50,422
Accumulated Other
Comprehensive
Income (Loss)
Balance, beginning
of period $ (5,069) $ (3,908) $ (1,665) $ 42
Unrealized foreign
currency
translation losses (1,710) (2,016) (5,114) (5,966)
--------------------------------------------------------
Balance, end of
period $ (6,779) $ (5,924) $ (6,779) $ (5,924)
Total Shareholders'
Equity $ 108,243 $ 83,055 $ 108,243 $ 83,055
--------------------------------------------------------
--------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Zungui Haixi Corporation
Consolidated Statements of Cash Flows
(Unaudited)
(Expressed in thousands of Canadian Dollars unless otherwise noted)
Three Months Ended Nine Months Ended
March 31, March 31,
2011 2010 2011 2010
------------------------------------------------
Cash flows from operating
activities
Net income $ 5,384 $ 5,194 $ 17,439 $ 18,401
Items not affecting cash:
Depreciation 619 114 1,401 337
Future income taxes 292 - (449) (10)
Provision for doubtful
accounts 34 (45) 3 119
Stock based compensation 183 114 413 127
Gain (loss) on disposal of
property, plant and
equipment - (1) 201 (1)
Changes in non-cash working
capital
Accounts receivable (3,380) 4,242 (948) (4,633)
Prepaid expenses 288 (4) (2,218) (5)
Inventories (9,210) 5,513 (9,468) (2,303)
Other receivables 34 (46) (32) (117)
Accounts payable and
accrued liabilities (7,873) (3,919) (16,995) 2,178
Taxes payable (381) (529) (906) (398)
------------------------------------------------
Net cash provided (used) by
operating activities (14,010) 10,633 (11,559) 13,679
Cash flows from investing
activities
Property, plant and
equipment (1,118) (291) (4,036) (297)
Proceeds from sale of
equipment - - 20 -
Construction in progress (12) - (703) -
------------------------------------------------
Net cash used in investing
activities (1,130) (291) (4,719) (297)
Cash flows from financing
activities
Due to related party (10) - (17) -
Increase in share capital - 1,466 - 35,431
Repurchase of shares for
cancellation (128) - (498) -
------------------------------------------------
Net cash provided (used) by
financing activities (138) 1,466 (515) 35,431
Effect of exchange rate
changes on cash (1,148) (1,581) (3,825) (4,320)
------------------------------------------------
Net increase (decrease) in
cash (16,426) 10,227 (20,618) 44,493
Cash, beginning of period 81,684 58,023 85,876 23,757
------------------------------------------------
Cash, end of period $ 65,258 $ 68,250 $ 65,258 $ 68,250
------------------------------------------------
------------------------------------------------
Supplemental disclosure of
cash information
Interest paid in cash $ - $ 5 $ - $ 18
Income taxes paid in cash 2,127 2,541 7,844 7,730
The accompanying notes are an integral part of these consolidated financial
statements
Zungui Haixi Corporation
Notes to Consolidated Financial Statements
For the three month periods ended March 31, 2011 and 2010
(Unaudited)
(Expressed in thousands of Canadian Dollars except per share and share
amounts)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Zungui Haixi Corporation ("Zungui" or "Company") was incorporated under the
Ontario Business Corporation Act on August 11, 2009. Zungui is a holding company
listed on TSX Venture Exchange. Through its subsidiaries, Zungui manufactures
and sells sports footwear and related apparel and accessories as well as leisure
leather shoes in the People's Republic of China (the "PRC" or "China"). Zungui's
wholly owned subsidiaries include Southern Trends International Holding Company
Ltd. ("Southern"), Honorable Int'l Investment Co., Limited ("Honorable") and
Mengshida Shoes Co., Ltd. Shishi City ("Mengshida").
On December 21, 2009, the Company completed a share exchange agreement with
Southern whereby the 10,000 issued and outstanding common shares of Southern
were exchanged for 50,000,000 common shares of the Company. On June 25, 2009,
Southern, an investment holding company, acquired 100% ownership interest in
Honorable which is an investment holding company based in Hong Kong. Honorable
acquired 100% interest in Mengshida on July 25, 2008.
