JPAK GROUP, INC...
Overview
We are engaged primarily in the development, manufacture, and distribution of aseptic liquid food and beverage cartons for milk, fruit juices, soy milk, yogurt drinks, iced tea, wine, sauces and other liquid foods and beverages in China. Since 2004, we have focused on research and development and we believe we are the largest and leading domestic supplier of aseptic liquid food and beverage cartons in China. Our business is primarily in China, but we have recently begun contract manufacturing products for export to several other countries.
Company History
Qingdao Renmin commenced operations in China in 1958 as a state-owned, traditional printing and packaging company. Management completed the buyout of 88.23% of the state-owned equity interest in 2004, and in the same year started the development of aseptic liquid food and beverage cartons which was launched in the China market in 2005.
On June, 22, 2006, Jpak was incorporated in the Cayman Islands as Winner Dragon Limited. Winner Dragon Limited and was renamed Jpak Group Co., Ltd. on September 18, 2006. Additionally, during September 2006, Jpak completed the acquisition of 88.23% of the equity interest in Qingdao Renmin through Grand International, the 100% owned subsidiary of Jpak. Currently, substantially, all of our operations are conducted in China through Qingdao Renmin.
In July 2007, Grand International completed the acquisition of the remaining 11.77% of the state-owned equity interest and now owns 100% of the equity interest of Qingdao Renmin.
Competitive environment
The market for packaging products is competitive. Our operations may be affected by technological advances of competitors, industry consolidation, competitive combination products and new information of marketed products or post-marketing surveillance. In addition, the recent milk scandal has brought significant downward pressure on the industry.
As a result of Chinas new anti-monopoly laws, some of our larger competitors have decreased the amount of bundled products that they offer. Although this may cause such competitors to lower their price points, we believe it may actually allow us to be more competitive with them as we continue to offer bundled material and equipment which still maintains a large market share.
Milk scandal and its continuous effect on Jpak
In September 2008, the Chinese health ministry announced that over the previous months several babies had died and thousands were sickened by contaminated milk formula powder. The authorities later confirmed that the tainted powder was laced with melamine, an industrial chemical sometimes used to make plastics and fertiliser. Adding the chemical to the milk made the formula test at higher concentrations of protein.
The tainted milk powder was traced to the Sanlu Group, one of China's biggest dairy producers, which operates as a joint venture with a New Zealand-based dairy conglomerate, Fonterra. Further investigation revealed that milk formula powders produced by dozens of other dairy producers were also contaminated. After this scandal, the Chinese government began strengthening its supervision of both the milk and beverage industries. As a result, some smaller plants have been stopped their production and other larger companies within the industry are still working to recovery from the damage caused by the scandal.
In recent years and prior to the milk scandal, we began focusing more efforts in the dairy packaged segment as it typically had higher margins than the fruit juice market. Due to the scandal, our previously developed relationship with Sanlu has been terminated and all orders were cancelled. Additionally, orders from Taizinai, one of our other customers in the diary sector, have also fallen sharply.
Management continues to monitor both the short and long-term impact that the milk scandal will continue to have on our operations. Although Management believes that we are currently taking every possible action to minimize the impact, we may still experience some negative short term impact on our operating results. For example, our short term revenue has been adversely impacted by scandals negative impact on medium and small size companies that constitute most of our customers. Additionally, we have reduced our average sales price by nearly 10% as a result of more competitive environment brought by this scandal. However, management's efforts to realign our marketing focus on the post-scandal market place are beginning to show positive results. Our orders of the fiscal year 2009 increased by 27% compared to fiscal year 2008 in terms of volume. Currently packages for dairy and tea drink account for a largely percentage of our products and 50% and 30% of our revenue respectively.
