WASHINGTON, D.C. 20549
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ]Yes [X] No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (- 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes [ ] No [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act .
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter. The aggregate market value on October 31, 2017 was $12,187,750.
Indicate the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date: As of July 27, 2018, there were 199,632,803 shares of the registrant's common stock issued and outstanding.
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980). None.
Our fiscal year end is April 30. The fiscal year ended April 30, 2017 is referred to as "fiscal 2017", the fiscal year ended April 30, 2018 is referred to as "fiscal 2018", and the coming fiscal year ending April 30, 2019 is referred to as "fiscal 2019."
The information which appears on our website at www.sunwininternational.com is not part of this report.
Our reporting currency is the United States dollar. Our business is conducted by our subsidiaries and variable interest entities in China, using RMB, the currency of China and our consolidated financial statements are presented in United States dollars. In this annual report, we refer to assets, obligations, commitments and liabilities in our consolidated financial statements in United States dollars. These dollar references are based on the exchange rate of RMB to United States dollars determined as of a specific date. Changes in the exchange rate will affect the amount of our obligations and the value of our assets in terms of United States dollars which may result in an increase or decrease in the amount of our obligations (expressed in dollars) and the value of our assets, including accounts receivable (expressed in dollars).
PART I
We sell stevioside, a natural sweetener, and herbs used in traditional Chinese medicines and veterinary products. Substantially all of our operations are located in the People's Republic of China (the "PRC"). We have built an integrated company with the sourcing and production capabilities designed to meet the needs of our customers. Our operations are organized into two operating segments related to our product lines:
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Stevioside, and
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Chinese medicines.
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STEVIOSIDE SEGMENT
In our Stevioside segment, we produce and sell a variety of purified steviol glycosides with rebaudioside A and stevioside as the principal components, an all natural, low calorie sweetener, and OnlySweet, a stevioside based table top sweetener. For the fiscal years ended April 30, 2018 and 2017, our Stevioside segment generated revenues of $19.1 million and $16.5 million, representing 86.9% and 85% of our total consolidated revenues, respectively.
The steviol glycosides are extracted from the leaves of the stevia rebaudiana plant of the Aster/Chrysanthemum family. The sweetness of the stevia leaves is caused by eight glycosides contained within the leaves including stevioside, rebaudioside A, C, D, E and F, steviolbioside and dulcoside A. Stevioside is the most abundant of these components and the main cause for the sweetness of the stevia leaves. Stevioside, rebaudiosides A and C as well as dulcoside A are known as the four most important steviol glycosides. Rebaudioside A is the sweetest and least bitter ingredient among the four. The higher purity of rebaudioside A brings better sensory attributes of the sweetener products.
The leaves of the stevia rebaudiana plant have been used for centuries to sweeten bitter beverages and to make tea in the plant's native Paraguay. Stevia is grown commercially in Brazil, Paraguay, Uruguay, Central America, Israel, Thailand and China. The stevia rebaudiana plant was first introduced to China in 1977 and commercial harvesting of stevia started in the mid-1980's. There are two major species of stevia grown in China; one was cultivated by Chinese researchers and another was introduced from Japan. Most stevioside produced in China is exported throughout Asia, primarily to Japan and South Korea meanwhile Chinese domestic market demand is also gradually building up in recent years.
Worldwide use of Stevioside and Related Approvals
Stevioside is a safe and natural alternative to sugar for people needing low sugar or low calorie diets. Stevioside can be used to replace sugar in beverages and foods, including those that require baking or cooking where man-made chemical based sweetener replacements are not suitable. Stevioside may be used in a wide variety of consumer products including soft drinks, vegetable products, tabletop sweeteners, confectioneries, fruit products and processed seafood products in the United States, Japan, Korea, China, Taiwan, India, Indonesia, Israel, Germany, France, Brazil, Paraguay, Malaysia, Russia, Switzerland, Australia and New Zealand.
We believe worldwide demand for alternative sweeteners, such as our stevia based products, will increase as more countries permit the use of stevioside as a food additive. Stevioside has been sanctioned by the Ministry of Health of China to be used as a food additive, and is listed in the Sanitation Standard of Food Additives.
The ongoing advocacy to eliminate the European Union's (EU) ban on the consumption of stevia was confirmed by the European Commission in November 2011. The European Stevia Research Center and the European Stevia Association are EU based organizations that focus on stevioside research and the elimination of the EU's ban on the consumption of stevioside. These organizations have determined that stevia is safe for use in foods. In addition, in June 2007, the Joint Expert Committee on Food Additives concluded that steviol glycoside showed no adverse affects and was stable for use in food and acidic beverages under normal conditions and in June 2008 extended its recommendation for acceptable daily intake of up to 4 mg per kg body weight per day.
In April 2010, at the request from the European Commission, the European Food Safety Authority's scientific Panel on additives known as the ANS Panel assessed the safety of steviol glycosides, sweeteners extracted from plant leaves, and established an acceptable daily intake for their safe use. This assessment is being considered by the European Commission in deciding whether or not to authorize the substances in the EU for their proposed use, particularly in sugar free or reduced energy foods such as certain flavored drinks, confectionery with no added sugar or energy reduced soups. The toxicological testing conducted by the ANS Panel showed that the stevia based substances are neither genotoxic nor carcinogenic, nor are they linked to any adverse effects on the human reproductive system or for the developing child. The ANS Panel set an acceptable daily intake of 4 mg per kg body weight per day for steviol glycosides, a level consistent with that already established by the Joint Expert Committee on Food Additives.
In July 2011, the EU Standing Committee on Food Chain and Animal Health announced that steviol glucoside derived from the stevia plant was safe for use in food ingredients throughout the 27 countries of the EU. In November 2011, the European Commission formally authorized the use of steviol glucoside derived from the stevia plant as a non-caloric sweetener for EU-wide use.
On March 23, 2010, we received a "no objection letter" from the U.S. Food and Drug Administration ("FDA") regarding our request for FDA Generally Recognized As Safe (GRAS) status on five of our stevia extract products, including Rebaudioside A 98, Rebaudioside A 95, Rebaudioside A 80, Rebaudioside A 60, and Stevioside 90 Stevia Extracts. The FDA affirmed GRAS status confirms that these stevia extracts are considered safe for use as a general purpose sweetener in foods, excluding meat and poultry products. This affirmation was based on our conclusion, which is supported by the extensive independent review of our production processes and the overall quality of these stevia products by a panel of qualified scientists.
In furtherance of our efforts to move toward production of organic, all natural and low calorie products and to enhance our international position and market penetration as a stevia producer along with our distribution partners around the world, we underwent an extensive audit in 2011 by CERES GmbH, an international organization that specializes in inspection and certification in the areas of organic farming and food processing. Upon completion of their audit in November 2011, CERES GmbH notified us that our stevia extracts production process had been certified organic and free of synthetic chemical inputs and uses clean and sanitized procedures that avoid chemical contamination under standards established by the USDA National Organic Program and European Commission (EC) 834/2007 and EC 889/2008.
In fiscal 2017, we have obtained certification of National Organic Program (NOP Certificate No: 50OP16SH0206 and NO: 50OP16SH0223) and certification of non-genetically modified organisms ("Non-GMO") with the ID number of 52462. NOP is the federal regulatory framework governing organic food. Certification is handled by state, non-profit and private agencies that have been approved by the United States Department of Agriculture (USDA). NOP regulations cover in detail all aspects of food production, processing, delivery and retail sale. Under the NOP, farmers and food processors, who wish to use the word "organic" in reference to their businesses and products, must be certified organic. A USDA Organic seal identifies products with at least 95% organic ingredients.
Steviosin
Steviosin is a natural low calorie stevia extract for medicinal use, containing stevioside at 90% with the total steviol glycosides meeting or exceeding 95% on a dry weight basis. Steviosin is used as an alternative sweetener in the pharmaceutical production in China.
OnlySweet
OnlySweet is an all natural, zero calorie, tabletop sweetener comprised of three natural ingredients, including stevioside. In June 2008 we began production of a new blend of OnlySweet increasing its sweetness. We believe this OnlySweet formulation represented a significant advancement in quality resulting in a sweeter and more natural taste compared to other manufacturers of stevioside based sweeteners. We believe consumers are attracted to these improvements in taste, absence of aftertaste and overall mouth feel of this new blend of OnlySweet. OnlySweet is manufactured in the United States at an FDA approved blending facility.
In March 2014, we entered an exclusively 5-year distribution agreement with Qingdao Dongfang Tongxiang International Trading Co., Ltd, and authorized them to use the trademark "OnlySweet" to sell the Company's Stevia products.
Our Customers
The majority of our stevioside is sold on a wholesale basis to domestic food and drug manufacturers and ingredient distributor of foreign trade companies. Our top 10 customers accounted for 47.8% of our sales in the Stevioside segment for the fiscal year ended April 30, 2018. Our biggest customers Qufu Shengwang Import and Export Trade Co., Ltd., a related party, accounted for 18.3% and 30.3%, respectively, of our stevioside sales for the fiscal years ended April 30, 2018 and 2017. We do not have long term supply agreements with our customers and sales are generally made under a purchase order arrangement. The payment terms are generally 60 to 90 days after receipt of products. We control the default risk by conducting due diligence on the customers' credit record before acceptance of a purchase order.
Sources and Availability of Raw Materials - Stevioside
The Shandong Province is a primary harvesting base of stevia leaves as well as the main region for the production of stevioside in China. We purchase all raw materials directly from local suppliers at market prices and pay for the leaves at the time of purchase. We test stevia leaves prior to purchase in an effort to maintain quality control. Our internal policy is to purchase leaves with stevioside content in excess of 9%.
Manufacturing, Extraction and Packaging
We have been engaged in the continuous production of stevioside since 1998. We use a traditional extraction technology process known as "aqueous extraction" which involves the use of purified water extraction and air dehydration to produce stevioside. The extraction process for stevioside generally takes seven days. The plant leaves are first dried and then inspected to insure quality leaves are used in the extraction process. We then use a combined process involving a solid/liquid extraction procedure, followed by a liquid-purifying step that is traditionally used to extract the stevioside from the stevia leaves. This all natural method results in a pure white stevia crystal, with no brownish coloring. Once the extraction process has been completed, the final product is ready for packaging and shipment to our customers. We bulk package our stevioside in 10 kilogram packages, two per box.
In July 2008, our stevioside manufacturing facility located in the Shuyuan Economic Zone of Qufu City, of the Shandong Province, received a Certificate of Good Manufacturing Practices (GMP) from the PRC.
In early 2011, our stevia production facility operated by Qufu Shengren received ISO 22000 and ISO 9001:2008 integrated process and systems certifications, in addition to HACCP (Hazard Analysis and Critical Control Points) certification from SGS S.A. and its country head offices in UK and China for this facility. SGS is one of the world's leading inspection, verification, testing and certification companies. In an effort to meet the international food safety standards mandated by larger consumer product companies that we expect to target as customers in the future, we have made capital investments to enhance our manufacturing facilities, equipment and documentation systems, changed certain manufacturing processes and carried out additional personnel training in order to meet these standards. These investments allowed us to meet the HACCP System Certification, ISO 9001:2015 Certification and ISO 22000:2005 Food Safety Certification. We obtained these certifications in October 2015.
The ISO certifications cover all of the processes throughout the production cycle that deal directly or indirectly with the end product being consumed and quality management principles. These certifications together with our comprehensive management system demonstrate the safety of our stevia products and our compliance with the requirements for food safety management systems by incorporating all the elements of GMP and HACCP. HACCP Certification is an international principle defining the requirements for effective control of food safety. HACCP compliance and certification demonstrates our focus on the hazards that affect food safety and hygiene and systematic identification of such by setting up control limits at critical points during the food production process. By achieving these high level certifications, we have further demonstrated our commitment to quality, safety and continuous improvement.
In December 2012, Qufu Shengren finished the construction of a new stevia extraction line in the same location of its current stevioside manufacturing facility. This line facility applies a new stevia extraction technology to produce both high and low grade stevioside. The annual production capacity of this line facility is 500 metric tons including 300 metric tons of high purity Rebaudioside A products and 200 metric tons of low purity Rebaudioside A product.
Since January 2014, our facilities have the capability of producing A3-99 stevia products, which is the highest quality stevioside extracts produced in the world and are used in the pharmaceutical and food industries. We generated approximately $504,000 and $370,000 in revenue from producing over 6.1 metric tons and 3.9 metric tons of A3-99 in the fiscal years ended April 30, 2018 and 2017, respectively.
Since fiscal 2014, our facilities have the capability of producing Enzyme treated stevia, which is one of the most advanced types of steviosides produced in the world for use in the food and beverage industries. We generated approximately $2,455,000 and $2,231,000 in revenue from producing over 45.9 metric tons and 47.1 metric tons of Enzyme treated stevia in the fiscal years ended April 30, 2018 and 2017, respectively.
In the fiscal years ended April 30, 2017 and 2018, we have invested over $1.7 million total for over the two years, including cash investments of $1,019,000 and $700,000 in fiscal 2018 and fiscal 2017, respectively, to purchase new manufacturing equipments for our facility with annual capacity of 500 metric tons in order to meet substantially increased demand for its high-grade stevia products. The new manufacturing facility is fully equipped with stainless steel equipment and a fully automated system in order to prevent any potential contamination from operators and plastic. In addition, the new manufacturing facility uses the most advanced production equipment that is the first time to be used for stevia production in the industry, such as a scraper with centrifuge and fluidized drying system.
As of now, Sunwin Stevia has approximately 1,200 metric tons of manufacturing capacity per year to produce high-grade stevia extract. With these manufacturing facilities, Sunwin Stevia is able to deliver stevia products containing Rebaudioside A in a range of 50% to 99% with a format of powder, granular, or tablet.
We set our production schedules based on the market demands and our capacity. Our total stevioside production capacity is approximately 1,200 metric tons annually, which we believe is sufficient to meet demand. For the fiscal year ended April 30, 2018, we manufactured approximately 944 metric tons of stevioside, an increase of 115 metric tons from the prior year, to better supply the market demand.
CHINESE MEDICINE SEGMENT
In our Chinese medicine segment, we manufacture and sell traditional Chinese medicine formula extracts which are used in products made for use by both humans and animals. For the fiscal years ended April 30, 2018 and 2017, this segment generated revenues of $2.9 million and $2.9 million, representing 13% and 15% of our total consolidated revenues, respectively. For the fiscal year ended April 30, 2018, revenues from the top five products represented approximately 68.4% of the total sales of our Chinese medicine segment.
Chinese herbal medicine has been applied as a means of both the prevention and treatment of illness and disease. We believe many modern chemical medicines contain high toxicities and present numerous side effects. Purely chemical based medicines are difficult, time consuming and expensive to develop. We believe natural Chinese traditional medicines represent an alternative approach offering advantages over a variety of chemical medicines and the process of combining herbal extraction and chemical medicines is becoming a popular alternative, following the current trends of "natural" and "green" products in a variety of industries.
We manufactured and sold approximately 224 different extracts for the fiscal year ended April 30, 2018, compared to 214 different extracts for the fiscal year ended April 30, 2017. These extracts can be divided into the following three general categories:
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single traditional Chinese medicine extracts;
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compound traditional Chinese medicine extracts; and
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purified extracts, including active parts and monomer compounds such as soy isoflavone.
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Our Customers
We sell our traditional Chinese medicine formula extracts on a wholesale basis to domestic traditional Chinese medicine manufacturers and animal pharmaceutical manufacturers. For the fiscal years ended April 30, 2018 and 2017, we had no customer accounting for 10% or more of the Company's revenue. We do not have contracts with our customers and sales are made under a purchase order arrangement. We deliver upon the acceptance of a purchase order with no deposit required. The payment terms are generally 60 to 90 days after receipt of products. We control the default risk by conducting due diligence on the customers' credit record before acceptance of a purchase order.
Sources and Availability of Raw Materials - Chinese Medicines
We purchase raw materials for our traditional Chinese medicine formula extracts on the open market at market prices. The prices of raw materials for Chinese medicines fell back to and steadily stay on the downward track since fiscal 2012 due to effective measures by Chinese governments to tame speculations on raw materials and the increase of market supply from harvest season.
Formulation, Manufacturing and Packaging
The extract formulas used in our manufacturing are either commonly used formulas published in the National Medicine Dictionary or industry standard formulas which may have been developed by university research scientists or internally developed by our research and development personnel. Internally developed formulas must be approved by the Shandong Bureau of Quality and Technical Supervision prior to public use.
NEW PRODUCT DEVELOPMENT
We engage in new product developments through our internal research facilities, industry consultants and specialists to provide research and development for the planting of stevia plants, the development of biological methods to improve lower-grade stevia product to higher grade stevia and applying biological method to change the taste of stevia to meet market demand. We are in partnership with a number of research facilities in the PRC including:
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We are working with a Jiangsu enzyme preparation company, to provide research and development for some of the enzyme modification products in order to produce better taste products; and
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Shandong Chinese Medicine University.
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We pay for the use of these facilities on an as needed basis and the costs are included in our research and development expenses. For the fiscal years ended April 30, 2018 and 2017, we spent approximately $846,000 and $493,000, respectively, on research and development.
For the fiscal years ended April 30, 2018 and 2017, we have invested over $1.7 million in total for the two years, including cash investments of $1,019,000 and $700,000 in fiscal 2018 and in fiscal 2017, respectively, to purchase new manufacturing equipments for our facility with annual capacity of 500 metric tons in order to meet substantially increased demand for its high-grade stevia products. The new manufacturing facility is fully equipped with stainless steel equipment without any plastic while it has a fully automated system in order to prevent any potential contamination from operators and plastic. In addition, the new manufacturing facility uses the most advanced production equipment that is the first time to be used for stevia production in the industry, such as scraper with centrifuge and fluidized drying system.
