-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UOCDGS/aQm3WEWPers2gsZaHtr9qphKeYjBCUq5p+RTKr64F2nHVFyXcgg8kNgrA 3bq1qhNminGyeIo6u2j0fw== 0001282826-06-000168.txt : 20061215 0001282826-06-000168.hdr.sgml : 20061215 20061215162510 ACCESSION NUMBER: 0001282826-06-000168 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20061031 FILED AS OF DATE: 20061215 DATE AS OF CHANGE: 20061215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. CENTRAL INDEX KEY: 0000806592 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 562416925 FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 033-10456 FILM NUMBER: 061280729 BUSINESS ADDRESS: STREET 1: 6 YOUPENG ROAD CITY: QUFU, SHANDONG STATE: F4 ZIP: 273100 BUSINESS PHONE: (86) 537-4424999 MAIL ADDRESS: STREET 1: 6 YOUPENG ROAD CITY: QUFU, SHANDONG STATE: F4 ZIP: 273100 FORMER COMPANY: FORMER CONFORMED NAME: NETWORK USA INC DATE OF NAME CHANGE: 20000731 FORMER COMPANY: FORMER CONFORMED NAME: PACIFIC RESOURCES INC DATE OF NAME CHANGE: 19870605 10QSB 1 sunwin10310610q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly report ended October 31, 2006 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT For the transition period from ________ to __________ Commission file number: 033-10456 SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. (Exact name of small business issuer as specified in charter) Nevada 56-2416925 --------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6 Youpeng Road Qufu, Shandong, China 273100 (Address of principal executive offices) (86) 537-4424999 (Issuer's telephone number) not applicable (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]. State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date: At December 14, 2006, there were 73,942,276 shares of the registrant's common stock was issued and outstanding. When used in this report, the terms "Sunwin," the "Company," "we," and "us" refers to Sunwin International Neutraceuticals, Inc. an Nevada corporation, and our wholly owned subsidiaries, Sunwin Tech Group, Inc., a Florida corporation, Sunwin Stevia International Corp., a Florida corporation, Sunwin California, Inc., a California corporation and Sunwin (Canada) Pharmaceutical LTD, a Canadian corporation, as well as Sunwin Tech Group, Inc.'s wholly owned subsidiary Qufu Natural Green Engineering Company, Limited ("Qufu"), and Qufu's three wholly owned subsidiaries, Shengya Veterinary Medicine Co., Ltd (formerly known as Shangong Qufu Veterinary Medicine Plant), Shengyuan Herb Extraction Co., Ltd., and Qufu Chinese Medicine Factory. The information which appears on our web site at www.sunwin.biz is not part of this quarterly report. CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION Certain statements in this quarterly report on Form 10-QSB contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, economic, political and market conditions and fluctuations, government and industry regulation, interest rate risk, global competition, and other factors as relate to our doing business solely within the People's Republic of China. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES FORM 10-QSB QUARTERLY PERIOD ENDED OCTOBER 31, 2006 INDEX Page PART I - FINANCIAL INFORMATION Item 1 - Consolidated Financial Statements Consolidated Balance Sheet October 31, 2006 (Unaudited)............... .......................3 Consolidated Statements of Operations (Unaudited) For the Three and Six Months Ended October 31, 2006 and 2005......4 Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended October 31, 2006 and 2005................5 Notes to Consolidated Financial Statements............................6-17 Item 2 - Management's Discussion and Analysis or Plan of Operation...18-30 Item 3 - Controls and Procedures........................................31 PART II - OTHER INFORMATION Item 1 - Legal Proceedings..............................................31 Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds....31 Item 3 - Default Upon Senior Securities ................................31 Item 4 - Submission of Matters to a Vote of Security Holders............31 Item 5 - Other Information..............................................31 Item 6 - Exhibits.......................................................32 -2- SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET October 31, 2006 (Unaudited)
ASSETS CURRENT ASSETS: Cash $ 7,008,997 Accounts receivable (net of allowance for doubtful accounts of $124,520) 3,031,348 Inventories, net 3,623,995 Prepaid expenses and other 888,365 ---------------------- Total Current Assets 14,552,705 PROPERTY AND EQUIPMENT (net of accumulated depreciation of $2,137,336) 5,223,697 ---------------------- Total Assets $ 19,776,402 ====================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Loans payable $ 259,908 Accounts payable and accrued expenses 1,764,766 Due to related parties 13,714 Advances from customers 7,100 ---------------------- Total Current Liabilities 2,045,488 OTHER PAYABLES 136,775 ---------------------- Total Liabilities 2,182,263 ---------------------- STOCKHOLDERS' EQUITY: Preferred stock ($.001 Par Value; 1,000,000 shares authorized; No shares issued and outstanding) - Common stock ($.001 Par Value; 200,000,000 shares authorized; 73,942,276 shares issued and outstanding) 73,942 Additional paid-in capital 12,025,899 Retained earnings 7,379,051 Deferred compensation (1,098,061) Subscription receivable (1,262,900) Other comprehensive income - foreign currency 476,208 ---------------------- Total Stockholders' Equity 17,594,139 ---------------------- Total Liabilities and Stockholders' Equity $ 19,776,402 ======================
See notes to unaudited consolidated financial statements -3- SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months For the Six Months Ended October 31, Ended October 31, --------------------------------- --------------------------------- 2006 2005 2006 2005 ---------------- --------------- --------------- --------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) NET SALES $ 4,319,977 $ 4,052,884 $ 7,764,596 $ 7,223,971 COST OF SALES 3,147,326 2,698,854 5,668,114 4,939,543 ---------------- --------------- --------------- --------------- GROSS PROFIT 1,172,651 1,354,030 2,096,482 2,284,428 ---------------- --------------- --------------- --------------- OPERATING EXPENSES: Stock-based consulting expense 142,923 101,947 285,845 135,374 Selling expenses 470,632 482,601 905,356 849,311 General and administrative 200,113 241,574 469,917 471,975 ---------------- --------------- --------------- --------------- Total Operating Expenses 813,668 826,122 1,661,118 1,456,660 ---------------- --------------- --------------- --------------- INCOME FROM OPERATIONS 358,983 527,908 435,364 827,768 OTHER INCOME (EXPENSE): Other income (expense) (2,145) 1,453 (2,256) 151,880 Interest income (expense) 28,755 (5,291) 44,060 (14,503) ---------------- --------------- --------------- --------------- Total Other Income (Expense) 26,610 (3,838) 41,804 137,377 ---------------- --------------- --------------- --------------- INCOME BEFORE PROVISION INCOME TAXES 385,593 524,070 477,168 965,145 PROVISION FOR INCOME TAXES - 624,759 - 521,593 ---------------- --------------- --------------- --------------- INCOME BEFORE MINORITY INTEREST 385,593 1,148,829 477,168 1,486,738 MINORITY INTEREST IN INCOME OF SUBSIDIARY - (250,299) - (332,832) ---------------- --------------- --------------- --------------- NET INCOME 385,593 898,530 477,168 1,153,906 OTHER COMPREHENSIVE INCOME: Unrealized foreign currency translation 178,409 21,482 251,548 131,007 ---------------- --------------- --------------- --------------- COMPREHENSIVE INCOME $ 564,002 $ 920,012 $ 728,716 $1,284,913 ================ =============== =============== =============== NET INCOME PER COMMON SHARE - BASIC AND DILUTED: Net income per common share - basic $ 0.01 $ 0.02 $ 0.01 $ 0.03 ================ =============== =============== =============== Net income per common share - diluted $ 0.01 $ 0.02 $ 0.01 $ 0.03 ================ =============== =============== =============== Weighted Common Shares Outstanding - basic 73,942,276 43,367,276 73,940,363 43,367,276 ================ =============== =============== =============== Weighted Common Shares Outstanding - diluted 73,942,276 43,367,276 73,940,363 43,367,276 ================ =============== =============== ===============
See notes to unaudited consolidated financial statements -4- SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended October 31, --------------------------------------- 2006 2005 ------------------- ------------------- (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 477,168 $ 1,153,906 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 290,017 62,331 Stock-based consulting and fees 285,845 33,427 Minority interest - 340,005 Allowance for doubtful accounts (148,248) (75,228) Changes in assets and liabilities: Accounts receivable (224,357) 122,130 Inventories (1,814,339) 708,805 Prepaid and other current assets 94,244 5,987 Due from/to related parties 5,070 67,190 Accounts payable and accrued expenses 158,142 (11,385) Income taxes payable - (528,434) Advances to customers (30,910) 74,118 ------------------- ------------------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (907,368) 1,952,852 ------------------- ------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Increase in due from related parties - (176,589) Capital expenditures (12,861) (836,098) ------------------- ------------------- NET CASH FLOWS USED IN INVESTING ACTIVITIES (12,861) (1,012,687) ------------------- ------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock option and warrants 12,500 - Proceeds from subscription receivable 2,417,100 - Proceeds from short term loan 720,000 - Payments on loans payable (720,000) (287,484) ------------------- ------------------- NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,429,600 (287,484) ------------------- ------------------- EFFECT OF EXCHANGE RATE ON CASH 65,935 53,433 ------------------- ------------------- NET INCREASE IN CASH 1,575,306 706,114 CASH - beginning of year 5,433,691 1,674,298 ------------------- ------------------- CASH - end of period $ 7,008,997 $ 2,380,412 =================== =================== SUPPLEMENTAL DISCLOSUREOF CASH FLOW INFORMATION: Cash paid for Interest $ 9,131 $ 14,788 =================== =================== Taxes $ - $ - =================== ===================