These reorganization transactions were accounted for on a continuity of interest
basis of accounting whereby the various assets and liabilities are accounted for
at the carrying value in the combining companies' records. Current and
comparative consolidated financial results are presented as if the companies
have always been combined. The number of common shares outstanding has been
restated for the purpose of determining earnings per share to reflect the
reorganization.
2. INITIAL PUBLIC OFFERING
On December 21, 2009, the Company completed its initial public offering ("IPO")
by issuing 11,500,000 common shares at a price of $3.25 per common share,
resulting in net proceeds of $33,040 after deducting the underwriters' fees and
other related expenses of the offering of $4,335.
The Company granted the underwriters an over-allotment option exercisable for a
period of 30 days from closing of the IPO to purchase up to an additional
1,725,000 common shares at the issue price. No stock based compensation was
recorded for this option. On January 12, 2010, the underwriters exercised the
over-allotment option and purchased 759,500 common shares at $3.25, resulting in
net proceeds of $2,278 after deducting the underwriters' fees and other related
expenses of $190.
In addition, the underwriters received compensation options entitling them to
acquire up to 7% of the number of common shares issued under the IPO including
any shares exercised under the over-allotment option. Refer to Note 7(d).
3. SIGNIFICANT ACCOUNTING POLICIES
These interim consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles ("GAAP") for interim
financial statements and are consistent with the accounting policies and methods
of computation as were used in the preparation of the audited consolidated
financial statements for the year ended June 30, 2010. The interim consolidated
financial statements do not contain all the information and disclosures required
by GAAP applicable for annual consolidated financial statements and accordingly
should be read in conjunction with the audited consolidated financial statements
for the year ended June 30, 2010. The results of the operations for the interim
periods are not necessarily indicative of the full-year results.
(a) Foreign currency translation
The Company's primary economic activities are in China and the functional
currency is Chinese Renminbi ("RMB") for its wholly owned subsidiary, Mengshida,
located in China. The Company's head office, Honorable and Southern's functional
currency is Canadian dollars. The Company uses Canadian dollars as its reporting
currency. Mengshida is considered to be a self-sustaining foreign operation and
its' financial statements are translated into the reporting currency using the
current rate method. Under this method, revenue and expenses are translated into
the reporting currency using the weighted average exchange rates for the period
and assets and liabilities are translated using the exchange rate at the end of
the period. Capital transactions are translated using historical rates. All
resulting exchange differences are reported as accumulated other comprehensive
income (loss), which is presented as a separate component of shareholders'
equity.
(b) Changes in accounting policies
(i) Stock-based compensation plan
The Company has a stock based compensation plan which is described in Note 8.
The Company measures and recognizes compensation expense using the fair value
method. Under this method, the Company estimates the fair value of options
granted to employees, non-employee directors and consultants at the grant date
using the Black-Scholes option pricing model. The Company recognizes the fair
value as a compensation expense over the period that the stock options vest on a
straight line basis, with a corresponding increase to contributed surplus. When
these stock options are exercised, the amount of the proceeds together with the
amount recorded in contributed surplus, is recorded in share capital.
(ii) Financial Instruments
The Canadian Institute of Chartered Accountants ("CICA") has amended Handbook
Section 3862 to require enhanced disclosure on the fair value of certain
financial instruments. The Company adopted these recommendations effective June
30, 2010 and the required disclosures are included in Note 15. The Company does
not have any financial instruments measured at fair value that require
disclosure of the hierarchy levels. These amendments did not impact the
Company's results of operations or financial position.
(c) Future accounting changes
(i) Transition to IFRS
Canada's Accounting Standards Board ratified a strategic plan that will result
in Canadian GAAP, as used by public companies, being evolved and converged with
International Financial Reporting Standards ("IFRS") over a transitional period
to be complete by 2011. The Company will be required to report using IFRS for
interim and annual financial statements relating to the fiscal year ended June
30, 2012. The Company will issue its financial statement in the first quarter of
2012 in accordance with IFRS including comparative data for 2011.
The Company expects the transition to IFRS to have an impact on financial
reporting, business processes and information systems. The Company began a
preliminary assessment during the year ended June 30, 2010. During the second
quarter of 2011, the Company engaged an external advisor to assist with the
initial assessment phase of the process and develop a conversion plan for the
detailed assessment, design and implementation phase of the project. The Company
will invest in training and resources through the transition process to
facilitate a timely conversion.