Consolidated Balance Sheets
| | December 31, | | | June 30, | |
| | 2009 | | | 2009 | |
Assets | | (Unaudited) | | | | |
Current assets | | | | | | |
Cash and cash equivalents | | $ | 7,203,020 | | | $ | 2,969,699 | |
Restricted cash | | | 4,180,409 | | | | 3,403,868 | |
Accounts receivable, net of allowance for doubtful accounts of $1,498,405 | | | | | | | | |
and $1,496,723 at December 31, 2009 and June 30, 2009, respectively | | | 9,271,365 | | | | 9,063,973 | |
Inventory | | | 7,160,336 | | | | 5,353,193 | |
Trade notes receivable | | | 448,701 | | | | - | |
Other receivables | | | 1,253,636 | | | | 1,205,983 | |
Loan receivable | | | 132,030 | | | | 175,800 | |
Advance payments | | | 5,103,265 | | | | 503,143 | |
Prepaid expenses and other current assets | | | 139,109 | | | | 70,544 | |
Prepaid other taxes | | | - | | | | 266,664 | |
Total current assets | | | 34,891,871 | | | | 23,012,867 | |
Property and equipment, net | | | 12,971,713 | | | | 13,107,216 | |
Other assets | | | 112,697 | | | | - | |
| | | | | | | | |
Total assets | | $ | 47,976,281 | | | $ | 36,120,083 | |
| | | | | | | | |
Liabilities | | | | | | | | |
Current liabilities | | | | | | | | |
Accounts payable and accrued expenses | | $ | 2,771,724 | | | $ | 3,277,973 | |
Trade notes payable | | | 4,362,115 | | | | 3,212,704 | |
Advance payments from customers | | | 298,928 | | | | 327,898 | |
Short-term bank loans | | | 2,347,200 | | | | 2,344,000 | |
Current portion of long-term debt | | | 764,307 | | | | 951,811 | |
Income tax payable | | | 324,607 | | | | 167,429 | |
Other current liabilities | | | 192,894 | | | | 97,827 | |
Total current liabilities | | | 11,061,775 | | | | 10,379,642 | |
Long-term debt | | | 4,724,812 | | | | 1,985,075 | |
Total liabilities | | | 15,786,587 | | | | 12,364,717 | |
| | | | | | | | |
Equity | | | | | | | | |
Stockholders’ equity | | | | | | | | |
Series A convertible preferred stock, $0.0001 par value, 5,608,564 | | | | | | | | |
shares authorized, issued and outstanding | | | 561 | | | | 561 | |
Series B convertible preferred stock, $0.0001 par value, 5,000,000 | | | | | | | | |
shares authorized, issued and outstanding | | | 500 | | | | 500 | |
Series C convertible preferred stock, $0.0001 par value, 12,000,000 | | | | | | | | |
shares authorized, issued and outstanding | | | 1,200 | | | | - | |
Common stock, $0.001 par value, 300,000,000 shares authorized, | | | | | | | | |
36,368,334 and 25,005,000 shares issued and outstanding at December | | | | | | | | |
31, 2009 and June 30, 2009, respectively | | | 36,368 | | | | 25,005 | |
Series A preferred shares | | | 2,484,226 | | | | 2,484,226 | |
Series B preferred shares | | | 1,390,853 | | | | 1,390,853 | |
Warrants | | | - | | | | 4,634,678 | |
Placement agent warrants | | | 1,172,487 | | | | 1,172,487 | |
Additional paid-in capital | | | 22,011,719 | | | | 11,473,104 | |
Retained earnings (deficit) | | | 1,386,164 | | | | (1,106,478 | ) |
Statutory reserves | | | 1,010,026 | | | | 1,010,026 | |
Accumulated other comprehensive income | | | 2,590,464 | | | | 2,565,276 | |
Total stockholders’ equity | | | 32,084,568 | | | | 23,650,238 | |
Noncontrolling interest | | | 105,126 | | | | 105,128 | |
Total equity | | | 32,189,694 | | | | 23,755,366 | |
| | | | | | | | |
Total liabilities and equity | | $ | 47,976,281 | | | $ | 36,120,083 | |
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
| | For the Three Months Ended | | | For the Six Months Ended | |
| | December 31, | | | December 31, | |
| | 2009 | | | 2008 | | | 2009 | | | 2008 | |
| | | | | | | | | | | | |
Sales | | $ | 13,166,264 | | | $ | 6,108,787 | | | $ | 29,728,184 | | | $ | 15,539,117 | |
