GLG Life Tech Corporation (Nasdaq:GLGL) (TSX:GLG) ("GLG" or the
"Company"), the vertically-integrated leader in the agricultural
and commercial development of high quality stevia and all natural
and zero calorie food and beverage products, announces financial
results for the quarter ended September 30, 2011.
BUSINESS HIGHLIGHTS
- European Commission approved the use of stevia as a
sweetener on November 11 & products will be allowed in the EU
market as early as December 3. GLG has recently signed six key
ingredient distributors whose coverage across the region will form
a sales network ready to distribute GLG's high-purity all-natural
stevia extract in the newly opened EU market.
- New stevia formulation company, AN0C Stevia Solutions,
established & began marketing its first product line, Dream
Sweetener, to international food and beverage companies, which is
expected to be the key enabler for them to provide great-tasting
zero-calorie beverages.
- AN0C Consumer Products Joint Venture launched vitamin
enriched waters in the China marketplace & signed exclusive
sponsorship of China's national Olympic swim-team for ready to
drink teas.
- National Conference in Beijing jointly hosted by AN0C
and Chinese Government celebrating the success of Xiaogang's
economic progress and AN0C's major role in its development &
showcased 34 AN0C beverages and two tabletop
products.
- Successful agricultural R&D of new stevia plant
strains: Huinong 3 and Huinong 4 which will be available for
planting in the 2012 growing season, providing GLG with a
significant cost reduction for production of high-purity stevia
extracts next year and beyond. Also developed this year is Huinong
5, a new plant strain with a seed capable of producing high amount
of stevioside.
- OEM bottler production issue in September impacted AN0C
revenues & new product launches. Production issues are now
resolved & settlement has been recently finalized with the OEM
bottler. There were 10,319 cases ultimately determined by AN0C and
the Bottler to be below quality standards out of the original
200,000 cases shipped to the market as well as the stock that
remained at the Bottler's plants. The settlement value for the
10,319 cases is approximately CAD 60,000.
Revenue from stevia was $0.7 million – High
purity Stevia revenues for the third quarter 2011 were $0.7
million, as customers continue to deal with aftertaste issues and
inventory levels.
Revenue from AN0C for the third quarter was $1.0
million – The Company's consumer products business, AN0C,
had sales of $1.0 million in the third quarter of 2011. The average
revenue per bottle was higher by 3.8% for the third quarter
compared to the second quarter as it reflected the change in
product mix and the reduced level of promotional activities that
were undertaken in the second quarter to support the launch of the
new AN0C brand the RTD products. The first sales of vitamin
enriched waters began in the third quarter, and were on average
sold at a higher price than the RTD teas. The objectives of
the promotional campaigns were to encourage consumers to try the
AN0C beverages through lower retail pricing and to reward our
distributors through volume purchases.
Impairment charges recorded during the third
quarter - During the period, management conducted
tests for impairment for both tangible and intangible assets
and concluded there was evidence of impairment on some of its
intangible assets (Goodwill and Customer Relationship Intangible)
resulting in a $12.2 million charge for the period (approximately
50% of net loss for the period).
Key Developments in China Consumer Products AN0CTM Joint
Venture – Since the launch of the AN0C's
original Ready-to-Drink (RTD) teas in March, AN0C has re-introduced
its RTD teas in a new custom branded bottle in the third quarter to
better differentiate AN0C's product, and launched six flavours of
zero calorie vitamin enriched waters. The new improved taste of
AN0C's RTD teas is sweetened with AN0C Stevia Solution's Dream
Sweetener. Vitamin enriched water is a relatively new beverage
category in China, however, AN0C has brought in new distribution
partners that specialize in vitamin enriched waters and the initial
feedback from the market for this product has been
encouraging. AN0C experienced production issues with its main
OEM Bottler in September. Potential batches impacted comprised
approximately 200,000 cases of RTD tea that had been shipped and
85,000 cases of vitamin enriched waters that were identified at the
OEM plant and were not shipped. Total of approximately 10,000
cases were found to be substandard, comprised of 3,000 cases that
were shipped and 7,000 cases that were not shipped. In the
long term interest of maintaining the high-quality image and
reputation of the AN0C brand, additional production orders were
withheld until we had the confidence that production issues had
been resolved and a fair settlement was reached with our OEM
Bottler. As a result, some new product launches such as soft
drinks and juice milk have been delayed until the 2012 in time for
the next peak summer sales season. AN0C has launched a zero
calorie tabletop product recently and plans to launch functional
health drinks in the fourth quarter of 2011 through its existing
and new distributors.
New stevia formulation company - AN0C Stevia
Solutions - The Company created a new subsidiary, AN0C
Stevia Solutions Company, to focus on providing naturally sweetened
zero and reduced calorie food and beverage formulations to
customers outside China. The solutions and formulations will
be all natural - natural sweeteners, natural flavours and natural
colours, for use in zero or low calorie beverage and food
products. The Company also announced the launch of AN0C Stevia
Solutions' first product line – the Dream Sweetener
series. Using GLG's BlendSure and other natural ingredients,
the Dream Sweetener product line (which initially consists of 10x,
30x, 60x, and 100x the sweetness of sugar) was formulated to
maintain the best taste while replacing sugar or artificial
sweeteners in different beverage and food applications. Core
advantages of Dream Sweetener products include: 1) tastes like cane
sugar and has no aftertaste, 2) provides a consistent sweetness for
much easier formulation for a food and beverage company, 3) easy to
handle, unlike typical stevia extracts which come in a light powder
form, 4) can reduce the time to market for food and beverage
companies since the major formulation challenges (aftertaste &
consistency of taste) with high purity stevia extracts have been
overcome, and 5) is more cost efficient at large volumes.
Third Quarter 2011 Financial Results
Highlights
The following results from operations have been derived from and
should be read in conjunction with the Company's interim
consolidated financial statements for the three and nine month
periods ended September 30, 2011. The Company has reclassified
certain of the figures presented for comparative purposes to
conform to the financial statement presentation adopted in the
current period. Certain prior year's figures have been recast
to conform with U.S. GAAP accounting standards.
In thousands Canadian $,
except per share |
3
Months Ended Sep 30 |
%
Change |
9
Months Ended Sep 30 |
%
Change |
amounts |
2011 |
2010 |
|
2011 |
2010 |
|
Revenue |
$1,740 |
$20,951 |
(92%) |
$24,367 |
$39,628 |
(39%) |
Cost of Sales |
$4,833 |
$14,006 |
(65%) |
$23,217 |
$25,867 |
(10%) |
% of
Revenue |
278% |
67% |
211% |
95% |
65% |
30% |
Gross Profit |
($3,093) |
$6,945 |
(145%) |
$1,150 |
$13,761 |
(92%) |
% of
Revenue |
(178%) |
33% |
(211%) |
5% |
35% |
(30%) |
Expenses |
$10,756 |
$4,267 |
152% |
$31,208 |
$10,888 |
187% |
% of
Revenue |
618% |
20% |
598% |
128% |
27% |
101% |
Income (loss) from
Operations |
($13,849) |
$2,678 |
(617%) |
($30,058) |
$2,873 |
(1146%) |
% of
Revenue |
(796%) |
13% |
(809%) |
(123%) |
7% |
(131%) |
Other Income (Expenses) |
($12,827) |
($1,066) |
1103% |
($16,164) |
($2,907) |
456% |
% of
Revenue |
(737%) |
(5%) |
(732%) |
(66%) |
(7%) |
(59%) |
Net Income (loss) before Income Taxes
and Non-Controlling Interests |
($26,676) |
$1,612 |
(1755%) |
($46,222) |
($34) |
135847% |
% of
Revenue |
(1533%) |
8% |
(1541%) |
(190%) |
(%) |
(190%) |
Net Income (loss) after Income Taxes
and Non- Controlling Interests |
($24,628) |
$1,777 |
(1486%) |
($42,893) |
$103 |
(41744%) |
Earnings (loss) per share (Basic
& Diluted) |
($0.74) |
$0.06 |
(1333%) |
($1.35) |
$0.01 |
(13600%) |
Total Comprehensive Income
(loss) |
($13,128) |
$315 |
(4268%) |
($33,243) |
$1,017 |
(3369%) |
% of
Revenue |
(754%) |
2% |
(756%) |
(136%) |
3% |
(139%) |
Asset Impairment Losses |
$12,189 |
$0 |
0% |
$12,189 |
$0 |
0% |
% of
Revenue |
701% |
0% |
0% |
50% |
0% |
0% |
Consolidated Depreciation &
Amortization |
$2,714 |
$2,788 |
(3%) |
$7,142 |
$7,430 |
(4%) |
% of
Revenue |
156% |
13% |
143% |
29% |
19% |
11% |
Stock based
Compensation |
$764 |
$867 |
(12%) |
$2,386 |
$2,340 |
2% |
% of
Revenue |
44% |
4% |
40% |
10% |
6% |
4% |
EBITDA (1) |
($8,822) |
$6,113 |
(244%) |
($16,789) |
$12,481 |
(235%) |
% of
Revenue |
(507%) |
29% |
(17%) |
28% |
31% |
(3%) |
"EBITDA is a non-GAAP financial measure. GLG calculates it
by adding to net income before taxes (1) Depreciation and
amortization expense as reported on the cash flow statement, (2)
Other Income (Expenses), (3) Stock-based compensation expense, (4)
non-cash asset impairment losses and (5) Non-controlling
interest. This might not be the same definition used by other
companies. For the discussion of EBITDA, and the
reconciliation of EBITDA to net income before taxes and after
minority interest under US GAAP, please see 'Non-GAAP Financial
Information".
