The accompanying notes are an integral part of these consolidated financial statements.
The consolidated financial statements include the financial statements of Spring Pharmaceutical, Landway Nano and its 97% owned subsidiary, Shandong Spring. All inter-company transactions and balances are eliminated in consolidation.
The following exchange rates were used to translate the amounts from RMB into United States dollars ("USD$") for the respective periods:
Spring Pharmaceutical and Landway Nano were incorporated in the United States of America and are subject to United States federal taxation. No provisions for income taxes have been made, as there was no taxable income from U.S. operations for the three and six months ended September 30, 2018 and 2017. The Company has net loss carryforward of approximately $22,000, which will expire in 2037. The Company has set up 100% valuation allowance on deferred tax assets resulting from net operating loss incurred in the U.S.
The U.S. Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017 and introduces significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduces the U.S. statutory tax rate from 35% to 21% and creates new taxes on certain foreign-sourced earnings and certain related-party payments.
The reconciliation of income tax expense at the U.S. statutory rate of 21% and 35% in 2018 and 2017, to the Company's effective tax rate is as follows:
The security deposit to related party of $1,453,657 represents the deposit paid to Shandong Yongchuntang Group Co., Ltd ("Shandong Yongchuntang") on January 4, 2017 for using the direct-sales license issued to Shandong Yongchuntang. The amount is non-interest bearing and not secured. Shandong Yongchuntang owns 3% of the equity of Shandong Spring.
On September 30, 2018 and March 31, 2018, purchase deposit to related party of $1,286,166 and $1,412,864, respectively, pertains to a purchase deposit paid in respect of the purchase of healthcare products from Shandong Yongchuntang.
The Company is authorized by Shandong Yongchuntang to sell Shandong Yongchuntang's products using the direct-sales license issued to Shandong Yongchuntang. As a condition for using the direct-sales license, the Company needs to make 20% sales increase each year based on 95% of sales in the year 2014. If the Company cannot meet this sales target in any year from April 1, 2017 to June 30, 2020, a security deposit of approximately $1.5 million will be used as an annual fee for using the direct-sales license. There is a risk that the Company may fail to meet the sales target and may need to pay approximately $1.5 million in the subsequent years.
Total purchases from Shandong Yongchuntang represented 40% and 49% of our total purchases during the six months ended September 30, 2018 and 2017, respectively. The purchases from three other vendors represented 26%, 11%, and 11% of the Company's total purchases for the six months ended September 30, 2018. The purchases from two other vendors represented 20% and 16% of the Company's total purchases for the six months ended September 30, 2017.
NOTE 10 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events that have occurred after the date of the balance sheet through the date of issuance of these consolidated financial statements and determined that no subsequent event requires recognition or disclosure to the consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation
You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this Form 10-Q and our audited financial statements included in our Annual Report on Form 10-K. This discussion contains forward-looking statements. These forward-looking statements are based on information available at the time the statements are made and/or management's belief as of that time with respect to future events and involve risks and uncertainties that could cause actual results and outcomes to be materially different. Important factors that could cause such differences include but are not limited to: competitive factors, general economic conditions, customer relations, relationships with vendors, the interest rate environment, governmental regulation and supervision, seasonality, distribution networks, product introductions and acceptance, technological change, changes in industry practices, onetime events and other factors described herein and in other filings made by the company with the Securities and Exchange Commission. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, and therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to the date this Form 10-Q is filed with the Securities and Exchange Commission.
We were incorporated in the State of Florida in January 1989 and reincorporated in the State of Delaware on April 4, 2007. We operate principally through our wholly-owned subsidiary, Landway Nano Bio-Tech, Inc. ("Landway Nano"), incorporated in Delaware, which, in turn, owns 97% of Shandong Spring Pharmaceutical Co., Ltd. ("Shandong Spring"), incorporated in the People's Republic of China (the "PRC"). We, through Shandong Spring, are engaged in the business of (i) distributing health care supplement products, (ii) developing, manufacturing, and selling Huoliyuan capsules, a prescription medicine, and (iii) developing the acer truncatum bunge planting bases and selling acer truncatum seed oil in the PRC. Acer truncatum bunge plants are a species of maple tree.