| | | | | | | | | | | | | | | | |
Cost of sales | | | 10,031,204 | | | | 5,206,666 | | | | 21,868,816 | | | | 12,202,568 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | 3,135,060 | | | | 902,121 | | | | 7,859,368 | | | | 3,336,549 | |
| | | | | | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | | | | | |
Selling, general and administrative | | | 1,805,476 | | | | 1,517,427 | | | | 4,693,819 | | | | 3,625,088 | |
| | | | | | | | | | | | | | | | |
Income (loss) from operations | | | 1,329,584 | | | | (615,306 | ) | | | 3,165,549 | | | | (288,539 | ) |
| | | | | | | | | | | | | | | | |
Other income (expenses): | | | | | | | | | | | | | | | | |
Interest expense, net | | | (95,005 | ) | | | (99,092 | ) | | | (192,056 | ) | | | (107,617 | ) |
Non-operating income, net | | | 89,878 | | | | 1,134 | | | | 86,366 | | | | 13,770 | |
| | | | | | | | | | | | | | | | |
Total other income (expenses) | | | (5,127 | ) | | | (97,958 | ) | | | (105,690 | ) | | | (93,847 | ) |
| | | | | | | | | | | | | | | | |
Income (loss) before provision for income taxes | | | 1,324,457 | | | | (713,264 | ) | | | 3,059,859 | | | | (382,386 | ) |
| | | | | | | | | | | | | | | | |
Provision for income taxes | | | 324,524 | | | | - | | | | 567,362 | | | | - | |
| | | | | | | | | | | | | | | | |
Net income (loss) | | | 999,933 | | | | (713,264 | ) | | | 2,492,497 | | | | (382,386 | ) |
| | | | | | | | | | | | | | | | |
Less: net (loss) attributable to noncontrolling interest | | | (89 | ) | | | (67 | ) | | | (145 | ) | | | (559 | ) |
| | | | | | | | | | | | | | | | |
Net income (loss) attributable to Jpak | | | 1,000,022 | | | | (713,197 | ) | | | 2,492,642 | | | | (381,827 | ) |
| | | | | | | | | | | | | | | | |
Undistributed income attributable to preferred | | | | | | | | | | | | | | | | |
stockholders | | | 491,161 | | | | - | | | | 1,165,971 | | | | - | |
| | | | | | | | | | | | | | | | |
Net income (loss) applicable to common | | | | | | | | | | | | | | | | |
stockholders | | | 508,861 | | | | (713,197 | ) | | | 1,326,671 | | | | (381,827 | ) |
| | | | | | | | | | | | | | | | |
Other comprehensive income (loss) | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | | (6,842 | ) | | | (375 | ) | | | 25,188 | | | | (39,283 | ) |
| | | | | | | | | | | | | | | | |
Comprehensive income (loss) | | $ | 993,180 | | | $ | (713,572 | ) | | $ | 2,517,830 | | | $ | (421,110 | ) |
| | | | | | | | | | | | | | | | |
Basic earnings (loss) per common share | | $ | 0.02 | | | $ | (0.03 | ) | | $ | 0.05 | | | $ | (0.02 | ) |
Diluted earnings (loss) per common share | | $ | 0.02 | | | $ | (0.03 | ) | | $ | 0.05 | | | $ | (0.02 | ) |
| | | | | | | | | | | | | | | | |
Weighted average number of common shares | | | | | | | | | | | | | | | | |
outstanding | | | | | | | | | | | | | | | | |
Basic | | | 28,092,863 | | | | 24,805,000 | | | | 26,548,931 | | | | 24,805,000 | |
Diluted | | | 56,295,779 | | | | 24,805,000 | | | | 49,882,001 | | | | 24,805,000 | |
Consolidated Statements of Cash Flows
(Unaudited)
| | For the Six Months Ended | |
| | December 31, | |
| | 2009 | | | 2008 | |
| | | | | | |
Cash flows from operating activities: | | | | | | |
Net income (loss) | | $ | 2,492,642 | | | $ | (381,827 | ) |
Adjustments to reconcile net income to net cash | | | | | | | | |
provided by (used in) operating activities: | | | | | | | | |
Noncontrolling interest | | | (145 | ) | | | (559 | ) |
Depreciation | | | 770,427 | | | | 598,024 | |
Share-based payment | | | - | | | | 303,750 | |
Loss (gain) on disposal of fixed assets | | | 2,355 | | | | (332 | ) |
Provision for bad debts | | | (361 | ) | | | 150,823 | |
Changes in assets and liabilities: | | | | | | | | |