Revenue
Revenue for the three months ended September 30, 2011 which was
derived from stevia sales and the sale of consumer beverage
products was $1.7 million, a decrease of 92% compared to $20.9
million in revenue for the same period last year.
Revenue for the nine months ended September 30, 2011 was $24.4
million compared to $39.6 million for the same period in
2010. The total revenue was composed of $17.0 million for
stevia sales and $7.4 million for consumer products sales.
For the three months ended September 30, 2011, the total sales
of $1.7 million are composed of stevia sales of $0.7 million and
consumer product sales of $1.0 million. Approximately 19% of
sales for the three month period are derived from sales denominated
in US dollars and 81% are derived from sales denominated in
RMB. As at September 30, 2011, 100% of the Company's sales are
in foreign currencies and translated into Canadian dollars for
financial reporting purposes.
Stevia sales of $0.7 million, for the three months ended
September 30, 2011 are net of intersegment sales to AN0C (YTD 2011
$1.2 million). Stevia sales for the third quarter 2011 were
down by 97% compared to the third quarter in 2010, which was driven
by lower demand for the Company's products during the third quarter
from its customers. One of the main issues has been existing
inventory levels of stevia extracts at some of its key customers
and distributors from previous sales made to them in 2010 and
2011. The end customers had experienced formulation challenges
with stevia (aftertaste problems) and this had led to longer
R&D projects and product launch delays. The Company
expects demand for its products to recover starting in the fourth
quarter based on the current customer prospects that it is working
on and the new products that it has launched which provide
solutions to the stevia formulation problems that the Company
previously announced. There were no additional orders from
its China partner related to the Healthy Sugar Project for the
China Sugar Reserve project; however our partner did successfully
complete their first 10,000 metric ton facility in Xiaogang to mass
produce the low-calorie healthy sugar. This achievement was a key
milestone in proving the scalability of the technology to produce
low-calorie health sugar in large scale production environment,
which is a requirement to move forward with the China Sugar Reserve
project.
AN0C Consumer Products Business
The Company's consumer products business, AN0C, had sales of
$1.0 million in the third quarter of 2011. In the
approximately six months of sales activity (end of March through
September 30th) AN0C has sold approximately 29.1 million bottles of
its RTD teas and 1.3 million bottles of vitamin enriched
waters. A series of factors contributed to the reduction in
sales in the third quarter. The three major factors that
impacted our sales through September 30, 2011 were as follows:
- Weather – The summer has been more moderate in China compared
to last year and industry wide sales of RTD teas and other
beverages that usually sell well during the hot weather were
adversely impacted.
- OEM Production issues - Production issues from AN0C's main OEM
Bottler resulted in complaints from distributors regarding product
packaging and product appearance quality of the RTD tea
products. Potential batches impacted comprised approximately
200,000 cases of RTD tea that had been shipped. Additionally,
85,000 cases of vitamin enriched waters were also impacted by the
same production issues, but fortunately these batches were
identified at the OEM plant and were not shipped. In the long
term interest of maintaining the high-quality image and reputation
of the AN0C brand, additional production orders were withheld until
we had the confidence that production issues had been resolved and
a fair settlement was reached with our OEM Bottler. AN0C
maintained the total number of its Tier I distributors at
approximately 600 throughout this OEM production issue, which it
expects to leverage for the launch of its new products.
- RTD Tea Bottle replacement Program - AN0C re-introduced its RTD
teas in a new custom branded bottle in the third quarter to better
differentiate AN0C's product from other competitors'
products. It was initially expected that only July sales would
be reduced substantially in order to sell through the inventory of
the RTD teas in the old bottles that were currently in retail
outlets. As the unusually cooler weather in China continued
through the summer and overall inventory for the industry remained
high, the sell through of AN0C's RTD teas in the old bottles took
longer to sell through the Key Account channels ("KA" includes
hypermarkets, supermarkets and chain convenience stores) than
originally anticipated. As these KA stores have been slower to
switch over to the new bottles, shipments of the new RTD teas in
August were also lower than expected. The AN0C sales team has
recently been able to open up new distribution channels to speed up
the sell through of the remaining old bottles, for example, through
government organizations.
The average revenue per bottle was higher by 3.8% for the third
quarter compared to the second quarter as it reflected the change
in product mix and the reduced level of promotional activities that
were undertaken in the second quarter to support the launch of the
new AN0C brand and the RTD products. The first sales of vitamin
enriched waters began in the third quarter, and were on average
sold at a higher price than the RTD teas. The objectives of
the promotional campaigns were to encourage consumers to try the
AN0C beverages through lower retail pricing and to reward our
distributors through volume purchases.
AN0C launched its vitamin enriched water in August into 41 major
cities, marking AN0C's entry into a second major beverage category
in China. Vitamin enriched water is a relatively new beverage
category in China, and there are only a few brands on the
market. Although the OEM production issues have impacted a
significant portion of vitamin enriched water production, AN0C had
brought in new distribution partners that specialize in vitamin
enriched waters. AN0C management expects that this new
category needs more time to grow and gain traction in the Chinese
beverage market, however, the initial feedback from the market for
this product has been encouraging.
Cost of Sales
Cost of sales for the three months ended September 30, 2011 was
$4.8 million compared to $14.0 million in cost of sales for the
same period last year. Cost of sales as a percentage of
revenues was 278% compared to 67% in the third quarter of
2010. The prior period does not have any consumer product
business reflected as that business only commenced in 2011.
Cost of sales for the nine months ended September 30, 2011 was
$23.2 million compared to $25.9 million for the same period in
2010. This was composed of $16.8 million for the stevia
business and $6.5 million for the consumer products business.
Stevia Business
For the three months ended September 30, 2011 the cost of sales
related to the stevia business was $3.9 million compared to $14.0
million in cost of sales for the same period last year ($ 10.1
million decrease or negative 72%). The 72% decrease is due to
the lower volume of extract sold as previously discussed.
Cost of sales for stevia as a percentage of revenues was 538%
compared to 67% in the same period last year. The largest
impact on the cost of sales as a percentage of revenue was the
fixed non-cash amortization charges in cost of sales that were not
sufficiently covered by the low amount of revenue generated for the
stevia segment and additional charges driven by lower utilization
of stevia facilities in the quarter that would ordinarily flow to
inventory during periods of higher plant utilization.