The Company's proprietary product, Huoliyuan capsule, is a China Food and Drug Administration ("CFDA") approved prescription TCM that has a wide range of therapeutic benefits. It is the only TCM of its kind made in slow-release capsule form for improved absorption rate and therapeutic effects.
Since July 2015, the Company has also produced acer truncatum bunge seed oil and sold the product to customers through an Internet direct sales system operated by the Company pursuant to an agreement with Shandong Yongchuntang. Currently, the acer truncatum bunge seed oil is extracted from acer truncatum pods that are purchased from third party vendors. We expect that approximately 10% of our self-grown acer truncatum pods will be ready for use in production during the last quarter of 2018, and the rest of the self-grown acer truncatum pods will be gradually ready for use in production during the next two to three years depending upon the timing of their harvest. The Company currently has a 5,880 mu (approximately 2,324.77 acres) acer truncatum bunge plantation base coupled with modern production facilities. We believe it is the only company in China able to achieve industrial-scale production and vertically integrated capability for acer truncatum bunge seed oil products.
On March 18, 2017, the Company entered into an Acquisition Agreement on Acer Truncatum Industrial Project (the "Agreement") with Shandong Yongchuntang. Pursuant to the Agreement, the Company agreed to transfer a 3% equity interest in Shandong Spring in exchange for tangible and intangible assets related to the Acer Truncatum Industrial Project (the "Project"), which were owned by Shandong Yongchuntang. As a result of this transaction, Shandong Yongchuntang has become a 3% shareholder of Shandong Spring.
On August 28, 2018, we filed a Certificate of Amendment to our Articles of Incorporation with the State of Delaware to change our Company's name from China YCT International Group, Inc. to Spring Pharmaceutical Group, Inc. The name change was effective as of the filing of the Certificate of Amendment with the State of Delaware.
Results of Operations
The following table sets forth information from our statements of comprehensive income (loss) for the three months ended September 30, 2018 and 2017, in dollars:
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
$
|
|
|
%
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
Change
|
|
|
Sales
|
|
|
18,684,939
|
|
|
|
13,866,784
|
|
|
|
4,818,155
|
|
|
|
34.7
|
%
|
|
Cost of Goods sold
|
|
|
10,619,845
|
|
|
|
8,811,390
|
|
|
|
1,808,455
|
|
|
|
20.5
|
%
|
|
Gross Profit
|
|
|
8,065,094
|
|
|
|
5,055,394
|
|
|
|
3,009,700
|
|
|
|
59.5
|
%
|
|
Operating Expenses
|
|
|
2,492,297
|
|
|
|
2,012,438
|
|
|
|
479,859
|
|
|
|
23.8
|
%
|
|
Operating Income
|
|
|
5,572,797
|
|
|
|
3,042,956
|
|
|
|
2,529,841
|
|
|
|
83.1
|
%
|
|
Interest Income
|
|
|
34,972
|
|
|
|
31,199
|
|
|
|
3,773
|
|
|
|
12.1
|
%
|
|
Income Tax Provision
|
|
|
1,401,942
|
|
|
|
768,539
|
|
|
|
633,403
|
|
|
|
82.4
|
%
|
|
Net Income
|
|
|
4,205,827
|
|
|
|
2,305,616
|
|
|
|
1,900,211
|
|
|
|
82.4
|
%
|
|
Comprehensive Income
|
|
|
80,711
|
|
|
|
4,214,415
|
|
|
|
(4,133,704
|
)
|
|
|
(98.1
|
)%
|
The following table sets forth information from our statements of comprehensive income (loss) for the six months ended September 30, 2018 and 2017, in dollars:
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
$
|
|
|
%