Accounts receivable | | | (194,577 | ) | | | 1,192,350 | |
Inventory | | | (1,799,098 | ) | | | 1,607,080 | |
Trade notes receivable | | | (448,518 | ) | | | - | |
Other receivables | | | (45,987 | ) | | | (157,372 | ) |
Advance payments | | | (3,172,068 | ) | | | (1,666,470 | ) |
Prepaid expenses and other current assets | | | (68,477 | ) | | | 36,782 | |
Other assets | | | (112,651 | ) | | | - | |
Accounts payable and accrued expenses | | | (510,297 | ) | | | (1,592,945 | ) |
Advance payments from customers | | | (29,406 | ) | | | - | |
Prepaid other taxes | | | 266,919 | | | | - | |
Income tax payable | | | 156,885 | | | | - | |
Other current liabilities | | | 94,896 | | | | 83,046 | |
Total adjustments | | | (5,090,103 | ) | | | 554,177 | |
| | | | | | | | |
Net cash provided by (used in) operating activities | | | (2,597,461 | ) | | | 172,350 | |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
Advance payments for fixed assets | | | (1,425,485 | ) | | | - | |
Additions to property and equipment | | | (619,447 | ) | | | (763,260 | ) |
Proceeds from disposal of fixed assets | | | - | | | | 48,345 | |
Change in loan receivable | | | 43,992 | | | | - | |
| | | | | | | | |
Net cash used in investing activities | | | (2,000,940 | ) | | | (714,915 | ) |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | | |
Issuance of trade notes payable | | | 1,144,557 | | | | (337,645 | ) |
Proceeds from (repayment of) long-term debt | | | 2,547,183 | | | | (211,591 | ) |
Additional paid-in capital | | | 5,916,500 | | | | - | |
| | | | | | | | |
Net cash provided by (used in) financing activities | | | 9,608,240 | | | | (549,236 | ) |
| | | | | | | | |
Effect of foreign currency translation on cash | | | 23 | | | | (128,910 | ) |
| | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 5,009,862 | | | | (1,220,711 | ) |
| | | | | | | | |
Cash and cash equivalents and restricted cash – beginning | | | 6,373,567 | | | | 7,218,904 | |
| | | | | | | | |
Cash and cash equivalents and restricted cash – ending | | $ | 11,383,429 | | | $ | 5,998,193 | |
Note 1 – Organization and Nature of Business
JPAK Group, Inc. (Formerly Rx Staffing Inc was established under the laws of Nevada on December 6, 2004. The accompanying consolidated financial statements include the financial statements of JPAK Group, Inc. and its subsidiaries (the “Company”). The Company’s primary business is to print and produce packaging products for sale to the beverage and other industries.
On August 9, 2007, Rx Staffing Inc. (“Rx Staffing”) completed a reverse acquisition of JPAK Group Co., Ltd., (“JPAK Co.”) which was incorporated in the Cayman Islands on June 22, 2006. To accomplish the exchange of shares Rx Staffing issued 23,005,000 shares of common stock on a one to one ratio for a 100% equity interest in JPAK Co., per the terms of the Share Exchange and Bill of Sale of assets of Rx Staffing and Shaun Jones. Rx Staffing was delivered with zero assets and zero liabilities at time of closing. Following the reverse acquisition, Rx Staffing changed the name to JPAK Group, Inc. (“JPAK”). The transaction was regarded as a reverse merger whereby JPAK Co. was considered to be the accounting acquirer as its shareholders retained control of RX Staffing after the exchange. Although the Company is the legal parent company, the share exchange was treated as a recapitalization of JPAK Co.. Thus, JPAK Co. is the continuing entity for financial reporting purposes. The financial statements have been prepared as if JPAK Co. had always been the reporting company and then on the share exchange date, had changed its name and reorganized its capital stock.
