SUNWIN STEVIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2018
NOTE 1 - ORGANIZATION AND OPERATIONS
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.
Our operations are organized into two product segments, 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"), wholly owned by Sunwin Stevia International;
- Qufu Shengren Pharmaceutical Co., Ltd. ("Qufu Shengren"), wholly owned by Qufu Natural Green;
- Qufu Shengwang Stevia Biology and Science Co., Ltd. ("Qufu Shengwang"), wholly owned by Qufu Natural Green; and
- Sunwin USA, LLC ("Sunwin USA"), 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 Natural Green 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.
On July 1, 2012, Qufu Shengwang entered 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 2013, 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 plan to use these assets to manufacture a variety of traditional Chinese medicine formula extracts. We started production in last quarter of fiscal 2014.
Qufu Shengren
In fiscal 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 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 management 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 continuing to purchase enzyme treated products from us.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed 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 pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") for interim financial reporting. The accompanying unaudited condensed consolidated financial statements for the interim periods presented are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the periods presented. Certain financial statement amounts relating to prior periods have been reclassified to conform to the current period presentation. All intercompany accounts and transactions have been eliminated in consolidation.
These unaudited condensed consolidated interim financial statements should be read in conjunction with the financial statements and footnotes for the year ended April 30, 2018 included in our Form 10-K as filed with the SEC. The results of operations and cash flows for the three months ended July 31, 2018 are not necessarily indicative of the results of operations or cash flows which may be reported for future periods or the full fiscal year.
The condensed consolidated balance sheet as of April 30, 2018 contained herein has been derived from the audited consolidated financial statements as of April 30, 2018, but do not include all disclosures required by the U.S. GAAP.
Our unaudited condensed consolidated financial statements include the accounts of Sunwin and all our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Our subsidiaries include the following:
- Qufu Natural Green;
- Qufu Shengren;
- Qufu Shengwang; and
- Sunwin USA
USE OF ESTIMATES
The preparation of unaudited condensed consolidated 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 unaudited condensed 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 July 31, 2018, we held $157,696 of our cash and cash equivalents with commercial banking institutions in the PRC, and $99,885 with banks in the United States. As of April 30, 2018, we held $1,100,052 of our cash and cash equivalents with commercial banking institution in PRC, and $696 in the United States. In China, there is no equivalent federal deposit insurance as in the United States, so the amounts held in banks in China are not insured. We have not experienced any losses in such bank accounts through July 31, 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 July 31, 2018 and April 30, 2018, the allowance for doubtful accounts was $178,037 and $191,865, 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 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. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, the Company will record reserves for the difference between the cost or estimated net realizable value. As of July 31, 2018 and April 30, 2018, the Company recorded a reserve for obsolete or slow-moving inventories of $0 and $235,258, respectively. As of July 31, 2018 and April 30, 2018, the Company wrote down inventories of $0 and $235,258, 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 paragraph 360-10-35-17 of the Financial Accounting Standards Board (FASB) Accounting Standards Codification ("ASC"), we examine the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
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 $0 and $303,377 at July 31, 2018 and April 30, 2018, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
We 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:
Level 1:
|
Observable inputs such as quoted market prices in active markets for identical assets or liabilities
|
Level 2:
|
Observable market-based inputs or unobservable inputs that are corroborated by market data
|
Level 3:
|
Unobservable inputs for which there is little or no market data, which require the use of the reporting entity's own assumptions.
|
The carrying amounts of our financial assets and liabilities, such as cash, accounts receivable, notes receivable, prepayments and other current assets, accounts payable, taxes payable and accrued expenses, 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 July 31, 2018 and April 30, 2018 amounted to $91,519 and $199,644, respectively, consisted primarily of VAT taxes.
REVENUE RECOGNITION
Pursuant to the guidance of ASC Topic 606, we record revenue 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.
GRANT INCOME
Grants received from PRC government agencies are recognized as deferred grant income and recognized in the consolidated statements of operations and comprehensive loss as and when they are earned for the specific research and development projects for which these grants are designated for.