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
Change
|
|
|
Sales
|
|
|
39,573,786
|
|
|
|
31,001,649
|
|
|
|
8,572,137
|
|
|
|
27.7
|
%
|
|
Cost of Goods sold
|
|
|
22,584,545
|
|
|
|
19,098,538
|
|
|
|
3,486,007
|
|
|
|
18.3
|
%
|
|
Gross Profit
|
|
|
16,989,241
|
|
|
|
11,903,111
|
|
|
|
5,086,130
|
|
|
|
42.7
|
%
|
|
Operating Expenses
|
|
|
5,287,682
|
|
|
|
4,221,513
|
|
|
|
1,066,169
|
|
|
|
25.3
|
%
|
|
Operating Income
|
|
|
11,701,559
|
|
|
|
7,681,598
|
|
|
|
4,019,961
|
|
|
|
52.3
|
%
|
|
Interest Income
|
|
|
75,045
|
|
|
|
56,302
|
|
|
|
18,743
|
|
|
|
33.3
|
%
|
|
Gain on Disposal of Acer Truncatum Bunge Plants
|
|
|
-
|
|
|
|
573,092
|
|
|
|
(573,092
|
)
|
|
|
(100.0
|
)%
|
|
Income Tax Provision
|
|
|
2,944,151
|
|
|
|
2,077,748
|
|
|
|
866,403
|
|
|
|
41.7
|
%
|
|
Net Income
|
|
|
8,832,453
|
|
|
|
6,233,244
|
|
|
|
2,599,209
|
|
|
|
41.7
|
%
|
|
Comprehensive Income (Loss)
|
|
|
(830,025
|
)
|
|
|
9,797,544
|
|
|
|
(10,627,569
|
)
|
|
|
(108.5
|
)%
|
Revenue
During the three months ended September 30, 2018, we realized $18,684,939 in revenue, representing an increase of 34.7% or $4,818,155 as compared to $13,866,784 for the same period in 2017. The increase in revenue in RMB was 38.7% as compared to the three months ended September 30, 2017, but 4.0% of the increase was offset by fewer USD converted from RMB due to RMB depreciation that occurred in the three months ended September 30, 2018, compared with the same period in 2017. The total 38.7% revenue increase in RMB was due to the increased sales of health care products, acer truncatum bunge seed oil, and Huoliyuan Capsule.
During the six months ended September 30, 2018, we realized $39,573,786 in revenue, representing an increase of 27.7%
or $8,572,137 as compared to $31,001,649 for the same period in 2017. The increase in revenue in RMB was 24.6%
as compared to the six months ended September 30, 2017. The other 3.1% of the increase in dollar denominated revenue was attributable to the RMB appreciation during the six months ended September 30, 2018 compared with the same period in 2017. The total 24.6% revenue increase in RMB was due to the increased sales of health care products, acer truncatum bunge seed oil, and Huoliyuan Capsule.
Part of our revenues was generated by us as the distributor for the health care products manufactured by Shandong Yongchuntang. We purchase the products from Shandong Yongchuntang, a related party, according to the purchase contract signed between the Company and Shandong Yongchuntang. Pursuant to the renewed one-year contract dated February 20, 2017, the Company agreed to purchase nine products from Shandong Yongchuntang at fixed prices. On February 21, 2018, the Company further renewed the purchase contract with Shandong Yongchuntang for a term of one year ending on February 25, 2019. Pursuant to this most recently renewed one-year contract, the Company continues to purchase the nine products from Shandong Yongchuntang at fixed prices without changes in any terms of the previous contract. During the three months ended September 30, 2018, 37.0% of our total revenue was generated as the distributor of Shandong Yongchuntang, compared to 39.8% during the three months ended September 30, 2017. During the six months ended September 30, 2018, 37.7% of our total revenue was generated as the distributor of Shandong Yongchuntang, compared to 43.1% during the six months ended September 30, 2017.