In September 2006, JPAK Co. acquired 100% interest in Grand International Industrial Ltd. which was incorporated on August 4, 2006, in the city of Hong Kong, the People’s Republic of China (“PRC”). In August 2006, Grand International acquired 88.23% interest in Qingdao Renmin, which was incorporated in May 2001 in the city of Qingdao, the People’s Republic of China. On July 3, 2007, Grand International acquired the remaining 11.77% interest in Qingdao Renmin. The consolidated financial statements reflect all predecessor statements of income and cash flows from the inception of Qingdao Renmin in August 2006. In October 2007, Qingdao Renmin invested in Qingdao Delikang Packing Machinery Co., Ltd., (“Qingdao Delikang”), a joint venture with Xi’an Heiniu Machinery, Co. Qingdao Renmin acquired 51% interest of Qingdao Delikang.
Substantially all of the Company’s business is conducted through Qingdao Renmin, an operating subsidiary established in the Peoples Republic of China, in which the Company indirectly holds a 100% interest.
Note 2 – Summary of Significant Accounting Policies
Basis Of Presentation
The Company’s consolidated financial statements include the accounts of its direct wholly-owned subsidiaries and of its indirect proportionate share of subsidiaries owned by the wholly-owned subsidiaries. All intercompany balances and transactions are eliminated in consolidation. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) applicable to interim financial information and the requirements of Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included.
Interim Financial Statements
These interim financial statements should be read in conjunction with the audited financial statements for the years ended June 30, 2009 and 2008, as not all disclosures required by generally accepted accounting principles for annual financial statements are presented. The interim financial statements follow the same accounting policies and methods of computations as the audited financial statements for the years ended June 30, 2009 and 2008.
Note 2 – Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements
On July 1, 2009, the Financial Accounting Standards Board (“FASB”) officially launched the FASB Accounting Standards Codification (“ASC”), which has become the single official source of authoritative nongovernmental U.S. GAAP, in addition to guidance issued by the Securities and Exchange Commission. The ASC is designed to simplify U.S. GAAP into a single, topically ordered structure. All guidance contained in the ASC carries an equal level of authority. The ASC is effective for all interim and annual periods ending after September 15, 2009. The Company’s implementation of this guidance effective July 1, 2009 did not have a material effect on the Company’s condensed consolidated financial statements.
On July 1, 2009, the Company adopted the accounting and disclosure requirements of Statement of Financial Accounting Standard (“SFAS”) No. 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51, which is now included with ASC Topic 810 Consolidation. This standard establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation. On a prospective basis, any changes in ownership will be accounted for as equity transactions with no gain or loss recognized on the transactions unless there is a change in control.
Reclassification
Certain amounts of December 31, 2008 were reclassified for presentation purposes.
Note 3– Restricted Cash
As of December 31, 2009 and June 30, 2009, the Company had restricted cash of $4,180,409 and $3,403,868, respectively. These restricted cash balances are reserved for settlement of trade notes payable and open letter of credit in connection with inventory purchases. The cash held in custody by bank issuing the trade notes payable and letter of credit is restricted as to withdrawal or use, and is currently earning interest.
Note 4– Accounts Receivable
Trade accounts receivable are stated at original invoice amount less allowance for doubtful receivables based on management’s periodic review of aging of outstanding balances and customer credit history. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
The balance of allowance for doubtful accounts amounted to $1,498,405 and $1,496,723 as of December 31, 2009 and June 30, 2009, respectively. The allowance was mainly because a major customer was near bankruptcy as of December 31, 2009.
Note 5 – Inventory
Inventory at December 31, 2009 and June 30, 2009 consists of the following:
| | December 31, 2009 | | | June 30, 2009 | |
| | | | | | |
Finished goods | | $ | 2,326,472 | | | $ | 939,428 | |
Raw materials | | | 4,263,303 | | | | 3,912,953 | |
Parts and supplies | | | 206,097 | | | | 84,806 | |
Work in process | | | 364,464 | | | | 416,006 | |
| | | | | | | | |
Total | | $ | 7,160,336 | | | $ | 5,353,193 | |