AN0C Consumer Products Business
For the three months ended September 30, 2011, cost of sales
related to the consumer products business was $0.94 million and
includes costs associated with bottling the beverage products,
supplies and ingredients used to manufacture the beverages, and
shipping the products to the different distribution
channels. The average cost of sales per bottle increased 17%
in the third quarter compared to the second quarter, as it
reflected the addition of the more expensive vitamin enriched
waters to the product mix. Product costs represented 83% of
the cost of sales for the quarter, down 4% from the second quarter
as reduced ingredients costs from refinements in the formulations
were offset by higher shipping costs. RTD tea product costs
were flat in the third quarter compared with the previous quarter,
bottling and packaging costs continue to account for the greatest
portion of product costs. RTD tea OEM charges represented
11.7% of its product costs in the third quarter. Starting with
our June production run, AN0C has negotiated a 5% reduction in OEM
costs. Shipping costs for the quarter represented 16% of cost
of sales, which are up from the second quarter as our volume
declined. AN0C has lower ingredient costs by utilizing GLG stevia
extracts relative to the use of sugar. Higher sugar costs have
been often cited by the China beverage industry previously as a
cost input that was impacting their margins.
Gross Profit
Gross profit for the three months ended September 30, 2011 was
negative $3.1 million, a decrease from the $7.0 million in gross
profit for the comparable period in 2010. The gross profit margin
for the three months period ended September 30, 2011 for the
Company as a whole was negative 178% compared to 33% for the three
months ended September 30, 2010. The main contributors to the
negative gross profit were (1) the high fixed non-cash charges that
are allocated to cost of sales each period and sales were not
sufficient to contribute enough margin to cover these amortized
amounts and, (2) additional charges driven by lower utilization of
stevia facilities in the quarter that would ordinarily flow to
inventory during periods of higher plant utilization.
Gross profit for the nine months ended September 30, 2011 was
$1.2 million compared to $13.8 million for the comparable period in
2010. The gross profit margin decreased to 5% for the nine
months ended September 30, 2011 from 35% for the comparable period
in 2010. On a disaggregated basis, stevia products had a gross
margin of 1% and the consumer products had a gross margin of
12%. Gross profit for the stevia adjusted for nine month
capacity charges would have been approximately 12% for the nine
month period ending September 30, 2011.
Stevia Business
The decrease in gross profit for the stevia business for the
third quarter of 2011 compared to the third quarter of 2010 is
driven by the lower sales achieved in the third quarter 2011
compared to the third quarter in 2010. Gross profit was
negative in the third quarter 2011 for the reasons described
earlier.
AN0C Consumer Products Business
For the AN0C consumer products business the gross profit was
$0.08 million or 7.0% of revenues for the third quarter of 2011
compared with 12% for the second quarter. The gross profit
margin before shipping costs for AN0C's beverage sales in the third
quarter was 17%, which was lower than the second quarter by
approximately 6 percentage points and reflects the higher cost of
sales per bottle in the third quarter due to the changing product
mix of ready to drink tea and vitamin enriched waters. Vitamin
enriched waters had just been launched during the quarter and the
costs also reflect the start-up launch of this new product
line. Lower advertising and promotional expenses in the third
quarter were a result of the successful promotional activities
undertaken in the second quarter, which have been effective in
increasing the brand awareness necessary for a new company and new
brand.
Selling, General and Administration
Expenses
Selling, General and administration ("SG&A") expenses
include sales, marketing, general, and administration costs
("G&A"), stock-based compensation, and depreciation and
amortization expenses on long lived assets. A breakdown of
SG&A expenses into these components is presented below:
In thousands Canadian
$ |
3
Months Ended Sep 30 |
%
Change |
9
Months Ended Sep 30 |
%
Change |
|
2011 |
2010 |
|
2011 |
2010 |
|
G&A Stevia |
$1,487 |
$2,994 |
(50%) |
$6,979 |
$7,556 |
(8%) |
G&A AN0C |
$8,290 |
$0 |
100% |
$19,873 |
$0 |
100% |
Stock Based Comp |
$764 |
$867 |
(13%) |
$2,386 |
$2,340 |
2% |
Amortization Stevia |
$178 |
$406 |
(56%) |
$1,932 |
$992 |
49% |
Amortization AN0C |
$37 |
$0 |
100% |
$38 |
$0 |
100% |
Total |
$10,756 |
$4,267 |
60% |
$31,208 |
$10,888 |
65% |
G&A for the stevia business for the three months ended
September 30, 2011 was $1.5 million compared to $3.0 million in the
same period in 2010. The decrease of $1.5 million was driven
by reductions in promotions cost of the stevia business outside of
China, an adjustment for capacity charges from the second quarter
to cost of sales, reductions in professional fees and a grant from
the Chinese Government for research and development activities in
2011 that was not available in 2010. Management has taken steps to
proactively reduce its G&A costs going forward as it works to
rebuild its order book. At the end of October, the total
number of employees in GLG's China subsidiaries was 667, which is
temporarily reduced by one-third from the 968 employees at the end
of September.
G&A for the consumer products business was $8.3 million for
the three month period ended September 30, 2011 compared to nil for
the same period last year and $10.2 million for the second
quarter. This represents a 19% decrease quarter over
quarter. 61% of these costs were related to advertising and
marketing expenditures to promote the launch of the AN0C brand and
business, down from 75% from the second quarter of 2011. AN0C
substantially reduced its advertising expenditures by over
two-thirds, with TV advertising seeing the largest
decrease. This was offset by increases in internet and other
advertising, including fees for the Chinese National Olympic swim
team exclusive sponsorship, as well as an increase in mass
promotional expenses such as posters and displays. The balance
of the AN0C G&A costs were related to salary (26%) and other
operating costs (13%). As the beverage industry in China enters
into a seasonally slower period, AN0C has also reduced its
headcount to a core team of 316 at the end of October from 1,360 at
the end of September. This measure is expected to
significantly reduce the G&A costs for AN0C in the fourth
quarter. AN0C management expects to ramp up the sales force as
seasonality picks up again.
Stock-based compensation was $0.8 million for the three months
ended September 30, 2011 compared with $0.9 million in the same
quarter of 2010. The number of common shares available for issue
under the stock compensation plan is 10% of the issued and
outstanding common shares. During the quarter, compensation
from vesting stock based compensation awards was recognized, due to
previously granted options, new grants and restricted shares.
G&A related depreciation and amortization expenses for the
three months ended September 30, 2011 were $0.2 million which is a
decrease of $0.2 million over the $0.4 million at September 30,
2010.
Other Expenses
In thousands Canadian
$ |
3
Months Ended Sep 30 |
%
Change |
9
Months Ended Sep 30 |
%
Change |
|
2011 |
2010 |
|
2011 |
2010 |
|
Other Income (Expenses) |
($12,827) |
($1,066) |
1103% |
($16,164) |
($2,907) |
456% |
% of
Revenue |
(737%) |
(5%) |
(732%) |
(66%) |
(7%) |
(59%) |
Other expenses for the three months ended September 30, 2011 was
$12.8 million, an $11.8 million increase compared to $1.1 million
for the same period in 2010. Other expenses are mainly driven
by asset impairment losses of $12.2 million recognized during the
quarter (see section asset impairment charges for the period),
interest expense that is incurred on the Company's short term loans
held in China and foreign exchange. Interest expense increased
by $0.2 million in the three months ended September 30, 2011
compared to September 30, 2010 due to the increase in the short
term loan balance in China, combined with an increase in the
average interest rate paid on the loans. Interest expense did
decrease from the second quarter 2011 by $0.4 million as the amount
of loans had been reduced at the start of the third quarter
2011.
Foreign exchange gain for the three months ended September 30,
2011 increased by $0.5 million to $0.5 million gain from $0.05
million gain for the same period in 2010.