See notes to unaudited consolidated financial statements. -5- SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2006 (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company Sunwin International Neutraceuticals, Inc. was incorporated on August 27, 1987 in the State of Nevada as Network USA, Inc. The Company does not have any substantive operations of its own and substantially all of its primary business operations are conducted through its 100% owned subsidiary, Qufu Natural Green Engineering Company Limited and its subsidiaries ("Qufu"). Qufu is a Chinese limited liability company, organized under the laws of the Peoples Republic of China, with principal offices in Qufu, China. Qufu was founded in July 1999 and was re-registered in January 2004 to change its capital structure. Qufu has three wholly owned Chinese subsidiaries, Shengya Veterinary Medicine Co., Ltd (formerly known as Shangong Qufu Veterinary Medicine Plant), Shengyuan Herb Extraction Co., Ltd., and Qufu Chinese Medicine Factory. Qufu is engaged in the areas of essential traditional Chinese medicine, 100 percent organic herbal medicine, neutraceutical products, natural sweetener (stevioside), and animal medicine prepared from 100% organic herbal ingredients. On January 26, 2004, effective February 1, 2004, Sunwin Tech Group, Inc., ("Sunwin Tech") a Florida corporation that became a wholly-owned subsidiary of the Company (on April 30, 2004; see the following paragraph) entered into a Stock Purchase Agreement with Shandong Shengwang Pharmaceutical Group Corporation, Limited ("Group Corporation") a major shareholder of Qufu. Under this agreement, Group Corporation exchanged 80% of the issued and outstanding capital stock of Qufu in exchange for 100% of the issued and outstanding capital stock of Sunwin Tech with a fair market value of $95,000. The Stock Purchase Agreement has been accounted for as a reverse acquisition under the purchase method for business combinations. Accordingly, the combination of the two companies is recorded as a recapitalization of Qufu, pursuant to which Sunwin Tech is treated as the continuing entity. On April 30, 2004, under a Share Exchange Agreement, the Company issued 17,000,004 shares of its common stock for the acquisition of all of the outstanding capital stock of Sunwin Tech from its four shareholders, Messrs. Baozhong Yuan, Laiwang Zhang, Xianfeng Kong and Lei Zhang. For financial accounting purposes, the exchange of stock was treated as a recapitalization of Sunwin Tech with the former shareholders of the Company retaining 11,492,268 or approximately 36.3% of the outstanding stock. The consolidated financials statements reflect the change in the capital structure of the Company due to the recapitalization and the consolidated financial statements reflect the operations of the Company and its subsidiaries for the periods presented. In connection with the Share Exchange Agreement, Sunwin Tech purchased 4,500,000 shares of the common stock of the Company owned by the former principal shareholders of the Company, for $175,000, and, at the closing Sunwin Tech distributed the 4,500,000 shares to Baozhong Yuan, Laiwang Zhang, Xianfeng Kong and Lei Zhang, pro-rata according to their ownership of Sunwin Tech immediately prior to the closing. This transaction did not affect the issuance of common shares by the Company. -6- SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2006 (UNAUDITED) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The Company (Continued) Effective July 27, 2004 the Company changed its name to Sunwin International Neutraceuticals, Inc. The Company filed an amendment to its Articles of Incorporation on July 12, 2004 to change its name, and to increase the number of shares of common stock it is authorized to issue to 200,000,000 shares, $.001 par value per share. Also, effective July 27, 2004, the Company effected a six for one (6:1) forward stock split of its issued and outstanding common stock. Each stockholder of record at the close of business on July 27, 2004 received five additional shares of common stock for each share of common stock held. All share and per-share information has been restated to reflect this forward stock split. As noted previously, prior to our acquisition of Sunwin Tech, effective February 1, 2004, Sunwin Tech acquired 80% of Qufu ("the Qufu Merger") from Group Corporation, a company controlled by Mr. Laiwang Zhang, our President and Chairman, in exchange for all shares of Sunwin Tech's common stock. At the time of this merger the minority shareholders of Qufu included Shandong Shengwang Pharmaceutical Corporation Ltd. ("Corporation Ltd.") (17%) and Shandong Shengwang Group Corporation (2.5%) ("Shengwang Group"), both of which are controlled by our President and Chairman. The remaining minority shareholder, Qufu Veterinary Medicine Company, Ltd. ("Qufu Vet Ltd.") (0.5%) was controlled by a Chinese state owned agency. Subsequent to the Qufu Merger, the Shengwang Group acquired the 17% interest of Qufu owned by Corporation Ltd., and ultimately the Shengwang Group acquired the 0.5% Qufu interest owned by Qufu Vet Ltd., after Qufu Vet Ltd. was dissolved. These events subsequent to the Qufu Merger, resulted in the Shengwang Group owning 20% of Qufu. In February 2006, the Company acquired the remaining 20% minority interest of Qufu from Shandong Shengwang Group Corporation. As a result, Qufu is a wholly-owned subsidiary of the Company, effective on February 1, 2006 On February 7, 2006, the Company formed a wholly owned subsidiary in Florida, Sunwin Stevia International Corp. The purpose of this subsidiary is to establish a North American distribution network for Stevioside manufactured by our company. On April 11, 2006, the Company formed a wholly owned subsidiary in California, Sunwin California, Inc. The purpose of this subsidiary is to exploit the distribution of Chinese herbs in Chinese communities within California. -7- SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2006 (UNAUDITED) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The Company (Continued) On April 20, 2006, the Company formed a wholly owned subsidiary in Canada, Sunwin (Canada) Pharmaceutical Limited, in order to market its Chinese herb-based medicines throughout Canada. The newly formed subsidiary will submit applications to health organizations in Canada for products licenses in order to distribute their products within Canada. On May 31, 2006, the Company has entered into an oral agreement with Shandong Yulong Group Company, Limited ("Yulong") to acquire 100% ownership of Qufu Pharmaceuticals Factory ("Qufu Pharmaceuticals"). Qufu Pharmaceuticals Factory, founded in 1994, a wholly owned subsidiary of Yulong, manufactures and distributes Class I medicines in China. The medicines are derived from chemical compounds not from herbal based remedies. Condition precedent to the transaction is the ownership of the land use permit for Qufu Pharmaceuticals being transferred from state ownership to Qufu Pharmaceuticals, and the receipt by Qufu Pharmaceuticals of GMP certification on its facilities. The transfer and certification are in processing and at such time as they are obtained by Qufu Pharmaceuticals the company will complete negotiations of the terms of this transaction. There is no assurance that the Company will ever consummate this acquisition. Basis of presentation Certain reclassifications have been made to the prior year to conform to current year presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The accompanying consolidated financial statements for the interim periods are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the periods presented. The consolidated financial statements include the accounts of the Company and its wholly and partially owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. These consolidated financial statements should be read in conjunction with the financial statements for the year ended April 30, 2006 and notes thereto contained on Form 10-KSB of the Company as filed with the Securities and Exchange Commission. The results of operations for the six months ended October 31, 2006 are not necessarily indicative of the results for the full fiscal year ending April 30, 2007. The consolidated statements include the accounts of the Company and its wholly and partially-owned subsidiaries. All significant inter-company balances and transactions have been eliminated. -8- SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2006 (UNAUDITED) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates in 2006 and 2005 include the allowance for doubtful accounts, the reserve for obsolete inventory and the useful life of property, plant and equipment. Net income per share Net income per common share for the six months ended October 31, 2006 and 2005 is based upon the weighted average common shares and dilutive common stock equivalents outstanding during the period as defined by Statement of Financial Accounting Standards, Number 128 "Earnings Per Share." Inventories Inventories, consisting of raw materials and finished goods related to the Company's products are stated at the lower of cost or market utilizing the weighted average method. Advances from customers Advances from customers at October 31, 2006 of $7,100 consist of a prepayment to the Company for merchandise that had not yet been shipped to the customer. The Company will recognize the deposits as revenue as customers take delivery of the goods, in compliance with its revenue recognition policy. Fair value of financial instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosures of information about the fair value of certain financial instruments for which it is practicable to estimate the value. For purpose of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable and accrued expenses, loans and amounts due from related parties approximate their fair market value based on the short-term maturity of these instruments. -9- SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2006 (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income taxes The Company files federal and state income tax returns in the United States for its domestic operations, and files separate foreign tax returns for the Company's Chinese subsidiaries. Income taxes are accounted for under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. The Company has no US tax liability based on the fact that the Company derived all of its revenues outside of the United States. Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are provided using the straight line method over the estimated economic lives of the assets, which are from five to twenty years. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. Foreign currency translation Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. Transactions and balances in other currencies are converted into U.S. dollars in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation," and are included in determining net income or loss. For foreign operations with the local currency as the functional currency, assets and liabilities are translated from the local currencies into U.S. dollars at the exchange rate prevailing at the balance sheet date. Revenues and expenses are translated at weighted average exchange rates for the period to approximate translation at the exchange rates prevailing at the dates those elements are recognized in the financial statements. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive loss. -10- SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2006 (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Foreign currency translation (Continued) The functional and reporting currency is the U.S. dollar. The functional currency of the Company's Chinese subsidiary, Qufu, is the local currency; the Chinese dollar or Renminbi ("RMB"). The financial statements of the subsidiaries are translated into United States dollars using year-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and were not material during the periods presented due to fluctuations between the Chinese dollar ("RMB") and the United States dollar. The cumulative translation adjustment and effect of exchange rate changes on cash at October 31, 2006 was $65,935. On July 21, 2005, the central government of China allowed the Chinese dollar or RMB to fluctuate, ending its decade-old valuation peg to the U.S. dollar. The new RMB rate reflects an approximately 2% increase in value against the U.S. dollar. Historically, the Chinese government has benchmarked the RMB exchange ratio against the U.S. dollar, thereby mitigating the associated foreign currency exchange rate fluctuation risk. The Company does not believe that its foreign currency exchange rate fluctuation risk is significant, especially if the Chinese government continues to benchmark the RMB against the U.S. dollar. Stock-based compensation The Company accounts for stock options issued to employees in accordance with FASB Statement No. 123R, "Share-Based Payment, an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires companies to recognize in the statement of operations the grant- date fair value of stock options and other equity-based compensation issued to employees. The Company has adopted FAS No.123R in the second quarter of fiscal year 2006. Revenue recognition The Company follows the guidance of the Securities and Exchange Commission's Staff Accounting Bulletin 104 for revenue recognition. In general, the Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectibility is reasonably assured. The following policies reflect specific criteria for the various revenue streams of the Company: The Company's revenues from the sale of products are recorded when the goods are shipped, title passes, and collectibility is reasonably assured. -11- SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2006 (UNAUDITED) NOTE 2 - INVENTORIES At October 31, 2006, inventories consisted of the following: Raw materials $ 1,945,484 Finished goods 1,742,932 -------------- 3,688,416 Less: reserve for obsolete inventory (64,421) ------------- $ 3,623,995 ============== NOTE 3 - RELATED PARTY TRANSACTIONS Due from related parties Before February 7, 2006, the minority shareholder of Qufu, which owned 20% of that company, was Shengwang Group. On February 7, 2006, the Company acquired 20% of Qufu from Shengwang Group. As a result, Qufu is a wholly-owned subsidiary of the Company, effective February 1, 2006. Many of the members of the Company's management have been employed by Group Corporation, the original 80% shareholder of Qufu, Corporation Ltd, and Shengwang Group, prior to the 80% and 20% acquisition of Qufu, and performed services in conjunction with their duties at, and for, Qufu and the Company. The Company pays management fees to Group Corporation. The management fees which are included in general and administrative expenses for the six months ended October 31, 2006 and October 31, 2005 were $93,972 and $ 24,303 respectively. At October 31, 2006, the Company owed Group Corporation $13,714 for management fees. NOTE 4 - PREPAID EXPENSES AND OTHERS ASSETS Prepaid expenses and other assets at October 31, 2006 of $888,365 consisted of a prepayment to the suppliers for merchandise that had not yet been shipped from the suppliers as well as services that had not yet been provided by the contractors/consultants. The Company will recognize the prepayment as inventory or expense as suppliers make delivery of goods or provide services, in compliance with its accounting policy. As of October 31, 2006, the prepaid to the suppliers for merchandise amounted to $628,265 and the prepaid to consulting services amounted to $260,000. NOTE 5 - STOCKHOLDERS EQUITY Common Stock For the six months ended October 31, 2006 and 2005, amortization of stock based compensation amounted to $ 285,845 and $135,374, respectively. -12- SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2006 (UNAUDITED) NOTE 5 - STOCKHOLDERS EQUITY (Continued) Stock Options On March 23, 2005, the Company's Board of Directors authorized and adopted the 2005 Equity Compensation Plan (the "2005 Plan"). The Company has currently reserved 5,000,000 of its authorized but unissued shares of common stock for issuance under the 2005 Plan. As of October 31, 2006, there are no available shares to be issued, or options granted, under the 2005 Plan. On February 7, 2006, the Company's Board of Directors authorized and adopted the 2006 Equity Compensation Plan (the "2006 Plan"). The Company has currently reserved 6,200,000 of its authorized but unissued shares of common stock for issuance under the 2006 Plan. As of October 31, 2006, there are 1,265,000 shares available to be issued or options granted under the 2006 Plan. The number of shares authorized under the 2006 Plan, may be amended (subject to adjustment in the event of certain changes in our capitalization) without further action by the Board of Directors and stockholders, as required. The purpose of the Plan is to encourage stock ownership by the Company's officers, directors, key employees and consultants, and to give these persons a greater personal interest in the success of its business and an added incentive to continue to advance and contribute to the Company. Subject to the limitation on the aggregate number of shares issuable under the 2005 and 2006 Plan, there is no limit as to the amount of shares that may be granted to any person. Shares used for stock grants and plan options may be authorized and unissued shares, or shares reacquired by the Company, including shares purchased in the open market. Shares covered by plan options which terminate unexercised will again become available for grant as additional options, without decreasing the maximum number of shares issuable under the plan, although such shares may also be used by the Company for other purposes. The 2005 and 2006 Plan is administered by the Company's Board of Directors or an underlying committee. The Board of Directors or the committee determines from time to time those of our officers, directors, key employees and consultants to whom stock grants or plan options are to be granted, the terms and provisions of the respective option agreements, the time or times at which such options shall be granted, the type of options to be granted, the dates such plan options become exercisable, the number of shares subject to each option, the purchase price of such shares and the form of payment of such purchase price. All other questions relating to the administration of the plans, and the interpretation of the provisions thereof and of the related option agreement, are resolved by the Board or committee. Plan options may either be options qualifying as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended or non-qualified options. The Company's officers, directors, key employees and consultants are eligible to receive stock grants and non-qualified options under the plan; only its employees are eligible to receive incentive options. In addition, the 2005 and 2006 Plans allow for the inclusion of a reload option provision which permits an eligible person to pay the exercise price of the option with shares of common stock owned by the eligible person and receive a new option to purchase shares of common stock equal in number to the tendered shares. Furthermore, compensatory stock grants may also be issued. -13- SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2006 (UNAUDITED) NOTE 5 - STOCKHOLDERS EQUITY (Continued) Stock Options (Continued) Any incentive option granted under the plans must provide for an exercise price of not less than 100% of the fair market value of the underlying shares on the date of grant, but the exercise price of any incentive option granted to an eligible employee owning more than 10% of our outstanding common stock must not be less than 110% of fair market value on the date of the grant. The term of each Plan's option and the manner in which it may be exercised is