As of now, Sunwin Stevia has approximately 1,200 metric tons of manufacturing capacity per year to produce high-grade stevia extract. With these manufacturing facilities, Sunwin Stevia is able to deliver stevia products containing Rebaudioside A in a range of 50% to 99% with a format of powder, granular, or tablet.
Competition
Our subsidiaries and the business segments operate with unique challenges and extensive competition.
Stevioside
. There are approximately 30 stevioside manufacturers operating on a continuing basis in China. While these competitors have production capacity similar to ours, we believe we are able to compete effectively with them based on our production capabilities and product quality. In addition, other companies periodically enter the market depending upon demand. These intermittent producers may choose to stop production when raw materials are not readily available in the marketplace. The sporadic oversupply of product from these competitors can adversely affect our market share. Furthermore, if demand wanes these competitors may reduce the price of their products, which can adversely affect market prices. In addition to competing with other Chinese companies, we also compete with foreign growers and processors.
We are one of the few steviosin manufacturers that are GMP certified and granted with drug approval number. We believe that the combination of eligibility to supply pharmaceutical ingredients and capability for stevia extraction provides us with a competitive advantage compared to our competitors, most of whom are either not eligible to supply pharmaceutical ingredients or not experienced in large-scale stevia extraction.
Chinese medicine
. The market in the PRC for traditional Chinese medicine extracts is extremely competitive. We believe there are more than 500 companies engaged in herb extraction in the PRC. Companies in many different industries, including pharmaceutical companies, chemical companies, health products companies, herb extraction companies, biological engineering companies and research and development institutions, are now engaged in herb extraction. Competitive factors primarily include price and quality. We believe our ability to compete is related to our product quality and reputation in the market place. Globally, we believe we will be able to effectively compete against similar companies from other countries as a result of our lower labor costs and China's soil and growing conditions, which enable us to produce higher quality products.
INTELLECTUAL PROPERTY
Our success depends in part on our ability to protect our intellectual property which includes various raw materials purification technologies used in our products. We have received a trademark from the U.S. Patent and Trademark Office covering the trade name "OnlySweet", which we are using for the North American distribution of our stevia based tabletop sweetener product.
To protect our proprietary rights outside the PRC we generally rely on confidentiality agreements with employees and third parties, and agreements with consultants, vendors and customers, although we have not signed such agreements in every case. We do not have any similar agreements with any of our employees or consultants in the PRC. Despite such protections, a third party could, without authorization, utilize our propriety technologies without our consent. In the past three of our traditional Chinese medicine products have been copied by our competitors. We can give no assurance that our agreements with employees, consultants and others who participate in the production of our products will not be breached, or that we will have adequate remedies for any breach, or that our proprietary technologies will not otherwise become known or independently developed by competitors.
GOVERNMENT REGULATION
Our business and operations are primarily located in the PRC. We are subject to state and local environmental laws related to certification of water release. We are subject to registration and inspection by the State Food and Drug Administration of China ("SFDA") with respect to the manufacturing and distribution of traditional Chinese medicine extracts and steviosides. In addition, we are licensed by the Shandong Provincial Government to manufacture stevioside. We believe we are in compliance with all provisions of those registrations, inspections and licenses and have no reason to believe that they will not be renewed as required by the applicable rules of the Central Government and the Shandong Province. In addition, our operations must conform to general governmental regulations and rules for private (non-state owned) companies doing business in China.
The production, distribution and sale of our products in the United States is subject to various federal and state regulations, including but not limited to: the Federal Food, Drug and Cosmetic Act ("FDCA"); the Dietary Supplement Health and Education Act of 1994; the Occupational Safety and Health Act; various environmental statutes; and various other federal, state and local statutes and regulations applicable to the production, transportation, sale, safety, advertising, labeling and ingredients of such products.
Compliance with applicable federal and state regulations is essential to our business. Although we believe that we are in compliance with applicable regulations, should the FDA or any state in which we operate amend its guidelines or impose more stringent interpretations of current laws or regulations, we may not be able to comply with these new guidelines. Such regulations could require the reformulation of certain products to meet new standards, market withdrawal or discontinuation of certain products we are unable to reformulate, imposition of additional record keeping requirements, expanded documentation regarding the properties of certain products, expanded or different labeling and/or additional scientific substantiation. Failure to comply with applicable requirements could result in sanctions being imposed on us or the manufacturers of any of our products, including but not limited to fines, injunctions, product recalls, seizures and criminal prosecution.
The FDCA generally regulates ingredients added to foods and requires that such ingredients making up a food product are themselves safe for their intended uses. In this regard, when a company adds an ingredient to a food, the FDCA generally requires that the ingredient either be determined by the company to be generally regarded as safe by qualified experts or go through FDA's review and approval process as a food additive.
PRC Legal System
Despite efforts to develop its legal system over the past several decades, including but not limited to legislation dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade, the PRC continues to lack a comprehensive system of laws. Further, the laws that do exist in the PRC are often vague, ambiguous and difficult to enforce, which could negatively affect our ability to do business in China and compete with other companies in our segments.
In September 2006, the Ministry of Commerce ("MOFCOM") promulgated the Regulations on Foreign Investors' Mergers and Acquisitions of Domestic Enterprises (M&A Regulations) in an effort to better regulate foreign investment in China. The M&A Regulations were adopted in part as a needed codification of certain joint venture formation and operating practices, and also in response to the government's increasing concern about protecting domestic companies in perceived key industries and those associated with national security, as well as the outflow of well-known trademarks, including traditional Chinese brands.
As a U.S. based company doing business in China, we seek to comply with all PRC laws, rules and regulations and pronouncements, and endeavor to obtain all necessary approvals from applicable PRC regulatory agencies such as the MOFCOM, the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission, and the State Administration of Foreign Exchange ("SAFE").
Currency
The value of the Renminbi ("RMB"), the main currency used in China, fluctuates and is affected by, among other things, changes in China's political and economic conditions. The conversion of RMB into foreign currencies such as the U.S. dollar have generally been based on rates set by the People's Bank of China, which are set daily based on the previous day's interbank foreign exchange market rates and current exchange rates on the world financial markets.
OUR CORPORATE HISTORY
We were incorporated in Nevada in August 1987 under the name Network USA, Inc. for the purposes of completing a merger or other business combination with an operating entity. From our inception through April 2002 we did not conduct business. On April 9, 2002, we acquired 20% of One Genesis, Inc., a privately-held Texas real estate corporation, from one of our then principal stockholders in exchange for approximately 4,333,332 shares of our common stock. The shares of One Genesis, Inc. were sold on July 31, 2002 for $120,000 in cash.
Effective on April 30, 2004, we acquired 100% of the issued and outstanding shares of Sunwin Tech from its stockholders in exchange for approximately 17,000,000 shares of our common stock which resulted in a change of control of our company. Sunwin Tech was organized in January 2004 before its acquisition of 80% of Qufu Natural Green. Prior to the acquisition of Qufu Natural Green, we did not have any business and operations. Concurrent with the closing of the acquisition of Qufu Natural Green, our officers and directors resigned and current officers and directors of Qufu Natural Green were appointed to their positions. In connection with the transaction, Sunwin Tech purchased 4,500,000 shares of our common stock owned by our former principal stockholders for $175,000, and, at the closing, Sunwin Tech distributed the 4,500,000 shares to Messrs. Baozhong Yuan, Laiwang Zhang, Xianfeng Kong and Lei Zhang, pro-rata to their ownership of Sunwin Tech immediately prior to the closing. Following the transactions, the former Sunwin Tech stockholders owned approximately 68 % of our issued and outstanding capital stock.
Prior to our acquisition of Sunwin Tech, effective February 1, 2004, Sunwin Tech acquired 80% of Qufu Natural Green from Pharmaceutical Corporation, a company controlled by Mr. Laiwang Zhang, our President and Chairman, in exchange for 32,500,000 shares of Sunwin Tech's common stock. At the time of this merger the minority stockholders of Qufu Natural Green included Pharmaceutical Corporation (17%) and Shandong Group (2.5%), both of which are controlled by Mr. Laiwang Zhang, our President and Chairman. The remaining minority stockholder, Qufu Veterinary Medicine Company, Ltd. (0.5%) was controlled by a Chinese state owned agency.
In July 2004 following the transaction with Sunwin Tech, we changed the name of our company from Network USA, Inc. to Sunwin International Neutraceuticals, Inc.
Subsequent to the acquisition of 80% of Qufu Natural Green, Shandong Group acquired the 17% interest of Qufu Natural Green owned by Pharmaceutical Corporation, and ultimately the Shandong Group acquired the 0.5% Qufu Natural Green interest owned by Qufu Veterinary Medicine Company, Ltd., after it was dissolved. These events resulted in Shandong Group owning 20% of Qufu Natural Green.
In February 2006, we acquired the remaining 20% of Qufu Natural Green from Shandong Group in exchange for 5,000,000 shares of our common stock valued at $2,775,000. At the request of Mr. Zhang, the control person of Shandong Group, 2,000,000 shares were issued to Ms. Dongdong Lin, our Chief Executive Officer, and the remaining 3,000,000 shares were issued to Mr. Zhang. Of the total purchase price, approximately $179,994 was allocated to consulting expenses paid to Mr. Zhang and Ms. Lin as it represented the difference between the purchase price and the valuation of the minority interest purchased.
On June 30, 2008, Qufu Natural Green, agreed to acquire a 60% interest in Qufu Shengwang from Shandong Group for $7,016,200. This purchase price was based on 60% of the value of the net tangible assets of Qufu Shengwang as of April 30, 2008. Upon completion of the acquisition of Qufu Shengwang in June 2008, Shandong Group agreed to purchase 29,000,000 shares of our common stock at a price of $0.25 per share.
On September 2, 2008, Qufu Natural Green amended its June 30, 2008 acquisition agreement with Qufu Shengwang and Shandong Group. Under the terms of the amendment, Qufu Natural Green agreed to acquire Shandong Group's 60% interest in Qufu Shengwang for $6,200,413. The purchase price was based on 60% of the revised value of the net tangible assets of Qufu Shengwang of $10,334,022 as of April 30, 2008. The net tangible assets of Qufu Shengwang were reduced from $11,693,666 to $10,334,022 as a result of the application of generally accepted accounting principles ("U.S. GAAP") which require elimination of the difference between the fair market value and cost basis of the land use rights recorded by Qufu Shengwang upon completion of an audit of its financial statements as of April 30, 2008.
In addition, on September 2, 2008, we entered into an amendment to the June 30, 2008 stock sale and purchase agreement with Shandong Group to purchase 29,525,776 shares of the common Stock at $0.21 per share, representing approximately 34% of our issued and outstanding common stock. In addition, the amendment provided that in the event Qufu Shengwang did not earn a minimum of $5,000,000 in net income as determined in accordance with U.S. GAAP (the "Target Amount") over a period of 36 consecutive months beginning the first day of the month following the closing (the "Earnings Target Period"), then Shandong Group was obligated to return to us a number of shares of our common stock equal to an amount computed by multiplying (i) a fraction, the numerator of which was the Target Amount less the amount of Qufu Shengwang's net income earned over the Earnings Target Period and the denominator was the Target Amount; by 29,525,776, the number of shares purchase under the amendment. As set forth below, the provision for the possible return of shares to us was terminated in November 2008 a subsequent amendment to this amended agreement.
On November 18, 2008, Qufu Natural Green entered into a second amendment to the June 30, 2008 acquisition agreement with Qufu Shengwang and its shareholder, Shandong Group, to further reduce the purchase price for the acquisition of a 60% interest in Qufu Shengwang to $4,026,851. The revised purchase price represents 60% of the revised value of the net assets of Qufu Shengwang of $6,711,418 as of April 30, 2008. The net assets of Qufu Shengwang were further revised to account for a $698,115 decrease in the value of inventory and a $2,924,489 decrease in the value of intangible assets as of April 30, 2008.
In addition, on November 18, 2008, we entered into a second amendment to the stock sale and purchase agreement to reduce the total number of shares of common stock to be purchased by Shandong Group from 29,525,776 shares to 19,175,480 shares at $0.21 per share. As a result of the second amendment, we cancelled 10,350,296 shares of our common stock issued to Shandong Group, reduced the amount due from Shandong Group by $2,173,562 reflecting the difference between the purchase price under the first amendment and the purchase price for the shares under the second amendment and eliminated the requirement for the earnings target amount provided for in the first amendment. In satisfaction of this term, the purchase was completed by Shandong Group's delivery of the 60% interest in Qufu Shengwang. The 19,175,480 shares of common stock purchased by Shandong Group represented approximately 22% of the issued and outstanding shares of our common stock prior to completion of the transaction.
On March 25, 2009 Qufu Natural Green acquired Qufu Shengren for $3,097,242. The purchase price was equal to the value of the assets of Qufu Shengren as determined by an independent asset appraisal in accordance with PRC issued asset appraisal principles in China. Qufu Shengren is engaged in the production and distribution of bulk drugs and pharmaceuticals.
Upon completion of the acquisition of Qufu Shengren in March 2009, the shareholders of Qufu Shengren purchased 21,434,201 shares of our common stock at $0.145 per share representing approximately 14.4% of our issued and outstanding common stock at the time of the sale. In satisfaction of this term, the purchase was completed by delivery of the 100% interest in Qufu Shengren by its shareholders.
On February 5, 2009, we entered into a securities purchase agreement with WILD Flavors to purchase 20,000,000 shares of our common stock at $0.15 per share together with five year warrants to purchase 26,666,666 shares of our common stock with an exercise price of $0.35 per share. In connection with the securities purchase agreement we paid fees of $100,000 in cash and 1,000,000 shares of our common stock and paid legal fees of $10,000. We used the net proceeds from this transaction for expansion of our production facilities in China and general corporate purposes. In February 2014, the warrants expired and were cancelled.
Pursuant to the terms of the securities purchase agreement, we converted our Sunwin Stevia International subsidiary into a limited liability company called Sunwin USA. In exchange for our contribution of Sunwin Stevia International's capital, we received 5,500 membership units in Sunwin USA, representing a 55% interest after giving effect to the issuance of 4,500 membership units to WILD Flavors. In addition, WILD Flavors provided sales, marketing, logistics and supply chain management, product development and regulatory services to Sunwin USA over a period of two years beginning on February 5, 2009. We valued the services at $1,000,000 over the two year period. WILD Flavors agreed to act as the sole manager of Sunwin USA and is responsible for all of its business and affairs. WILD Flavors has the right of first refusal to purchase additional membership units in Sunwin USA at $222.22 per unit to provide any additional capital required by Sunwin USA as mutually determined by us and WILD Flavors.
Under the terms of the securities purchase agreement, WILD Flavors had the option to exchange its 45% interest in Sunwin USA into 6,666,666 shares of our common stock at any time until December 31, 2010. This exchange option expired unexercised. WILD Flavors is also entitled to a bonus option which would entitle it to receive the greater of:
- 6% of the issued and outstanding membership units of Sunwin USA or
- the number of membership units of Sunwin USA necessary to increase WILD Flavor's ownership interest to 51% if Sunwin USA achieved cumulative pre-tax profits of $3,000,000 on or before December 31, 2011 computed in accordance with U.S. GAAP exclusive of the cost of product liability insurance.
The bonus option expired unexercised as the threshold profit criteria was not reached.
On February 5, 2009 as part of the transactions we entered into a distributorship agreement with WILD Flavors for the worldwide distribution of our stevioside products. The distributorship agreement is for an initial term of 60 months with automatic renewal terms of 12 successive 36 month renewal periods.
In July 2010 Qufu Natural Green sold its 100% ownership interest in Shengya Veterinary Medicine to Mr. Laiwang Zhang, our president and chairman of our board of directors. Shengya Veterinary Medicine historically represented less than 20% of our total revenues and represented approximately 12% of our total revenues in fiscal 2010, compared to 16.7% in fiscal 2009. Under the terms of the agreement, Mr. Zhang tendered to us for cancellation 7,818,545 shares of our common stock he owned, valued at $3,674,716, based on the closing stock price at July 31, 2010. The carrying value of Shengya Veterinary Medicine's net assets totaled $4,906,747 at July 31, 2010 and we recognized a foreign currency translation gain of $1,243,481 that had previously been reflected in accumulated other comprehensive income. As a result, we booked a gain on sale of subsidiary of $11,450 in fiscal 2011.
On September 30, 2011, Qufu Shengwang purchased the 40% equity interest in Qufu Shengwang owned by our Korean partners, Korea Stevia Company, Limited, for $626,125 in cash, and as a result of this repurchase transaction we now own 100% equity interest in all of the net assets of our subsidiary Qufu Shengwang. Therefore, the non-controlling interest of $2,109,028 in our balance sheet as of April 30, 2012 has been eliminated to reflect our 100% interest in Qufu Shengwang. Qufu Shengwang has resumed production in the last quarter of fiscal 2014 for the products including bio-fermentation bacterial fertilizers, foliar fertilizers, and biological pesticides.
In April 2012 we changed our corporate name to Sunwin Stevia International, Inc.
In August 2012, the Company entered into an Exchange Agreement with WILD Flavors pursuant to which it purchased its 45% membership interest in Sunwin USA for an aggregate consideration of approximately $1,625,874, which includes the issuance of 7,666,666 shares of our common stock valued at approximately $1,533,333 and a cash payment of $92,541. In connection with the Exchange Agreement, WILD Flavor granted, transferred and assigned to Sunwin USA all of its rights, title and interest, and the trade name OnlySweet, including any trademarks, trademark registrations and applications, service marks, service mark registrations and applications, copyrights, copyright registrations and applications, trade dress, trade names (whether or not registered or by whatever name or designation), owned, applied for, or registered in the name of, the WILD Flavor (the "OnlySweet Name Rights").