For the three months ended September 30, 2018, our revenue from sales of the health care products was $6,918,146, representing an increase of 25.3% or $1,398,948 as compared to $5,519,198 for the same period in 2017. For the six months ended September 30, 2018, our revenue from sales of the health care products was $14,928,744, representing an increase of 11.7% or $1,564,545 as compared to $13,364,199 for the same period in 2017. The increase in sales of the health care products was primarily due to the growth of our customer basis and the internet direct-sales.
The sales of Huoliyuan Capsule accounted for 37.8% of our revenue during the three months ended September 30, 2018, compared to 49.4% during the three months ended September 30, 2017. The sales of Huoliyuan Capsule accounted for 37.1% of our revenue during the six months ended September 30, 2018, compared to 42.7% during the six months ended September 30, 2017. The sales of the Huoliyuan Capsule during the three months ended September 30, 2018 were $7,067,046, an increase of 3.1% or $210,677 as compared to the three months ended September 30, 2017. The sales of the Huoliyuan Capsule during the six months ended September 30, 2018 were $14,697,336, an increase of 10.9% or $1,445,925 as compared to the six months ended September 30, 2017. The increase in sales of Huoliyuan Capsule was primarily due to the stabilization of the market competition.
Since July 2015, we have produced acer truncatum bunge seed oil and sold the product to customers through our distributors. The acer truncatum bunge seed oil was extracted from the acer truncatum pods that were purchased from third party vendors. We expect that approximately 10%of our self-grown acer truncatum pods will be ready for use in production during the last quarter of 2018, and the rest of the self-grown acer truncatum pods will be gradually ready for use in production during the next two to three years depending upon the timing of their harvest. During the three months ended September 30, 2018, 25.2% of our total revenue was generated from the sales of acer truncatum oil products, compared to 10.8% during the same period in 2017. During the three months ended September 30, 2018, the sales of acer truncatum bunge seed oil was $4,699,747, representing an increase of 215.2% or $3,208,530 compared to $1,491,217 for the same period in 2017. During the six months ended September 30, 2018, 25.2% of our total revenue was generated from the sales of acer truncatum oil products, compared to 14.2% during the same period in 2017. During the six months ended September 30, 2018, the sales of acer truncatum bunge seed oil was $9,947,706, representing an increase of 126.8% or $5,561,667 compared to $4,386,039 for the same period in 2017. The significant increase in sales of acer truncatum seed oil products was primarily due to the continuing promotion of our acer truncatum bunge seed oil by organizing conferences to introduce the features and benefits of the product to our distributors and customers.
The following is the sales breakdown by products during the three months ended September 30, 2018 and 2017:
|
|
|
For the Three Months
Ended September 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Health care supplements
|
|
|
6,918,146
|
|
|
|
37.0
|
%
|
|
|
5,519,198
|
|
|
|
39.8
|
%
|
|
Drugs (Huoliyuan capsule)
|
|
|
7,067,046
|
|
|
|
37.8
|
%
|
|
|
6,856,369
|
|
|
|
49.4
|
%
|
|
Acer truncatum oil
|
|
|
4,699,747
|
|
|
|
25.2
|
%
|
|
|
1,491,217
|
|
|
|
10.8
|
%
|
|
Total
|
|
|
18,684,939
|
|
|
|
100.0
|
%
|
|
|
13,866,784
|
|
|
|
100.0
|
%
|
The following is the sales breakdown by products during the six months ended September 30, 2018 and 2017:
|
|
|
For the Six Months
Ended September 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Health care supplements
|
|
|
14,928,744
|
|
|
|
37.7
|
%
|
|
|
13,364,199
|
|
|
|
43.1
|
%
|
|
Drugs (Huoliyuan capsule)
|
|
|
14,697,336
|
|
|
|
37.1
|
%
|
|
|
13,251,411
|
|
|
|
42.7
|
%
|
|
Acer truncatum oil
|
|
|
9,947,706
|
|
|
|
25.2
|
%
|
|
|
4,386,039
|
|
|
|
14.2
|
%
|
|
Total
|
|
|
39,573,786
|
|
|
|
100.1
|
%
|
|
|
31,001,649
|
|
|
|
100.1
|
%
|
Our cost of goods sold were comprised primarily of the cost of finished goods we purchased from Shandong Yongchuntang, the raw materials we purchased from third party vendors, and the manufacturing costs of acer truncatum bunge seed oil, and Huoliyuan Capsule. The cost of manufacturing Huoliyuan Capsule was approximately 46.5% and 55.5% of the total cost of goods sold during the three months ended September 30, 2018 and 2017, respectively. The cost of manufacturing Huoliyuan Capsule was approximately 45.9% and 48.3% of the total cost of goods sold during the six months ended September 30, 2018 and 2017, respectively. The cost of manufacturing acer truncatum bunge seed oil was approximately 17.3% and 9.8% of the total cost of goods sold during the three months ended September 30, 2018 and 2017, respectively. The cost of manufacturing acer truncatum bunge seed oil was approximately
17.3% and 12.9% of the total cost of goods sold during the six months ended September 30, 2018 and 2017, respectively.
