Results of Operations
Comparison of Sales for the Three Months Ended March 31, 2010 and 2009
Three Months Ended March 31,
Sales in US dollars 2010 2009
Silk $ 631,835 $ 257,961
Cocoons - 33,565
By products and others 80,676 106,845
Total sales $ 712,511 $ 398,371
Net Sales
Our net sales increased $314,140, or 79% to $712,511 in the first quarter 2010 from $398,371 in the first quarter 2009. The Company sold 21.60 tons of silk during the three months ended March 31, 2010, an increase of 8.84 tons, compared to 12.76 tons during the same period of 2009. The revenue from sale of silk was $631,835 in the first quarter 2010, an increase of $373,874, or 145% as compared to $257,961 for the three months ended March 31, 2009.
The cocoon is a raw material for production of silk. There were no cocoon sales in the first quarter of 2010 due to seasonality.
Gross Profit
Comparison of Gross Profit for the Three Months Ended March 31, 2010 and 2009
Three Months Ended March 31,
2010 2009
Net sales $ 712,511 $ 398,371
Cost of sales (600,928 ) (370,486 )
Gross profit $ 111,583 $ 27,885
Gross profit margin rate 15.66 % 7.00 %
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Gross profit for the three months ended March 31, 2010 and 2009 was $111,583 and $27,885, respectively. The gross profit margin rate increased 8.66 percentage points to 15.66% in the first quarter 2010 from 7% in the first quarter 2009. This improvement reflects the improvement of silk market conditions and is also the result of our contemplated acquisition of Zhengzhong (see Plan of Operation). The Company started to use its exclusive right through acquired assets of Zhengzhong to purchase cocoons directly from local farmers commencing in the spring cocoon season of 2008. As a result, the Company had better quality and lower cost cocoons.
(Loss) from Operations
Comparison of (Loss) from Operations for the Three Months Ended March 31, 2010 and 2009
Three Months Ended March 31,
2010 2009
Gross profit $ 111,583 $ 27,885
Professional fees 17,024 16,629
Depreciation and amortization 10,111 9,625
Selling expenses 16,815 10,127
Cocoon station costs - 18,088
Other general and administrative expenses 124,490 92,147
Total operating expenses 168,440 146,616
(Loss) from operations $ (56,857 ) $ (118,731 )
Loss from operations for the three months ended March 31, 2010 was $56,857, an improvement of $61,874, as compared to loss from operations of $118,731 for the three months ended March 31, 2009.
Total operating expenses were $168,440, an increase of $21,824, or 15%, as compared to $146,616 for the three months ended March 31, 2009. The increase was primarily due to the increase in other general and administrative expenses.
Other general and administrative expenses consist of expenses relating to our back office and general and administrative expenses relating to our cocoon stations. Other general and administrative expenses increased $32,343 to $124,490 in the first quarter 2010 from $92,147 in the same quarter 2009. The increase was primarily attributable to the cost in connection with the application of government subsidy.
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Other Expenses, Net
Comparison of Other Expenses, net for the Three Months Ended March 31, 2010 and 2009
Three Months Ended March 31,
2010 2009
Subsidy income $ 173,611 $ 265,458
Interest income 802 6,457
Interest expense (433,638 ) (479,730 )
Other Expenses, net $ (259,225 ) $ (207,815 )
Total other expenses, net were $259,225 for the three months ended March 31, 2010, an increase of $51,410 as compared to $207,815 for the three months ended March 31, 2009. The Company received $173,611 and $265,458 net subsidy from local Chinese government during the three months ended March 31, 2010 and 2009, respectively. These government subsidies were in connection with the purchase of cocoons and as an incentive for technology innovation. Part of these subsidies will pass through to the farmers who produced the cocoons when we purchase the cocoons from farmers.
Interest expenses consist of interest paid for short term loans and accrued loan interest expense and default penalties in connection with the defaulted convertible notes. Accrued loan interest and default penalties totaled $342,042 and $342,042 for the three months ended March 31, 2010 and 2009, respectively.
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