On August 8, 2012 we entered into an Exchange Agreement with WILD Flavors pursuant to which we purchased its 45% membership interest in Sunwin USA for an aggregate consideration of approximately $1,625,874, which includes the issuance of 7,666,666 shares of our common stock valued at approximately $1,533,333 and a cash payment of $92,541. The transaction closed on August 20, 2012. On August 22, 2012, we issued 7,666,666 shares of our common stock and paid $92,541 cash to WILD Flavors.
The net tangible assets of Sunwin USA were reduced from $1,825,804 to $1,625,874 as a result of the application of generally accepted accounting principles ("U.S. GAAP") which requires elimination of the difference between the purchase price of the 45% membership interest in Sunwin USA and cost basis of the intangible assets recorded by Sunwin USA. Intangible assets include the product development and supply chain for OnlySweet.
Under the terms of the agreement, WILD Flavors assumed certain pre-closing obligations of Sunwin USA totaling approximately $694,000, including trade accounts receivable, loans, health care and monthly expenses of an employee, potential chargebacks, bank fees and broker commissions incurred prior to the closing date. The agreement also contained customary joint indemnification and general releases. As a result of this transaction, we began consolidating the operations of Sunwin USA from the date of acquisition (August 20, 2012).
In addition to the Exchange Agreement, on August 8, 2012 we entered into the following additional agreements with WILD Flavors or its affiliate:
- We entered into an Amendment to Operating Agreement with WILD Flavors pursuant to which we are now the sole manager of Sunwin USA and certain sections of the original agreement dated April 29, 2009 were cancelled as they were no longer relevant following our purchase of the minority interest in Sunwin USA described above;
- We entered into a Termination of Distribution Agreement with WILD Flavors and Sunwin USA pursuant to which the Distribution Agreement dated February 5, 2009 was terminated; and
- We entered into a Distributorship Agreement with WILD Procurement Gmbh, a Swiss corporation ("WILD Procurement") which is an affiliate of WILD Flavors. Under the terms of this agreement, we appointed WILD Procurement as a non-exclusive world-wide distributor for the resale of our stevia products. There are no minimum purchase quantities under the agreement, and the pricing and terms of each order will be negotiated by the parties at the time each purchase order is placed. The agreement restricts WILD Procurement from purchasing steviosides or other forms of stevia that are included in our products from sources other than our company under certain circumstances. In addition, at such time as we desire to offer new products, we must first offer WILD Procurement the non-exclusive right to distribute those products and the parties will have 60 days to reach mutually agreeable terms. The agreement contains certain representations by us as to the quality of the products we may sell WILD Procurement and the products' compliance with applicable laws and good manufacturing practices, as well as customary confidentiality and indemnification provisions.
In the event WILD Procurement should fund research on stevia used in food, beverage or dietary supplement applications, and as a result of this research it develops new intellectual property, such intellectual property shall be the sole property of WILD Procurement. In the event we should jointly fund research, any new intellectual property developed from this effort will be jointly owned and each party will have the right to use the developed intellectual property in stevia-based products.
The agreement is for an initial term of 12 months and will automatically renew for successive 12 month terms unless the agreement has been terminated by either party upon 45 days prior written notice. There are no assurances any purchase orders will be placed under the terms of the Distribution Agreement. The agreement may also be terminated by either party upon a material breach by the other party, or upon the filing of a bankruptcy petition, both subject to certain cure periods. In the event the agreement is terminated, WILD Procurement has the right to continue to distribute our products on a non-exclusive basis for 24 months upon terms and conditions to be negotiated by the parties. At the end of fiscal year 2016, we have received the notice for termination from WILD. Currently, WILD still is one of our customers keeping to purchase enzyme treated products from us.
On April 30, 2018, the Company decided that it was in its best interest to discontinue and close Sunwin Tech. All assets and liabilities owned by Sunwin Tech, including the equity ownership of Qufu Natural Green transferred to and is assumed by Sunwin Stevia International, Inc.
EMPLOYEES
As of July 27, 2018, we have 308 full time employees. All of our employees are primarily based in Qufu, China while some managerial and sales staff occasionally works in other Chinese cities or overseas on different projects. Each full-time Chinese employee is a member of a local trade union. Labor relations have remained positive and we have not had any employee strikes or major labor disputes. Unlike trade union in western countries, trade unions in most parts of China are organizations mobilized jointly by the government and the management of the corporation.
An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this report, before making an investment decision, and you should only consider an investment in our common stock if you can afford to sustain the loss of your entire investment. You should carefully consider the risks described below together with all of the other information included in this report before making an investment decision with regard to our securities. If any of the following risks occurs, our business, financial condition or results of operations could be harmed. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
RISKS RELATED TO OUR COMPANY
FOR THE FISCAL YEAR ENDED APRIL 30, 2018, WE INCURRED NET LOSS OF $4.7 MILLION, WE CANNOT ASSURE YOU THAT OUR LOSSES WILL NOT CONTINUE, AND WE BELIEVE THAT THESE MATTERS RAISE SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN FOR THE NEXT TWELVE MONTHS FROM THE ISSUANCE DATE OF THIS REPORT.
Our consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in our accompanying consolidated financial statements, we have incurred a net loss of approximately $4,715,000 for the fiscal year ended April 30, 2018. The net cash used in operations were approximately $2,089,000 for the fiscal year ended April 30, 2018. Additionally, we have an accumulated deficit of $33.8 million as of April 30, 2018, the cash balance and revenues generated are not currently sufficient and cannot be projected to cover the operating expenses for the next twelve months from the date of this report. Management believes that these matters, among others, raise substantial doubt about our ability to continue as a going concern for the twelve months from the issuance date of this report. Management cannot provide assurance that we will ultimately achieve profitable operations or become cash flow positive, or raise additional debt and/or equity capital. Management believes that our capital resources are not currently adequate to continue operating and maintaining our business strategy for the fiscal year ending April 30, 2019 without raising additional funds through debt and/or equity capital financings.
We may seek to raise capital through additional debt and/or equity financings to fund our operations in the future. Although we have historically raised capital from third parties, related party and bank loans, however, there is no assurance that we will be able to continue to do so and on satisfactory terms and conditions. Our consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
OUR AUDITORS HAVE ISSUED A "GOING CONCERN" AUDIT OPINION.
Our independent auditors have indicated in their report on our April 30, 2018 consolidated financial statements that there is substantial doubt about our ability to continue as a going concern. We have a significant accumulated deficit, incurred recurring losses and generated negative cash flow from operating activities. These conditions raise substantial doubt about our ability to continue as a going concern for the next twelve months from the issuance date of this report. Our ability to continue as a going concern is dependent on our ability to ultimately achieve profitable operations, or become cash flow positive, or raise additional capital from debt and or equity. However, we cannot provide assurance that we will ultimately achieve profitable operations or become cash flow positive, or raise additional capital and or if any will be available to us on satisfactory terms and conditions.
EACH OF OUR TWO MAIN PRODUCT GROUPS OPERATES IN HIGHLY COMPETITIVE MARKETS WHERE THE BARRIER TO ENTRY IS LOW.
Each of our product groups is subject to competition from other manufacturers of those products and the barriers to entry in the markets in which we compete are relatively low. While we believe we are one of the leading manufacturers of stevioside in the PRC, from time to time there is a sporadic oversupply of this product which can decrease our market share and competitive position in this product group. Because there are no assurances we will be successful in this endeavor, we may never attain a competitive position in this product group. In addition, our competition within the traditional Chinese medicine formula extract portion of our business is the most intense. There are over 500 companies in China against whom we compete in the sale of traditional Chinese medicine formula extracts and the barriers to entry in this product segment are relatively low. If these other companies successfully market their products or market their products better than we market ours, we may have difficult time marketing and selling our products. As a result, we cannot assure you that we will be able to effectively compete in any of our product segments.
WE ARE DEPENDENT ON OUR PRESIDENT AND THE LOSS OF HIS SERVICES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We are dependent upon the services of Mr. Laiwang Zhang, our president and chairman of the board of directors, for the continued growth and operation of our company because of his experience in the industry and his personal and business contacts in the PRC. We do not have an employment agreement with Mr. Zhang. We also have done business with several companies which are affiliated with Mr. Zhang as described later in this report under "Certain Relationships and Related Party Transactions." Although we have no reason to believe that Mr. Zhang would discontinue his services with us, the interruption or loss of his services would adversely affect our ability to effectively run our business and pursue our business strategy as well as our results of operations.
WE CANNOT CONTROL THE COST OF OUR RAW MATERIALS, WHICH MAY ADVERSELY IMPACT OUR PROFIT MARGIN AND FINANCIAL POSITION.
Our principal raw materials are stevia used to make stevioside and herbs used in the formulation of traditional Chinese medicine extracts. The prices for these raw materials are subject to market forces largely beyond our control, including availability and competition in the market place. The prices for these raw materials have varied significantly in the past and may vary significantly in the future. Our cost of sales as a percentage of revenues was 87% and 85% for the fiscal years ended April 30, 2018 and 2017, respectively, and we may experience significantly higher costs in the future. Because of increased competition in all of our business segments, we may not be able to pass along potential raw material price increases to our customers and, accordingly, our gross profit margins would be adversely impacted.
OUR OPERATIONS ARE SUBJECT TO GOVERNMENT REGULATION. IF WE FAIL TO COMPLY WITH THE APPLICABLE REGULATIONS, OUR ABILITY TO OPERATE IN FUTURE PERIODS COULD BE IN JEOPARDY.
We are subject to state and local environmental laws related to certification of water release. We are subject to registration and inspection under the PRC Food Safety Laws by the SFDA with respect to the manufacturing and distribution of traditional Chinese medicine extracts and steviosides. We are also licensed by the Shandong Provincial Government to manufacture stevioside. While we are in substantial compliance with all provisions of these laws, inspections and licenses and have no reason to believe that any licenses will not be renewed as required by the applicable rules of the PRC Central Government and the Shandong Province, any non-renewal of these licenses could result in the cessation of our business activities. In addition, any change in those laws and regulations could impose costly compliance requirements on us or otherwise subject us to future liabilities.
OUR RECOGNITION OF UNREALIZED GAINS (LOSS) ON FOREIGN CURRENCY TRANSACTIONS CAN MATERIALLY IMPACT OUR INCOME (LOSS) FROM PERIOD TO PERIOD.
As described elsewhere herein, the functional currency of our Chinese subsidiaries is the RMB. As required by generally accepted accounting principles, net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations. The gain from the foreign exchange transaction was approximately $903,000 and the loss from the foreign exchange transaction was approximately $859,000 for the fiscal years ended April 30, 2018 and 2017, respectively. The recording of these non-cash gain and loss, which is required under generally accepted accounting principles in the United States, could have a material impact on our financial statements.
WE HAVE NOT VOLUNTARILY IMPLEMENTED VARIOUS CORPORATE GOVERNANCE MEASURES, IN THE ABSENCE OF WHICH STOCKHOLDERS MAY HAVE LESS PROTECTIONS AGAINST INTERESTED DIRECTOR TRANSACTIONS, CONFLICTS OF INTEREST AND OTHER MATTERS.
The Sarbanes-Oxley Act of 2002 and other federal legislation have resulted in the adoption of various corporate governance measures designed to promote the integrity of corporate management and the securities markets. Some of these measures have been adopted in response to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges, such as the NYSE MTK LLC or The Nasdaq Stock Market, on which their securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges are those that address board of directors' independence, audit committee oversight, the adoption of a code of ethics and the adoption of a related persons transaction policy. Although we have adopted a Code of Ethics, we have not yet adopted any of these other corporate governance measures and, since our securities are not yet listed on a national securities exchange, we are not required to do so. We have not adopted corporate governance measures such as an audit committee or other independent committees of our board of directors as we presently do not have any independent directors. It is possible that if we were to adopt some or all of these corporate governance measures, stockholders would benefit from somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct. For example, in the absence of audit, nominating and compensation committees comprised of at least a majority of independent directors and our lack of independent directors, decisions concerning matters such as the terms of related party transactions, the amount of management fee paid to a related party, compensation packages to our senior officers and recommendations for director nominees may be made by a majority of directors who have an interest in the outcome of the matters being decided. Prospective investors should bear in mind our current lack of corporate governance measures in formulating their investment decisions.
RISKS RELATED TO DOING BUSINESS IN CHINA
RESTRICTIONS ON CURRENCY EXCHANGE MAY LIMIT OUR ABILITY TO RECEIVE AND USE OUR REVENUE EFFECTIVELY.
Because all of our revenue is denominated in RMB, restrictions on currency exchange may limit our ability to use revenue generated in RMB to fund any business activities we may ultimately have outside China or to make dividend payments to our shareholders in U.S. dollars. The principal regulation governing foreign currency exchange in China is the Foreign Currency Administration Rules (1996), as amended. Under these rules, RMB is freely convertible for trade and service-related foreign exchange transactions, but not for direct investment, loan or investment in securities outside China unless the prior approval of SAFE is obtained. Although the PRC government regulations now allow greater convertibility of RMB for current account transactions, significant restrictions still remain. For example, foreign exchange transactions under our subsidiaries capital accounts, including principal payments in respect of foreign currency-denominated obligations, remain subject to significant foreign exchange controls. These limitations could affect our ability to obtain foreign exchange for capital expenditures. We cannot be certain that the PRC regulatory authorities will not impose more stringent restrictions on the convertibility of RMB, especially with respect to foreign exchange transactions.
FLUCTUATIONS IN THE VALUE OF THE RMB MAY HAVE A MATERIAL ADVERSE EFFECT ON YOUR INVESTMENT.
The change in value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China's political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the current policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. Recently, the PRC has decided to proceed further with reform of the RMB exchange regime and to enhance the RMB exchange rate flexibility. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in a further and more significant adjustment of the RMB against the U.S. dollar. Any significant revaluation of the RMB may have a material adverse effect on the value of, and any dividends payable on, our common stock in foreign currency terms. More specifically, if we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our common stock or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. Consequently, appreciation or depreciation in the value of the RMB relative to the U.S. dollar could materially adversely affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations.
THERE ARE SIGNIFICANT UNCERTAINTEIS UNDER THE DRAFT FOREIGN INVESTMENT LAW RELATING TO THE STATE OF BUSINESS IN CHINA CONTROLLED BY FOREIGH INVESED ENTERPRISES PRIMARILY THROUGH CONTRATUAL ARRANGEMNTS, SUCH AS OUR BUSISESS.
On January 19, 2015, MOFCOM published a draft of the PRC Law on Foreign Investment (Draft for Comment), or the Draft Foreign Investment Law, which is open for public comments until February 17, 2015. At the same time, MOFCOM published an accompanying explanatory note of the Draft Foreign Investment Law, or the Explanatory Note, which contains important information about the Draft Foreign Investment Law, including its drafting philosophy and principles, main content, plans to transition to the new legal regime and treatment of business in China controlled by foreign invested enterprises, or FIEs, primarily through contractual arrangements. The draft Foreign Investment Law utilizes the concept of "actual control" for determining whether an entity is considered to be a foreign-invested enterprise, and defines "control" broadly to include, among other things, voting or board control through contractual arrangements.
The draft Foreign Investment Law proposes significant changes to the PRC foreign investment legal regime and may have a material impact on Chinese companies listed or to be listed overseas. The proposed draft Foreign Investment Law is to regulate FIEs the same way as PRC domestic entities, except for those FIEs that operate in industries deemed to be either "restricted" or "prohibited" in a "negative list." Because the negative list has yet to be published, it is unclear whether it will differ from the current list of industries subject to restrictions or prohibitions on foreign investment. The draft Foreign Investment Law also provides that only FIEs operating in industries on the negative list will require entry clearance and other approvals that are not required of PRC domestic entities. As a result of the entry clearance and approvals, certain FIE's operating in industries on the negative list may not be able to continue to conduct their operations through contractual arrangements. It states that entities established in China but controlled by foreign investors will be treated as foreign-invested enterprises, while entities set up outside of China which are controlled by PRC persons or entities, would be treated as domestic enterprises after completion of market entry procedures.
There is substantial uncertainty regarding the draft Foreign Investment Law, including, among others, what the actual content of the law will be as well as the adoption and effective date of the final form of the law. While such uncertainty exists, we cannot assure you that the new foreign investment law, when it is adopted and becomes effective, will not have a material and adverse effect on our ability to conduct our business through our contractual arrangements.
PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations. If the PRC government determines that our contractual arrangements do not comply with applicable laws and regulations, it could revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, block our website, require us to restructure our operations, impose additional conditions or requirements with which we may not be able to comply, or take other regulatory or enforcement actions against us that could be harmful to our business. The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our business.
RECENT SAFE REGULATIONS COULD ADVERSELY IMPACT OUR COMPANY AND SUBJECT US TO FINES.
Recent PRC regulations relating to offshore investment activities by PRC residents and employee stock options granted by overseas-listed companies may increase our administrative burden, restrict our overseas and cross-border investment activity or otherwise adversely affect the implementation of our acquisition strategy. If our shareholders who are PRC residents, or our PRC employees who are granted or exercise stock options, fail to make any required registrations or filings under such regulations, we may be unable to distribute profits and may become subject to liability under PRC laws. In 2005, SAFE promulgated regulations that require PRC residents and PRC corporate entities to register with local branches of SAFE in connection with their direct or indirect offshore investment activities. These regulations apply to our shareholders who are PRC residents and may apply to any offshore acquisitions that we make in the future.