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 July 31, 2018, the Company had no uncertain tax positions, and will continue to evaluate for uncertain positions in the future.
BASIC AND DILUTED EARNINGS PER SHARE
Pursuant to ASC Section 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 ours, subject to anti-dilution limitations. The following table presents a reconciliation of basic and diluted net income per common share:
|
|
For Three Months Ended July 31,
|
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
Net loss attributable to Sunwin Stevia International, Inc.
|
|
$
|
(1,190,337
|
)
|
|
$
|
(1, 107,428
|
)
|
Numerator for basic EPS, loss applicable to common stock holders
|
|
$
|
(1,190,337
|
)
|
|
$
|
(1, 107,428
|
)
|
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 outstanding 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
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
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 income statements 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 July 31, 2018
|
RMB 6.83 to $1.00
|
As of April 30, 2018
|
RMB 6.33 to $1.00
|
|
|
Three months ended July 31, 2018
|
RMB 6.52 to $1.00
|
Three months ended July 31, 2017
|
RMB 6.82 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 the three months ended July 31, 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 July 31, 2018, we had $157,696 of cash balance held in PRC banks, which is not insured. We have not experienced any losses in such accounts through July 31, 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 and are included in general and administrative expenses in the accompanying statements of operations. Research and development costs are incurred on a project specific basis. Research and development cost were $232,946 and $186,326 for the three months ended July 31, 2018 and 2017, respectively.
SHIPPING COSTS
Shipping costs are included in selling expenses and totaled $74,734 and $68,559 for the three months ended July 31, 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 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. This standard, which is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2017. 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 adopted this standard effective May 1, 2018 by 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 completed its analysis and concluded that the adoption of Topic 606 did 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 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 adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
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 unaudited condensed consolidated financial statements have been prepared assuming we will continue as a going concern. The Company has incurred recurring loss with a net loss of approximately $1,190,000 for the three months ended July 31, 2018 and has a significant accumulated deficit of $35.0 million as of July 31, 2018. The Company's 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. Management intends to make every effort to improve its current sales force as to further develop and expand the international markets for its new products as well as continuing with the current sources of funds to meet working capital needs on as needed basis. There can be no assurance that these plans and arrangements will be successful.
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 unaudited condensed 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 3 - INVENTORIES
As of July 31, 2018 and April 30, 2018, inventories consisted of the following:
|
|
July 31, 2018
|
|
|
April 30, 2018
|
|
|
|
(unaudited)
|
|
|
|
|
Raw materials
|
|
$
|
8,525,977
|
|
|
$
|
8,803,685
|
|
Work in process
|
|
|
2,127,430
|
|
|
|
1,357,484
|
|
Finished goods
|
|
|
1,692,161
|
|
|
|
2,403,402
|
|
|
|
|
12,345,568
|
|
|
|
12,564,571
|
|
Less: reserve for obsolete inventory
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
12,345,568
|
|
|
$
|
12,564,571
|
|
NOTE 4 - PROPERTY AND EQUIPMENT
As of July 31, 2018 and April 30, 2018, property and equipment consisted of the following:
|
|
July 31, 2018
|
|
|
April 30, 2018
|
|
|
Estimated Life
|
|
(unaudited)
|
|
|
|
|
Office equipment
|
3-10 Years
|
|
$
|
97,617
|
|
|
$
|
75,821
|
|
Auto and trucks
|
2-10 Years
|
|
|
617,426
|
|
|
|
660,926
|
|
Manufacturing equipment
|
2-20 Years
|
|
|
5,281,058
|
|
|
|
5,638,206
|
|
Buildings
|
5-20 Years
|
|
|
8,532,256
|
|
|
|
9,224,911
|
|
Construction in process
|
|
|
|
1,442,921
|
|
|
|
661,111
|
|
|
|
|
|
15,971,278
|
|
|
|
16,260,975
|
|
Less: accumulated depreciation
|
|
|
|
(6,972,825
|
)
|
|
|
(7,208,089
|
)
|
|
|
|
$
|
8,998,453
|
|
|
$
|
9,052,886
|
|
For the three months ended July 31, 2018 and 2017, depreciation expense totaled $297,837 and $356,155, of which $247,157 and $283,105 were included in cost of revenues, respectively, and of which $50,680 and $73,050 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.