The Company will cease to prepare its consolidated financial statements in
accordance with Canadian GAAP and will apply IFRS as its basis of accounting.
Consequently, future accounting changes to Canadian GAAP that are effective for
periods beginning on or after July 1, 2011 are not discussed in these interim
financial statements.
4. INVENTORIES
Inventories consist of:
----------------------------------------------------------------------------
March 31, June 30,
2011 2010
----------------------------------------------------------------------------
Raw materials $ 451 $ 1,433
Work in progress 497 466
Finished goods 11,634 1,599
----------------------------------------------------------------------------
Total inventory $ 12,582 $ 3,498
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Inventories expensed as cost of sales were $32,405 and $105,324 for the three
and nine months ended March 31, 2011, respectively and were $24,412 and $83,126
for the three and nine months ended March 31, 2010, respectively.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
----------------------------------------------------------------------------
March 31, 2011
----------------------------------------------------------------------------
Accumulated Net Book
Cost Depreciation Value
----------------------------------------------------------------------------
Plant and building $ 5,246 $ 1,963 $ 3,283
Machinery and production equipment 2,098 798 1,300
Automobiles and trucks 639 222 417
Leasehold improvements 4,557 1,171 3,386
Construction in progress 688 - 688
Office equipment 215 96 119
----------------------------------------------------------------------------
Total $ 13,443 $ 4,250 $ 9,193
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
June 30, 2010
----------------------------------------------------------------------------
Accumulated Net Book
Cost Depreciation Value
----------------------------------------------------------------------------
Plant and building $ 5,859 $ 2,036 $ 3,823
Machinery and production equipment 1,798 950 848
Automobiles and trucks 668 191 477
Leasehold improvements 1,422 156 1,266
Construction in progress
Office equipment 148 92 56
----------------------------------------------------------------------------
Total $ 9,895 $ 3,425 $ 6,470
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Depreciation expense was $619 and $1,401 for the three and nine months ended
March 31, 2011, respectively, and $114 and $337 for the three and nine months
ended March 31, 2010, respectively.
6. BANK LOAN
On July 17, 2009, the Company signed a one year term loan agreement with Bank of
Agriculture Shishi branch to borrow $511 (RMB 3,000,000). The interest rate is
the higher of 5.31% per annum or the lending rate per Bank of China, reset every
3 months. Interest is payable on a quarterly basis. The loan was fully repaid on
June 25, 2010.
Interest expense was $nil for the three and nine months ended March 31, 2011,
respectively, and $31 and $100 for the three and nine months ended March 31,
2010, respectively.
7. SHARE CAPITAL, PAID IN CAPITAL AND CONTRIBUTED SURPLUS
(a) Share Capital:
As at March 31, 2011 the authorized share capital of Zungui was unlimited common
shares with no par value.
----------------------------------------------------------------------------
Number Number of Weighted
Number of of Compen- Average
Shares Stock sation Exercise
Issued Options Options Price Amount
----------------------------------------------------------------------------
Balance as at August
11, 2009 1 - - $ - $ -
Share exchange
transaction (Note 1) 50,000,000 - - - -
Initial public
offering (Note 2) 11,500,000 - - - 33,040
Cancellation of share (1) - - - -
Stock options (Note
7(d)):
Granted - 700,000 - 3.25 (1,005)
Underwriter options
(Note 7(d)) - - 805,000 3.25 (811)
----------------------------------------------------------------------------
Balance as at
December 31, 2009 61,500,000 700,000 805,000 - $ 31,224
----------------------------------------------------------------------------
Over-allotment option
(Note 2) 759,500 - - $ 3.25 $ 2,278
Underwriter options
(Note 7(d)) - - 53,165 3.25 (51)
----------------------------------------------------------------------------
Balance as at March
31, 2010 and June
30, 2010 62,259,500 700,000 858,165 - $ 33,451
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Normal course issuer
bid (131,400) - - - (71)
----------------------------------------------------------------------------
Balance as at
December 31, 2010 62,128,100 700,000 858,165 $ 3.25 $ 33,380
----------------------------------------------------------------------------
Normal course issuer
bid (47,700) - - - (25)
----------------------------------------------------------------------------
Balance as at March
31, 2011 62,080,400 700,000 858,165 - $ 33,355
----------------------------------------------------------------------------
----------------------------------------------------------------------------
On September 17, 2010, the Company announced its intention to proceed with a
normal course issuer bid as approved by the TSX Venture Exchange. The Company
can purchase for cancellation, at market prices, up to 3,112,975 of its issued
and outstanding common shares during the period October 4, 2010 to October 3,
2011. During the three months ended March 31, 2011, the Company repurchased
47,700 shares at an average price of $2.67 for total proceeds of $128. During
the nine months ended March 31, 2011, the Company repurchased 179,100 shares at
an average price of $2.78 for total proceeds of $498. Of the total cost, $25 and
$96 is charged to share capital for the three and nine months, respectively, and
$103 and $402 is charged to retained earnings for the three and nine months,
respectively. All of the repurchased shares were cancelled.