Under the SAFE regulations, PRC residents who make, or have previously made, direct or indirect investments in offshore companies, will be required to register those investments. In addition, any PRC resident who is a direct or indirect shareholder of an offshore company is required to file or update the registration with the local branch of SAFE, with respect to that offshore company, any material change involving its round-trip investment, capital variation, such as an increase or decrease in capital, transfer or swap of shares, merger, division, long-term equity or debt investment or creation of any security interest. If any PRC shareholder fails to make the required SAFE registration, the PRC subsidiary of that offshore parent company may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation, to their offshore parent company, and the offshore parent company may also be prohibited from injecting additional capital into their PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
We cannot provide any assurances that all of our shareholders who are PRC residents will make or obtain any applicable registrations or approvals required by these SAFE regulations. The failure or inability of our PRC resident shareholders to comply with the registration procedures set forth in the SAFE regulations may subject our company fines and legal sanctions, restrict our cross-border investment activities, or limit our ability to distribute dividends to or obtain foreign-exchange dominated loans from our company. As it is uncertain how the SAFE regulations will be interpreted or implemented, we cannot predict how these regulations will affect our business operations or future strategy. For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and obtaining foreign currency denominated borrowings, which may harm our results of operations and financial condition. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the SAFE regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.
IF WE BECOME DIRECTLY SUBJECT TO SCRUTINY, CRITICISM AND NEGATIVE PUBLICITY INVOLVING U.S.-LISTED CHINESES COMPANIES, WE MAY HAVE TO EXPENSE SIGNIFICANT RESOURCES TO INVESTIGATE AND RESOLVE THE MATTER WHICH COULD HARM OUR BUSENESS OPERATIONS, STOCK PRICE AND REPUTATION.
U.S. public companies that have substantially all of their operations in China, particularly companies like us that have completed so-called reverse acquisition transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered on financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on us, our business and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company. This situation will be costly and time consuming and distract our management from developing our growth. If such allegations are not proven to be groundless, we and our business operations will be severely affected and you could sustain a significant decline in the value of our stock.
THE DISCLOURES IN OUR REPORTS AND OTHER FILINGS WITH THE SEC AND OUR OTHER PUBLIC PRONOUNCEMENTS ARE NOT SUBJECT TO THE SCRUTINY OF ANY REGULATORY BODIES IN THE PRC.
We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Our SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review by China Securities Regulatory Commission, a PRC regulator that is responsible for oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any review of us, our SEC reports, other filings or any of our other public pronouncements.
WE FACE RISKS RELATED TO NATURAL DISASTERS AND HEALTH EPIDEMICS IN CHINA, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.
Our business could be materially adversely affected by natural disasters or the outbreak of health epidemics in China. For example, in May 2008, Sichuan Province suffered a strong earthquake measuring approximately 8.0 on the Richter scale that caused widespread damage and casualties. In addition, in the last decade, the PRC has suffered health epidemics related to the outbreak of avian influenza and severe acute respiratory syndrome, or SARS. In April 2009, an outbreak of the H1N1 virus, also commonly referred to as "swine flu" occurred in Mexico and has spread to other countries. Cases of swine flu have been reported in Hong Kong and mainland China. The Chinese government and certain regional governments within China have enacted regulations to address the H1N1 virus, which may have an effect on our business. If the outbreak of swine flu were to become widespread in China or increase in severity, it could have an adverse effect on economic activity in China, and could require the temporary closure of our facilities. Such events could severely disrupt our business operations and harm our results of operations. Any future natural disasters or health epidemics in the PRC could also have a material adverse effect on our business and results of operations.
CERTAIN AGREEMENTS TO WHICH WE ARE A PARTY AND WHICH ARE MATERIAL TO OUR OPERATIONS LACK VARIOUS LEGAL PROTECTIONS WHICH ARE CUSTOMARILY CONTAINED IN SIMILAR CONTRACTS PREPARED IN THE UNITED STATES.
Although we are a U.S. company, substantially all of our business and operations are conducted in the PRC. We are a party to certain material contracts, including the leases for the facilities used by our stevioside and our Chinese medicine segments. While these contracts contain the basic business terms of the agreements between the parties, these contracts do not contain certain provisions which are customarily contained in similar contracts prepared in the U.S., such as representations and warranties of the parties, confidentiality and non-compete clauses, provisions outlining events of defaults, and termination and jurisdictional clauses. Because our material contracts omit these types of clauses, notwithstanding the differences in Chinese and U.S. laws we may not have the same legal protections as we would if the contracts contained these additional provisions. We anticipate that contracts we enter into in the future will likewise omit these types of legal protections. While we have yet to experience any adverse consequences as a result of the omission of these types of clauses, and we consider the contracts to which we are a party to contain all the material terms of our business arrangements with the other party, we cannot assure you that future events will not occur which could have been avoided if the contracts were prepared in conformity with U.S. standards, or what the impact, if any, of these hypothetical future events could have on our company.
IT MAY BE DIFFICULT FOR STOCKHOLDERS TO ENFORCE ANY JUDGMENT OBTAINED IN THE UNITED STATES AGAINST US, WHICH MAY LIMIT THE REMEDIES OTHERWISE AVAILABLE TO OUR STOCKHOLDERS.
Substantially all of our assets are located outside the United States and substantially all of our current operations are conducted in the PRC. Moreover, all of our directors and officers are nationals or residents of the PRC. All or a substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult for our stockholders to effect service of process within the United States upon these persons. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts obtained against us or such officers and/or directors predicated upon the civil liability provisions of the securities law of the United States or any state thereof or be competent to hear original actions brought in the PRC against us or such persons predicated upon the securities laws of the United States or any state thereof.
RISKS RELATED TO OUR COMMON STOCK
DUE TO RECENT CHINESE ACCOUNTING SCANDALS, THE PRICE OF OUR COMMON STOCK MIGHT FLUCTUATE SIGNIFICANTLY AND IF OUR STOCK PRICE DROPS SHARPLY, WE MAY BE SUBJECT TO SHAREHOLDER LITIGATION, WHICH COULD CAUSE OUR STOCK PRICE TO FALL FURTHER.
In the past few years, there have been well-publicized accounting problems at several U.S.-listed Chinese companies that have resulted in significant drops in the trading prices of their shares and, in some cases, have led to the resignation of outside auditors, trading halts or share delistings by NASDAQ or the New York Stock Exchange, and investigations by the Division of Enforcement of the Securities and Exchange Commission. Many, but not all, of the companies involved in these scandals had entered the U.S. trading market through "reverse mergers" into publicly traded shells. The scandals have had a broad effect on Chinese companies with shares listed or quoted in the United States. Past or future accounting scandals in other Chinese companies could have a material adverse effect on the market for shares of our common stock and the interest of investors in our company or generally in PRC companies. In this event, the fluctuations in the market prices of our common stock could result in decreased liquidity and/or declining stock prices unrelated to our results of operation or business. In addition, as set forth in the risk factor immediately below, we do not have any audit committee financial experts on our Board of Directors and, accordingly, the risk of future errors in our financial statements is increased.
PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS MAY DELAY OR PREVENT A TAKE-OVER WHICH MAY NOT BE IN THE BEST INTERESTS OF OUR STOCKHOLDERS.
Provisions of our articles of incorporation and bylaws may be deemed to have anti-takeover effects, which include when and by whom special meetings of our stockholders may be called, and may delay, defer or prevent a takeover attempt. In addition, certain provisions of the Nevada Revised Statutes also may be deemed to have certain anti-takeover effects which include that control of shares acquired in excess of certain specified thresholds will not possess any voting rights unless these voting rights are approved by a majority of a corporation's disinterested stockholders.
In addition, our articles of incorporation authorize the issuance of up to 1,000,000 shares of preferred stock with such rights and preferences as may be determined from time to time by our Board of Directors, of which no shares are currently outstanding. Our Board of Directors may, without stockholder approval, issue preferred stock with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of our common stock. Collectively, these provisions may prevent a change of control of our company in situations where a change of control would be beneficial to our stockholders.
BECAUSE OUR STOCK CURRENTLY TRADES BELOW $5.00 PER SHARE, AND IS QUOTED ON THE OTC PINK TIER OF THE OTC MARKETS, OUR STOCK IS CONSIDERED A "PENNY STOCK" WHICH WILL ADVERSELY AFFECT ITS LIQUIDITY.
Our common stock is currently quoted on the OTC Pink Tier of the OTC Markets. As the trading price of our common stock is less than $5.00 per share, our common stock is considered a "penny stock," and trading in our common stock could be subject to the requirements of Rule 15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. The broker/dealer must make an individualized written suitability determination for the purchaser and receive the purchaser's written consent prior to the transaction. SEC regulations also require additional disclosure in connection with any trades involving a "penny stock", including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of securities in the secondary market because few broker or dealers are likely to undertake these compliance activities. In addition to the applicability of the penny stock rules, other risks associated with trading in penny stocks could also be price fluctuations and the lack of a liquid market.
A LARGE PORTION OF OUR OUTSTANDING COMMON SHARES ARE "RESTRICTED SECURITIES" AND FUTURE SALES OF THOSE SHARES BY OUR STOCKHOLDERS COULD ADVERSELY IMPACT THE MARKET PRICE OF OUR COMMON STOCK.
At July 28, 2018 we had 199,632,803 shares of common stock outstanding, of which approximately 77,755,305 shares are "restricted securities." Future sales of restricted common stock under Rule 144 or otherwise could negatively impact the market price of our common stock.
|
ITEM 1B.
|
UNRESOLVED STAFF COMMENTS
|
Not applicable for smaller reporting companies
.
All of our facilities described below are located in the Shuyuan Economic Zone of Qufu City, of the Shandong Province, including our traditional Chinese medicine facilities which were moved from 6 Youpeng Road of Qufu City to Shuyuan Economic Zone since the fiscal year ended April 30, 2016.
Our principal executive offices and stevioside manufacturing facility is approximately 64,000 square feet and situated on land to which we hold land use rights. The land use rights expire on March 14, 2054.
Qufu Shengwang owns an 89,000 square-foot facility which includes 30,000 square feet of manufacturing space, a 21,500 square feet warehouse and 38,000 square feet of office space. Qufu Shengwang occupies this facility pursuant to land use rights which expire in March 2054
.
Qufu Shengren occupies approximately 4.9 acres of land at no cost pursuant to a March 13, 2004 land use agreement with Shandong Group that expires on March 14, 2054. Located on this land is a 33,000 square feet of manufacturing facility we are converting to a high grade stevioside production facility, an 18,000 square feet of warehouse facility and approximately 3.74 acres (approximately 163,000 square feet) of vacant land.
|
ITEM 3.
|
LEGAL PROCEEDINGS
|
We are not a party to any pending legal proceedings, and to our knowledge, none of our officers, directors or principal stockholders are a party to any legal proceeding in which they have an interest adverse to us.
|
ITEM 4.
|
MINE SAFETY DISCLOSURES.
|
Not applicable for our operations.
PART III
|
ITEM 10.
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
|
Directors and Executive Officers
The following sets forth the names and ages of each of our executive officers and directors and the positions they hold:
|
Name
|
|
Age
|
|
Positions
|
|
Laiwang Zhang
|
|
|
56
|
|
President and Chairman
|
|
Dongdong Lin
|
|
|
44
|
|
Chief Executive Officer, Secretary and Director
|
|
Fanjun Wu
|
|
|
44
|
|
Chief Financial Officer
|
|
Chengxiang Yan
|
|
|
50
|
|
Director and General Manager of Qufu Natural Green
|
Laiwang Zhang
. Mr. Zhang has served as our President and Chairman since April 30, 2004 and he has served as Chairman of Qufu Natural Green since January 2003. Mr. Zhang also serves as Chairman of Pharmaceutical Corporation, a company engaged in the sale and distribution of Chinese herb medicines, since April 2000. In 1996, Mr. Zhang founded Shandong Group, a holding company with interests in companies operating in the areas of nutritional products, Chinese herb extracts, packaged products, animal health products, animal medicine and chemical products. Since April 1996, he has been General Manager of this company. From April 1992 to April 1996 Mr. Zhang served as Manager of our subsidiary Shengya Veterinary Medicine. From 1984 to 1992, Mr. Zhang served as President of Shandong Qufu Amylum Plant, a company that manufactures amylum. Mr. Zhang graduated from Shandong Technical University in 1984 with a Master's Degree in Engineering.
Dongdong Lin
. Ms. Lin has served as our Chief Executive Officer, Secretary and a member of our Board of Directors since February 2005. Ms. Lin served as Manager of the Technology Information Department of Pharmaceutical Corporation, a company engaged in the sale and distribution of Chinese herb medicines, from January 2003 to December 2004. Ms. Lin joined Shandong Group in 1996, serving as a supervisor from April 1998 to April 2000, and Manager of the Department of Export and Import from April 2000 to December 2002. Ms. Lin holds a Bachelor's Degree in Technology English from Haerbin Industry University and a Master's Degree in Economics from the China Academy of Social Science.
Fanjun Wu
. Ms. Wu has been our Chief Financial Officer since April 30, 2004. Since 1997, she has been employed by Qufu Natural Green, serving as Director of Finance from 1997 to 1998 and thereafter as Chief Financial Officer. From 1992 to 1996, Ms. Wu was a Director of Finance for our subsidiary Shengya Veterinary Medicine, which was owned by Shandong Group prior to our acquisition in 2004. Ms. Wu graduated from Qufu Industrial College in 1995 with the Bachelor's Degree in Accounting.
Chengxiang Yan
. Mr. Yan has been the General Manager of our subsidiary Qufu Natural Green since 1999 and a member of our Board of Directors since April 30, 2004 following our acquisition of Qufu Natural Green. From 1999 to 2004, Mr. Yan was the Director of the Marketing Department for that company. From 1996 to 1998, Mr. Yan was Director of the Marketing Department for Shandong Group, a holding company with interests in companies operating in the areas of nutritional products, Chinese herb extracts, packaged products, animal health products, animal medicine and chemical products, and from 1993 to 1996, he was Director of the Marketing Section for our subsidiary Shengya Veterinary Medicine owned by Shandong Group before our acquisition in 2004. Mr. Yan graduated from Shandong Agriculture University in 1993 with a Bachelor's Degree in Farming.
There are no family relationship between any of the executive officers and directors. Each director is elected at our annual meeting of stockholders and holds office until the next annual meeting of stockholders, or until his successor is elected and qualified.
Director Qualifications
The following is a discussion for each director of the specific experience, qualifications, attributes or skills that led to our conclusion that such person should be serving as a member of our Board of Directors as of the date of this annual report in light of our business and structure. In addition to their individual skills and backgrounds which are focused on our industry as well as financial and managerial experience, we believe that the collective skills and experience of our Board members are well suited to guide us as we continue to grow our company.
Liawang Zhang
. Mr. Zhang has over 18 years of professional experience in areas of nutritional products, Chinese herb extracts, packaged products, animal health products, animal medicine and chemical products. He has significant experience in starting companies within our industry segments and has many professional contacts which serve to promote our efforts to expand our business and operations.
Dongdong Lin
. Ms. Lin has over 22 years of operational experience in our industry.
Chengxiang Yan
. Mr. Yan has over 22 years of marketing experience in our industry and an advanced degree in farming.
Stockholders Agreement - Election of Directors
On February 5, 2009, as part of the Securities Purchase Agreement we entered into with WILD Flavors, we entered into a stockholders agreement with WILD Flavors and certain of our shareholders who owned approximately 34% of our common stock at the time the agreement was entered into. The stockholders agreement provides that so long as WILD Flavors owns at least 4,000,000 shares of our common stock, the parties to that agreement will vote or cause their shares of our common stock to be voted to elect two members of our Board of Directors designated by WILD Flavors and three members designated by our shareholders who are a party to the stockholders agreement. As of the date of this report, WILD Flavors has not designated anyone to be appointed to our Board of Directors.
Compliance with Section 16(a) of the Exchange Act
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us under Rule 16a-3(d) of the Securities Exchange Act of 1934 during the fiscal year ended April 30, 2018 and Forms 5 and amendments thereto furnished to us with respect to the fiscal year ended April 30, 2018, as well as any written representation from a reporting person that no Form 5 is required, we are not aware that any officer, director or 10% or greater shareholder failed to file on a timely basis, as disclosed in the aforementioned Forms, reports required by Section 16(a) of the Securities Exchange Act of 1934 during the fiscal year ended April 30, 2018.
Code of Business Conduct and Ethics
In April 2005, we adopted a Code of Ethics applicable to our Chief Executive Officer, principal financial and accounting officers and persons performing similar functions. A Code of Ethics is a written standard designed to deter wrongdoing and to promote:
|
|
-
|
|
honest and ethical conduct;
|
|
|
-
|
|
full, fair, accurate, timely and understandable disclosure in regulatory filings and public statements;
|
|
|
-
|
|
compliance with applicable laws, rules and regulations;
|
|
|
-
|
|
the prompt reporting violation of the code; and
|
|
|
-
|
|
accountability for adherence to the Code.
|
A copy of our Code of Ethics is filed as an exhibit to this annual report and we will provide a copy, without charge, to any person desiring a copy of the Code of Ethics, by written request to us at our principal offices, attention: Corporate Secretary.
Committees of the Board of Directors and Independence
Our Board of Directors has not yet established an Audit Committee, a Compensation Committee, a Nominating Committee or any committee performing a similar function. The functions of those committees are being undertaken by the entire board as a whole. Because we do not have any independent directors, our Board of Directors believes that the establishment of committees of the Board would not provide any benefits to our company and could be considered more form than substance.
We do not have a policy regarding the consideration of any director candidates which may be recommended by our stockholders, including the minimum qualifications for director candidates, nor has our Board of Directors established a process for identifying and evaluating director nominees. We have not adopted a policy regarding the handling of any potential recommendation of director candidates by our stockholders, including the procedures to be followed. Our Board has not considered or adopted any of these policies as we have never received a recommendation from any stockholder for any candidate to serve on our Board of Directors. Given that all our operations are located in the PRC and our lack of directors and officers insurance coverage, we do not anticipate that any of our stockholders will make such a recommendation in the near future. While there have been no nominations of additional directors proposed, in the event such a proposal is made, all members of our Board will participate in the consideration of director nominees.