During the three months ended September 30, 2018, our cost of goods sold totaled $10,619,845, representing an increase of $1,808,455 or 20.5% as compared to $8,811,390 during the three months ended September 30, 2017. The percentages of the cost of goods sold to total revenues decreased from 63.5% for the three months ended September 30, 2017 to 56.8% for the three months ended September 30, 2018. During the six months ended September 30, 2018, our cost of goods sold totaled $ 22,584,545, representing an increase of $3,486,007 or 18.3% as compared to $19,098,538 during the six months ended September 30, 2017. The percentages of the cost of goods sold to total revenues decreased from 61.6% for the six months ended September 30, 2017 to
57.1% for the six months ended September 30, 2018. The decrease in the percentages of the costs of goods sold to total revenues was primarily due to the decreased raw material, packaging and manufacturing cost for acer truncatum bunge seed oil products.
Gross Profit
Gross profit for the three months ended September 30, 2018 was $8,065,094, an increase of 59.5% or $3,009,700 as compared to the same period for the prior year. The overall gross profit as a percentage of net revenues was approximately 43.2% for the three months ended September 30, 2018, an increase of 6.7% from 36.5% for the same period of 2017. The gross profit as percentage of net revenues for the health care products was approximately 44.3% for the three months ended September 30, 2018, a slight decrease from 44.5% for the same period of 2017. The gross profit as percentage of net revenues for Huoliyuan was approximately 30.2% for the three months ended September 30, 2018, a slight increase from 28.7% for the same period of 2017. The gross profit as percentage of net revenues for acer truncatum bunge seed oil was approximately 61.0% for the three months ended September 30, 2018, increased from 42.1% for the same period of 2017. The higher gross profit as percentage of net revenue for the acer truncatum bunge seed oil during the three months ended September 30, 2018 was primarily due to the decreased raw material, packaging and manufacturing cost.
The comparison of the gross profits for the three months ended September 30, 2018 and 2017 is as follows:
|
|
|
September 30,
2018
|
|
|
Gross
Profit
Margin
|
|
|
September 30,
2017
|
|
|
Gross
Profit
Margin
|
|
|
Change
in $
|
|
|
Variance
|
|
|
Health care supplements
|
|
|
3,066,425
|
|
|
|
44.3
|
%
|
|
|
2,456,533
|
|
|
|
44.5
|
%
|
|
|
609,892
|
|
|
|
24.8
|
%
|
|
Drugs (Huoliyuan capsule)
|
|
|
2,131,152
|
|
|
|
30.2
|
%
|
|
|
1,970,445
|
|
|
|
28.7
|
%
|
|
|
160,707
|
|
|
|
8.2
|
%
|
|
Acer truncatum oil
|
|
|
2,867,517
|
|
|
|
61.0
|
%
|
|
|
628,416
|
|
|
|
42.1
|
%
|
|
|
2,239,101
|
|
|
|
356.3
|
%
|
|
Total
|
|
|
8,065,094
|
|
|
|
43.2
|
%
|
|
|
5,055,394
|
|
|
|
36.5
|
%
|
|
|
3,009,700
|
|
|
|
59.5
|
%
|
Gross profit for the six months ended September 30, 2018 was $16,989,241, an increase of 42.7% or $5,086,130 as compared to the same period for the prior year. The overall gross profit as a percentage of net revenues was approximately 42.9% for the six months ended September 30, 2018, increased from 38.4% for the same period of 2017. The gross profit as percentage of net revenues for the health care products was approximately 44.4% for the six months ended September 30, 2018, a slight decrease from 44.6% for the same period of 2017. The gross profit as percentage of net revenues for Huoliyuan was approximately 29.4% for the six months ended September 30, 2018, a slight decrease from 30.4% for the same period of 2017. The gross profit as percentage of net revenues for acer truncatum bunge seed oil was approximately 60.7% for the six months ended September 30, 2018, increased from 43.7% for the same period of 2017. The higher gross profit as percentage of net revenue for the acer truncatum bunge seed oil during the six months ended September 30, 2018 was primarily due to the decreased raw material, packaging and manufacturing cost.