(b) Earnings Per Share:
As a result of the reorganization as described in Note 1 and the application of
the continuity of interest accounting, all periods prior to the initial public
offering completed on December 21, 2009 are deemed to have 50,000,000 shares
issued and outstanding for the purposes of calculating earnings per share.
(c) Stock Options Outstanding:
A summary of the stock options outstanding as at March 31, 2011 are as follows:
----------------------------------------------------------------------------
Remaining
Contractual
Exercise Date of Expiry Life Number Number
Price Grant Date (Years) Outstanding Exercisable
----------------------------------------------------------------------------
Employee and
Non-
Employee December December
Directors $3.25 21, 2009 21, 2014 3.7 950,000 316,666
----------------------------------------------------------------------------
December December
Consultants $3.25 21, 2009 21, 2014 3.7 700,000 233,333
----------------------------------------------------------------------------
December December
Underwriters $3.25 21, 2009 21, 2011 0.7 805,000 805,000
----------------------------------------------------------------------------
January January
Underwriters $3.25 12, 2010 12, 2012 0.7 53,165 53,165
----------------------------------------------------------------------------
Employee and
Non-
Employee December December
Directors $2.65 13, 2010 13, 2015 4.7 150,000 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(d) Consultant and Underwriters Options:
In conjunction with the initial public offering, on December 21, 2009 the
Company granted 700,000 stock options at an exercise price of $3.25 to
consultants (see Note 13(d)). The consultant's stock options vest equally over a
three year period. The per share fair value of these grants was $1.44. Stock
based compensation in the amount of $1,005 was deducted from share capital as
part of the expenses of the offering.
On December 21, 2009, the Company also granted the underwriters an option to
purchase 805,000 common shares ("compensation options") at $3.25 for a period of
24 months. The per share fair value of these grants was $1.01. Stock based
compensation in the amount of $811 was deducted from share capital as part of
the expenses of the offering.
On January 12, 2010, the underwriters earned an additional 53,165 common shares
("compensation options") at $3.25 for a period of 24 months in conjunction with
the exercise of the over-allotment option. The per share fair value of these
grants was $0.97. Stock based compensation in the amount of $51 was deducted
from share capital as part the expenses of the offering.
The fair value of the option grants above were estimated at the date of the
grant using a Black-Scholes option pricing model with the following weighted
average assumptions:
---------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, 2010 March 31, 2010
---------------------------------------------------------------------------
Risk-free interest rate 1.27 1.27-2.46
Expected dividend yield 0.0% 0.0%
Expected volatility 54.3% 54.3%
Expected option life (in years) 2 2 - 4
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Expected volatility is based on the historical volatility of companies in
comparable industries. The risk-free interest rate is based on yields of
Government of Canada T-bills with similar maturities. The expected option life
was estimated based on vesting schedule and the expiry date for the compensation
options.
(e) Paid in Capital:
As part of the reorganization referred to in Note 1, the paid in capital of
Mengshida of $1,174 became the contributed surplus of the Company.
On January 29, 2010, the Company applied to change the registered capital of
Mengshida to $33.9 million (RMB 220.0 million). As of March 31, 2011,
Mengshida's registered and paid in capital was $33.8 million (RMB 220.3
million).
8. STOCK BASED COMPENSATION
The Company introduced a stock option plan on December 21, 2009 to incent
directors, officers, consultants and employees. In accordance with the stock
option plan, the term of any stock option grant cannot exceed five years and no
more than 10% of Company's common shares are reserved for stock option grants.