determined by the Board of Directors or the committee, provided that no option may be exercisable more than ten years after the date of its grant and, in the case of an incentive option granted to an eligible employee owning more than 10% of the common stock, no more than five years after the date of the grant. The exercise price of non-qualified options shall be determined by the Board of Directors or the Committee, but shall not be less than the par value of our common stock on the date the option is granted. The per share purchase price of shares issuable upon exercise of either the 2005 or 2006 Plan option may be adjusted in the event of certain changes in our capitalization, but no such adjustment shall change the total purchase price payable upon the exercise in full of options granted under the Plan. All incentive stock options expire on or before the 10th anniversary of the date the option is granted; however, in the case of incentive stock options granted to an eligible employee owning more than 10% of the common stock, these options will expire no later than five years after the date of the grant. Non-qualified options expire 10 years and one day from the date of grant unless otherwise provided under the terms of the option grant. As of October 31, 2006, there are no shares available to be issued, or options granted, under the 2005 Plan. As of October 31, 2006, there are 1,265,000 shares available to be issued or options granted under the 2006 Plan. Under the 2006 Plan a total of 860,000 common shares were issued to satisfy the requirements under a service consulting agreement from January 2006, in February 2006 the Company granted options to purchase 4,000,000 shares to employees, and the Company granted options to purchase 75,000 shares under a consulting agreement entered into in February 2006. All options granted for the purchase by employees of 4,000,000 shares of common stock were exercised in the year ended April 30, 2006. Of the options granted to the consultant for the purchase of 75,000 shares of common stock a total of 50,000 were exercised for the year ended April 30, 2006 and a total of 25,000 options were exercised for the six months ended October 31, 2006. There were no outstanding stock options as of October 31, 2006. -14- SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2006 (UNAUDITED) NOTE 6- SEGMENT INFORMATION The following information is presented in accordance with SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information. In the periods ended October 31, 2006 and 2005, the Company operated in two reportable business segments - (1) the sale of essential traditional Chinese medicine, 100 percent organic herbal medicine, neutraceutical products, and animal medicines prepared from 100% organic herbal ingredients and (2) sale of natural sweetener (Stevioside). The Company's reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations. Condensed information with respect to these reportable business segments for the six months ended October 31, 2006 and 2005 are as follows: Six Months Ended October 31, 2006 (Unaudited): Chinese and Natural Animal Sweetener Corporate and Medicines (Stevioside) Other Consolidated --------------- --------------- --------------- ---------------- Net Revenues $ 3,479,550 $ 4,272,973 $ 12,073 $ 7,764,596 Interest income 5,706 37,576 778 44,060 Depreciation and amortization 130,990 159,027 - 290,017 Net income (loss) 542,299 484,098 (549,229) 477,168 Long-lived asset expenditures 12,861 - - 12,861 Segment Assets $ 10,196,953 $ 9,180,398 $ 399,051 $ 19,776,402 Six Months Ended October 31, 2005(Unaudited): Chinese and Natural Animal Sweetener Corporate and Medicines (Stevioside) Other Consolidated --------------- -------------- --------------- --------------- Net Revenues $ 4,359,957 $ 2,864,014 $ - $ 7,223,971 Interest (expense) (13,146) (1,357) - (14,503) Depreciation and amortization 17,962 44,369 - 62,331 Net income (loss) 762,794 568,534 (177,422) 1,153,906 Long-lived asset expenditures 1,087 835,011 - 836,098 Segment Assets $ 4,831,000 $ 6,135,691 $ 877,870 $ 11,844,561
-15- SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2006 (UNAUDITED) NOTE 7 - OPERATING RISK (a) Country risk Currently, the Company's revenues are mainly derived from sale of herbs, beet sugar and veterinary products in the Peoples Republic of China ("PRC"). The Company hopes to expand its operations to countries outside the PRC, however, such expansion has not been commenced and there are no assurances that the Company will be able to achieve such an expansion successfully. Therefore, a downturn or stagnation in the economic environment of the PRC could have a material adverse effect on the Company's financial condition. (b) Products risk In addition to competing with other companies, the Company could have to compete with larger U.S. companies who have greater funds available for expansion, marketing, research and development and the ability to attract more qualified personnel if access is allowed into the PRC market. If U.S. companies do gain access to the PRC markets, they may be able to offer products at a lower price. There can be no assurance that the Company will remain competitive should this occur. (c) Exchange risk The Company can not guarantee that the current exchange rate will remain steady, therefore there is a possibility that the Company could post the same amount of profit for two comparable periods and because of a fluctuating exchange rate actually post higher or lower profit depending on exchange rate of Chinese Renminbi (RMB) converted to U.S. dollars on that date. The exchange rate could fluctuate depending on changes in the political and economic environments without notice. (d) Political risk Currently, the PRC is in a period of growth and is openly promoting business development in order to bring more business into the PRC. Additionally, the PRC allows a Chinese corporation to be owned by a United States corporation. If the laws or regulations are changed by the PRC government, the Company's ability to operate the PRC subsidiaries could be affected. (e) Key personnel risk The Company's future success depends on the continued services of executive management in China. The loss of any of their services could be detrimental to the Company and could have an adverse effect on business development. The Company does not currently maintain key-man insurance on their lives. Future success is also dependent on the ability to identify, hire, train and retain other qualified managerial and other employees. Competition for these individuals is intense and increasing. -16- SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OCTOBER 31, 2006 (UNAUDITED) NOTE 7 - OPERATING RISK (Continued) (f) Performance of subsidiaries risk Currently all of the Company's revenues are derived via the operations of Qufu and its subsidiaries. Economic, governmental, political, industry and internal company factors outside of the Company's control affect each of the subsidiaries. If the subsidiaries do not succeed, the value of the assets and the price of our common stock could decline. Some of the material risks relating to the subsidiary companies include the fact that Qufu and all of their subsidiaries are located in China and have specific risks associated with that and the intensifying competition for the Company's products and services. -17- ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following analysis of our consolidated financial condition and results of operations for the six months ended October 31, 2006 and 2005, should be read in conjunction with the consolidated financial statements, including footnotes, appearing elsewhere in this quarterly report on Form 10-QSB for the period ended October 31, 2006. Overview Effective February 1, 2004, Sunwin Tech entered into a stock purchase agreement with Shandong Shengwang Pharmaceutical Group Corporation ("Group Corporation") and acquired 80% of the outstanding capital stock of Qufu Natural Green Engineering Company, Ltd. ("Qufu") in exchange for 100% of Sunwin Tech's capital stock which had a fair market value of $95,000. In April 2004, we acquired 100% of Sunwin Tech in exchange for approximately 17,000,004 shares of our common stock which resulted in a change of control of our company. The transaction has been accounted for as a reverse acquisition under the purchase method for business combinations. The combination of the two companies is recorded as a recapitalization of Qufu and we are treated as the continuing entity. Prior to our acquisition of Sunwin Tech, effective February 1, 2004, Sunwin Tech acquired 80% of Qufu ("the Qufu Merger") from Shandong Shengwang Pharmaceutical Group Corporation ("Group Corporation"), a company controlled by Mr. Laiwang Zhang, our President and Chairman, in exchange for all the outstanding shares of Sunwin Tech's common stock. At the time of this merger the minority shareholders of Qufu included Shandong Shengwang Pharmaceutical Corporation Ltd. ("Corporation Ltd.") (17%) and Shandong Shengwang Group Corporation (2.5%) ("Shengwang Group"), both of which are controlled by Mr. Laiwang Zhang, our President and Chairman. The remaining minority shareholder, Qufu Veterinary Medicine Company, Ltd. ("Qufu Vet Ltd") (0.5%) was controlled by a Chinese state owned agency. In July 2004 following the transaction with Sunwin Tech, we changed the name of our company from Network USA, Inc. to Sunwin International Neutraceuticals, Inc. ("Sunwin" or the "Company"). Subsequent to the Qufu Merger, the Shengwang Group acquired the 17% interest of Qufu owned by Corporation Ltd., and ultimately the Shengwang Group acquired the 0.5% Qufu interest owned by Qufu Vet Ltd., after Qufu Vet Ltd. was dissolved. These events subsequent to the Qufu Merger, resulted in the Shengwang Group owning 20% of Qufu. In February 2006, the Company acquired the remaining 20% minority interest of Qufu from Shandong Shengwang Group Corporation. As a result, Qufu is a wholly-owned subsidiary of the Company, effective on February 1, 2006. Through our subsidiaries, we manufacture and sell neutraceutical products which can be