The comparison of the gross profits for the six months ended September 30, 2018 and 2017 is as follows:
|
|
|
September 30,
2018
|
|
|
Gross
Profit
Margin
|
|
|
September 30,
2017
|
|
|
Gross
Profit
Margin
|
|
|
Change
in $
|
|
|
Variance
|
|
|
Health care supplements
|
|
|
6,623,716
|
|
|
|
44.4
|
%
|
|
|
5,964,647
|
|
|
|
44.6
|
%
|
|
|
659,069
|
|
|
|
11.0
|
%
|
|
Drugs (Huoliyuan capsule)
|
|
|
4,324,819
|
|
|
|
29.4
|
%
|
|
|
4,022,212
|
|
|
|
30.4
|
%
|
|
|
302,607
|
|
|
|
7.5
|
%
|
|
Acer truncatum oil
|
|
|
6,040,706
|
|
|
|
60.7
|
%
|
|
|
1,916,252
|
|
|
|
43.7
|
%
|
|
|
4,124,454
|
|
|
|
215.2
|
%
|
|
Total
|
|
|
16,989,241
|
|
|
|
42.9
|
%
|
|
|
11,903,111
|
|
|
|
38.4
|
%
|
|
|
5,086,130
|
|
|
|
42.7
|
%
|
Research and Development Expenses
Our R&D expenses for the three months ended September 30, 2018 were $68,424 or approximate 0.4% of total corresponding revenue, an increase of $6,391 or 10.3%, as compared to $62,033 or approximately 0.4% of total corresponding revenue for the three months ended September 30, 2017. Our R&D expenses for the six months ended September 30, 2018 were $391,157 or approximate 1.0% of total corresponding revenue, an increase of $264,746 or 209.4%, as compared to $126,411 or approximately 0.4% of total corresponding revenue for the six months ended September 30, 2017. The increase in R&D expenses was primarily due to the increased cost of the materials used by the R&D department.
Our long-term goal is to utilize advanced biological technology to refine and extract the beneficial compounds in plants that have traditionally been known to have medicinal benefits, primarily gingko and acer truncatum bunge plants. As of September 30, 2018, we had 27 staff in R&D department.
Our selling expenses consist primarily of sales commissions, advertising and promotion expenses, freight charges and related compensation. Our selling expenses for the three months ended September 30, 2018 were $1,312,878 or 7.0% of our total revenue for the period, representing a decrease on the percentage of total revenue from 7.8% for the prior year's quarter ended September 30, 2017. Our selling expenses for the three months ended September 30, 2018 increased by 21.3% or $230,731 as compared to the same period in the prior year. The increase in selling expenses was primarily due to the increase in shipping cost and sales commission as a result of increased sales.