NOTE 5 - LAND USE RIGHTS
As of July 31, 2018 and April 30, 2018, land use rights consisted of the following:
|
July 31, 2018
|
|
April 30, 2018
|
|
|
Estimated Life
|
(unaudited)
|
|
|
|
Land use right
|
45 Years
|
|
$
|
2,324,881
|
|
|
$
|
2,507,726
|
|
Less: accumulated amortization
|
|
|
|
(516,897
|
)
|
|
|
(543,120
|
)
|
|
|
|
$
|
1,807,984
|
|
|
$
|
1,964,606
|
|
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 three month periods ended July 31, 2018 and 2017, amortization expense related to land use rights amounted to $13,540 and $12,939, respectively.
NOTE 6 - RELATED PARTY TRANSACTIONS
Accounts receivable - related party and revenue - related party
As of July 31, 2018 and April 30, 2018, $2,586,722 and $2,576,944 in accounts receivable - related party, respectively, were 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 and Shangdong Shengwang Pharmaceutical Co., Ltd. ("Pharmaceutical Corporation"), a Chinese entity owned by our Chairman, Mr. Laiwang Zhang. For the three months ended July 31, 2018 and 2017, we recorded revenue - related party and cost of revenue – related party of $1,402,947 and $121,556, $1,216,544 and $103,362, respectively, from Qufu Shengwang Import and Export and Pharmaceutical Corporation.
Due to (from) related parties
From time to time, we receive advances from related parties and advance funds to related parties for working capital purposes. In the three months ended July 31, 2018 and 2017, we received advances from related parties for working capital totaled $1,320,584 and $2,420,352, respectively, and we repaid to related parties a total of $1,144,025 and $2,738,473, respectively. In the three months ended July 31, 2018 and 2017, interest expense related to due to related parties amounted to $35,718 and $22,070, 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 Pharmaceutical Corporation. These advances bear interest at the rate of 6.3% per annum. As of July 31, 2018, the balance we owed Pharmaceutical Corporation, Qufu Shengwang Import and Export and Mr. Weidong Chai, a management member of Qufu Shengren Pharmaceutical Co., Ltd., amounted to $2,094,173, $318,498 and $166,861, respectively. As of April 30, 2018, the balance we owed to Pharmaceutical Corporation, Qufu Shengwang Import and Export, and Mr. Weidong Chai, a management member of Qufu Shengren Pharmaceutical Co., Ltd., amounted to $2,280,266, $103,169 and $175,781, respectively.
As of July 31, 2018 and April 30, 2018, due to (from) related party activities consisted of the following:
|
|
Shandong Shengwang Pharmaceutical
Co., Ltd.
|
|
|
Qufu
Shengwang
Import and Export Co., Ltd.
|
|
|
Mr. Wedong Chai
|
|
|
Total
|
|
Balance due to related parties, April 30, 2018
|
|
$
|
2,280,266
|
|
|
$
|
103,169
|
|
|
$
|
175,781
|
|
|
$
|
2,559,216
|
|
Working capital advances from related parties
|
|
|
1,086,604
|
|
|
|
230,051
|
|
|
|
3,929
|
|
|
|
1,320,584
|
|
Repayments
|
|
|
(1,136,356
|
)
|
|
|
(7,668
|
)
|
|
|
-
|
|
|
|
(1,144,025
|
)
|
Effect of foreign currency exchange
|
|
|
(136,341
|
)
|
|
|
(7,053
|
)
|
|
|
(12,849
|
)
|
|
|
(156,243
|
)
|
Balance due to related parties, July 31, 2018
|
|
$
|
2,094,173
|
|
|
$
|
318,498
|
|
|
$
|
166,861
|
|
|
$
|
2,579,532
|
|
NOTE 7 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets as of July 31, 2018 and April 30, 2018 totaled $3,980,889 and $2,284,379, respectively. As of July 31, 2018, prepaid expenses and other current assets includes $3,376,263 prepayments to suppliers for merchandise that had not been shipped to us and services that had not been provided to us, $408,886 prepayment for employees' stock-based compensation and $195,740 for business related employees' advances. 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.