classified into three main product groups including; Stevioside, a 100% natural sweetener, veterinary medicines and animal feed additives, and traditional Chinese medicine formula extracts. All of our business and operations are located in the People's Republic of China. The majority of our revenues are derived from our Stevioside product, and our principal customers for this product are located in Asia, primarily China and Japan where Stevioside is approved for use both as a food additive as well as a nutritional supplement. -18- ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued) This product group represented approximately 55% of our net sales for the six months ended October 31, 2006. China has grown into the world's largest exporting company of Stevioside, with volume exceeding 80% of the world's supply. We believe that we are one of the top three companies in China manufacturing Stevioside. We also manufacture and sell a comprehensive group of veterinary medicines including seven series of more than 200 products. These veterinary medicines include traditional Chinese medicine as well as western medicine, feed additives, feeds and antibiotics. We are an advocate of developing animal medicine from Chinese herbs, especially antivirus and feed additives. We are concentrating our efforts in this product category on developing and producing medicines which are relevant to the needs of the animal stock industry in the PRC, and developing special veterinary medicines made from pure traditional Chinese medicines or combining traditional Chinese medicine with Western medicine. This product group represented approximately 21% of our net sales for the six months ended October 31, 2006. Our last product group includes the manufacture and sale of traditional Chinese medicines formula extracts that are used in products made for use by both humans and animals. This product group represented approximately 24% of our net sales for the six months ended October 31, 2006. Our ability to significantly increase our revenues in any of these groups faces a number of challenges. In addition to the existing laws which limit the sale of Stevioside to Western countries, we face competition in the manufacture and sale of Stevioside. There are approximately 30 Stevioside manufacturers in China, with approximately 10 companies operating on a continuing basis. Our other two product groups operate in highly competitive environments. We estimate that there are more than 5,000 companies in China selling animal medicines and more than 200 companies in China that produce Chinese traditional medicines and extracts and refined chemical products. The sale of our products in these two product groups are concentrated on domestic customers therefore our ability to expand our revenues in these product groups is limited to a certain extent by economic conditions in the PRC. In addition, since we are dependent upon raw materials which are harvested and farmed, our ability to produce our products and compete in our markets is also subject to risks including weather and similar events which may reduce the amount of raw materials we are able to purchase from farmers as well as increased competition or market pressure which may result in reduced prices for our products. Our ability, however, to expand our revenues from the sale of Stevioside is limited as the product is not approved for use as a food additive in most Western countries, including the United States, Canada and the European Union. In these countries forms of Stevioside can be marketed and sold as a nutritional supplement. In an effort to increase our competitive position within our market segment, we have built an additional Stevioside manufacturing line in order to expand our Stevioside production, upgraded our existing manufacturing Stevioside line, and relocated to a larger facility. Through October 31, 2006, we have invested an aggregate of approximately $1,969,308 for leasehold improvements and equipment for an additional veterinary medicine manufacturing line and $1,214,777 for a new Stevioside facility. -19- ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued) Even though we are a U.S. company, because all of our operations are located in the PRC, we face certain risks associated with doing business in that country. These risks include risks associated with the ongoing transition from state business ownership to privatization, operating in a cash-based economy, various government policies, unexpected changes in regulatory requirements, export restrictions, tariffs and other trade barriers, challenges in staffing and managing operations in a communist country, differences in technology standards, employment laws and business practices, longer payment cycles and problems in collecting accounts receivable, changes in currency exchange rates and currency exchange controls. We are unable to control the vast majority of these risks associated both with our operations and the country in which they are located and these risks could result in significant declines in our revenues and adversely affect our ability to continue as a going concern in future periods. Foreign Exchange Considerations Since revenues from our operations in the PRC accounted for 100% of our net revenues for fiscal 2006 and fiscal 2005, how we report net revenues from our PRC-based operations is of particular importance to understanding our financial statements. Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. Transactions and balances in other currencies are converted into U.S. dollars in accordance with Statement of Financial Accounting Standards (SFAS) No. 52,"Foreign Currency Translation," and are included in determining net income or loss. For foreign operations with the local currency as the functional currency, assets and liabilities are translated from the local currencies into U.S. dollars at the prevailing exchange rate on the respective balance sheet date. Revenues and expenses are translated at weighted average exchange rates for the period to approximate translation at the exchange rates prevailing at the dates those elements are recognized in the financial statements. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive loss. The functional currency of our Chinese subsidiaries is the local currency or the Chinese dollar called the Renminbi ("RMB"). The financial statements of our subsidiaries are translated to U.S. dollars using year-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and were not material during the periods presented. The cumulative translation adjustment and effect of exchange rate changes on cash at October 31, 2006 was $65,935. Until 1994, the Renminbi experienced a gradual but significant devaluation against most major currencies, including the U.S. dollar. There was a significant devaluation of the Renminbi on January 1, 1994 in connection with the replacement of the dual exchange rate system with a unified managed floating rate foreign exchange system. Since 1994, the value of the Renminbi relative to the U.S. dollar has remained stable; appreciating slightly against the U.S. dollar. Countries, including the United States, have historically argued that the Renminbi is artificially undervalued due to China's current monetary policies and have pressured China to allow the Renminbi to float freely in world markets. On July 21, 2005, the PRC announced that the Renminbi would be pegged to a basket of currencies rather than just tied to a fixed exchange rate to the U.S. dollar. It also increased the value of its currency 2% higher against the U.S. dollar, effective immediately -20- ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued) If any devaluation of the Renminbi were to occur in the future, returns on our operations in China, which are expected to be in the form of Renminbi, will be negatively impacted upon conversion to U.S. dollars. Although we attempt to have most future payments, mainly repayments of loans and capital contributions denominated in U.S. dollars, if any increase in the value of the Renminbi were to occur in the future, our product sales in China and in other countries may be negatively affected. Critical Accounting Policies The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A summary of significant accounting policies is included in Note 1 to the audited consolidated financial statements on Form 10-KSB as filed with the Securities and Exchange Commission. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about the company's operating results and financial condition. We record property and equipment at cost. Depreciation and amortization are provided using the straight-line method over the estimated economic lives of the assets, which are from five to twenty years. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. We review the carrying value of long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparison of its carrying amount to the undiscounted cash flows that the asset or asset group is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair market value. The Company accounts for stock options issued to employees in accordance with the FASB Statement No. 123R, "Share-Based Payment, an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires companies to recognize in the statement of operations the grant- date fair value of stock options and other equity-based compensation issued to employees. The Company has adopted FAS No.123R in the second quarter of fiscal year 2006. -21- ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued) RESULTS OF OPERATIONS SIX MONTHS ENDED OCTOBER 31, 2006 AS COMPARED TO SIX MONTHS ENDED OCTOBER 31, 2005 Internally we identify our products in three product groups, Stevioside, traditional Chinese medicine formula extracts and veterinary medicines. For accounting purposes, we report two segments which include Stevioside as one segment and traditional Chinese medicine extracts and veterinary medicine products as the second segment. The following table provides certain comparative information on our results of operations for the six months ended October 31, 2006 and the six months ended October 31, 2005.