Other expenses for the nine months ended September 30, 2011 was
$16.2 million, a $13.2 million increase compared to $2.9 million
for the same period in 2010. Other expenses are mainly driven
by asset impairment losses of $12.2 million recognized during the
quarter (see section asset impairment charges for the period),
interest expense that is incurred on the Company's short term loans
held in China as well as foreign exchange gain/loss. Interest
expense increased by $1.3 million in the nine months ended
September 30, 2011 compared to September 30, 2010 due to the higher
average short term loan balance in China during 2011 compared to
the average balance outstanding in 2010, combined with an increase
in the average interest rate paid on the loans. Foreign
exchange gain decreased by $0.02 million to $0.11 million compared
to a foreign exchange gain of $0.13 million for the same period in
2010.
Asset impairment charges for the period
In light of current economic conditions including the Company's
operating performance to date management conducted a test for
impairment of property, plant and equipment. The Company tests for
impairment using a two-step process. The first step involves the
assessment of probability weighted undiscounted estimated future
cash flows attributable to property, plant and equipment and
comparison to carrying value. When impairment is indicated by the
first step, a second step is carried out to measure the impairment
using discounted cash flows to estimate the excess of fair value
over carrying value. Based on the current review, management
believes there are sufficient opportunities based on probability
weighted undiscounted cash flows to support the recovery of the
carrying value of property, plant and equipment and no impairment
exists.
Impairment of Goodwill
During the period, management concluded there were impairment
indicators present for the goodwill asset due to changes to certain
external factors as well as the market capitalization of the
Company being below book value as of September 30, 2011. As a
result, management conducted a test for impairment of goodwill as
at September 30, 2011. The Company used a present value technique
to discount a series of expected future cash flows for the stevia
reporting unit in order to estimate the fair value. When the
estimate of fair value was compared to the carrying value it was
determined that a non-cash impairment charge of $7,649,321 was
required to be recorded against the goodwill asset. The
carrying value of goodwill is therefore $nil as at September 30,
2011 and the impairment charge was allocated to the stevia
operating segment.
Impairment of Intangible Asset
During the period, management conducted a test for impairment of
the customer relationship intangible asset as there was a change in
the terms of the agreement. As a result, the Company concluded
there was an indicator of impairment present. The Company used a
present value technique and applied a discount rate of 14.5% to
discount a series of expected future cash flows for this customer
relationship asset in order to estimate the fair value. When
compared to the carrying value it was determined that a non-cash
impairment loss of $4,540,000 was required which was recorded as at
September 30, 2011.
As there was an indication of impairment present, the Company
also conducted the same test for impairment with respect to the
Patents and acquired technologies and determined that there were
impairment of these assets present.
In thousands Canadian
$ |
3
Months Ended Sep 30 |
%
Change |
9
Months Ended Sep 30 |
%
Change |
|
2011 |
2010 |
|
2011 |
2010 |
|
Income tax recovery
(expense) |
$496 |
$165 |
201% |
($417) |
$121 |
(445%) |
Income tax expense as a percent
of revenue |
28.5% |
1% |
28% |
(2%) |
0.3% |
(2%) |
During the three months ended September 30, 2011 the Company
recorded income tax recovery of $0.5 million, an increase of $0.3
million compared to the income tax recovery of $0.2 million in the
comparable period in 2010.
During the nine months ended September 30, 2011 the Company
recorded an income tax expense of $0.4 million compared to income
tax recovery of $0.1 million in 2010.
Net Income (Loss) Attributable to the
Company
In thousands Canadian
$ |
3
Months Ended Sep 30 |
%
Change |
9
Months Ended Sep 30 |
%
Change |
|
2011 |
2010 |
|
2011 |
2010 |
|
Net Loss |
($24,628) |
$1,777 |
(1486%) |
($42,893) |
$103 |
(41744%) |
percent of
revenue |
(1415%) |
8% |
(1423%) |
(176%) |
0% |
(176%) |
For the three months ended September 30, 2011, the Company had a
net loss attributable to the Company of $24.6 million compared to a
net gain attributable to the Company of $1.8 for same period in
2010. The net change of $26.4 million was driven by: (1) a
decrease in gross profit of $10.0 million and (2) an increase in
G&A expenses of $6.5 million driven by the marketing and
advertising costs for the start-up of its AN0C joint venture, (3)
an increase in other income and expenses of 11.7 million (including
asset impairment charges of $12.2 million). These items were offset
by the increase in loss attributable to non-controlling interests
of $1.5 million and an increase in income tax recovery of $0.3
million.
For the nine months ended September 30, 2011, the Company had a
net loss attributable to the Company of $42.9 million, a change of
$43.0 million over the comparable period in 2010. The increase
in net loss was driven by: (1) a decrease in gross profit of $12.6
million, (2) an increase in G&A expenses of $20.3 million
mainly associated with marketing and advertising costs for the
start-up of its AN0C joint venture (3) other income and expenses of
$13.2 million and (4) an increase in income tax expense of $0.5
million. These items were offset by the increase in loss
attributable to non-controlling interests of $3.7 million.
Non-GAAP Financial Information
Consolidated EBITDA
EBITDA for the quarter ended September 30, 2011 was negative
$8.8 million, compared to $6.1 million for the same period in
2010. EBITDA for the nine months ended September 30, 2011 was
negative $16.8 million compared to $12.5 million for the nine
months ended September 30, 2010. The main drivers for the decrease
in EBITDA are a) increased SG&A expenses attributable to the
start-up of at the Company's AN0C subsidiary b) lower gross profit
(compared to the same period in 2010) for stevia sales.
In thousands Canadian
$ |
3
Months Ended Sep 30 |
9
Months Ended Sep 30 |
|
2011 |
2010 |
2011 |
2010 |
Income (Loss) Before Income Taxes and
Non-Controlling Interests |
($26,676) |
$1,612 |
($46,222) |
($34) |
Add: |
|
|
|
|
Asset Impairment Losses |
$12,189 |
$0 |
$12,189 |
$0 |
Net Interest
Expense |
$1,137 |
$898 |
$4,081 |
$2,863 |
Depreciation and
Amortization |
$2,714 |
$2,788 |
$7,142 |
$7,430 |
Foreign Exchange Loss
(Gain) |
($503) |
($52) |
($111) |
($135) |
Non-Controlling
Interests |
$1,553 |
$0 |
$3,745 |
$17 |
Non-Cash Share Compensation |
$764 |
$867 |
$2,386 |
$2,340 |
EBITDA |
($8,822) |
$6,113 |
($16,789) |
$12,481 |
EBITDA as a % of
revenue |
(507%) |
29% |
(69%) |
31% |
EBITDA by Segment
Stevia business EBITDA for the three months ended September 30,
2011 was negative $2.8 million compared to $6.1 million in the same
period last year. This decrease is driven by lower revenues
and gross margin during the third quarter of 2011 compared to the
third quarter of 2010. EBITDA for the stevia business for the
nine months ended September 30, 2011 was lower at negative $2.0
million compared to a positive $12.5 million for the comparable
period in 2010. EBITDA for the AN0C consumer products business was
negative $6.0 million for the three months ended September 30, 2011
and negative $14.8 million for the nine months ended September 30,
2011. EBITDA performance in the third quarter reflects the
issues that impacted revenue as well as AN0C's advertising and
promotion program to build its brand in the China market as well as
encourage the initial purchase of its products by
consumers. AN0C Management substantially reduced the level of
its advertising expenditures in the third quarter 2011 to better
rationalize its marketing budget and the EBITDA loss in Q3 2011 for
AN0C was reduced by approximately $2 million compared with Q2
2011.