None of our directors is an "audit committee financial expert" within the meaning of Item 407(d)(5) of Regulation S-K. In general, an "audit committee financial expert" is an individual member of the audit committee or Board of Directors who:
|
|
-
|
|
understands generally accepted accounting principles and financial statements;
|
|
|
-
|
|
is able to assess the general application of such principles in connection with accounting for estimates, accruals and reserves;
|
|
|
-
|
|
has experience preparing, auditing, analyzing or evaluating financial statements comparable to the breadth and complexity to our financial statements;
|
|
|
-
|
|
understands internal controls over financial reporting; and
|
|
|
-
|
|
understands audit committee functions.
|
Since the reverse acquisition of our company by Sunwin Tech in April 2004 our Board of Directors has been comprised of individuals who are members of our management or otherwise affiliated with our company. While we would prefer that one or more of our directors be an audit committee financial expert, none of our current directors have professional backgrounds in either finance or accounting.
All of our current management is located in the PRC and no member of our Board of Directors has previously served as an officer or a director of a U.S. public company. As a result of both the cultural differences between doing business in the PRC and doing business as a public company in the U.S., as well as the lack of experience of our Board of Directors with laws, rules and regulations which apply to public companies in the U.S., we are seeking to expand our Board of Directors to include qualified individuals who are also residents of the U.S. to serve as independent directors. At such time as we are able to attract additional members to our Board of Directors which include one or more independent directors, we intend to establish an Audit Committee of our Board of Directors. It is our intention that one or more of these independent directors will also qualify as an audit committee financial expert. Our securities are not quoted on a stock exchange that has requirements that a majority of our Board members be independent and we are not currently otherwise subject to any law, rule or regulation requiring that all or any portion of our Board of Directors include "independent" directors, nor are we required to establish or maintain an Audit Committee or other committee of our Board of Directors.
Board oversight in risk management
Risk is inherent with every business, and how well a business manages risk can ultimately determine its success. We face a number of risks, including liquidity risk, operational risk, strategic risk and reputation risk. Our Chief Executive Officer also serves as one of our three directors and we do not have a lead director. In the context of risk oversight, at the present stage of our operations we believe that our selection of one person to serve in both positions provides the Board with additional perspective which combines the operational experience of a member of management with the oversight focus of a member of the Board. The business and operations of our company are managed by our Board as a whole, including oversight of various risks that our company faces. Because our Board is comprised of members of our management, these individuals are responsible for both the day-to-day management of the risks we face as well as the responsibility for the oversight of risk management.
|
ITEM 11.
|
EXECUTIVE COMPENSATION.
|
Summary Compensation Table
The following table summarizes all compensation recorded by us in the fiscal years ended April 30, 2018 and 2017 for:
All compensation was paid in RMB and the amounts below reflect the conversion to U.S. dollar, rounded to the nearest whole dollar, based upon an exchange rate of RMB 6.58 to $1.00. For definitional purposes in this annual report these individuals are sometimes referred to as the "named executive officers" as that term is defined under Rule 3b-7 of the Securities Exchange Act of 1934. The value attributable to any option awards is computed in accordance with FASB ASC Topic 718.
|
Name and principal position
|
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
No equity
incentive plan
compensation
($)
|
|
|
Non-qualified
deferred
compensation
earnings
($)
|
|
|
All other
compensation
($)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laiwang Zhang (1)
|
2018
|
|
$
|
11,068
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
11,068
|
|
|
2017
|
|
$
|
9,555
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
9,555
|
|
|
Dongdong Lin (2)
|
2018
|
|
$
|
10,122
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
10,122
|
|
|
2017
|
|
$
|
9,045
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
9,487
|
|
|
(1)
|
Mr. Zhang has served as our President and Chairman of the Board of Directors since April 2004.
|
|
(2)
|
Ms. Lin has served as our Chief Executive Officer since February 2005.
|
|
|
|
Narrative Regarding Executive Compensation
Neither Mr. Zhang nor Ms. Lin is a party to an employment agreement with our company. Their compensation is determined by our Board of Directors, of which Mr. Zhang and Ms. Lin are members. The Board of Directors considers a number of factors in determining the compensation of Mr. Zhang and, Ms. Lin, including the scope of their duties and responsibilities to our company, compensation levels of executives with comparable duties in similar companies such as ours and the time they devote to our business. The Board of Directors did not consult with any experts or other third parties in establishing the compensation for Mr. Zhang or Ms. Lin. The amount of compensation payable to either Mr. Zhang or Ms. Lin can be changed at any time at the discretion of the Board of Directors.
We are required to contribute a portion of our employees' total salaries to the Chinese government's social insurance funds, including medical insurance, unemployment insurance and job injuries insurance, and a housing assistance fund, in accordance with relevant regulations. Mr. Zhang and Ms. Lin are covered by these government sponsored programs.
Outstanding Equity Awards at Fiscal Year End
The following table provides information concerning unexercised options, stock that has not vested and equity incentive plan awards for each named executive officer outstanding as of April 30, 2018:
|
OPTION AWARDS
|
|
STOCK AWARDS
|
|
|
Name
|
Number of securities underlying unexercised options (#) exercisable
|
|
Number of securities underlying unexercised options (#) unexercisable
|
|
Equity incentive plan awards: Number of securities underlying unexercised unearned options (#)
|
|
Option exercise price ($)
|
|
Option expiration
date
|
|
Number of shares or units of stock that have not vested (#)
|
|
Market value of shares or units of stock that have not vested ($)
|
|
Equity incentive plan awards: Number of unearned shares, units or other rights
that have not vested (#)
|
|
Equity incentive plan awards: Market or payout value of unearned shares, units or other rights
that have
not vested
(#)
|
|
|
Laiwang Zhang
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
Dongdong Lin
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
2005 Equity Compensation Plan
On March 23, 2005, our Board of Directors authorized and adopted our 2005 Equity Compensation Plan. The purpose of the plan is to encourage stock ownership by our officers, directors, key employees and consultants, and to give these persons a greater personal interest in the success of our business and an added incentive to continue to advance and contribute to us. We have currently reserved 5,000,000 of our authorized but unissued shares of common stock for issuance under the plan, and a maximum of 5,000,000 shares may be issued, unless the plan is subsequently amended (subject to adjustment in the event of certain changes in our capitalization), without further action by our Board of Directors and stockholders, as required. Subject to the limitation on the aggregate number of shares issuable under the plan, there is no maximum or minimum number of shares as to which a stock grant or plan option may be granted to any person. Shares used for stock grants and plan options may be authorized and unissued shares or shares reacquired by us, including shares purchased in the open market. Shares covered by plan options which terminate unexercised will again become available for grant as additional options, without decreasing the maximum number of shares issuable under the plan, although such shares may also be used by us for other purposes. As of July 31, 2018, there are no shares available to be issued or options outstanding under the 2005 Equity Compensation Plan.
2006 Equity Compensation Plan
On February 7, 2006, our Board of Directors authorized and adopted our 2006 Equity Compensation Plan. The purpose of the plan is to encourage stock ownership by our officers, directors, key employees and consultants, and to give such persons a greater personal interest in the success of our business and an added incentive to continue to advance and contribute to us. Our Board of Directors administers the 2006 Equity Compensation Plan including, without limitation, the selection of the persons who will be awarded stock grants and granted options, the type of options to be granted, the number of shares subject to each Option and the exercise price. We have currently reserved 6,200,000 of our authorized but unissued shares of common stock for issuance under the 2006 Equity Compensation Plan, and a maximum of 6,200,000 shares may be issued, unless the plan is subsequently amended (subject to adjustment in the event of certain changes in our capitalization). Subject to the limitation on the aggregate number of shares issuable under the plan, there is no maximum or minimum number of shares as to which a stock grant or plan option may be granted to any person. Shares used for stock grants and plan options may be authorized and unissued shares or shares reacquired by us, including shares purchased in the open market. Shares covered by plan options which terminate unexercised will again become available for grant as additional options, without decreasing the maximum number of shares issuable under the 2006 Equity Compensation Plan, although such shares may also be used by us for other purposes. As of July 31, 2018, there are no shares available to be issued or options outstanding under the 2006 Equity Compensation Plan.
2012 Equity Compensation Plan
On August, 2012, our Board of Directors authorized and adopted our 2012 Equity Compensation Plan. The purpose of the plan is to encourage stock ownership by our officers, directors, key employees and consultants, and to give these persons a greater personal interest in the success of our business and an added incentive to continue to advance and contribute to us. We have currently reserved 10,000,000 of our authorized but unissued shares of common stock for issuance under the plan, and a maximum of 10,000,000 shares may be issued, unless the plan is subsequently amended (subject to adjustment in the event of certain changes in our capitalization), without further action by our Board of Directors and stockholders, as required. Subject to the limitation on the aggregate number of shares issuable under the plan, there is no maximum or minimum number of shares as to which a stock grant or plan option may be granted to any person. Shares used for stock grants and plan options may be authorized and unissued shares or shares reacquired by us, including shares purchased in the open market. Shares covered by plan options which terminate unexercised will again become available for grant as additional options, without decreasing the maximum number of shares issuable under the plan, although such shares may also be used by us for other purposes. As of July 31, 2018, there are no shares available to be issued or options outstanding under the 2012 Equity Compensation Plan.
2015 Equity Compensation Plan
On May 11, 2015, our board of directors authorized our 2015 Equity Compensation Plan (the "2015 Plan"). The purpose of the 2015 Plan is to enable us to offer to our employees, officers, directors and consultants, whose past, present and/or potential contributions to our company have been, are or will be important to our success, an opportunity to acquire a proprietary interest in our company. We have initially reserved 25,000,000 shares of our common stock for issuance upon awards to be made under the 2015 Plan. The maximum number of shares of common stock which may be subject to awards under the 2015 Plan made to individuals who are neither officers, directors nor employees of our company is limited to 2,500,000 shares. The 2015 Plan also contains an "evergreen formula" pursuant to which the number of shares of common stock available for issuance under the 2015 Plan will automatically increase on the first trading day of January each calendar year during the term of the 2015 Plan beginning with calendar year 2016 providing that we have sufficient authorized but unissued and unreserved shares of our common stock available, by an amount equal to 1.5% of the total number of shares of common stock outstanding on the last trading day in December of the immediately preceding calendar year, up to a maximum annual increase of 375,000 shares of common stock. As of July 31, 2018, there are no shares available to be issued or options outstanding under the 2015 Equity Compensation Plan.
Director Compensation
We do not have a policy establishing compensation arrangements for members of our Board of Directors and no Board member received any compensation for his or her services during the fiscal year ended April 30, 2018 other than their regular employee compensation.
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ITEM 12.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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On July 28, 2018 we had 199,632,803 shares of common stock issued and outstanding. The following table sets forth information known to us as of July 28, 2018 relating to the beneficial ownership of shares of our common stock by:
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-
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each person who is known by us to be the beneficial owner of more than five percent of our outstanding common stock;
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-
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each director;
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-
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each named executive officer; and
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-
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all named executive officers and directors as a group.
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Unless otherwise indicated, the business address of each person listed is in care of 6 Shengwang Avenue, Qufu, Shandong, China 273100. We believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock shown as being owned by them. Under securities laws, a person is considered to be the beneficial owner of securities owned by them (or certain persons whose ownership is attributed to them) and that can be acquired by them within 60 days from the that date, including upon the exercise of options, warrants or convertible securities. We determine a beneficial owner's percentage ownership by assuming that options, warrants or convertible securities that are held by them, but not those held by any other person, and which are exercisable within 60 days of the that date, have been exercised or converted.
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NAME OF BENEFICIAL OWNER
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AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
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% OF CLASS
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Laiwang Zhang
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3,457,154
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1.7
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%
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Dongdong Lin
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4,984,108
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2.5
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%
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Fanjun Wu
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1,732,052
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0.9
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%
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Chengxiang Yan
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-
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-
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%
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All officers and directors as a group (four persons)
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10,173,314
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5.1
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%
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Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth securities authorized for issuance under any equity compensation plans approved by our shareholders as well as any equity compensation plans not approved by our shareholders as of April 30, 2017.
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Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)
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Weighted average exercise price of outstanding options, warrants and rights (b)
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Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
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Plan category
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Plans approved by our shareholders:
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2005 Equity Compensation Plan
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0
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N/A
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0
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2006 Equity Compensation Plan
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0
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N/A
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0
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2008 Equity Compensation Plan
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0
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N/A
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0
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2012 Equity Compensation Plan
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0
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N/A
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0
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2015 Equity Compensation Plan
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0
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N/A
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0
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Plans not approved by shareholders:
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None.
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ITEM 13.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
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Related Party Transactions
From time to time we engage in transactions with related parties. The following is a summary of the related party transactions reflected on our consolidated financial statements as of April 30, 2018 and which have occurred through the date of this report:
From time to time we sell high-grade stevia products to Qufu Shengwang Import and Export Corporation, a Chinese entity owned by our Chairman. During the fiscal years ended April 30, 2018 and 2017, sales to this related party were $3,614,521 and $5,855,594, respectively. As of April 30, 2018 and 2017, the related party accounts receivable balances were $2,576,944 and $339,270, respectively.
From time to time, we received advances from related parties and advance funds to related parties for working capital purposes. In the fiscal years ended April 30, 2018 and 2017, we received advances from related parties for working capital totaled $6,076,535 and $2,613,077 respectively. Repayments made to related parties totaled $3,708,072 and $3,848,626, respectively. During the fiscal years ended April 30, 2018 and 2017, interest expense related to related party payables amounted to $104,437 and $138,092, respectively, which were included in interest expense in the accompanying consolidated statements of operations. A portion of the interest expense pertains to the advances of $743,196 (RMB5,000,000) and $1,189,114 (RMB8,000,000) as of April 30, 2018 and 2017, respectively, from Shangdong Shengwang Pharmaceutical Co., Ltd. ("Pharmaceutical Corporation"), a Chinese entity owned by our Chairman, Mr. Laiwang Zhang. These advances bear interest at the rate of 6.3% per annum. Other advances made to the Company bear no interest and are payable on demand. As of April 30, 2018, the balance we owed to Pharmaceutical Corporation, Qufu Shengwang Import and Export, Mr. Weidong Chai, a management member of Qufu Shengren Pharmaceutical Co., Ltd., and Mr. Weidong Chai amounted $2,280,266, $103,169 and $175,781, respectively. As of April 30, 2017, the balance we owed to Qufu Shengwang Import and Export and Mr. Weidong Chai totaled $21,878 and $134,002, respectively, the balance due from Pharmaceutical Corporation was $30,568, which was repaid on July 28, 2017.
Director Independence
None of our directors are considered independent within The NASDAQ Stock Market's director independence standards pursuant to Marketplace Rule 5605.
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ITEM 14.
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PRINCIPAL ACCOUNTANT FEES AND SERVICES.
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RBSM LLP served as our independent registered public accounting firm for the fiscal years ended April 30, 2018 and 2017. The following table shows the fees that were billed for the audit and other services provided by such firm for the fiscal years ended April 30, 2018 and 2017.
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2018
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2017
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Audit Fees
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$
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90,000
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$
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90,000
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Audit - Related Fees
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-
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-
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Tax Fees
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-
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-
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All Other Fees
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-
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-
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$
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90,000
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$
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90,000
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Audit Fees
- This category includes the audit of our annual financial statements, review of financial statements included in our quarterly reports on Form 10-Q and services that are normally provided by the independent auditors in connection with engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.
Audit-Related Fees
- This category consists of assurance and related services by the independent auditors that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under Audit Fees." The services for the fees disclosed under this category include consultation regarding our correspondence with the SEC and other accounting consulting.
Tax Fees
- This category consists of professional services rendered by our independent auditors for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice.
All Other Fees
- This category consists of fees for other miscellaneous items.
Our Board of Directors has adopted a procedure for pre-approval of all fees charged by our independent auditors. Under the procedure, the Board approves the engagement letter with respect to audit, tax and review services. Other fees are subject to pre-approval by the Board, or, in the period between meetings, by a designated member of Board. Any such approval by the designated member is disclosed to the entire Board at the next meeting.
NOTE 1 - ORGANIZATION, NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Sunwin Stevia International, Inc. ("Sunwin Stevia International"), a Nevada corporation, and its subsidiaries are referred to in this report as "we", "us", "our", "Sunwin" or the "Company".
We sell stevioside, a natural sweetener, as well as herbs used in traditional Chinese medicines and veterinary products. Substantially all of our operations are located in the People's Republic of China (the "PRC"). We have built an integrated company with the sourcing and production capabilities designed to meet the needs of our customers.
For the fiscal years ended April 30, 2018 and 2017, our operations are organized into two operating segments related to our Stevioside and Chinese Medicine product lines, and subsidiaries included in continuing operations consisted of the following:
- Sunwin Stevia International;
- Qufu Natural Green Engineering Co., Ltd. ("Qufu Natural Green"), a wholly owned by Sunwin Stevia International;
- Qufu Shengren Pharmaceutical Co., Ltd. ("Qufu Shengren"), a wholly owned by Qufu Natural Green;
- Qufu Shengwang Stevia Biology and Science Co., Ltd. ("Qufu Shengwang"), a wholly owned by Qufu Natural Green; and
- Sunwin USA, LLC. ("Sunwin USA"), a wholly owned by Sunwin Stevia International.
Stevioside Segment
In our Stevioside segment, we produce and sell a variety of purified steviol glycosides with rebaudioside A and stevioside as the principal components, an all natural, low calorie sweetener, and OnlySweet, a stevioside based table top sweetener.
Chinese Medicine Segment
In our Chinese Medicine Segment, we manufacture and sell a variety of traditional Chinese medicine formula extracts which are used in products made for use by both humans and animals.