Six Months Ended October 31, % Change 2006 2005 $ Change 2006 v 2005 (unaudited (unaudited) 2006 v 2005 (+/-) ----------------------------------------------------------------------- Net sales $7,764,596 $7,223,971 540,625 +7.5% Cost of sales 5,668,114 4,939,543 728,571 +14.7% --------- --------- Gross profit 2,096,482 2,284,428 (187,946) -8.2% Operating expenses: Stock based consulting expense 285,845 135,374 150,471 +111% Selling expenses 905,356 849,311 56,045 +6.6% ------- ------- General and administrative 469,917 471,975 (2,058) -0.4% ------- ------- Total operating expenses 1,661,118 1,456,660 204,458 +14% Income from operations 435,364 827,768 (392,404) -47.4% Other income (expense): Other income(expense) (2,256) 151,880 (154,136) -101% Interest income (expense) 44,060 (14,503) 58,563 +404% Total other income (expense) 41,804 137,377 (95,573) -69.6% ----------------------------------------------------------------------- Income before provision for income 477,168 965,145 (487,977) -50.6% taxes Income Tax 0 521,593 (521,593) -100% Minority interest in income of subsidiary 0 (332,832) 332,832 -100% - Net income 477,168 1,153,906 (676,738) -58.6%
NM = not meaningful Other key indicators: Six months ended October 31, 2006 2005 % Change ---------- --------- --------------- Cost of sales as a percentage of sales 73% 68% +5% Gross profit as a percentage of sales 27% 32% -5% Selling expense as a percentage of sales 12% 12% none Total operating expenses as a percentage of sales 21% 20% +1%
-22- ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued) Revenues For the six months ended October 31, 2006, our total net sales were $7,764,596 as compared to total net sales of $7,223,971 for the six months ended October 31, 2005, an increase of $540,625 or approximately 7.5%. For six months ended October 31, 2006, sales from our Stevioside segment represented approximately 55% of our net sales and sales from our traditional Chinese medicine extracts and veterinary medicine segment represented approximately 45% of our total net sales. For six months ended October 31, 2005, sales from our Stevioside segment represented approximately 40% of our total net sales and sales from our traditional Chinese medicine extracts and veterinary medicine segment represented approximately 60% of our total net sales. Our sales related to the manufacture and sale of Stevioside increased from $2,864,014 for the six months ended October 31, 2005 to $4,272,973 for the six months ended October 31, 2006, an increase of $1,408,959, or approximately 49%. The increase in the sales of our natural sweetener, Stevioside, reflects the completion in fiscal 2006 of our manufacturing equipment upgrade. The new facility improves the quality of our Stevioside and could enable us to capture a larger market share. We manufactured 107 tons of Stevioside and resold 123 tons during fiscal year 2006. We anticipate manufacturing 300 tons of Stevioside during fiscal year 2007. For the six months ended October 31, 2006, we manufactured 97 tons and resold 73 tons and for the six months ended October 31, 2005, we manufactured 32 tons of Stevioside and resold 73 tons. We believe that the market for Stevioside remains strong as we continue to witness growing demand for the product from consumers based in Japan resulting in increased exports to Japan. In order to ensure we have a sufficient supply of raw materials for production. Our sales related to our traditional Chinese medicine products was $1,878,193 for the six months ended October 31, 2006 as compared to $2,182,766 for the six months ended October 31, 2005, a decrease of $304,573 or approximately 14%. Sales of our traditional Chinese medicine products include sales of products to third party animal medicine producers who use our products as a component of their own product. Sales of traditional Chinese medicine products to these animal medicine producers were sluggish due to reduced demand for animal medicine products as a result of heightened health standard which the Chinese government instituted in response to increased reports of the avian flu. These measures were strictly enforced from February 2006 through May 2006. One such measure mandates that farmers and breeders euthanize livestock upon confirmation of avian flu symptoms. This policy has caused a short term decline in the demand for animal medicine products in the market. However, the Company estimates sales will return to prior levels as government regulations have eased since May 2006 as reports of avian flu have declined. Our primary clients are veterinary facilities. As a result of the recently imposed standards to curtail the spread of the avian flu, these veterinary facilities have reduced demand for our traditional Chinese medicine products. Our sales related to our veterinary medicine products was $1,601,357 for the six months ended October 31, 2006 as compared to $2,177,191 for the six months ended October 31, 2005, a decrease of $575,834 or approximately 26%. The decrease in the sale of our veterinary medicine products was caused by reduced demand for animal medicine products as a result of heightened health standards. However, the Company estimates sales will return to prior levels as government regulations have eased as reports of avian flu have declined. -23- ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued) Cost of Sales and Gross Profit For the six months ended October 31, 2006, cost of sales amounted to $5,668,114 or approximately 73.0% of net sales as compared to cost of sales of $4,939,543 or approximately 68.4% of net sales for the six months ended October 31, 2005, an increase of 4.6%. The cost of sales increased due to the increase in the cost of raw materials. For Chinese medicine, the cost of sales as a percentage of revenues increased from 57.9% for the six months ended October 31, 2005 to 62.6% for the six months ended October 31, 2006. The Company has witnessed an increase in the general cost of raw materials in this product segment. The Company expects that the cost of raw materials employed in the process and manufacture of Chinese medicine will continue to increase in the future. As a precaution the Company has increased its inventory levels for the raw materials employed in the process and manufacture of Chinese medicine. Gross profit for the six months ended October 31, 2006 was $2,096,482 or approximately 27% of net sales, as compared to $2,284,428, or approximately 31.6% of net sales for the six months ended October 31, 2005. Operating Expenses Total operating expenses were $1,661,118 for the six months ended October 31, 2006 as compared to operating expenses of $1,456,660 for the six months ended October 31, 2005, an increase of $204,458, or approximately 14.0%. Included in this increase were: * For the six months ended October 31, 2006, we recorded non-cash compensation expense of $285,845 as compared to $135,374 for the six months ended October 31, 2005, an increase of $150,471 or approximately 111%. This amount represented the value of shares of our common stock we issued as compensation for consulting services and professional services being rendered to us. While we anticipate that we will enter into additional, similar agreements during the balance fiscal 2007, we cannot predict the amount of expense which will be attributable to such agreements; * For the six months ended October 31, 2006, selling expenses amounted to $905,356 compared to $849,311 for the six months ended October 31, 2005 an increase of $56,045 or approximately 6.6%. For the six months ended October 31, 2006 selling expenses were approximately 11.7% of our net sales, as compared to approximately 11.8% for the six months ended October 31, 2005. For the six months ended October 31, 2006 we experienced an increase in marketing expenses for Stevia products in the North American market of $130,000; these costs are associated with the introduction of our products to the North American market. As discussed the Company formed new subsidiaries in Florida, Canada, and California. The purpose of these subsidiaries is to establish a North American distribution network for a proprietary blend of Stevioside, as well as for our traditional Chinese medicine products. The Company has experienced increased expenditures related to these efforts. As a result, the Company has been granted a trademark, UPC bar code certification, retained the services of Blue Chip Marketing and Communications to conduct extensive market research studies, created an interactive web site, hired Jeffrey G. Reynolds as the CEO of Sunwin Stevia International Corp. There is no assurance that these subsidiaries will generate substantial revenues in the near term. The increase were offset by the decrease of commission expenses of approximately $42,000, the decrease of the travel expenses of approximately $26,000 and overall decrease in other selling expenses of approximately $5,600. -24- ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued) Operating Expenses (continued) * For the six months ended October 31, 2006, general and administrative expenses were $469,917 as compared to $471,975 for the six months ended October 31, 2005, a decrease of $2,058 or approximately 0.44%. The Company formed a wholly owned subsidiary, Sunwin California, Inc., on April 11, 2006. The Company incurred expenses related to Sunwin California, Inc. which are included in the general and administrative costs of approximately $50,000 for the six months ended October 31, 2006 which reflects expenses associated with our efforts to expand distribution of Chinese herbs in Chinese communities within California. The Company formed a wholly owned subsidiary in Canada, Sunwin (Canada) Pharmaceutical Limited, on April 20, 2006. The Canadian subsidiary related expenses included in the general and administrative costs were approximately $30,000 for the six months ended October 31, 2006 which reflects expenses associated with our efforts to expand distribution of Stevioside into Canada. For the six months ended October 31, 2006 we