On January 5, 2011, the Company entered into a consulting contract with a China
based firm to provide management training, over a two year period, to the 50
most senior executives at Mengshida. The consideration for these services is an
option on 800,000 common shares of the Company at an exercise price of $2.60 per
share. The options have been granted and will be settled upon exercise through
the transfer of shares of the Company from the holdings of the Chairman and
controlling shareholder (Refer to Note 13(e)). The options have an expiry date
of January 5, 2013. The Company has the right to terminate this agreement by
July 1, 2011 and require the consultant to return the option on the 800,000
common shares of the Company if it is not satisfied with the services provided.
The Company recorded a stock based compensation expense for the services
rendered for the three months ended March 31, 2011 of $56 with a credit to
contributed surplus.
On December 13, 2010, the Company granted 150,000 stock options at an exercise
price of $2.65 to Company employee and non-employee directors with an expiry
date of December 13, 2015. The stock options vest equally over a three year
period and as at March 31, 2011, none were vested nor exercisable. The per share
fair value of these grants was $1.23.
On December 21, 2009, the Company granted 950,000 stock options at an exercise
price of $3.25 to Company employees and non-employee directors with an expiry
date of December 21, 2014. The stock options vest equally over a three year
period and as at December 31, 2010, 316,666 were vested and exercisable. The per
share fair value of these grants was $1.44.
The fair value of the options grants was estimated at the date of the grant
using a Black-Scholes option pricing model with the following weighted average
assumptions:
----------------------------------------------------------------------------
Three and Nine Three and Nine
Months Ended Months Ended
March 31, 2011 March 31, 2010
----------------------------------------------------------------------------
Risk-free interest rate 1.768 - 2.558 2.46
Dividend yield 0.0% 0.0%
Expected volatility 56.6% - 57.8% 54.3%
Expected option life (in years) 1 - 4 4
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Expected volatility is based on the historical volatility of companies in
comparable industries. The risk-free interest rate is based on yields of
Government of Canada T-bills with similar maturities.
During the three and nine months ended March 31, 2011, stock based compensation
expense was $183 and $413, respectively, and during the three and nine months
ended March 31, 2010, stock based compensation was $114 and $127, respectively.
9. SURPLUS RESERVE FUNDS
In accordance with applicable regulations for foreign funded enterprises in the
PRC, Mengshida, the Company's operating subsidiary, is required to retain a
certain amount from net income as reserve funds. The amount retained shall not
be less than 10% of net income as determined under PRC GAAP annually for
statutory reserves. When the balance of the statutory reserves reaches 50% of
the registered capital of Mengshida, no further appropriations are required.
During the nine months ended March 31, 2011, Mengshida transferred $1.3 million
to its' surplus reserve funds. As of March 31, 2011 Mengshida's surplus reserve
funds aggregated $6,043 (June 30, 2010 - $4,774) which represents 17% (15% as of
June 30, 2010) of Mengshida's registered capital.
10. MAJOR CUSTOMERS AND SUPPLIERS
The Company sells products to various customers. There were no customers that
purchased more than 10% of the Company's products for the three and nine month
periods ended March 31, 2011 and 2010.
During the three month period ended March 31, 2011, purchases from three
suppliers, each represented 15% ($5,981), 13% ($4,968) and 13% ($4,955) of total
purchases. During the three month period ended March 31, 2010, purchases from
three suppliers represented 10% ($1,745), 9% ($1,509) and 8% ($1,420) of total
purchases. During the nine month period ended March 31, 2011, purchases from
three suppliers, each represented 17% ($18,193), 15% ($16,601) and 15% ($16,592)
of total purchases. During the nine month period ended March 31, 2010, purchases
from three suppliers represented 16% ($13,075), 16% ($13,009) and 16% ($12,989)
of total purchases.
11. REVENUE
----------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, March 31,
2011 2010 2011 2010
----------------------------------------------------------------------------
Footwear $ 37,303 $ 27,982 $ 126,557 $ 97,142
Apparel and accessories 8,851 5,468 22,290 17,372
----------------------------------------------------
46,154 33,450 148,847 114,514
Subsidy provision 1,526 108 5,917 1,182
----------------------------------------------------------------------------
Revenue $ 44,628 $ 33,342 $ 142,930 $ 113,332
----------------------------------------------------------------------------
----------------------------------------------------------------------------
12. INCOME TAXES
The Company is subject to income taxes in Canada while its operating subsidiary,
Mengshida is subject to the Corporate Income Tax Law of the PRC enacted on
January 1, 2008 which resulted in a unified tax rate of 25% for all enterprises.