In thousands
Canadian $ |
3 Months Ended Sep 30, 2011 |
9 Months Ended Sep 30, 2011 |
|
Stevia
Business |
AN0C Consumer Products
Business |
Stevia Business |
AN0C Consumer Products
Business |
Income (Loss) Before Income Taxes and
Non- Controlling Interests |
($18,993) |
($7,683) |
($27,571) |
($18,651) |
Add: |
|
|
|
|
Asset Impairment
Losses |
$12,189 |
$0 |
$12,189 |
$0 |
Net Interest Expense
(Income) |
$1,138 |
($1) |
$4,085 |
($4) |
Depreciation and
Amortization |
$2,677 |
$37 |
$7,103 |
$38 |
Foreign Exchange Loss
(Gain) |
($551) |
$47 |
($214) |
$103 |
Non-Controlling
Interests |
$0 |
$1,553 |
$0 |
$3,745 |
Non-Cash Share
Compensation |
$764 |
$0 |
$2,386 |
$0 |
EBITA |
($2,776) |
($6,046) |
($2,021) |
($14,769) |
EBITDA as a % of
revenue |
(384%) |
(594%) |
(8%) |
(37%) |
Capital Expenditures
GLG's capital expenditures of $1.2 million for the third quarter
of 2011 reflected a decrease of 17% in comparison to $1.5 million
in the third quarter of 2010. Expenditures for the first nine
months were $6.5 million compared to $11.9 million for the same
period in 2010, a decrease of 46%. In 2011, the main asset
additions were for stevia distillation equipment, the waste water
treatment plant, production storage, and security equipment.
In thousands Canadian
$ |
3
Months Ended Sep 30 |
%
Change |
9
Months Ended Sep 30 |
%
Change |
|
2011 |
2010 |
|
2011 |
2010 |
|
Capital
Expenditures |
$1,213 |
$1,463 |
(17%) |
$6,485 |
$11,920 |
(46%) |
Financial Resources
Cash and cash equivalents decreased by $14.4 million during the
nine months ended September 30, 2011. Working capital
increased to $36.8 million from the year-end 2010 position of $7.0
million. The working capital increase can be attributed
primarily to increases in inventory, prepaid expenses and a net
repayment of short term loans which were partially offset by
reductions in cash and accounts receivable and an increase in
accounts payable.
Balance Sheet
In comparison to December 31, 2010, total assets increased by
$3.5 million as at September 30, 2011, primarily due to an increase
in current assets of $12.6 million, a decrease in capital assets
goodwill and intangible assets of $9.1 million. The increase
in the current assets was mainly driven by the following:
1. Increase of $32.8 million in inventory.
2. Increase in taxes recoverable of $1.3 million, which can be
attributed to refundable VAT taxes on the increase in
inventory.
3. Increase in prepaid expenses of $8.8 million, which was
driven by both prepayments for AN0C production to contracted OEM
bottlers and stevia leaf prepayments.
These were partially offset by:
4. Decrease of $15.7 million accounts receivable due to the
collection of cash in the first nine months of 2011, which related
to sales in the fourth quarter of 2010 as well as new sales in
2011.
5. Decrease in cash and cash equivalents of $14.4 million
resulting primarily from the An0c investment and net repayments of
short term loans
The increase in property plant, and equipment of $5.6 million in
the fixed assets was due primarily to the strengthening of the RMB
against the Canadian dollar partially offset by amortization of
these assets. The decrease in goodwill and intangibles of
$14.7 million was due to the impairment charges recorded during the
third quarter (see section asset impairment charges for the
period).
Current liabilities decreased by $17.1 million as at September
30, 2011 in comparison to December 31, 2010, driven by a net
decrease in short term loans of approximately $27.8 million and a
decrease in interest payable of $0.2 million. This was
partially offset by the increase of accounts payable of $10.3
million and increases to advances from customers and deferred
revenue totaling $0.6 million.
Long term liabilities decreased by $6.5 million due to the
reduction of the related party loan which was repaid with the cash
collection from accounts receivable, as well as the decrease in the
deferred income tax liability.
Shareholders' equity increased by $27.2 million due to a) the
issuance of common shares for the equity financing and stock based
compensation of $57.7 million b) the increase in accumulated other
comprehensive income of $9.7 million, c) an increase in deficit of
$43.1 million, and d) an increase in non-controlling interests of
$3.1 million.
China Lines of Credit and Short Term Loans
As at September 30, 2011, the Company had the following short
term loans balances in China to finance its expansion and
operations:
Loan amount in
C$ |
Loan amount in
RMB |
Maturity
Date |
Interest
rate |
Lender |
|
|
|
per annum |
|
|
|
|
|
|
$ 1,628,002 |
10,000,000 |
October 18, 2011 |
6.31% |
Agricultural Bank of China |
488,400 |
3,000,000 |
October 27, 2011 |
6.44% |
Agricultural Bank of China |
4,884,005 |
30,000,000 |
October 28, 2011 |
6.44% |
Agricultural Bank of China |
3,256,003 |
20,000,000 |
Dec 17, 2011 |
6.06% |
Construction Bank of China |
4,884,005 |
30,000,000 |
Dec 23, 2011 |
6.06% |
Construction Bank of China |
16,280,016 |
100,000,000 |
February 25, 2012 |
7.98% |
Bank of Communication |
3,093,203 |
19,000,000 |
February 27, 2012 |
7.87% |
CITIC Bank |
1,628,002 |
10,000,000 |
March 28, 2012 |
7.18% |
Agricultural Bank of China |
9,768,010 |
60,000,000 |
June 9, 2012 |
6.81% |
Agricultural Bank of China |
3,256,003 |
20,000,000 |
June 16, 2012 |
6.81% |
Agricultural Bank of China |
13,024,013 |
80,000,000 |
June 20, 2012 |
6.81% |
Agricultural Bank of China |
2,767,602 |
17,000,000 |
July 25, 2012 |
7.08% |
Agricultural Bank of China |
3,256,002 |
20,000,000 |
August 26, 2012 |
7.22% |
Bank of China |
3,581,603 |
22,000,000 |
September 29, 2012 |
7.22% |
Bank of China |
|
|
|
|
|
|
|
|
|
|
$ 71,794,872 |
441,000,000 |
|
|
|
During the period ended September 30, 2011 the Company repaid
loans totaling $32,971,667 (219,000,000 RMB). The repaid loans
were held by the Bank of Communication in China, the Agricultural
Bank of China, and the CITIC Bank and had interest rates ranging
from 5.31%-6.12% per annum. The short term loan and bank loans
do not have any attached covenants. The assets of the
Company's subsidiaries have been pledged as collateral for the
short term bank loans. Land of two subsidiaries has also been
used as collateral for the above facilities.
During the second and third quarters, the Company decided to
consolidate and restructure its outstanding short term debt and has
repaid a portion of the short term loans outstanding in order to
reduce its interest costs. The Company plans to utilize a
portion of the RMB 1 billion credit facility which was a commitment
included in the key agreement signed with the Fengyang County
Government and the Chuzhou City Government in June 2011 as
required. The credit line will have interest rates discounted
to market rates, as well as longer term maturities which are
expected to reduce the company's interest expense on comparable
short term loans that it had recently paid down. GLG is currently
completing the application process, and expects that the first loan
on the credit facility will be available for drawdown before the
end of December 2011.
Subsequent to the quarter, the three loans that matured in
October 2011 were all renewed with the Agriculture Bank (Total loan
amount of RMB 43 Million)
Liquidity and Capital Resources
In thousands
Canadian $ |
30-Sep-11 |
31-Dec-10 |
Cash and Cash
Equivalents |
$9,417 |
$23,817 |
Working
Capital |
$36,846 |
$7,081 |
Total
Assets |
$284,948 |
$281,407 |
Total
Liabilities |
$105,474 |
$129,399 |
Loan Payable (1
year) |
$0 |
$0 |
Total Equity |
$176,399 |
$152,004 |
Capital Structure
Outstanding Share Data as November 14, 2011
|
Shares |
Common Shares
Issued |
33,126,634 |
Reserved For
Issuance |
|
Warrants |
2,645,000 |
Stock
Options |
537,205 |
Reserved For Issuance -
Other |
62,500 |
Total Reserved For
Issuance |
3,244,705 |
Fully Diluted
Shares |
36,371,339 |
Market and Key Markets
Outlook
China
China's Economy Performance to Date and
Outlook
According to Xinhuanet.com, Chief of the China Banking
Regulatory Commission said in October that China's foreign trade
volume will surpass US$ 3 trillion in 2011, accounting for 10.5% of
the world's total. According to preliminary estimates by
National Bureau of Statistics of China (NBSC), gross domestic
product (GDP) in the third quarter grew 9.1% year-on-year, slowed
down from the growth seen in the first and second quarters of 9.7%,
and 9.5% respectively and its slowest expansion since the third
quarter of 2009. The preliminary estimates also showed that for the
first nine months of this year, GDP grew 9.4% year-on-year and GDP
in the third quarter of 2011 went up by 2.3% over the second
quarter of 2011.