Qufu Shengwang
In fiscal 2009, Qufu Natural Green acquired a 60% interest in Qufu Shengwang from its shareholder, Shandong Group, for $4,026,851. The purchase price represented 60% of the value of the net tangible assets of Qufu Shengwang as of April 30, 2008. Shandong Group is owned by Laiwang Zhang, our President and Chairman of the Board of Directors. Qufu Shengwang manufactures and sells stevia -based fertilizers and feed additives.
On September 30, 2011, Qufu Shengwang purchased the 40% equity interest in Qufu Shengwang owned by our Korean partner, Korea Stevia Company, Limited, for $626,125 in cash, and as a result of this repurchase transaction we now own 100% equity interest in all of the net assets of our subsidiary Qufu Shengwang. Therefore, the non-controlling interest of $2,109,028 in our balance sheet as of April 30, 2012 has been eliminated to reflect our 100% interest in Qufu Shengwang.
On July 1, 2012, Qufu Shengwang entered into the Cooperation Agreement with Hegeng (Beijing) Organic Farm Technology Co, Ltd. ("Hegeng"), a Chinese manufacturer and distributor of bio-fertilizers and pesticides, to jointly develop bio-bacterial fertilizers based on the residues from our stevia extraction. Under the Cooperation Agreement, Hegeng provides strain and formula that we apply to the stevia residues to produce bio-bacterial fertilizers in the current facility of Qufu Shengwang. The bio-bacterial fertilizers will be distributed under Qufu Shengwang's name. No additional investment in the facility would be required. During the third quarter of fiscal year 2014, we decided to suspend the agreement with Hegeng due to a lack of sales since the reaction to the products was lower than anticipated in fertilizer market. Currently we use these assets to manufacture a variety of traditional Chinese medicine formula extracts. We started production in last quarter of fiscal year 2014.
Qufu Shengren
In fiscal year 2009, Qufu Natural Green acquired Qufu Shengren for $3,097,242. The purchase price was equal to the value of the assets of Qufu Shengren as determined by an independent asset appraisal in accordance with asset appraisal principles in the PRC. Prior to being acquired by us, Qufu Shengren was engaged in the production and distribution of bulk drugs and pharmaceuticals. Subsequent to the acquisition, Qufu Shengren produces and distributes steviosides with a full range of grades from rebaudioside-A 10 to 99.
Sunwin USA
In fiscal year 2009, we entered into a distribution agreement with WILD Flavors to assist our 55% owned subsidiary, Sunwin USA, in the marketing and worldwide distribution of our stevioside-based sweetener products and issued WILD Flavors a 45% interest in Sunwin USA.
On August 8, 2012, we entered into an Exchange Agreement with WILD Flavors pursuant to which we purchased its 45% membership interest in Sunwin USA for an aggregate consideration of approximately $1,625,874, which includes the issuance of 7,666,666 shares of our common stock valued at approximately $1,533,333 and a cash payment of $92,541. The transaction closed on August 20, 2012. On August 22, 2012, we issued 7,666,666 shares of our common stock and paid $92,541 cash to WILD Flavors. The net tangible assets of Sunwin USA were reduced from $1,825,804 to $1,625,874 as a result of the application of generally accepted accounting principles ("U.S. GAAP") which requires elimination of the difference between the purchase price of the 45% membership interest in Sunwin USA and cost basis of the intangible assets recorded by Sunwin USA. Intangible assets include the product development and supply chain for OnlySweet.
Under the terms of the agreement, WILD Flavors assumed certain pre-closing obligations of Sunwin USA totaling approximately $694,000, including trade accounts receivable, loans, health care and monthly expenses of an employee, potential chargebacks, bank fees and broker commissions incurred prior to the closing date. The agreement also contained customary joint indemnification and general releases. As a result of this transaction, we began consolidating the operations of Sunwin USA from the date of acquisition (August 20, 2012).
In addition to the Exchange Agreement, on August 8, 2012 we entered into the following additional agreements with WILD Flavors or its affiliate:
- We entered into an Amendment to Operating Agreement with WILD Flavors pursuant to which we are now the sole manager of Sunwin USA and certain sections of the original agreement dated April 29, 2009 were cancelled as they were no longer relevant following our purchase of the minority interest in Sunwin USA described above;
- We entered into a Termination of Distribution Agreement with WILD Flavors and Sunwin USA pursuant to which the Distribution Agreement dated February 5, 2009 was terminated; and
- We entered into a Distributorship Agreement with WILD Procurement Gmbh, a Swiss corporation ("WILD Procurement") which is an affiliate of WILD Flavors. Under the terms of this agreement, we appointed WILD Procurement as a non-exclusive world-wide distributor for the resale of our stevia products. There are no minimum purchase quantities under the agreement, and the pricing and terms of each order will be negotiated by the parties at the time each purchase order is placed. The agreement restricts WILD Procurement from purchasing steviosides or other forms of stevia that are included in our products from sources other than our company under certain circumstances. In addition, at such time as we desire to offer new products, we must first offer WILD Procurement the non-exclusive right to distribute those products and the parties will have 60 days to reach mutually agreeable terms. The agreement contains certain representations by us as to the quality of the products we may sell WILD Procurement and the products' compliance with applicable laws and good manufacturing practices, as well as customary confidentiality and indemnification provisions.
In the event WILD Procurement should fund research on stevia used in food, beverage or dietary supplement applications, and as a result of this research it develops new intellectual property, such intellectual property shall be the sole property of WILD Procurement. In the event we should jointly fund research, any new intellectual property developed from this effort will be jointly owned and each party will have the right to use the developed intellectual property in stevia-based products.
The agreement is for an initial term of 12 months and will automatically renew for successive 12 month terms unless the agreement has been terminated by either party upon 45 days prior written notice. There are no assurances any purchase orders will be placed under the terms of the Distribution Agreement. The agreement may also be terminated by either party upon a material breach by the other party, or upon the filing of a bankruptcy petition, both subject to certain cure periods. In the event the agreement is terminated, WILD Procurement has the right to continue to distribute our products on a non-exclusive basis for 24 months upon terms and conditions to be negotiated by the parties. Currently, WILD still is one of our customers keeping to purchase enzyme treated products from us.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of Sunwin and all our wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and with the rules and regulations of the U.S. Securities and Exchange Commission for financial information. The Company's consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
.
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the allowance for doubtful accounts, the allowance for obsolete inventory, the useful life of property and equipment and intangible assets, assumptions used in assessing impairment of long-term assets and valuation of deferred tax assets, and the value of stock-based compensation. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
We consider all highly liquid investments with maturities of three months or less at the time of purchase to be cash and equivalents. As of April 30, 2018 and 2017, we held $1,100,052 and $30,781 of our cash and cash equivalents with commercial banking institutions in the PRC, respectively, and $696 and $20,335 with banks in the United States. In the PRC, there is no equivalent federal deposit insurance as in the United States, therefore the amounts held in banks in the PRC are not insured. We have not experienced any losses in such bank accounts through April 30, 2018.
ACCOUNTS RECEIVABLE
Accounts receivable and other receivable are reported at net realizable value. We have established an allowance for doubtful accounts based upon factors pertaining to the credit risk of specific customers, historical trends, and other information. Delinquent accounts are written off when it is determined that the amounts are uncollectible after exhaustive efforts on collection. As of April 30, 2018 and 2017, the allowance for doubtful accounts was $191,865 and $1,182,632, respectively.
INVENTORIES
Inventories, consisting of raw materials, work in process, and finished goods related to our products, are stated at the lower of cost and net realizable value that can be estimated utilizing the weighted moving average method. A reserve is established when management determines that certain slow-moving inventories may be sold at below book value. These reserves are recorded based on estimates. As of April 30, 2018 and 2017, the Company recorded a reserve for slow-moving inventories of $0 and $163,048, respectively. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, the Company will record a write down for inventories for the difference between the cost and the lower of cost or estimated net realizable value. As of April 30, 2018 and 2017, the Company wrote down inventories of $235,258 and $0, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated economic lives of the assets, which range from three to twenty years. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. In accordance with Accounting Standards Codification ("ASC"), 360-10-35-17 of the Financial Accounting Standards Board (FASB), we examine the possibility of decreases in the value of property and equipment when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Included in property and equipment is construction-in-progress which consisted of factory improvements and machinery pending installation and included the costs of construction, machinery and equipment, and or any interest charges arising from borrowings used to finance these assets during the period of construction or installation of the assets if applicable. No provision for depreciation is made on construction-in-progress until such time as the relevant assets are completed and ready for their intended use.
LONG-LIVED ASSETS
In accordance with ASC 360, we review and evaluate our long-lived assets, including property and equipment, intangible assets, and land use rights, for impairment or when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. An impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the assets, including goodwill, if any. An impairment loss is measured and recorded based on discounted estimated future cash flows. In estimating future cash flows, assets are grouped at the lowest level for which there is identifiable cash flows that are largely independent of future cash flows from other asset groups. Our estimates of future cash flows are based on numerous assumptions and it is possible that actual future cash flows will be significantly different than the estimates. Based on our evaluation, we have determined certain long-lived assets that are no longer useful for our operations, and we recorded a loss on disposition of property and equipment of $303,377 and $122,285 for the fiscal years ended April 30, 2018 and 2017, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
We follow the ASC Section 825-10-50-10 for disclosures regarding the fair value of financial instruments and have adopted ASC Section 820-10-35-37 to measure the fair value of our financial instruments. ASC Section 820-10-35-37 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. The adoption of ASC Section 820-10-35-37 did not have an impact on our financial position or operating results, but did expand certain disclosures.
ASC Section 820-10-35-37 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC Section 820-10-35-37 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
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Level 1:
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Observable inputs such as quoted market prices in active markets for identical assets or liabilities;
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Level 2:
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Observable market-based inputs or unobservable inputs that are corroborated by market data;
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Level 3:
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Unobservable inputs for which there is little or no market data, which require the use of the reporting entity's own assumptions.
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The carrying amounts of our financial assets and liabilities, such as cash, accounts receivable, loans receivable, prepayments and other current assets, accounts payable and accrued expenses, and taxes payable, approximate their fair values because of the short maturity of these instruments.
TAXES PAYABLE
We are required to charge for and to collect value added taxes (VAT) on our sales on behalf of the PRC tax authority. We record VAT that we billed our customers as VAT payable. In addition, we are required to pay value added taxes on our primary purchases. We record VAT that charged by our vendors as VAT receivable. We are required to file VAT return on a monthly basis with the PRC tax authority, which we are entitled to claim the VAT that we charged by vendors as VAT credit and these credits can be applied to our VAT payable that we billed our customers. Accordingly, these VAT payable and receivable are presented as net amounts for financial statement purposes. Taxes payable as of April 30, 2018 and 2017 amounted to $199,644 and $121,127, respectively, consisted primarily of VAT taxes.
REVENUE RECOGNITION
Pursuant to the guidance of ASC Topic 605, we record revenue when persuasive evidence of an arrangement exists, product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured.
INCOME TAXES
The Company has adopted Accounting Standards Codification subtopic 740-10,
Income Taxes
("ASC 740-10") which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are recorded to reduce the deferred tax assets to an amount that it is more likely than not be realized.
We file federal and state income tax returns in the United States for our corporate operations pursuant to the U.S. Internal Revenue Code of 1986, as amended, and file separate foreign tax returns for our Chinese subsidiaries pursuant to the China's Unified Corporate Income Tax Law.
We apply the provisions of ASC 740-10-50, "Accounting for Uncertainty in Income Taxes", which provides clarification related to the process associated with accounting for uncertain tax positions recognized in our consolidated financial statements. Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company's liability for income taxes. Any such adjustment could be material to the Company's results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. As of April 30, 2018, the Company had no uncertain tax positions, and will continue to evaluate for uncertain positions in the future.
BASIC AND DILUTED LOSS PER SHARE
Pursuant to ASC 260-10-45, basic loss per common share is computed by dividing loss available to common shareholders by the weighted average number of shares of common stock outstanding for the periods presented. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the income of us, subject to anti-dilution limitations. The following table presents a reconciliation of basic and diluted net income per ordinary share:
|
|
|
For Fiscal Years Ended April 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net loss attributable to Sunwin Stevia International, Inc.
|
|
$
|
(4,714,795
|
)
|
|
$
|
(3,898,024
|
)
|
|
Numerator for basic EPS, loss applicable to common stockholders
|
|
$
|
(4,714,795
|
)
|
|
$
|
(3,898,024
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share - weighted average number of common shares outstanding
|
|
|
199,632,803
|
|
|
|
199,632,803
|
|
|
Stock awards, options, and warrants
|
|
|
-
|
|
|
|
-
|
|
|
Denominator for diluted earnings per share - weighted average number of common shares outstanding
|
|
|
199,632,803
|
|
|
|
199,632,803
|
|
|
Basic and diluted loss per common share:
|
|
|
|
|
|
|
|
|
|
Loss per share - basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
FOREIGN CURRENCY TRANSLATION
Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. Transactions and balances in other currencies are converted into U.S. dollars in accordance with ASC Section 830-20-35 and are included in determining net income or loss.
The reporting currency of the Company is the U.S. dollar. The functional currency of the parent company is the U.S. dollar and the functional currency of the Company's operating subsidiaries is the Chinese Renminbi ("RMB"). In accordance with ASC 830-20-35, the consolidated financial statements were translated into United States dollars using balance sheet date rates of exchange for assets and liabilities, and average rates of exchange for the period for the statements of operations and cash flows. Equity accounts were stated at their historical rate. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in other comprehensive income or loss.
RMB is not a fully convertible currency. All foreign exchange transactions involving RMB must take place either through the People's Bank of China (the "PBOC") or other institutions authorized to buy and sell foreign exchange. The exchange rate adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC, which are determined largely by supply and demand. Translation of amounts from RMB into United States dollars ("$") was made at the following exchange rates for the respective periods:
|
As of April 30, 2018
|
RMB 6.33 to $1.00
|
|
As of April 30, 2017
|
RMB 6.90 to $1.00
|
|
Year ended April 30, 2018
|
RMB 6.58 to $1.00
|
|
Year ended April 30, 2017
|
RMB 6.76 to $1.00
|
COMPREHENSIVE LOSS
Comprehensive loss is comprised of net loss and all changes to the statements of stockholders' equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive loss for fiscal years ended April 30, 2018 and 2017 included net loss and unrealized gains (losses) from foreign currency translation adjustments.
CONCENTRATIONS OF CREDIT RISK
Substantially all of our operations are carried out in the PRC. Accordingly, our business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC's economy. Our operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America. Our results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and trade accounts receivable. We place our cash with high credit quality financial institutions in the United States and China. As of April 30, 2018 and 2017, we had $1,100,052 and $30,781 cash held in PRC bank accounts, respectively, which are not insured. We have not experienced any losses in such accounts through April 30, 2018.
Almost all of our sales are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, we believe that the concentration of credit risk with respect to trade accounts receivable is limited due to generally short payment terms. We also perform ongoing credit evaluations of our customers to help further reduce potential credit risk.
STOCK-BASED COMPENSATION
Stock-based compensation is accounted for based on the requirements of the Share-Based Payment topic of ASC 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). ASC 718 also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred in the accompanying consolidated statements of operations and comprehensive loss. Research and development costs are incurred on a project specific basis. Research and development costs were $846,046 and $492,978 for fiscal years ended April 30, 2018 and 2017, respectively.
SHIPPING COSTS
Shipping costs are included in selling expenses and totaled $317,002 and $433,268 for the fiscal years ended April 30, 2018 and 2017, respectively.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on net earnings and financial position.
SEGMENT REPORTING
The Company uses the "management approach" in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company's chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company's reportable segments. The Company's chief operating decision maker has been identified as the chief executive officer of the Company who reviews financial information of separate operating segments based on U.S. GAAP. The chief operating decision maker now reviews results analyzed by customer. This analysis is only presented at the revenue level with no allocation of direct or indirect costs. Consequently, the Company has determined that it has only one operating segment.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2014, the FASB issued ASU 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity". The amendments in the ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance in U.S. GAAP. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. The Company has disclosed the discontinued of operations of its wholly owned subsidiary, Sunwin Tech Group, Inc. ("Sunwin Tech") under the guidance of ASU 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity".
In May 2014, the FASB issued ASU 2014-09, "
Revenue from contracts with Customers (Topic 606)
". Under ASU 2014-09, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for fiscal years and interim periods within those years beginning after December 15, 2017, and early adoption is permitted for periods beginning after December 15, 2016. The Company elected to adopt the new standard effective May 1, 2018. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). The Company elected adopting the standard using the full retrospective method to restate prior reporting period presented. The Company has identified its revenue streams and assessed each for the impacts. The Company expects the adoption of Topic 606 will not have a material impact in the timing or amount of revenue recognized, including the presentation of revenues in the Company's consolidated statements of income and comprehensive loss.
In January 2016, the FASB issued ASU No. 2016 01, Financial Instruments — Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. The guidance is effective in the first quarter of fiscal 2019. Early adoption is permitted for the accounting guidance on financial liabilities under the fair value option. The Company is currently evaluating the impact of the new guidance on its financial statements.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash". These amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company elected to adopt the standard effective May 1, 2018 and anticipates this standard will not have a material impact on the Company's consolidated statements of cash flows.
On May 1, 2017, the Company adopted ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU No. 2015-11 changes the inventory measurement principle for entities using the FIFO or average cost methods. For entities utilizing one of these methods, the inventory measurement principle changed from the lower of cost or market to the lower of cost and net realizable value. The Company follows the FIFO and average cost methods, and the adoption of this ASU did not have a material effect on our consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting (ASU 2016-09), which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This pronouncement is effective for annual reporting periods beginning after December 15, 2017. The Company will adopt this standard on May 1, 2018 and the adoption will not have a material impact on the Company's financial statements.