The Company is not subject to any taxation in the British Virgin Islands and the
Company is subject to 16.5% income tax rate in Hong Kong.
The Company established a valuation allowance of $1,651 as at March 31, 2011
($1,515 as at June 30, 2010) due to the uncertainty of future realization of
future income tax assets that originated from tax losses recognized in Canada
and Hong Kong. As at March 31, 2011, the Company has income tax losses of $3,502
($1,820 as at June 30, 2010) for which no accounting benefit has been recognized
and which can be applied against future years' taxable income in Canada. These
losses expire in the year 2020 ($1,820) and 2021 ($1,682). The Company has
income tax losses of $42 in Hong Kong which do not expire.
13. RELATED PARTY TRANSACTIONS
(a) Directors of Mengshida have jointly made personal guarantees to indemnify
Mengshida on certain potential tax exposures including the related interest and
penalties arising in periods prior to 2006. Accordingly, the Company has
recorded an other receivables of $1,296 from Directors.
(b) Due to related party consists of a loan from a Director of Honorable
totalling $424 (Hong Kong $3,200,000 and RMB 100,000) as at March 31, 2011 and
$440 (Hong Kong $3,200,000 and RMB 100,000) as at June 30, 2010. This loan is
unsecured, is interest free and is payable on demand.
(c) The Directors of Mengshida have jointly made personal guarantees to
indemnify Mengshida for any premiums for social insurance in arrears in excess
of RMB 4,465,000 as discussed in Note 14. One of the Directors has pledged
2,000,000 common shares of the Company owned by him for any potential liability
that may become payable under this undertaking.
(d) A corporation 50% owned by one of Zungui's Directors received $400,000 in
cash and 700,000 stock options of the Company in trust for various parties as
consideration for services rendered in connection with the initial public
offering. The stock options were granted at $3.25 and vest in equal amounts over
three years. A company controlled by the same Director received 440,000 of the
700,000 stock options granted by the Company. The above transactions were
conducted in the normal course of business and are measured at the exchange
amount, which is the amount of consideration established and agreed to by the
parties.
(e) The Chairman and controlling shareholder granted an option on 800,000 common
shares of the Company to a China based consulting company at an exercise price
of $2.60 per share that will be settled upon exercise through the transfer of
shares of the Company from the Chairman and controlling shareholder's holding.
Refer to Note 8.
14. CONTINGENCY
Pursuant to the relevant laws and regulations of the PRC, the Company makes
contributions to the local Labour and Social Security Bureaus based on a rate
determined by the local bureaus. The process of determining this rate involves
uncertainties and judgments on the part of the Bureaus. Significant estimates
and judgement are applied by management to determine the appropriate amount of
social insurance to be paid. The Directors of Mengshida have jointly made
personal guarantees to indemnify the Company for any premiums for social
insurance in arrears and all related fines, penalties, interest and other
payments in excess of RMB 4,465,000 ($663) that the Company may be required to
make relating to periods prior to December 31, 2009 in the event of a dispute or
settlement with the applicable government authorities. See Note 13(c).
15. FINANCIAL INSTRUMENTS
Financial assets and financial liabilities are measured on an ongoing basis at
fair value or amortized cost. Fair value estimates are made at a specific point
in time, using available information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and the exercise of
significant judgement. The fair value of financial assets and financial
liabilities approximates their carrying value due to their short term maturity.