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 will amortize these compensations over three years from December 1, 2015 to November 30, 2018 and we recognized $306,667, $1,226,668 and $1,226,669 as stock-based compensation expenses during the first quarter of fiscal year 2019, fiscal year 2018 and fiscal year 2017, respectively. We also have recorded the remaining balance of the stock-based compensation of $408,886 as prepaid compensation as of July 31, 2018.
During the third quarter of fiscal 2013, Qufu Shengwang paid Qufu Public Auction Center (the "Center") $610,751 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 $465,904 as of July 31, 2018 and the remaining balance of $142,640 and $153,720 has been classified to other long-term asset as of July 31, 2018 and April 30, 2018, respectively.
NOTE 8 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses included the following as of July 31, 2018 and April 30, 2018:
Account
|
|
July 31,
2018
|
|
|
April 30,
2018
|
|
|
|
(unaudited)
|
|
|
|
|
Accounts payable
|
|
$
|
6,427,065
|
|
|
$
|
9,169,871
|
|
Advanced from customers
|
|
|
405,598
|
|
|
|
44,488
|
|
Accrued salary payable
|
|
|
302,609
|
|
|
|
169,321
|
|
Tax payable
|
|
|
91,519
|
|
|
|
199,644
|
|
Deferred revenue
|
|
|
37,111
|
|
|
|
39,994
|
|
Other payable*
|
|
|
2,053,412
|
|
|
|
2,036,686
|
|
Total accounts payable and accrued expenses
|
|
$
|
9,317,314
|
|
|
$
|
11,660,004
|
|
* As of on July 31, 2018, other payables consists of general liability, worker's compensation, and medical insurance payable of $518,515, consulting fee payable of $290,239, union and education fees payable of $282,953, interest payables for short-term loans of $502,417, advances from the employees of $198,229 and other miscellaneous payables of $261,059. 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, advances from the employees of $210,115 and other miscellaneous payables of $265,714.
NOTE 9 -LOAN PAYABLE
Short-term loan payable
Short-term loans are 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 July 31, 2018 and April 30, 2018, short-term loans consisted of the following:
|
|
July 31, 2018
|
|
|
April 30, 2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Loan from Min Wu, an employee of Qufu Shengren, due on October 5, 2018, with an annual interest rate of 10% at October 6, 2017.
|
|
$
|
32,202
|
|
|
$
|
34,704
|
|
Loan from Jianjun Yan, non-related individual, due on October 6, 2018, with an annual interest rate of 10% at October 7, 2017.
|
|
|
1,289,382
|
|
|
|
1,389,531
|
|
Loan from Jianjun Yan, non-related individual, due on March 31, 2019, with annual interest rate of 4%, renewed at April 1, 2018.
|
|
|
1,147,575
|
|
|
|
1,236,710
|
|
Loans from Jianjun Yan, non-related individual, due on demand, with free interest at January 27, 2018.
|
|
|
190,287
|
|
|
|
457,457
|
|
Loan from Junzhen Zhang, non-related individual, due on October 5, 2018, with an annual interest rate of 10% at October 6, 2017.
|
|
|
23,420
|
|
|
|
25,239
|
|
Loan from Jian Chen, non-related individual, due on January 26, 2019 and April 10, 2019, bearing an annual interest rate of 10%, with the principle amount of RMB770,000 ($112,708) and RMB330,000 ($48,304) at January 27, 2018 and April 11, 2018, respectively.
|
|
|
161,012
|
|
|
|
173,518
|
|
Loan from Qing Kong, non-related individual, due on March 6, 2019, with an annual interest rate of 10% at March 7, 2018.