In a news release on October 18, 2011, NBSC reported that urban
and rural residents' income increased steadily with a higher growth
for rural residents. In the first nine months of this year, the per
capita total income of urban households was 17,886 yuan, with per
capita disposable income of 16,301 yuan, a year-on-year growth of
13.7%, or a real growth of 7.8% after adjusting for inflation. The
per capita cash income of rural population was 5,875 yuan, up by
20.7% year-on-year, or 13.6% growth in real terms. The rural
wage income growth was 21.9%. GLG and AN0C have worked closely
with the Chuzhou City Government and the Fengyang County Government
to develop the AN0C business, which creates value for local farmers
as well as higher paying regional factory jobs and other work
opportunities. The Xiaogang rural development project has
become a model for how a rural agriculturally based economy can
build a value added industry around an agriculture crop like
stevia.
The news release also stated that total retail sales of consumer
goods in domestic markets enjoyed a steady growth. In the first
nine months of this year, total retail sales of consumer goods
reached 13.1 trillion yuan, a nominal year-on-year rise of 17.0%,
with the retail sales in urban areas reaching 11.3 trillion yuan,
up by 17.1%, and the retail sales in rural areas achieving 1.7
trillion yuan, up by 16.4%.
According to figures released by the Chinese Academy of Social
Sciences (CASS) in 2010, about 170 million people have moved to
Chinese cities from the country's rural areas over the last 10
years with the urban middle class reaching over 230 million people,
or 37% of the urban population in 2009. CASS forecasts that
the middle class could make up over 50% of the urban population by
2023. History has shown that as income grows, quality and
convenience will become the dominant theme in the food and beverage
markets. As consumers try to maintain a balanced and healthy
lifestyle, we believe AN0C products will be at the leading edge of
this trend.
In October, CASS adjusted downward China's 2011 GDP growth
estimate to 9.4% from a previous forecast of 9.6%, and forecasted
CPI to increase 5.5% for the full 2011 year. Monthly CPI data
published by NBSC shows that foodstuffs have seen the highest
year-on-year increases. This is directly felt in the food and
beverage industry's input costs, for example, sugar prices in China
increased 37% in the third quarter 2011 compared with the third
quarter last year. We believe AN0C can leverage the fact that
it uses lower cost stevia to sweeten its all-natural zero-calorie
products instead of sugar. The inflation rate in July reached a
three-year high of 6.5%, and was 6.2% in August. According to China
Daily, a vice-director of the National Development and Reform
Commission (NDRC), China's top economic planning agency who spoke
at an economic forum on October 22, 2011, commented that the
government's anti-inflation battle has been effective and the
growth of CPI will decelerate to less than 5% in the rest of
2011. China's economic priority seems to be the stabilization
of overall price level balanced with steady economic
development.
The Company believes that China presents the largest market
opportunity for its high-grade stevia products and future
growth. There are two opportunities that the Company sees and
is currently developing.
(1) Zero or reduced calorie consumer
products - The Company announced the AN0CTM joint venture
in December 2010 and has launched the first six AN0CTM beverage
products in late March 2011. AN0C is expected to contribute
new revenues in 2011. China's per capita GDP is expected to
grow from RMB 9,315 in 2007 to RMB 28,195 in 20171 and with its
expected growth will come increased consumption in the food and
beverage sector in China. Since China opened its door to the
world in 1978, the China food industry has kept a 13.1% average
annual growth rate from 1980 to 2001. In 2001, the total China food
industry revenue reached RMB 900 billion (equivalent to about US$
130 billion). More recently, from 2002 to 2009, the food
industry in China kept a 23% average annual growth rate and in
2009, the total revenue reached RMB 4.7 trillion (equivalent to US$
693 billion). The Company believes that China's food industry
will continue its fast growth for the next 10-20 years, as the
Chinese middle class population and wealth continues to
increase.
(2) Industrial sales of stevia extract
for use by the food and beverage industry- China's
continued growth in GDP and expansion of its middle class has
resulted in strong growth in China's food and beverage
Industry. This, in turn, has resulted in strong growth in
domestic sugar demand. Domestic production of sugar in China has
not been sufficient to meet the growing demand for sugar in China
which has resulted in a shortfall of sugar supply. In 2009,
China imported over 1.5 million metric tons of sugar worth
approximately US$1.1 billion and in 2010 the shortfall was 3
million metric tons of sugar. This sugar shortage is expected
to grow as the population continues to grow and per capita sugar
consumption increases. China has also seen a large increase in
health related problems including growth in diabetes and obesity
rates.
2011 China Sugar Market Update
On September 16, 2011 the China Sugar Reserve auctioned 200,000
metric tonnes of sugar from state reserves that fetched an average
price of about CNY7,021 (US$1,099) per metric tonne, according to
NDRC. This was the ninth auction held during the 2010/2011
marketing year (October 2010 – September 2011), and according to
Dow Jones Newswire, the Chairman of the Guangxi Sugar Association
commented that state sugar stockpiles are at the "lowest level in
history" after the government has sold 1.88 million tonnes from
state reserves in the 2010/2011 year. According to China Sugar
Association data, China imported 2.07 million tonnes of sugar in
the 2010/2011 year.
China Beverage Industry Outlook
2
Overall the China beverage industry, most notably the
Ready-To-Drink (RTD) tea market, this year has been materially
weaker than originally expected by industry players and
analysts. Master Kong, which holds over 50% of the Chinese RTD
tea market, commented at the end of August that its 2Q results were
weaker than expected and July and August RTD sales growth was also
below management expectations. At the Barclay's Corporate Day
held in early September, Master Kong's management further cited an
unusually cool summer in China for a relatively weak recovery in
beverage sales in the third quarter. The Barclay research
analyst reported that competitive pressure has increased from both
existing companies as well as newer entrants in the beverage market
in China. Uni-President, the second largest RTD tea
manufacturer in China with over 20% market share, recently reported
third quarter beverage results that were weaker than expected due
to a further slowdown at RTD tea and expects fourth quarter revenue
growth for RTD tea to remain under pressure. Citi's research
analyst in a mid-October report commented that channel checks
suggested slow sales and channel inventory in China's soft drinks
market. Fourth quarters are traditionally seasonally weak,
however, an early Chinese New Year in 2012 may pull some sales
forward into the fourth quarter of 2011.
According to a Euromonitor report in February, China's soft
drinks market has an expected CAGR of 9.5% for the period of
2010-2015, with 2011 volume growth expected at almost 11%
year-over-year. However, the rise in the CPI so far in
2011 has led to a significant increase in the costs of raw
materials and labour. As a result, manufacturers' profit margins
are under pressure. The intense competition within the industry has
made it difficult for manufacturers to increase prices, therefore,
they are instead making changes to packaging to relieve the cost
pressure. One packaging trend has been the use of less plastic,
which results in thinner bottles and reduces its cost. PET
costs, which is the main raw material used to make plastic bottles
and is the largest cost in the RTD beverage product, has moderated
recently but is still substantially higher than the previous
year. Another trend is the introduction of new slimmer and
taller packaging, which effectively reduces the size of the bottle
and indirectly raises prices. However, many products are
"me-too" products that have similar packaging designs that are hard
for consumers to differentiate AN0CTM recently launched new custom
branded bottles to better differentiate from other competitors'
products, and maintained the original 500ml size. For other
beverage companies, another large cost component is sugar which has
also increased drastically over the past two years. AN0C's
value proposition of all-natural zero-calorie sweetener has the
benefit of using stevia and allows AN0C to avoid the high sugar
costs.