The classification of the financial instruments as well as their carrying values
is shown in the table below:
----------------------------------------------------------------------------
Other Total
Held for Loans and Financial Carrying
March 31, 2011 Trading Receivables Liabilities Value
----------------------------------------------------------------------------
Financial assets
Cash $ 65,258 $ - $ - $ 65,258
Accounts receivable - 33,328 - 33,328
Other receivables - 1,296 - 1,296
----------------------------------------------------------------------------
$ 65,258 $ 34,624 $ - $ 99,882
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Financial liabilities
Accounts payable and
accrued liabilities $ - $ - $ 12,146 $ 12,146
Due to related party - - 424 424
----------------------------------------------------------------------------
$ - $ - $ 12,570 $ 12,570
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other Total
Held for Loans and Financial Carrying
June 30, 2010 Trading Receivables Liabilities Value
----------------------------------------------------------------------------
Financial assets
Cash $ 85,876 $ - $ - $ 85,876
Accounts receivable - 34,128 - 34,128
Other receivables - 1,331 - 1,331
----------------------------------------------------------------------------
$ 85,876 $ 35,459 $ - $ 121,335
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Financial liabilities
Accounts payable and
accrued liabilities $ - $ - $ 30,288 $ 30,288
Due to related party - - 440 440
----------------------------------------------------------------------------
$ - $ - $ 30,728 $ 30,728
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Financial risk management
Financial risk is the risk to the Company's earnings that arises from
fluctuations in market risk (including interest rate risk, foreign currency
risk), credit risk and liquidity risk and the degree of volatility of these
rates. The Company's business practices seek to minimize any potential adverse
effects on the Company's financial performance.
The Company's financial instruments that are included in the consolidated
balance sheets are comprised of cash, accounts receivable, other receivables,
accounts payable and accrued liabilities and due to related party. As at the
balance sheet date, there are no significant differences between the carrying
value of these items and their estimated fair values because they are short-term
in nature.
Market risk
Interest risk
Interest rate risk is the risk that the fair value of future cash flows of a
financial instrument will fluctuate because of changes in market interest rates.
The Company repaid its bank loan on June 25, 2010 and no longer has exposure to
interest rate fluctuations. The Company does not use any derivative financial
instruments to reduce its exposure to interest rate risk.
Foreign Currency risk
Foreign currency risk is the risk that the fair value of future cash flows of a
financial instrument will fluctuate because of changes in foreign currency
exchange rates. The Company has some financial assets and liabilities in foreign
currencies that expose the Company to foreign exchange risks. The Company has
not hedged its exposure to currency fluctuations. The translation of foreign
operations to the reporting currency is not taken into account.
Credit risk
Credit risk is the risk that a counterparty to a financial instrument will
default on its obligations. The Company's maximum exposure to credit risk
consists of the carrying value of its cash, accounts receivable and other
receivables. The Company places the majority of its cash with a PRC regulated
financial institution.
Credit risk with respect to accounts receivable is mitigated through the sales
to numerous different customers. No customer accounted for more than 10% of
total sales. In addition, the Company evaluates the financial position of its
customers and regularly reviews their credit limit. Allowances are established
with regards to potential losses. The Company was not exposed to any particular
credit risk concentration for the three or nine months ended March 31, 2011 and
2010, respectively.
Liquidity risk
Liquidity risk is the risk that the Company is not able to meet its financial
obligations as they become due. The Company finances its operations through cash
flows from operating activities. The Company's goal is to maintain an optimal
level of liquidity through the active management of the assets and liabilities
as well as the cash flows. As at March 31, 2011, the Company had $12,146 in
accounts payable and accrued liabilities and due to related party $424. All
financial liabilities have contractual maturities of less than one year as of
March 31, 2011.
16. CAPITAL DISCLOSURE
The Company's objectives when managing capital is to safeguard the entity's
ability to continue as a going concern and continue to provide returns and
benefits for its shareholders. The Company's capital is defined as shareholders'
equity as presented on the consolidated balance sheet excluding accumulated
other comprehensive loss. The Company's capital is as follows:
----------------------------------------------------------------------------
March 31, 2011 June 30, 2010
----------------------------------------------------------------------------
Shareholders' equity excluding accumulated
other comprehensive loss $ 115,022 $ 97,668
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company does not establish quantitative return on capital criteria for
management or internally imposed restrictions, but rather promotes
year-over-year sustainable profitable growth. The Company may adjust its capital
mix in order to manage its capital structure. There has been no change with
respect to the overall capital risk management strategy during the three or nine
months ended March 31, 2011.
17. SUBSEQUENT EVENT
On April 15, 2011 the Company entered into a contract to construct a ten storey
building and an addition to the dormitory building for a cost of $4 million.
Rumbu (TSXV:RMB)
Gráfico Histórico do Ativo
De Mai 2024 até Jun 2024
Rumbu (TSXV:RMB)
Gráfico Histórico do Ativo
De Jun 2023 até Jun 2024