Our selling expenses for the six months ended September 30, 2018 were $2,704,481 or 6.8% of our total revenue for the period, representing a decrease on the percentage of total revenue from 7.5% for the prior year's six months ended September 30, 2017. Our selling expenses for the six months ended September 30, 2018 increased by 16.7% or $386,042 as compared to the same period in the prior year. The increase in selling expenses was primarily due to the increase in shipping cost and sales commission as a result of increased sales.
Our G&A expenses for the three months ended September 30, 2018 were $1,110,995 or 5.9% of our total revenue for the period, representing a decrease on the percentage of total revenue from 6.3% for the prior year's quarter ended September 30, 2017. Our G&A expenses for the three months ended September 30, 2018 increased by 28.0% or $242,737 as compared to the same period in the prior year. The increase in G&A expenses was primarily due to the increase in legal and consulting fees.
Our G&A expenses for the six months ended September 30, 2018 were $2,192,044 or 5.5% of our total revenue for the period, representing a slight decrease on the percentage of total revenue from 5.7% for the prior year's six months ended September 30, 2017. Our G&A expenses for the six months ended September 30, 2018 increased by 23.4% or $415,381 as compared to the same period in the prior year. The increase in G&A expenses was primarily due to the increase in legal and consulting fees.
As a result of above, during the three months ended September 30, 2018, we realized net income of $4,205,827, representing an 82.4% or $1,900,211 increase, compared to $2,305,616 during the three months ended September 30, 2017. The increase was mainly due to the higher revenue from sales of acer truncatum bunge seed oil and health care supplement and the lower production cost for acer truncatum bunge seed oil.
During the six months ended September 30, 2018, we realized net income of $8,832,453, representing a 41.7% or $2,599,209 increase, compared to $6,233,244 during the six months ended September 30, 2017. The increase was mainly due to the higher revenue from sales of all products and the lower production cost for acer truncatum bunge seed oil.
Income Taxes
Income tax expense increased by $633,403 during the three months ended September 30, 2018, as compared to the prior quarter ended September 30, 2017, as a result of the increase in income from operation.
Income tax expense increased by $866,403 during the six months ended September 30, 2018, as compared to the six months ended September 30, 2017, as a result of the increase in income from operation.
Comprehensive Income (Loss)
Our business operates entirely in Chinese RMB, but we report our results in our SEC filings in U.S. Dollars. The conversion of our accounts from RMB to Dollars results in translation adjustments, which are reported as a middle step between net income and comprehensive income. The net income is added to the retained earnings on our balance sheet while the translation adjustment is added to a line item on our balance sheet labeled "Accumulated other comprehensive income (loss)," since it is more reflective of changes in the relative values of U.S. and Chinese currencies than of the success of our business. During the three months ended September 30, 2018, the effect of converting our financial results to Dollars was a loss of $4,125,116 to our other comprehensive income, as compared to income of $1,908,799 during the three months ended September 30, 2017 as a result of the currency exchange rate fluctuation.
During the six months ended September 30, 2018, the effect of converting our financial results to Dollars was
a loss of $9,662,478 to our other comprehensive income, as compared to income of $3,564,300 during the six months ended September 30, 2017 as a result of the currency exchange rate fluctuation.
On March 18, 2017, Shandong Yongchuntang became a 3% shareholder of Shandong Spring. During the three months ended September 30, 2018, $2,422 of comprehensive income was attributable to Shandong Yongchuntang.
During the six months ended September 30, 2018, $24,900 of comprehensive loss was attributable to Shandong Yongchuntang.
Liquidity and Capital Resources
Our principal sources of liquidity were generated from our operations. As of September 30, 2018, we had $33,964,064 in working capital, an increase of $5,881,126 or 20.9% as compared to $28,082,938 in working capital as of March 31, 2018. Based on our current operating plan, we believe that existing cash and cash equivalents balances, and the funds to be generated by operations will be sufficient to meet our working capital and capital requirements for our current operations for at least the next 12 months. Our operations produced positive cash flow of $9,936,718 during the six months ended September 30, 2018. We expect our marketing activities to continue to help generate positive cash flow. The operations of our own manufacturing since fiscal year 2010 and the development of our own acer truncatum bunge planting bases have put some pressure on our cash flow. We may be required to seek additional capital and reduce certain spending as needed on an on-going basis. There can be no assurance that any additional financing will be available on acceptable terms.