incurred management fees of $93,972 as compared to $24,303 in management fees for the six months ended October 31, 2005, an increase of $69,669, or 287%. The management fees for Stevioside factory and veterinary factory were waived by the Corporation for the six months ended October 31, 2005 due to the upgrade of the facility. For the six months ended October 31, 2006, the Company completed the upgrade of the facility and incurred $68,913 in management fees to Stevioside factory and the veterinary factory. Shandong Shengwang Pharmaceutical Corporation, Limited, a company controlled by Mr. Zhang, our CEO, provides management services to us which includes costs and services related to housing provided to certain of our non-management employees, government mandatory insurance for our employees and rent for our principal offices. For the six months ended October 31, 2006 we incurred advertising fees of $12,529 as compared to $0 in advertising fees for the six months ended October 31, 2005, an increase of $12,529. The advertising fees for the six months ended October 31, 2006 were for the Stevioside factory. These increases were offset by a decrease of approximately $120,877 in bad debt expenses, $21,226 in rent expenses, and $20,861 in travel expenses overall decrease in other general and administrative expenses of approximately $1,292. Bad debt expenses decreased for the six months ended October 31, 2006 as compared to the six months ended October 31, 2005. During the six months ended October 31, 2006, the Company formed a delinquent accounts receivable department whose objective is to resolve overdue accounts receivable. The Company established an initiative to resolve outstanding accounts receivable; the goal is to improve our collection rate for outstanding accounts receivable. As a result, the bad debt expenses were decreased approximately $120,877 for the six months ended October 31, 2006 as compared to the six months ended October 31, 2005. For the six months ended October 31, 2005, we incurred rental expense of $24,400 while we upgraded the traditional Chinese medicine factory. The Company needed additional space to warehouse goods while the upgrade was in process. For the six months ended October 31, 2006, the Company has completed the upgrade of the facility and the rental expense decreased accordingly. Travel expenses decreased for the six months ended October 31, 2006 as compared to the six months ended October 31, 2005. The Company expects travel expenses will return to prior levels as government regulations have eased as reports of avian flu have declined; therefore our salespeople expect to travel more frequently. -25- ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued) Total Other Income (Expense) For the six months ended October 31, 2006, other expenses amounted to $2,256 as compared to other income of $151,880 for the six months ended October 31, 2005, a decrease of $154,136. Other income for the six months ended October 31, 2005 was associated with income recognized from the accrual of value-added taxes on certain of our animal medicine products which had not been assessed to our customers. Respective tax authorities notified the Company that certain of our animal medicine products are not subject to value added taxes. However until we received notification of such position from the respective tax authority, we had accrued additional value added taxes. Upon notification from the tax authority, the accrued taxes were recorded as other income for the six months ended October 31, 2005. For fiscal year 2007, the Company was not required to record an accrual for value added taxes, since the Company received the notification from the tax authority. For the six months ended October 31, 2006, interest income was $44,060 as compared to interest expense of $14,503 for the six months ended October 31, 2005, an increase of $58,563. Interest income for the six months ended October 31, 2006 was associated with interest on our increased cash position held in our bank accounts and interest expense for the six months ended October 31, 2005 was associated with our borrowings. For the six months ended October 31, 2006, we reported a minority interest in income of our subsidiary, Qufu, of $0 as compared to a minority interest of $332,832 for the six months ended October 31, 2005. On February 7, 2006, we acquired the remaining 20% of Qufu and, as a result, Qufu is now our wholly-owned subsidiary effective February 1, 2006. As a result of these factors, we reported net income of $477,168 or $.01 per share for the six months ended October 31, 2006 as compared to net income of $1,153,906 or $.03 per share for the six months ended October 31, 2005. -26- ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued) LIQUIDITY AND CAPITAL RESOURCES Liquidity is the ability of a Company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. The following table provides certain selected balance sheet comparisons between October 31, 2006 (unaudited) and April 30, 2006:
October 31, April 30, $ of % of 2006 (Unaudited) 2006 Change Change (+/-) --------------------- ---------------- --------------- ---------------- Working capital $ 12,507,217 $8,908,577 3,598,640 40.4% Cash $ 7,008,997 $5,433,691 1,574,306 29.0% Accounts receivable, net $ 3,031,348 $2,608,873 422,475 16.2% Inventories $ 3,623,995 $1,778,870 1,845,125 103.7% Prepaid expenses and other $ 888,365 $ 967,892 (79,527) -8.2% Total current assets $ 14,552,705 $10,789,326 3,763,379 34.9% Property and equipment, net $ 5,223,697 $5,375,849 (152,152) -2.8% Loans payable $ 259,908 $ 255,487 4,421 1.7% Accounts payable and accrued expenses $ 1,764,766 $1,579,402 185,364 11.7% Due to related party $ 13,714 $ 8,497 5,217 61.4% Advances from customers $ 7,100 $ 37,363 (30,263) -81.0% Total current liabilities $ 2,045,488 $1,880,749 164,739 8.8% Total liabilities $ 2,182,263 $2,015,197 167,066 8.3%
At October 31, 2006, we had working capital of $12,507,217 and cash and cash equivalents of $7,008,997. At October 31, 2006, our cash position by geographic area is as follows: United States $ 45,755 Canada 93,296 China 6,869,946 -------------- Total $ 7,008,997 ================ At October 31, 2006 we had prepaid expenses and other of $888,365 as compared to $967,892 at April 30, 2006, a decrease of $79,527 or approximately 8.2%. As reported in Prepaid expenses and other, advances to vendors for the year ended April 30, 2006 was $80,224 while the advances to vendors for the period ending October 31, 2006 was $0; a decrease of $80,224. We advanced funds to farmers in the region as a down payment to grow Stevia leaves for the production of our Stevioside. Prepayment to farmers is dependent on the supply of Stevioside in the market. For the six months ended October 31, 2006, supply of Stevioside is strong; therefore the Company decreased the advances to vendors as of October 31, 2006. -27- ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued) As of October 31, 2006, we had $259,908 in short term loans maturing February 2007. The $259,908 in short term loans is due to Bank of China; the loan commenced on February 28, 2006, maturing on February 28, 2007 at an annual interest rate of 6.9030%. Interest is payable quarterly. Principal is due at maturity. Given our current cash flow, we expect we are able to meet the obligation of the debt services from our existing working capital. Our inventories, net of reserve for obsolete inventory, increased $1,845,125 during the six months ended October 31, 2006 from $1,778,870 at April 30, 2006 to $3,623,995 at October 31, 2006. It is the harvest season for Stevia leaves. We reserve adequate Stevia leaves for our increased sales of Stevioside. The Company believes the inventory will be maintained at this level for the next quarter as well. As of October 31, 2006, we had approximately $13,714 in due to related party. The Company pays management fees to Shandong Shengwang Pharmaceutical Corporation, Limited, a related company. The management fees which are included in general and administrative expenses for the six months ended October 31, 2006 and October 31, 2005 were $93,972 and $ 24,303. respectively. At October 31, 2006, the Company owed Shandong Shengwang Pharmaceutical Corporation, Limited $13,714 for management fees. We do not have a contract with Shandong Shengwang Pharmaceutical Corporation, Limited and the amount of annual management fee is subject to increase at Mr. Zhang's discretion. Net cash provided by (used in) operating activities decreased to $(907,368) the six months ended October 31, 2006 from $1,952,852 for the six months ended October 31, 2005. This decrease is primarily attributable to: * a decrease of $676,738 in our net income, * an increase of $227,686 in depreciation and amortization as a result of the fact that during fiscal 2006 we upgraded a portion of our facilities to satisfy heightened GMP (good manufacturing practices) standards. * an increase of $252,418 in stock based compensation which reflects the increase in the amortization of the payments of non-cash compensation to consultants during the fiscal 2006. We paid stock based compensation to consultants for business development services, management services, and investor relations services. The total payments are amortized during the service period, * a decrease of $340,005 in minority interest which represents that portion of our net income which is attributable to the 20% of Qufu we did not own for the six months ended October 31, 2005. * a decrease of $73,020 in allowance for doubtful accounts which represents a decrease in our allowance for bad debts based on an analysis of our receivable balances and the collection of previously written-off accounts receivable, -28- ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued) * a decrease of $346,487 in accounts receivable as a result of collecting our receivables in a more timely manner and the application of advances from customers to our accounts receivable balances. The Company established an initiative to resolve outstanding