However, AN0C products have not been able to avoid being
adversely affected by the other industry-wide factors such as
reduced consumer demand in June through August driven by a cooler
summer that have impacted the entire industry, most notably the
largest players in the China beverage industry who represent over
70% of the product volume. Given the background of softer industry
demand and high competition for the RTD Tea market in China, AN0C's
products have still made a strong impact on the market and
Management remains confident that their products and brand are well
received by the market. For example, in a consumer survey
conducted in 20 target cities from June 25–July 3, about half of
the over 1,300 participants link the AN0C brand to the key messages
of zero-calorie and non-fattening. Furthermore, the same
survey reported that over 10% of participants replied that their
next RTD tea purchase would be an AN0C product.
Healthier beverages and food is the one trend that is common
throughout China, from consumers in East China who typically have
higher incomes and more exposure to foreign markets, to consumers
in Southwest China who have a longstanding habit of tea drinking,
to consumers in Northeast China, where in large cities such as
Beijing consumers are increasingly willing to pay higher prices for
buying in convenience stores. According to Euromonitor, sales
growth of traditional carbonates has slowed because of its
unhealthy image and manufacturers have emphasized more on the
functional or healthy features of their products, such as low
sugar, low calorie content, added vitamins or being free of
additives. AN0CTM is the only nationally distributed brand in
China with all naturally sweetened zero-calorie
products. AN0CTM has already launched RTD teas and vitamin
enriched waters, and expects to launch additional products to cover
six traditional beverage categories (ready-to-drink teas, vitamin
enriched waters, carbonated soft drinks, juice milk, children's
beverage products, herbal teas), two functional beverage categories
(anti-aging and detoxification), as well as tabletop
sweeteners.
The focus on the AN0CTM brand from an overall brand concept
perspective, rather than on a product basis, means that we are able
to leverage brand recognition across all our product lines. We
believe consumers are becoming aware that AN0C stands for a line of
"naturally sweetened, zero calorie" beverage products that are
better for you. AN0C's marketing and sales strategy is very
cost effective compared to the strategies typically followed by
beverage companies in China. AN0C's products are all being
marketed under one AN0C brand rather than individual SKU marketing
and sales as other companies have done in the past. From the
beginning, AN0C's goal was to be the number one all-natural zero
calorie beverage and food brand in China, and AN0C management knew
that national distribution for AN0C products was a fundamental
requirement that needed to be achieved as quickly as
possible. Early on in 2011, AN0C secured national distributors
such as Walmart, Carrefour, Metro and Tesco to carry its
products. According to Euromonitor, cooperating with
large-scale retailers, such as Wal-Mart and Carrefour, to develop
modern sales channels has become one of the key factors of
successful distribution in China. Euromonitor reported that
the sales share of different retail channels is gradually changing,
as supermarkets and hypermarkets become more popular. Consumption
habits are changing, with some consumers believing that products
sold at supermarkets are safer and also cheaper than in other
channels.
Distribution Relationships in Key Markets
Given the significance of the China market opportunity to the
Company's expected future growth, the Company's distribution
arrangements in other key markets will be its main approach to
sales outside of China. The Company signed a number of
these distribution agreements in 2010 for South America, Australia,
New Zealand, Mexico, the US, India and the Middle East. These
distribution agreements are expected to contribute to stevia
revenues outside of China in 2011 and beyond. The number of
agreements has increased during the first quarter of 2011 with
agreements being signed with M. Cassab for Brazil and Argentina and
International Flavour and Fragrances. With the recent approval
of stevia by the European Commission on November 11 and products
allowed in the EU marketplace starting December 3, GLG's
distributor network is ready to do business throughout the
EU. The Company has signed seven ingredient distributors who
are responsible for broad coverage across the region with a focus
on their specialty in the food and beverage industry. These
long-term distributor agreements will secure an dynamic sales
network set to reach out to a brand new market for the company's
high-purity all-natural stevia extracts across
Europe. Management also expects a positive regulatory ruling
in India for the use of stevia as a sweetener in 2011. Under
the terms of the Company's Strategic Alliance Agreement with
Cargill, the parties agreed to negotiate certain provisions of the
agreement during 2011. The parties have agreed that the
exclusivity obligations of both parties and the parties' product
supply, sourcing and purchase obligations will not continue beyond
September 30, 2011. As a result, GLG is now free to offer all
its high-purity extract products to multinational food and beverage
companies headquartered in the US and EU, and is no longer required
to offer the right of first refusal on new products developed to
Cargill. All other terms of the 10-year renewable agreement
remain in place. The Company continues to see global demand
for stevia extracts to be used either in a zero calorie application
or a blend of sucrose and stevia for reduced calorie/better-for-you
products.
Business Outlook Summary
- World sugar prices were close to 30 year record high prices at
the start of 2011 (approximately $700 per tonne) and have remained
in the range $600 to $800 per tonne for the past nine months. We
believe in the long term that sugar prices will remain high driven
by supply shortages and material increases in demand.
- Shortages for sugar continue to occur in some key markets such
as China and Indonesia, resulting in higher ingredient prices that
food and beverage companies will need to pay.
- Health concerns over obesity and diabetes remain high and are
driving both government policy (e.g. Mexico, China) and new product
introductions. We are now seeing government policy in China
starting to come into place such as the Capital Municipal Health
Bureau in Beijing that will be focusing on decreasing student
obesity rates through a variety of new initiatives including
ensuring healthier foods and drinks to be served at the
schools.
- New markets for stevia are expected to open up late in 2011
including the European Union and India.
- We are seeing a slower rate of product launches in North
America as we originally expected.
- We are seeing a slower rate of product launches in Mexico,
Central and South America than we originally expected in 2011.
- We expect that our focus on China and surrounding Asian markets
will lead to higher rates of growth than in North America.
As a result of these key trends and issues, the Company sees
long term growth ahead for its products. The Company further
expects the majority of its revenue growth to come from China in
2011 and beyond. Other markets have moved slower in 2011 than
we originally expected, however our success with our consumer
products in China is starting to positively influence the other
markets where we operate. For example, the Company is able to
demonstrate its success in formulating all-natural zero-calorie
drinks through its current AN0C products to international food and
beverage customers. A key new initiative that has generated
significant interest in our international stevia business and that
we expect will increase the speed at which food and beverage
customers will launch products is our AN0C Stevia Solutions
Company. Through this new company, we are providing turn-key
formulations for our beverage and food products to international
food and beverage companies. We are already working on
opportunities in India, the Middle East, Asia, EU and Latin
America, and we expect to further increase activities in the other
markets that we currently serve.
Financial Guidance Change
To better address a longer-term perspective on GLG and AN0C's
performance, we are modifying the Company's guidance policy. The
continued turmoil in the financial markets and high degree of
uncertainty in the economy in general makes it particularly
difficult to predict the timing of the Company's sales, therefore,
management has decided to temporarily discontinue providing formal
financial guidance on revenues, EBITDA and capital
expenditures. We will continue to offer longer-term
directional indications with a primary focus on growth drivers and
relevant factors. The Company remains committed to high levels of
disclosure and transparency.
Stevia Business
GLG's Chinese partner has completed the first 10,000 metric
tonnes of Low-Calorie Healthy Sugar production line which was
completed in mid-October 2011. Completion of this facility is an
important milestone in advancing the Healthy Sugar opportunity with
the China Sugar Reserve, as it demonstrates the scalability of its
production technology. The Company has filled a $7 million
order to its Chinese Partner related to the China Sugar Reserve
opportunity in the second quarter. Our Chinese partner is in
the process of planning the next phase of Healthy Sugar capacity
with the construction of an additional 50,000 MT line currently
scheduled for 2012. The Company's confidence in the project
remains high for the following reasons:
- Talks with CSR have indicated their strong interest in moving
this project forward.