|
|
|
70,845
|
|
|
|
76,348
|
|
Loan from Qing Kong, non-related individual, due on January 8, 2019, with an annual interest rate of 10% at January 9, 2018.
|
|
|
29,275
|
|
|
|
31,549
|
|
Loan from Guihai Chen, non-related individual, due on March 10, 2019, with an annual interest rate of 10% at March 11, 2018.
|
|
|
17,565
|
|
|
|
18,929
|
|
Loan from Guihai Chen, non-related individual, due on September 20, 2018, with an annual interest rate of 10% at September 21, 2017.
|
|
|
29,275
|
|
|
|
31,549
|
|
Loan Weifeng Kong, non-related individual, due on November 28, 2018, with an annual interest rate of 10% at November 29, 2017.
|
|
|
29,275
|
|
|
|
31,549
|
|
Loan Shidong Wang, non-related individual, due on March 7, 2019, with an annual interest rate of 4% at March 8, 2018.
|
|
|
1,522,292
|
|
|
|
1,640,534
|
|
Loan from Xuxu Gu, non-related individual, due on March 8, 2019, with an annual interest rate of 4% at March 9, 2017.
|
|
|
1,463,743
|
|
|
|
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.
|
|
|
1,463,743
|
|
|
|
1,577,436
|
|
Total
|
|
$
|
7,469,891
|
|
|
$
|
8,302,489
|
|
Long-term loan payable
Long-term loans are 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 July 31, 2018 and April 30, 2018, long-term loans consisted of the following:
|
|
July 31, 2018
|
|
|
April 30, 2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Loan Xuxu Gu, non-related individual, due on September 27, 2019, with an annual interest rate of 4% at September 28, 2017.
|
|
$
|
1,566,205
|
|
|
$
|
1,687,857
|
|
Loan Xuxu Gu, non-related individual, due on July 13, 2020, with an annual interest rate of 4% at July 14, 2018.
|
|
|
424,485
|
|
|
|
-
|
|
Loan Mingbang Ma, non-related individual, due on May 22, 2020, with an annual interest rate of 4% at May 23, 2018.
|
|
|
292,749
|
|
|
|
-
|
|
Loan Weiwei Lian, non-related individual, due on May 29, 2020, with an annual interest rate of 4% at May 30, 2018.
|
|
|
1,463,743
|
|
|
|
-
|
|
Loan Guanghua Xia, non-related individual, due on June 8, 2020, with an annual interest rate of 4% at June 9, 2018.
|
|
|
1,317,369
|
|
|
|
-
|
|
Loan Yuehu Zhou, non-related individual, due on June 12, 2020, with an annual interest rate of 4% at June 13, 2018.
|
|
|
1,317,369
|
|
|
|
-
|
|
Total:
|
|
$
|
6,381,920
|
|
|
$
|
1,687,857
|
|
For the three months ended July 31, 2018 and 2017, interest expense related to short-term loans and long-term loans amounted to $149,351 and $95,397, respectively, which were included in interest expense in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.