On December 22, 2017 the SEC staff issued Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act (the TCJA). SAB 118 provides a measurement period that should not extend beyond one year from the enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the accounting under ASC 740 is complete. To the extent that a company's accounting for certain income tax effects of the TCJA is incomplete but for which they are able to determine a reasonable estimate, it must record a provisional amount in the financial statements. Provisional treatment is proper in light of anticipated additional guidance from various taxing authorities, the SEC, the FASB, and even the Joint Committee on Taxation. If a company cannot determine a provisional amount to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the TCJA. The Company has applied this guidance to its financial statements.
In February 2018, the FASB issued ASU 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income". These amendments provide financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of ASU 2018-02 is permitted, including adoption in any interim period for the public business entities for reporting periods for which financial statements have not yet been issued. The amendments in this ASU should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company is currently evaluating the impact of the adoption of ASU No. 2018-02 on its consolidated financial statements.
In March 2018, the FASB issued ASU 2018-05, "Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118". The amendments in this ASU add SEC paragraphs pursuant to the SEC Staff Accounting Bulletin No. 118, which expresses the view of the staff regarding application of Topic 740, Income Taxes, in the reporting period that includes December 22, 2017 - the date on which the Tax Cuts and Jobs Act was signed into law. The amendments are effective upon addition to the FASB Accounting Standards Codification. The Company is currently evaluating the impact of the adoption of this guidance on the Consolidated Financial Statements.
The FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory" which removes the prohibition in Accounting Standards Codification ("ASC") 740 against the immediate recognition of current and deferred income tax effects of intra-entity transfers of assets other than inventory. The amendments in this ASU are effective for the Company on May 1, 2018. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. The ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company adopted the ASU on May 1, 2018. There was no impact to the Company's consolidated financial statements and related disclosures upon adoption.
A variety of proposed or otherwise potential accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and preliminary nature of those proposed standards, we have not determined whether implementation of such proposed standards would be material to our consolidated financial statements.
GOING CONCERN
Our consolidated financial statements have been prepared assuming we will continue as a going concern. The report of our independent registered public accounting firm on our consolidated financial statements for the year ended April 30, 2018 contained a qualification as to our ability to continue as a going concern. For the year ended April 30, 2018, the Company has incurred a net loss of approximately $4.7 million. The Company also has an accumulated deficit of $33.8 million and its cash balance and revenues generated are not currently sufficient and cannot be projected to cover operating expenses for the next twelve months from the date of this report. These factors raise doubt as to the ability of the Company to continue as a going concern. Management's plans include attempting to improve its business profitability, its ability to generate sufficient cash flow from its operations to meet its operating needs on a timely basis, obtain additional working capital funds through debt and equity financings, and restructure on-going operations to eliminate inefficiencies to raise cash balance in order to meet its anticipated cash requirements for the next twelve months from the date of this report. However, there can be no assurance that these plans and arrangements will be sufficient to fund the Company's ongoing capital expenditures, working capital, and other requirements. Management intends to make every effort to identify and develop sources of funds. The outcome of these matters cannot be predicted at this time. There can be no assurance that any additional financings will be available to the Company on satisfactory terms and conditions, if at all.
The ability of the Company to continue as a going concern is dependent upon its ability to achieve profitable operations and raise additional capital. The accompanying consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amount or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
NOTE 2 - INVENTORIES
As of April 30, 2018 and 2017, inventories consisted of the following:
|
|
|
April 30, 2018
|
|
|
April 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
8,803,685
|
|
|
$
|
4,087,036
|
|
|
Work in process
|
|
|
1,357,484
|
|
|
|
1,802,782
|
|
|
Finished goods
|
|
|
2,403,402
|
|
|
|
3,089,703
|
|
|
|
|
|
12,564,571
|
|
|
|
8,979,521
|
|
|
Less: reserve for obsolete inventory
|
|
|
-
|
|
|
|
(163,048
|
)
|
|
|
|
$
|
12,564,571
|
|
|
$
|
8,816,473
|
|
NOTE 3 - PROPERTY AND EQUIPMENT
As of April 30, 2018 and 2017, property and equipment consisted of the following:
|
|
|
April 30, 2018
|
|
|
April 30, 2017
|
|
|
Estimated Life
|
|
|
|
|
|
|
|
Office equipment
|
3-10 Years
|
|
$
|
75,821
|
|
|
$
|
67,091
|
|
|
Auto and trucks
|
2-10 Years
|
|
|
660,926
|
|
|
|
446,968
|
|
|
Manufacturing equipment
|
2-20 Years
|
|
|
5,638,206
|
|
|
|
5,109,816
|
|
|
Buildings
|
5-20 Years
|
|
|
9,224,911
|
|
|
|
8,136,080
|
|
|
Construction in process
|
|
|
|
661,111
|
|
|
|
815,471
|
|
|
|
|
|
|
16,260,975
|
|
|
|
14,575,426
|
|
|
Less: accumulated depreciation
|
|
|
|
(7,208,089
|
)
|
|
|
(6,334,229
|
)
|
|
|
|
|
$
|
9,052,886
|
|
|
$
|
8,241,197
|
|
For the fiscal years ended April 30, 2018 and 2017, depreciation expense totaled $1,400,718 and $1,349,590, of which $1,137,724 and $1,061,747 were included in cost of revenues, respectively, and of which $262,994 and $287,843 were included in general and administrative expenses, respectively. Depreciation is not taken during the period of construction or equipment installation. Upon completion of the installation of manufacturing equipment or any construction in progress, construction in progress balances will be classified to their respective property and equipment category. For the fiscal years ended April 30, 2018 and 2017, the Company received the proceeds from disposal of equipment of $1,519 and $295,792, respectively, and the Company also recognized loss on disposition of property and equipment of $303,377 and $122,285, respectively.
NOTE 4 - INTANGIBLE ASSETS
On August 8, 2012 the Company entered into an Exchange Agreement with WILD Flavors pursuant to which it purchased its 45% membership interest in Sunwin USA for an aggregate consideration of approximately $1,625,874, which includes the issuance of 7,666,666 shares of our common stock valued at approximately $1,533,333 and a cash payment of $92,541. In connection with the Exchange Agreement, WILD Flavor granted, transferred and assigned to Sunwin USA all of its rights, title and interest, and the trade name OnlySweet, including any trademarks, trademark registrations and applications, service marks, service mark registrations and applications, copyrights, copyright registrations and applications, trade dress, trade names (whether or not registered or by whatever name or designation), owned, applied for, or registered in the name of, the WILD Flavor (the "OnlySweet Name Rights"). Additionally, we entered into a new Distributorship Agreement with WILD Procurement which is an affiliate of WILD Flavors, as discussed in Note 1. The transaction closed on August 20, 2012. The intangible assets of Sunwin USA were reduced from $1,825,804 to $1,625,874 as a result of the application of U.S. GAAP which requires elimination of the difference between the purchase price of the 45% membership interest in Sunwin USA and cost basis of the intangible assets recorded by Sunwin USA. Intangible assets have a useful life of five years and consist of the cost of OnlySweet Name Rights and related technologies as well as the fair value of the Wild Flavors distribution Agreement. For the fiscal years ended April 30, 2018 and 2017, amortization expense amounted to $108,390 and $325,175, respectively.
As of April 30, 2018 and 2017, intangible assets consisted of the following:
|
|
|
April 30, 2018
|
|
|
April 30, 2017
|
|
|
Estimated Life
|
|
|
|
|
|
|
|
OnlySweet name rights and related technologies
|
5 Years
|
|
$
|
587,183
|
|
|
$
|
587,183
|
|
|
Distribution agreement and related distribution channels
|
5 Years
|
|
|
1,038,691
|
|
|
|
1,038,691
|
|
|
|
|
|
|
1,625,874
|
|
|
|
1,625,874
|
|
|
Less: accumulated amortization
|
|
|
|
(1,625,874
|
)
|
|
|
(1,517,484
|
)
|
|
Intangible assets, net
|
|
|
$
|
-
|
|
|
$
|
108,390
|
|
NOTE 5 - LAND USE RIGHT
As of April 30, 2018 and 2017, land use right consisted of the following:
|
|
April 30, 2018
|
|
April 30, 2017
|
|
|
|
Estimated Life
|
|
|
|
|
|
Land use right
|
45 Years
|
|
$
|
2,507,726
|
|
|
$
|
2,303,168
|
|
|
Less: accumulated amortization
|
|
|
|
(543,120
|
)
|
|
|
(448,113
|
)
|
|
|
|
|
$
|
1,964,606
|
|
|
$
|
1,855,055
|
|
In conjunction with our acquisition of Qufu Shengwang, we acquired land use rights for properties located in the PRC until March 14, 2054. For the fiscal years ended April 30, 2018 and 2017, amortization expense related to land use rights amounted to $53,656 and $52,227, respectively.
NOTE 6 - RELATED PARTY TRANSACTIONS
Accounts receivable - related party and revenue - related party
For the fiscal years ended April 30, 2018 and 2017, we recorded revenue from related party of $4,043,074 and $5,855,594, respectively, related to sales of products to Qufu Shengwang Import and Export Co., Ltd. ("Qufu Shengwang Import and Export"), a Chinese entity owned by our Chairman, Mr. Laiwang Zhang. As of April 30, 2018 and 2017, related party accounts receivable totaled $2,576,944 and $339,270, respectively, were due from Qufu Shengwang Import and Export Corporation.
Due to (from) related parties
From time to time, we received advances from related parties and advance funds to related parties for working capital purposes. During the fiscal years ended April 30, 2018 and 2017, we received advances from related parties for working capital totaled $6,076,535 and $2,613,077 respectively, and we repaid to related parties a total of $3,708,072 and $3,848,626, respectively. In the fiscal years ended April 30, 2018 and 2017, interest expense related to due to related parties amounted to $104,437 and $138,092, respectively, which were included in interest expense in the accompanying consolidated statements of operations and comprehensive loss, and in connection with the advances of $743,196 (RMB5,000,000) and $1,189,114 (RMB8,000,000) from Shangdong Shengwang Pharmaceutical Co., Ltd. ("Pharmaceutical Corporation"), a Chinese entity owned by our Chairman, Mr. Laiwang Zhang. These advances bear interest at the rate of 6.3% per annum. The other advances bear no interest and are payable on demand. On April 30, 2018, the balance we owed to Pharmaceutical Corporation, Qufu Shengwang Import and Export, Mr. Weidong Chai, a management member of Qufu Shengren Pharmaceutical Co., Ltd., and Mr. Weidong Chai amounted $2,280,266, $103,169 and $175,781, respectively. On April 30, 2017, the balance we owed to Qufu Shengwang Import and Export and Mr. Weidong Chai totaled $21,878 and $134,002, respectively, the balance due from Pharmaceutical Corporation was $30,568, which was repaid on July 28, 2017.
For the fiscal years ended April 30, 2018 and 2017, due to (from) related party activities consisted of the following:
|
|
|
Pharmaceutical Corporation
|
|
|
Qufu Shengwang Import and Export
|
|
|
Mr. Laiwang Zhang
|
|
|
Mr. Weidong Chai
|
|
|
Total
|
|
|
Balance due to related parties, April 30, 2016
|
|
$
|
910,373
|
|
|
$
|
366,875
|
|
|
$
|
-
|
|
|
$
|
129,778
|
|
|
$
|
1,407,026
|
|
|
Working capital advances from related parties
|
|
|
2,293,631
|
|
|
|
307,023
|
|
|
|
-
|
|
|
|
12,423
|
|
|
|
2,613,077
|
|
|
Repayments
|
|
|
(3,241,576
|
)
|
|
|
(607,050
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,848,626
|
)
|
|
Effect of foreign currency exchange
|
|
|
7,004
|
|
|
|
(44,970
|
)
|
|
|
-
|
|
|
|
(8,199
|
)
|
|
|
(46,165
|
)
|
|
Balance due to related parties, April 30, 2017
|
|
$
|
(30,568
|
)
|
|
$
|
21,878
|
|
|
$
|
-
|
|
|
$
|
134,002
|
|
|
$
|
125,312
|
|
|
Working capital advances from related parties
|
|
|
5,293,804
|
|
|
|
359,451
|
|
|
|
394,359
|
|
|
|
28,921
|
|
|
|
6,076,535
|
|
|
Repayments
|
|
|
(3,011,352
|
)
|
|
|
(302,361
|
)
|
|
|
(394,359
|
)
|
|
|
-
|
|
|
|
(3,708,072
|
)
|
|
Effect of foreign currency exchange
|
|
|
28,382
|
|
|
|
24,201
|
|
|
|
-
|
|
|
|
12,858
|
|
|
|
65,441
|
|
|
Balance due (from) to related parties, April 30, 2018
|
|
$
|
2,280,266
|
|
|
$
|
103,169
|
|
|
$
|
-
|
|
|
$
|
175,781
|
|
|
$
|
2,559,216
|
|
NOTE 7 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets as of April 30, 2018 and 2017 totaled $2,284,379 and $4,729,865, respectively. As of April 30, 2018, prepaid expenses and other current assets includes $1,366,280 prepayments to suppliers for merchandise that had not been shipped to us and services that had not been provided to us, $715,553 prepayment for employees' stock-based compensation and $202,546 for business related employees' advances. As of April 30, 2017, prepaid expenses and other current assets includes $3,286,808 prepayments to suppliers for merchandise that had not been shipped to us and services that had not been provided to us, $1,226,668 prepayment for employees' stock-based compensation for shares issued, and $216,389 for business related employees' advances.
On December 1, 2015, we entered into three year employment agreements with four employees. Pursuant to employment agreements, we issued a total of 23 million shares of the Company's common stock to them, valued at $3,680,000, as employees' stock-based compensations over three-year term of their employment from December 1, 2015 through November 30, 2018. We amortize these compensations over three years from December 1, 2015 to November 30, 2018 and we recognized $1,226,668 and $1,226,669 as stock-based compensation expenses during the fiscal years ended April 30, 2018 and 2017, respectively. We also have recorded the remaining balance of the stock-based compensation of $715,553 as prepaid compensation as of April 30, 2018.
During the third quarter of fiscal 2013, Qufu Shengwang paid Qufu Public Auction Center (the "Center") $618,758 as deposit for renewing the land use right. The deposit is required for the Center to appraise the land use right, which we do not know when we can receive the remaining refund. We received a total refund of $465,038 as of April 30, 2018 and the remaining balances of $142,325 and $154,956 have been classified to other long-term asset as of April 30, 2017 and 2018, respectively.
NOTE 8 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses included the following as of April 30, 2018 and 2017:
|
Account
|
|
April 30,
2018
|
|
|
April 30,
2017
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
9,169,871
|
|
|
$
|
5,096,599
|
|
|
Advanced from customers
|
|
|
44,488
|
|
|
|
40,900
|
|
|
Accrued salary payable
|
|
|
169,321
|
|
|
|
160,244
|
|
|
Tax payable
|
|
|
199,644
|
|
|
|
121,127
|
|
|
Deferred revenue
|
|
|
39,994
|
|
|
|
82,581
|
|
|
Other payable*
|
|
|
2,036,686
|
|
|
|
1,535,020
|
|
|
Total accounts payable and accrued expenses
|
|
$
|
11,660,004
|
|
|
$
|
7,036,471
|
|
* As of April 30, 2018, other payables consists of general liability, worker's compensation, and medical insurance payable of $558,789, consulting fee payable of $312,782, union and education fees payable of $304,930, interest payables for short-term loans of $384,356, advanced from the employees of $210,115 and other miscellaneous payables of $265,714. As of April 30, 2017, other payables consists of commission payable of $133,712, general liability, worker's compensation, and medical insurance payable of $465,505, consulting fee payable of $266,852, union and education fees payable of $280,404, interest payables for short-term loans of $213,153, advanced from the employees of $172,435 and other miscellaneous payables of $2,959.