- Our Chinese partner took material much earlier in 2011 than we
originally expected for the CSR project.
- China's sugar prices remain high and the shortage of sugar in
China has continued in 2011
- The success of the AN0C consumer products is starting to have
the desired effect of increasing interest in sweetening food and
beverage in China with stevia.
- China's media are putting out more and more articles about the
dangers of consuming too much sugar.
- Policies such as Municipal Capital Health targeting healthier
foods and beverages in schools in Beijing to reduce childhood
obesity.
Markets outside of China including the US, Mexico, South
America, and Australia have been active with customer projects,
however, the time that it is taking to convert projects into
launched products is taking longer than originally
anticipated. Therefore, distributors are taking longer
to work through product inventories delivered in the fourth quarter
of 2010, and we are decreasing our revenue expectations in 2011
from those customers as a result. A key to future revenue
generation will be the products and solutions of AN0C Stevia
Solutions. We are seeing interest from a number of existing
customers and international companies as they look to overcome some
of the traditional challenges in formulating with stevia. We
expect AN0C Stevia Solutions to accelerate stevia sales going
forward as they can offer significant advantages to a company
looking to formulate good tasting beverage and food products.
Other key assumptions include raw sugar prices remaining in the
range of $600 to $800 per metric tonne and the RMB to USD exchange
rate declining approximately 3% in 2011. The Canadian dollar to the
US dollar exchange rate is assumed to be at par for the
year.
Margins are expected to improve with the expected introduction
of Huinong 2 ("H2") special leaf variety in the 2011 harvest
year. It is expected the Company will grow 100% of its stevia
leaf requirements in 2011 with the H2 strain. As previously
announced, the H2 strain is expected to deliver reduced stevia leaf
processing costs starting in late third quarter 2011. Huinong
3 ("H3") and Huinong 4 ("H4") will be available for planting in the
2012 growing season, providing GLG with a significant cost
reduction in its production of high-purity stevia extracts next
year and beyond. The H3 plants have approximately 76% RA in
the plant leaf, which is 26% higher than the first generation (H1)
seeds, and will generate 46% more leaf per acre than the earlier H1
plants as well. H4 results show a 16% increase in leaf yield over
the H3 plants, while maintaining a similar 76% RA content.
Inflation in China has impacted our salary costs in our stevia
business which has resulted in higher G&A costs incurred to
date and we anticipate those costs to be higher than forecast for
the balance of 2011.
AN0CTM Consumer Products Business
With the successful launches of our RTD tea and vitamin enriched
water products, we plan to roll out additional SKU's across
six major beverage categories, plus functional (health) and
tabletop sweetener products.
New products in the pipeline include the previously announced
carbonated soft drinks, juice milk, children's beverage products,
herbal teas, two categories of functional drinks, anti-aging and
detoxification, zero and low-calorie tabletop sweeteners, as well
as the newly formulated cold-weather beverages such as coffee, milk
tea and ginger drinks. AN0C expects to launch the cold-weather
beverages in the fourth quarter 2011, with the rest of the products
planned for 2012 launches. The Company plans to
leverage its existing brand equity investment as well as its
distribution channels to launch these products more quickly into
the market. AN0C's pricing policy is to maintain a
10% to 15% premium over the leading national brands, as consumers
in China perceive them to be of a higher quality than comparable
national brands on the market that are sugar sweetened.
AN0C's EBITDA have been impacted by higher operating costs due
to China's inflation as well as higher advertising
expenditures. An official at China's State Information Center
expects the consumer price index to rise 5.5% for the full year of
2011 and increase by 4% next year. Input costs such as PET
chips for AN0C's bottling costs and fuel and transportation costs
may also impact the product gross margins. AN0C's first
priority for the development of the AN0CTM
business is to take a leading position in the marketplace and to
build the number one brand for consumer products in the
all-natural, zero-calorie food and beverage sector. This was
the most important objective for AN0CTM in the
initial phases, rather than EBITDA generation.
About GLG Life Tech Corporation
GLG Life Tech Corporation is a global leader in the supply of
high purity stevia extracts, an all-natural, zero-calorie sweetener
used in food and beverages. The Company's vertically
integrated operations cover each step in the stevia supply chain
including non-GMO stevia seed breeding, natural propagation, stevia
leaf growth and harvest, proprietary extraction and refining,
marketing and distribution of finished product. GLG's advanced
technology, extraction technique and premier, high quality product
offerings make it a leading producer of high purity, great tasting
stevia extracts. For further information, please visit
www.glglifetech.com
The GLG Life Tech Corporation logo is available at
http://www.globenewswire.com/newsroom/prs/?pkgid=7994
About AN0C™
AN0C focuses on the sale and distribution of all-natural
zero-calorie food and beverage products in China that are sweetened
with stevia provided by GLG Life Tech Corporation. GLG is a global
leader in the supply of high quality stevia extracts and holds an
80% controlling stake in AN0C with China and Healthy Foods Company
Limited (CAHFC) holding 20%. Dr. Luke Zhang, Chairman and CEO of
AN0C, is supported by an experienced team of senior executives
recruited from the beverage industry in China. For further
information, please visit www.an0c.com.
Forward-looking statements: This press release
contains certain information that may constitute "forward-looking
statements" and "forward looking information" (collectively,
"forward-looking statements") within the meaning of applicable
securities laws. Such forward-looking statements include, without
limitation, statements evaluating the market, potential demand for
stevia and general economic conditions and discussing
future-oriented costs and expenditures. Often, but not always,
forward-looking statements can be identified by the use of words
such as "plans", "expects" or "does not expect", "is expected",
"budget", "scheduled", "estimates", "forecasts", "intends",
"anticipates" or "does not anticipate", or "believes" or variations
of such words and phrases or words and phrases that state or
indicate that certain actions, events or results "may", "could",
"would", "might" or "will" be taken, occur or be achieved.
While the Company has based these forward-looking statements on
its current expectations about future events, the statements are
not guarantees of the Company's future performance and are subject
to risks, uncertainties, assumptions and other factors which could
cause actual results to differ materially from future results
expressed or implied by such forward-looking statements. Such
factors include amongst others the effects of general economic
conditions, consumer demand for our products and new orders from
our customers and distributors, changing foreign exchange rates and
actions by government authorities, uncertainties associated with
legal proceedings and negotiations, industry supply levels,
competitive pricing pressures and misjudgments in the course of
preparing forward-looking statements. Specific reference is made to
the risks set forth under the heading "Risk Factors" in the
Company's Annual Information Form for the financial year ended
December 31, 2010. In light of these factors, the forward-looking
events discussed in this press release might not occur.
Further, although the Company has attempted to identify factors
that could cause actual actions, events or results to differ
materially from those described in forward-looking statements,
there may be other factors that cause actions, events or results
not to be as anticipated, estimated or intended. The Company
undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information,
future events or otherwise.
As there can be no assurance that forward-looking statements
will prove to be accurate, as actual results and future events
could differ materially from those anticipated in such statements,
readers should not place undue reliance on forward-looking
statements.
Financial outlook information contained in this press release
about prospective results of operations, capital expenditures or
financial position is based on assumptions about future events,
including economic conditions and proposed courses of action, based
on management's assessment of the relevant information as of the
date hereof. Such financial outlook information should not be
used for purposes other than those for which it is disclosed
herein.
1 Freedonia Beverage Containers in China Report, May 1,
2009.
2 Euromonitor, Soft Drinks – China Report, February 2011
CONTACT: Sophia Luke, Vice President of Investor Relations
Phone: +1 (604) 669-2602 ext 104
Fax: +1 (604) 662-8858
Email: ir@glglifetech.com
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