NOTE 10 - SEGMENT INFORMATION
The following information is presented in accordance with ASC Topic 280, "Segment Reporting", for the three months ended July 31, 2018 and 2017; we accounted for 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. Condensed financial information with respect to these reportable business segments for the three months ended July 31, 2018 and 2017 is as follows:
|
|
Three Months Ended July 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
Chinese medicine - third party
|
|
$
|
832,799
|
|
|
$
|
681,266
|
|
Chinese medicine - related party
|
|
|
3,367
|
|
|
|
-
|
|
Total Chinese medicine
|
|
$
|
836,166
|
|
|
$
|
681,266
|
|
|
|
|
|
|
|
|
|
|
Stevioside - third party
|
|
|
3,597,580
|
|
|
|
2,994,500
|
|
Stevioside - related party
|
|
|
1,399,580
|
|
|
|
121,556
|
|
Total Stevioside
|
|
|
4,997,160
|
|
|
|
3,116,056
|
|
Total segment and consolidated revenues
|
|
$
|
5,833,326
|
|
|
$
|
3,797,322
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense):
|
|
|
|
|
|
|
|
|
Chinese medicine
|
|
$
|
380
|
|
|
$
|
163
|
|
Stevioside
|
|
|
(184,994
|
)
|
|
|
(117,462
|
)
|
Corporate and other
|
|
|
-
|
|
|
|
-
|
|
Total segment and consolidated interest expense
|
|
$
|
(184,614
|
)
|
|
$
|
(117,299
|
)
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Chinese medicine
|
|
$
|
41,381
|
|
|
$
|
67,782
|
|
Stevioside
|
|
|
269,996
|
|
|
|
382,606
|
|
Total segment and consolidated depreciation and amortization
|
|
$
|
311,377
|
|
|
$
|
450,388
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
Chinese medicine
|
|
$
|
(87,795
|
)
|
|
$
|
(75,716
|
)
|
Stevioside
|
|
|
(729,332
|
)
|
|
|
(658,875
|
)
|
Corporate and other
|
|
|
(373,210
|
)
|
|
|
(372,837
|
)
|
Total consolidated loss before income taxes
|
|
$
|
(1,190,337
|
)
|
|
$
|
(1,107,428
|
)
|
|
|
July 31, 2018
|
|
|
April 30, 2018
|
|
Segment property and equipment:
|
|
|
|
|
|
|
Chinese medicine
|
|
$
|
1,022,608
|
|
|
$
|
1,129,884
|
|
Stevioside
|
|
|
7,975,845
|
|
|
|
7,923,002
|
|
Corporate and other
|
|
|
-
|
|
|
|
-
|
|
Total consolidated assets
|
|
$
|
8,998,453
|
|
|
$
|
9,052,886
|
|
NOTE 11 - CONCENTRATIONS AND CREDIT RISK
(i) Customer Concentrations
For the three months ended July 31, 2018 and 2017, customers accounting for 10% or more of the Company's revenue were as follows:
|
Net Sales
|
|
|
For the three months ended July 31, 2018
|
|
For the three months ended July 31, 2017
|
|
|
Chinese Medicine
|
|
Stevioside
|
|
Chinese Medicine
|
|
Stevioside
|
|
Qufu Shengwang Import and Export Trade Co., Ltd(1)
|
|
|
-
|
|
|
|
24.0
|
%
|
|
|
-
|
|
|
|
*
|
|
Shandong Yidatong Enterprises Co., Ltd
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11.3
|
%
|
Total
|
|
|
-
|
|
|
|
24.0
|
%
|
|
|
-
|
|
|
|
11.3
|
%
|
(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 three months ended July 31, 2017.
(ii) Vendor Concentrations
For the three months ended July 31, 2018 and 2017, suppliers accounting for 10% or more of the Company's purchase were as follows:
|
Net Purchases
|
|
|
For the three months ended July 31, 2018
|
|
For the three months ended July 31, 2017
|
|
|
Chinese Medicine
|
|
Stevioside
|
|
Chinese Medicine
|
|
Stevioside
|
|
Dongtai Jintudi Stevia Co., Ltd
|
|
|
-
|
|
|
|
*
|
|
|
|
-
|
|
|
|
15.2
|
%
|
Dongtai Yandun Stevia Corp.
|
|
|
-
|
|
|
|
16.6
|
%
|
|
|
-
|
|
|
|
32.5
|
%
|
Dongtai Zhongxin Stevia Corp.
|
|
|
-
|
|
|
|
40.2
|
%
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
-
|
|
|
|
56.8
|
%
|
|
|
-
|
|
|
|
47.7
|
%
|
* This represents less than 10% of the Company's purchase for the three months ended July 31, 2018.
(iii) Credit Risk
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 the PRC. As of July 31, 2018, we had $157,696 of cash balance 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 July 31, 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.
NOTE 12 - 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 unaudited condensed consolidated financial statements.