NOTE 9 - LOAN PAYABLE
Short-term loan payable
Short-term loans are loans obtained from various individual lenders that are due within one year for working capital purpose. These loans are unsecured and can be renewed with 10 days advance notice prior to maturity date. As of April 30, 2018 and 2017, short-term loans consisted of the following:
|
|
|
April 30,
2018
|
|
|
April 30,
2017
|
|
|
|
|
|
|
|
|
|
|
Loan from Min Wu, an employee of Qufu Shengren, due on October 5, 2017, with an annual interest rate of 10% at October 6, 2016. Renewed on October 6, 2017 and accrued interest of RMB20,000 ($3,155) added to the original principal amount of RMB200,000 ($31,549), terms were not changed, with new due date on October 5, 2018.
|
|
$
|
34,704
|
|
|
$
|
29,005
|
|
|
Loans from Jianjun Yan, non-related individual, due on October 6, 2017, with an annual interest rate of 10% at October 7, 2016. Renewed on October 7, 2017 and accrued interest of RMB800,800 ($127,336) added to the original principal amount of RMB8,008,000 ($1,273,375), terms were not changed, with new due date on October 6, 2018.
|
|
|
1,389,531
|
|
|
|
1,161,354
|
|
|
Loans from Jianjun Yan, non-related individual, due on March 30, 2018, with annual interest rate of 4% at March 31, 2017. Repaid partial principal amount of $375,077 on August 23, 2017 and borrowed additional amount of $51,660 on April 1, 2018.
|
|
|
1,236,710
|
|
|
|
1,450,242
|
|
|
Loans from Jianjun Yan, non-related individual, due on demand, with free interest at January 27, 2018.
|
|
|
457,457
|
|
|
|
-
|
|
|
Loan from Junzhen Zhang, non-related individual, due on October 5, 2017, with an annual interest rate of 10% at October 6, 2016. Renewed on October 6, 2017 and accrued interest ofRMB10,000 ($1,577) added to the original principal amount of RMB150,000 ($23,662), terms were not changed, with new due date on October 5, 2018.
|
|
|
25,239
|
|
|
|
21,754
|
|
|
Loan from Jian Chen, non-related individual, due on January 26, 2018 and April 10, 2018, bearing an annual interest rate of 10%, with the principle amount of RMB700,000 ($110,421) and RMB300,000 ($47,323) at January 27, 2017 and April 11, 2017, respectively. Renewed these loans on January 27, 2018 and April 11, 2018, and accrued interest of RMB70,000 ($11,042) and RMB30,000 ($4,732) added to the original principal amount, terms were not changed, with new due date on January 27, 2019 and April 11, 2019, respectively.
|
|
|
173,518
|
|
|
|
145,024
|
|
|
Loan from Qing Kong, non-related individual, due on March 6, 2017, with an annual interest rate of 10% at March 7, 2016, which renewed on March 7, 2017 and 2018, accrued interest of RMB44,000 ($6,941) added to the original principal amount of RMB440,000 ($69,407), terms were not changed, with new due date on March 6, 2019.
|
|
|
76,348
|
|
|
|
63,811
|
|
|
Loan from Qing Kong, non-related individual, due on January 8, 2019, with an annual interest rate of 10% at January 9,2018.
|
|
|
31,549
|
|
|
|
-
|
|
|
Loan from Guihai Chen, non-related individual, due on March 10, 2017, with an annual interest rate of 10% at March 11, 2016, which renewed on March 11, 2017 and 2018, totally accrued interest of RMB10,000 ($1,577) added to the original principal of RMB110,000 ($17,352), terms were not changed, with new due date on March 10, 2019.
|
|
|
18,929
|
|
|
|
15,953
|
|
|
Loan from Guihai Chen, non-related individual, due on September 20, 2018, with an annual interest rate of 10% at September 21, 2017.
|
|
|
31,549
|
|
|
|
-
|
|
|
Loan from Weifeng Kong, non-related individual, due on November 28, 2017, with an annual interest rate of 10% at November 29, 2016, extended another one year at on November 29, 2017.
|
|
|
31,549
|
|
|
|
29,004
|
|
|
Loan from Shidong Wang, non-related individual, due on March 7, 2018, with an annual interest rate of 4% at March 8, 2017.
|
|
|
1,640,534
|
|
|
|
1,450,242
|
|
|
Loan from Xuxu Gu, non-related individual, due on March 8, 2019, with an annual interest rate of 4% at March 9, 2017. *
|
|
|
1,577,436
|
|
|
|
-
|
|
|
Loan from Dadong Mei, non-related individual, due on March 8, 2019, with an annual interest rate of 4% at March 9, 2017. *
|
|
|
1,577,436
|
|
|
|
-
|
|
|
Total
|
|
$
|
8,302,489
|
|
|
$
|
4,366,389
|
|
* The Company recorded these loans as long-term loans as of April 30, 2017.
Long-term loan payable
Long-term loans payable obtained from various individual lenders that are due more than one year for working capital purpose. These loans are unsecured and can be renewed with one month advance notice prior to maturity date. As of April 30, 2018 and 2017, long-term loans consisted of the following:
|
|
|
April 30,
2018
|
|
|
April 30,
2017
|
|
|
|
|
|
|
|
|
|
|
Loan from Xuxu Gu, non-related individual, due on March 8, 2019, with an annual interest rate of 4% at March 9, 2017. *
|
|
$
|
-
|
|
|
$
|
1,450,242
|
|
|
Loan from Dadong Mei, non-related individual, due on March 8, 2019, with an annual interest rate of 4% at March 9, 2017. *
|
|
|
-
|
|
|
|
1,450,242
|
|
|
Loan from Xuxu Gu, non-related individual, due on September 27, 2019, with an annual interest rate of 4% at September 28, 2017.
|
|
|
1,687,857
|
|
|
|
-
|
|
|
Total:
|
|
$
|
1,687,857
|
|
|
$
|
2,900,484
|
|
* The Company recorded these loans as short-term loans as of April 30, 2018.
For the fiscal years ended April 30, 2018 and 2017, interest expense related to short-term loans and long-term loans amounted to $438,615 and $257,562, respectively, which were included in interest expense in the accompanying consolidated statements of operations and comprehensive loss.
NOTE 10 - INCOME TAXES
We account for income taxes under ASC 740,
"Accounting For Income Tax
". ASC 740 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. ASC 740 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets.
On December 22, 2017,
the Tax Cuts and Jobs Act (the TCJA), which significantly modified U.S. corporate income tax law,
was signed into law by President Trump. The TCJA contains significant changes to corporate income taxation, including but not limited to the reduction of the corporate income tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and generally eliminating net operating loss carrybacks, allowing net operating losses to carryforward without expiration, one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits (including changes to the orphan drug tax credit and changes to the deductibility of research and experimental expenditures that will be effective in the future). Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain, including to what extent various states will conform to the newly enacted federal tax law.
The Company has not recorded the necessary provisional adjustments in the financial statements
in accordance with its current understanding of the TCJA and guidance currently available as of this filing.
But is reviewing the TCJA's potential ramifications.
Our subsidiaries in the PRC are governed by the Income Tax Law of the People's Republic of China concerning Foreign Investment Enterprises and Foreign Enterprises and local income tax laws (the PRC Income Tax Law"). Pursuant to the PRC Income Tax Law, our PRC subsidiaries are subject to tax at a maximum statutory rate of 25% (inclusive of state and local income taxes).
The components of loss before income tax consisted of the following:
|
|
Fiscal Years Ended April 30,
|
|
|
|
2018
|
|
2017
|
|
|
U.S. Operations
|
|
$
|
(1,445,170
|
)
|
|
$
|
(1,826,809
|
)
|
|
Chinese Operations
|
|
|
(3,269,625
|
)
|
|
|
(2,071,215
|
)
|
|
Total
|
|
$
|
(4,714,795
|
)
|
|
$
|
(3,898,024
|
)
|
The Effective Tax Rate reconciliation is a follows:
|
|
|
April 30, 2018
|
|
|
April 30, 2017
|
|
|
U.S. Federal and state tax rate
|
|
|
38.0
|
%
|
|
|
38.0
|
%
|
|
Stock- based compensation
|
|
|
(9.9
|
)%
|
|
|
(13.5
|
)%
|
|
Difference in US / China statutory rate
|
|
|
(3.7
|
)%
|
|
|
(6.9
|
)%
|
|
Valuation allowance
|
|
|
(24.4
|
)%
|
|
|
(17.6
|
)%
|
|
Total provision for income taxes
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The table below summarizes the reconciliation of our income tax provision (benefit) computed at the statutory U.S. Federal rate and the actual tax provision:
|
|
|
Fiscal Years Ended April 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Income tax benefit at federal statutory rate
|
|
$
|
(1,151,707
|
)
|
|
$
|
(1,211,991
|
)
|
|
State income taxes, net of federal benefit
|
|
|
(173,781
|
)
|
|
|
(269,258
|
)
|
|
Valuation allowances
|
|
|
1,325,488
|
|
|
|
1,481,249
|
|
|
Tax provision
|
|
$
|
-
|
|
|
$
|
-
|
|
We have a net operating loss ("NOL") carry forward for U.S. income tax purposes aggregating approximately $10, 968,616 as of April 30, 2018 expiring through the tax year 2037, subject to the Internal Revenue Code Section 382, which places a limitation on the amount of taxable income that can be offset by net operating losses after a change in ownership. In addition, to U.S. NOL's, we have a PRC NOL for our Chinese operations as of April 30, 2018 of approximately $25,054,198, that expires in 2023.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Included in the deferred tax asset is the aforementioned NOL and the tax benefit associated with the issuance of stock-based compensation. The realization of the deferred tax assets is dependent on future taxable income, in addition to the exercise of stock options; we are not able to predict if such future taxable income will be more likely than not sufficient to utilize the benefit. As such, we do not believe the benefit is more likely than not to be realized and we recognize a full valuation allowance for those deferred tax assets. Our deferred tax assets as of April 30, 2018 and 2017 are as follows:
|
|
|
Fiscal Years Ended April 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Deferred tax assets from NOL carry forwards
|
|
$
|
8,896,017
|
|
|
$
|
9,508,000
|
|
|
Total deferred tax asset
|
|
|
8,896,017
|
|
|
|
9,508,000
|
|
|
Valuation allowance
|
|
|
(8,896,017
|
)
|
|
|
(9,508,000
|
)
|
|
Deferred tax asset, net of allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
The decrease in total deferred tax asset is attributable to the U.S. TCJA Federal tax rate reduction from 35% to a flat rate of 21%.
NOTE 11 - STOCKHOLDERS' EQUITY
As of April 30, 2018 and 2017, we are authorized to issue 200,000,000 shares of common stock. We had 199,632,803 shares issued and outstanding as of April 30, 2018 and 2017.
On December 1, 2015, we entered into three years employment agreements with four employees. Pursuant to employment agreements, we issued a total of 23 million shares of the Company's common stock, valued at $3,680,000, as employees' stock-based compensations over three-year term of their employment from December 1, 2015 through November 30, 2018. We amortize these compensations over three years from December 1, 2015 to November 30, 2018 and we recognized $1,226,668 and $1,226,669 as stock-based compensation expenses during fiscal years ended April 30, 2018 and 2017, respectively. We also have recoded the remaining balance of the stock-based compensation of $715,553 as prepaid compensation included in prepaid expenses and other current assets of the accompanying consolidated balance sheet as of April 30, 2018.
On April 25, 2016, we entered into a one year consulting service agreement with Dr. Yuejian (James) Wang. Pursuant to the terms of the consulting service agreement for fiscal year ended April 30, 2017, we issued a total of 1,000,000 shares of the Company's common stock to Dr. Yuejian (James) Wang as compensation for the services to be provided from May 1, 2016 through April 30, 2017. On April 27, 2016, we issued 1,000,000 shares of the Company's common stock to Dr. Yuejian (James) Wang as prepaid payment of the consulting service fee, valued at $145,000. We amortized this consulting service fee through fiscal year ended April 30, 2017 over twelve months and recorded $145,000 as stock-based compensation expense during fiscal year ended April 30, 2017.
NOTE 12 - SEGMENT INFORMATION
The following information is presented in accordance with ASC Topic 280, "Segment Reporting", for fiscal years ended April 30, 2018 and 2017; we operated in three reportable business segments - (1) natural sweetener (stevioside), (2) traditional Chinese medicines and (3) corporate and other. Our reportable segments are strategic business units that offer different products and are managed separately based on the fundamental differences in their operations. Financial information with respect to these reportable business segments for the fiscal years ended April 30, 2018 and 2017 is as follows:
|
|
|
Fiscal Years Ended April 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Chinese medicine - third party
|
|
$
|
2,897,497
|
|
|
$
|
2,879,795
|
|
|
Chinese medicine - related party
|
|
|
-
|
|
|
|
-
|
|
|
Total Chinese medicine
|
|
|
2,897,497
|
|
|
|
2,879,795
|
|
|
|
|
|
|
|
|
|
|
|
|
Stevioside - third party
|
|
|
15,099,238
|
|
|
|
10,619,522
|
|
|
Stevioside - related party
|
|
|
4,043,074
|
|
|
|
5,855,594
|
|
|
Total Stevioside
|
|
|
19,142,312
|
|
|
|
16,475,116
|
|
|
Total segment and consolidated revenues
|
|
$
|
22,039,809
|
|
|
$
|
19,354,911
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
Chinese medicine
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Stevioside
|
|
|
(543,052
|
)
|
|
|
(395,654
|
)
|
|
Corporate and other
|
|
|
-
|
|
|
|
-
|
|
|
Total segment and consolidated interest expense
|
|
$
|
(543,052
|
)
|
|
$
|
(395,654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
Chinese medicine
|
|
$
|
214,934
|
|
|
$
|
288,868
|
|
|
Stevioside
|
|
|
1,347,830
|
|
|
|
1,438,124
|
|
|
Total segment and consolidated depreciation and amortization
|
|
$
|
1,562,764
|
|
|
$
|
1,726,992
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes:
|
|
|
|
|
|
|
|
|
|
Chinese medicine
|
|
$
|
549,255
|
|
|
$
|
759,574
|
|
|
Stevioside
|
|
|
2,828,760
|
|
|
|
1,636,816
|
|
|
Corporate and other
|
|
|
1,336,780
|
|
|
|
1,501,634
|
|
|
Total consolidated loss before income taxes
|
|
$
|
4,714,795
|
|
|
$
|
3,898,024
|
|
|
|
|
April 30,
2018
|
|
|
April 30,
2017
|
|
|
Segment property and equipment:
|
|
|
|
|
|
|
|
Chinese medicine
|
|
$
|
1,129,884
|
|
|
$
|
1,319,227
|
|
|
Stevioside
|
|
|
7,923,002
|
|
|
|
6,921,970
|
|
|
Corporate and other
|
|
|
-
|
|
|
|
-
|
|
|
Total propterty and equipment
|
|
$
|
9,052,886
|
|
|
$
|
8,241,197
|
|
NOTE 13 – DISCONTINUED OPERATIONS
On April 30, 2018, the Company decided to close the Company's wholly owned subsidiary, Sunwin Tech Group, Inc. ("Sunwin Tech"), a Florida corporation, due to no operation activities in the past several years. The Board of Directors discussed with the management and determined that it is more efficient and cost beneficial to transfer all liability of Suwnin Tech for direct management by the Parent. All assets and liabilities owned by Sunwin Tech, including the equity ownership of Qufu Natural Green transferred to and is assumed by Sunwin Stevia International, Inc on Apr 30, 2018. The carrying amounts of the major classes of assets and liabilities of discontinued operations as of April 30, 2018 and 2017 were as follows:
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Prepaid expenses and other current assets, net
|
|
|
-
|
|
|
|
-
|
|
|
Total assets of discontinued operations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
-
|
|
|
|
8,570
|
|
|
Due to related parties
|
|
|
221,188
|
|
|
|
212,618
|
|
|
Total liabilities of discontinued operations
|
|
$
|
221,188
|
|
|
$
|
221,188
|
|
The following table presents the results of discontinued operations in the fiscal years ended April 30, 2018 and 2017:
|
|
|
For the Twelve Months ended April 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Cost of revenues
|
|
|
-
|
|
|
|
-
|
|
|
Loss before income taxes
|
|
|
-
|
|
|
|
-
|
|
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinuing operations
|
|
|
-
|
|
|
|
-
|
|
|
Gain from disposal, net of taxes
|
|
|
-
|
|
|
|
-
|
|
|
Total Gain from discontinued operations
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE 14 – CONCENTRATIONS AND CREDIT RISK
(i) Customer Concentrations
For fiscal years ended April 30, 2018 and 2017, customers accounting for 10% or more of the Company's revenue were as follows:
|
|
|
Net Sales For Fiscal Years Ended April 30,
|
|
|
|
|
2018
|
|
2017
|
|
|
|
|
Chinese Medicine
|
|
Stevioside
|
|
Chinese Medicine
|
|
Stevioside
|
|
|
|
A(1)
|
|
|
|
-
|
|
|
|
18.3
|
%
|
|
|
-
|
|
|
|
30.3
|
%
|
|
|
B
|
|
|
|
-
|
|
|
|
*
|
|
|
|
-
|
|
|
|
14.4
|
%
|
|
Total
|
|
|
|
-
|
|
|
|
18.3
|
%
|
|
|
-
|
|
|
|
44.7
|
%
|
(1)
Qufu Shengwang Import and Export Co., Ltd is a related party, an entity owned by Mr. Laiwang Zhang.
* This represents less than 10% of the Company's revenue for the fiscal year ended April 30, 2018.
(ii) Vendor Concentrations
For fiscal years ended April 30, 2018 and 2017, suppliers accounting for 10% or more of the Company's purchase were as follows:
|
|
|
Net Purchases For Fiscal Years Ended April 30,
|
|
|
|
|
2018
|
|
2017
|
|
|
|
|
Chinese Medicine
|
|
Stevioside
|
|
Chinese Medicine
|
|
Stevioside
|
|
|
|
A
|
|
|
|
-
|
|
|
|
14.7
|
%
|
|
|
-
|
|
|
|
13.7
|
%
|
|
|
B
|
|
|
|
-
|
|
|
|
10.6
|
%
|
|
|
-
|
|
|
|
17.1
|
%
|
|
|
C
|
|
|
|
-
|
|
|
|
*
|
|
|
|
-
|
|
|
|
10.4
|
%
|
|
|
D
|
|
|
|
-
|
|
|
|
*
|
|
|
|
-
|
|
|
|
21.2
|
%
|
|
Total
|
|
|
|
-
|
|
|
|
25.3
|
%
|
|
|
-
|
|
|
|
62.4
|
%
|
* This represents less than 10% of the Company's purchase for the fiscal year ended April 30, 2018.
(iii) Credit Risk
Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. We place our cash and cash equivalents with high credit quality financial institutions in the United States and the PRC. As of April 30, 2018, we had $1,100,052 of cash held in PRC banks, where there is no equivalent of federal deposit insurance as in the United States. As a result, cash held in PRC financial institutions is not insured. We have not experienced any losses in such accounts through April 30, 2018. Our cash position by geographic area was as follows:
|
|
|
April 30, 2018
|
|
|
April 30, 2017
|
|
|
China
|
|
$
|
1,100,052
|
|
|
$
|
30,781
|
|
|
United States
|
|
|
696
|
|
|
|
20,335
|
|
|
Total
|
|
$
|
1,100,748
|
|
|
$
|
51,116
|
|
Almost all of our sales are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, we believe that the concentration of credit risk with respect to trade accounts receivable is limited due to generally short payment terms. We also perform ongoing credit evaluations of our customers to help further reduce potential credit risk.
NOTE 15 - SUBSEQUENT EVENTS
Our management has evaluated all activities subsequent to our balance sheet date through the issuance date of this report and concluded that no subsequent events have occurred that would require adjustments or disclosure to the accompanying consolidated financial statements.
F -24