In order to fully implement our business plan, however, we will require capital contributions in excess of our current asset value. While our self-generated funds are sufficient for bringing our manufacturing facility to an operating level that assures profitability, we still need additional funding for market development and further promotion of our products. Our expectation, therefore, is that we will seek to access the capital markets in both the U.S. and China to obtain the funds we need. At present, we have no commitment from any source for additional funds and there can be no assurance that the funds will be available on terms acceptable to us.
The following table sets forth a summary of our cash flows for the periods indicated:
|
|
|
For the Six Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Change in $
|
|
|
Change in %
|
|
|
Net cash provided by operating activities
|
|
$
|
9,936,718
|
|
|
$
|
10,740,623
|
|
|
|
(803,905
|
)
|
|
|
(7.5
|
)%
|
|
Net cash used in investing activities
|
|
$
|
(781,858
|
)
|
|
$
|
(2,416,389
|
)
|
|
|
1,634,531
|
|
|
|
(67.6
|
)%
|
|
Effect of exchange rate change on cash and cash equivalents
|
|
$
|
(2,559,334
|
)
|
|
$
|
558,074
|
|
|
|
(3,117,408
|
)
|
|
|
(558.6
|
)%
|
|
Net increase in cash and cash equivalents
|
|
$
|
6,595,526
|
|
|
$
|
8,882,308
|
|
|
|
(2,286,782
|
)
|
|
|
(25.7
|
)%
|
|
Cash and cash equivalents, beginning balance
|
|
$
|
25,353,360
|
|
|
$
|
10,308,622
|
|
|
|
15,044,738
|
|
|
|
145.9
|
%
|
|
Cash and cash equivalents, ending balance
|
|
$
|
31,948,886
|
|
|
$
|
19,190,930
|
|
|
|
12,757,956
|
|
|
|
66.5
|
%
|
Operating Activities
Net cash provided by operating activities was $9,936,718 for the six months ended September 30, 2018, which was a decrease of 7.5% or $803,905 from the $10,740,623 net cash provided by operating activities for the same period of the prior year
.
The decrease primarily resulted from increased cash outflow from the increased balance in prepaid leases; and decreased balance in accounts payable and advance from customers offset by increased cash inflow, resulting from higher net income and increased balance in tax payable.
Investing Activities
During the six months ended September 30, 2018, our net cash used in investing activities was $781,858, as compared to $2,416,389 of net cash used for the six months ended September 30, 2017. The cash used in investing activities for the six months ended September 30, 2018 of $781,858 was primarily attributable to the acquisition of property, plant and equipment of $68,483 and capital expenditures of $713,375 in acer truncatum bunge planting.
During the six months ended September 30, 2017, our net cash used in investing activities was $2,416,389. The cash used in investing activities for the six months ended September 30, 2017 of $2,416,389 was primarily attributable to the acquisition of property, plant and equipment of $2,110,189, and capital expenditures of $2,420,741 in acer truncatum bunge planting, and offsetting by cash receipt of $2,114,541 from disposal of acer truncatum bunge plants.
Financing Activities
No net cash was generated or used by financing activities over the six months ended September 30, 2018 and 2017.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
A smaller reporting company is not required to provide the information required by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The term "disclosure controls and procedures" (defined in SEC Rule 13a-15(e)) refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within required time periods. The Company's management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q (the "Evaluation Date"). Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were not effective. Our material weaknesses in internal control over financial reporting and efforts to correct such weaknesses are discussed in Item 9A of our Annual Report on Form 10-K for the year ended March 31, 2018 filed on June 29, 2018.
Changes in Internal Controls
The term "internal control over financial reporting" (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated any changes in the Company's internal control over financial reporting that occurred during the quarter ended September 30, 2018, and they have concluded that there was no change to the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.