accounts receivable; the goal is to improve our collection rate for outstanding accounts receivable. The initiative was instituted as a means to force employees to focus more intently on collections. Furthermore, the Company formed a delinquent accounts receivable department whose objective is to resolve overdue accounts receivable. * a decrease of $2,523,144 in inventory for the six months ended October 31, 2006 as compared to the change in inventory for the six months ended October 31, 2005. Our inventory level increased due to our increased Stevioside production. As well we have increased our inventory for raw materials used in Stevia production and veterinary medicine production; however we have decreased our raw material inventory levels for Chinese medicine production. Presently during the harvest season for Stevia leaves, we have reserved adequate Stevia leaves for our increased sales of Stevioside. Also management expects sales for veterinary medicine will increase as government regulations have eased as reports of avian flu have declined. The management also expects that the raw material of the veterinary medicine will increase in the market. Therefore, for the six months ended October 31, 2006 the inventory for stevioside is $2,299,117, a 175% increase from the inventory for the six months ended October 31, 2005 of $836,883. And for the six months ended October 31, 2006 the inventory of veterinary medicine is $903,758, a 0.2% increase from the inventory for the six months ended October 31, 2005 of $901,983. * an increase of $88,257 in prepaid and other current assets, as a result of advances made to consultants in preparation of our business marketing and development. We made approximately $157,500 advances to consultants and professional resources for the marketing of our proprietary blend of Stevioside, "Only Sweet" during the three months ended October 31, 2006. These expenses to various professional resources for the marketing of our products is a continual practice, we expect to witness these expenses in the foreseeable future. * a decrease of $62,120 in amounts due to related parties for mangaement fees which are discussed elsewhere in this section, * an increase of $169,527 in accounts payable and accrued expenses as a result of the slow down of the repayment due from our cash provide by operations, * an increase of $528,434 in income tax payable as a result of the receipt of a tax waiver during the current period which would impact for fiscal 2007. For the six months ended October 31, 2005 we recorded a benefit from income tax in the amount of $521,593. For the six months ended October 31, 2006 we did not record a provision for tax expenses due to the tax waiver. There is no income tax payable as of October 31, 2006. We received the tax waiver from the government for the period from November 2005 to October 2006, and * a decrease of $105,028 in advances from customers which includes a reduction in prepayments from our animal medicine customers due to a slow down in production and shipments as a result of reduced demand of animal medicine products as discussed earlier in this section. -29- ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued) Net cash used in investing activities decreased to $12,861 for the six months ended October 31, 2006 as compared to $1,012,687 for the six months ended October 31, 2005. This change is primarily the result of a decrease of $823,237 in capital expenditures for the acquisition of manufacturing equipment during the six months ended October 31, 2005 as compared to the six months ended October 31, 2006. Net cash provided by financing activities was $2,429,600 for the six months ended October 31, 2006 as compared to net cash used in financing activities of $287,484 for the six months ended October 31, 2005. This change is primarily attributable to proceeds of $2,417,100 from subscription receivable during the six months ended October 31, 2006.The Company received $720,000 proceeds from short term loan during the three months ended July 31, 2006. As of October 31, 2006, the $720,000 of the notes payable was satisfied. We currently have no material commitments for capital expenditures. During fiscal 2007, however, we may seek to raise additional working capital to further augment our cash position and to provide additional funds for marketing and distribution as we seek to bring distribution of Stevioside to North American markets. We do not have any firm commitments for any additional capital and there are no assurances we will obtain a commitment upon terms and conditions which are acceptable to our company. Off Balance Sheet Arrangements Under SEC regulations, we are required to disclose our off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement or contractual arrangement to which any entity that is not consolidated with us is a party, under which we have: * Any obligation under certain guarantee contracts; * Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets; * Any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to our stock and classified in stockholder's equity in our statement of financial position; and * Any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us. As of the date of this report, we do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with generally accepted accounting principles in the United States. -30- ITEM 3. CONTROLS AND PROCEDURES Our Chief Executive Officer and Chief Financial Officer (collectively, the "Certifying Officers") are responsible for establishing and maintaining disclosure controls and procedures for us. Based upon such officers' evaluation of these controls and procedures as of a date as of the end of the period covered by this Quarterly Report, and subject to the limitations noted hereinafter, the Certifying Officers have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in this Quarterly Report is accumulated and communicated to management, including our principal executive officers as appropriate, to allow timely decisions regarding required disclosure. There was no change in the Company's internal control over financial reporting identified in connection with our evaluation that occurred during its last fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting. Our management, including each of the Certifying Officers, does not expect that our disclosure controls or our internal controls will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. The design of any systems of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. -31- Part II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits Exhibit Number Description - ----------- ---------------- 31.1 Section 302 Certificate of Chief Executive Officer 31.2 Section 302 Certificate of Chief Financial Officer 32.1 Section 906 Certificate of Chief Executive Officer 32.2 Section 906 Certificate of Chief Financial Officer SIGNATURES In accordance with the requirements of the Exchange Act, the registrant has caused his report to be signed on its behalf by the undersigned, thereunto duly authorized. SUNWIN INTERNATIONAL NEUTRACEUTICALS, INC. By: /s/ Dongdong Lin Dongdong Lin, Dated: December 15, 2006 CEO, Principal Executive Officer -36- EX-31 2 ex311.txt EXHIBIT 31.1 CERTIFICATION PURSUANT TO 18 U.S.C. ss 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Dongdong Lin, certify that: 1. I have reviewed this quarterly report on Form 10-QSB for the period ended October 31, 2006 of Sunwin International Neutraceuticals, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions after the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuers other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. December 15, 2006 By: /s/ Dongdong Lin ---------------- Dongdong Lin, CEO, principal executive officer EX-31 3 ex312.txt EXHIBIT 31.2 CERTIFICATION PURSUANT TO 18 U.S.C. ss 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Fanjun Wu, certify that: 1. I have reviewed this quarterly report on Form 10-QSB for the period ended October 31, 2006 of Sunwin International Neutraceuticals, Inc; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) 15d-15(e) and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions after the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuers other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. December 15, 2006 By: /s/ Fanjun Wu ------------- Fanjun Wu, CFO, principal financial officer EX-32 4 ex321.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Dongdong Lin, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Sunwin International Neutraceuticals, Inc. on Form 10-QSB for the period ended October 31, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-QSB fairly presents in all material respects the financial condition and results of operations of Sunwin International Neutraceuticals, Inc. December 15, 2006 By:/s/ Dongdong Lin ------------------------- Dongdong Lin, CEO [A signed original of this written statement required by Section 906 has been provided to Sunwin International Neutraceuticals, Inc. and will be retained by Sunwin International Neutraceuticals, Inc. and furnished to the United States Securities and Exchange Commission or its staff upon request.] EX-32 5 ex322.txt Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Fanjun Wu, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Sunwin International Neutraceuticals, Inc. on Form 10-QSB for the period ended October 31, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-QSB fairly presents in all material respects the financial condition and results of operations of Sunwin International Neutraceuticals, Inc. December 15, 2006 By:/s/ Fanjun Wu --------------------------- Fanjun Wu, CFO and Chief and Principal Accounting Officer [A signed original of this written statement required by Section 906 has been provided to Sunwin International Neutraceuticals, Inc. and will be retained by Sunwin International Neutraceuticals, Inc. and furnished to the United States Securities and Exchange Commission or its staff upon request.] -----END PRIVACY-ENHANCED MESSAGE-----