SUNWIN STEVIA INTERNATIONAL, INC. - Quarter Report: 2017 October (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 (Mark One)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2017

or

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to ___________

Commission file number: 000-53595

SUNWIN STEVIA INTERNATIONAL, INC.

(Exact name of registrant as specified in charter)

 

(86) 537-4424999

(Registrant's telephone number, including area code)

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes [X] No [  ]

Indicate by check mark whether the registrant has been submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

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 .  ☐ 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X].

Indicate the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date: As of December 13, 2017, there were 199,632,803 shares of the registrant's common stock issued and outstanding.

 

SUNWIN STEVIA INTERNATIONAL, INC. AND SUBSIDIARIES

FORM 10-Q

 QUARTERLY PERIOD ENDED OCTOBER 31, 2017

 

INDEX

 

FORWARD LOOKING STATEMENTS

INDEX OF CERTAIN DEFINED TERMS USED IN THIS REPORT

We are on a fiscal year ending April 30, as such the year ending April 30, 2018 is referred to as "fiscal 2018" and the year ended April 30, 2017 is referred to as "fiscal 2017".  Also, the three month period ended October 31, 2017 is our second quarter and is referred to as the "second quarter of fiscal 2018". Likewise, the three month period ended October 31, 2016 is referred to as the "second quarter of fiscal 2017".

 

 The information which appears on our website at www.sunwininternational.com is not part of this report.

PART I - FINANCIAL INFORMATION

 

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 operating segments related to our Stevioside and Chinese Medicine product lines and subsidiaries included in continuing operations consisted of the following:

-   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;

-   Sunwin Tech Group, Inc. ("Sunwin Tech"), a wholly owned by Sunwin Stevia International; and

-   Sunwin USA, LLC. ("Sunwin USA"), a wholly owned by Sunwin Stevia International.

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.

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.

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.

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.

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 $92,541 cash payment was paid by China Direct Investment, Inc. ("CDI"), our corporate management services provider, and reimbursed by us to CDI through the issuance of our common shares as part of the terms of the consulting agreement with CDI dated May 1, 2012. 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. In fiscal year 2017, WILD is still 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, 2017 included in our Form 10-K as filed with the SEC. The results of operations and cash flows for the six months ended October 31, 2017 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, 2017 contained herein has been derived from the audited consolidated financial statements as of April 30, 2017, 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;

-                                            Sunwin Tech; 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 October 31, 2017, we held $988,037 of our cash and cash equivalents with commercial banking institutions in the PRC, and $785 with banks in the United States. As of April 30, 2017, we held $30,781 of our cash and cash equivalents with commercial banking institution in PRC, and $20,335 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 October 31, 2017.

 

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. At October 31, 2017 and April 30, 2017, the allowance for doubtful accounts was $1,093,388 and $1,182,632, respectively. We recognized bad debt expenses of $38,702 and $290,272 for the six months ended October 31, 2017 and 2016, respectively and which was offset by a recovery of bad debt reserve of $173,162 and $0, respectively.

INVENTORIES

Inventories, consisting of raw materials, work in process, and finished goods related to our products, are stated at the lower of cost or market (estimated net realizable value) utilizing the weighted average method. An allowance is established when management determines that certain inventories may not be saleable. 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 and the market value. These reserves are recorded based on estimates. At October 31, 2017 and April 30, 2017, the Company recorded a reserve for obsolete or slow-moving inventories of $260,824 and $163,048, 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 $282,720 and $122,285 at October 31, 2017 and April 30, 2017, respectively. We received $1,492 and $0 in cash proceeds form disposal of equipment for the six months ended October 31, 2017 and 2016, 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:

 

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 on October 31, 2017 and April 30, 2017 amounted to $124,817 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.

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 received.

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 October 31, 2017, 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:

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:

 

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 six months ended October 31, 2017 and 2016 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. At October 31, 2017, we had $988,037 of cash balance held in PRC banks, which is not insured. We have not experienced any losses in such accounts through October 31, 2017.

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 $179,977 and $70,269 for the three months ended October 31, 2017 and 2016, and $366,303 and $109,328 for the six months ended October 31, 2017 and 2016, respectively.

 

SHIPPING COSTS

Shipping costs are included in selling expenses and totaled $93,692 and $167,724 for the three months ended October 31, 2017 and 2016, and $162,251 and $251,391 for the six months ended October 31, 2017 and 2016, 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.

RECENT ACCOUNTING PRONOUNCEMENTS

 

 

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 losses with a net loss of approximately $1,842,000 and $2,949,000 for the three and six months ended October 31, 2017, respectively, and has a significant accumulated deficit of $32.1 million at October 31, 2017.  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

At October 31, 2017 and April 30, 2017, inventories consisted of the following:

  

NOTE 4 - PROPERTY AND EQUIPMENT

At October 31, 2017 and April 30, 2017, property and equipment consisted of the following:

For the three months ended October 31, 2017 and 2016, depreciation expense totaled $377,823 and $335,827, of which $340,563 and $249,791 were included in cost of revenues, respectively, and of which $37,260 and $86,036 were included in general and administrative expenses, respectively. For the six months ended October 31, 2017 and 2016, depreciation expense totaled $733,978 and $659,876, of which $623,668 and $502,030 was included in cost of revenues, respectively, and of which $110,310 and $157,846 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

Land use right consisted of the following:

 

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 October 31, 2017 and 2016, amortization expense related to land use rights amounted to $13,326 and $13,204, respectively. For the six month periods ended October 31, 2017 and 2016, amortization expense amounted to $26,265 and $26,586.

 

NOTE 6 - RELATED PARTY TRANSACTIONS

Accounts receivable - related party and revenue - related party

On October 31, 2017 and April 30, 2017, we reported $326,572 and $339,270 in accounts receivable - related party, 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. For the three months ended October 31, 2017 and 2016, we had revenue - related party of $145,824 and $1,948,631, respectively. For the six months ended October 31, 2017 and 2016, we had revenue - related party of $267,380 and $3,462,369, respectively, from Qufu Shengwang Import and Export.

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 six months ended October 31, 2017 and 2016, we received advances from related parties for working capital totaled $4,247,021 and $2,035,881, respectively, and we repaid to related parties a total of $3,474,678 and $1,961,565, respectively. During the three and six months ended October 31, 2017 and 2016, interest expense related to due to related parties amounted to $23,120 and $32,468, and $45,190 and $58,113, 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 7.87% per annum and we have repaid one of the loans of RMB5,000,000 with its accrued interests on April 1, 2017. The other advances bear no interest and are payable on demand. On October 31, 2017, 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., is $691,913, $52,277 and $153,268, 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. On October 31, 2017 and April 30, 2017, due to (from) related party activities consisted of the following:  

  

NOTE 7 - PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets on October 31, 2017 and April 30, 2017 totaled $2,968,579 and $4,729,865, respectively. As of October 31, 2017, prepaid expenses and other current assets includes $1,408,490 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 and $333,421 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 will amortize these compensations over three years from December 1, 2015 to November 30, 2018 and we recognized $613,334, $1,226,668 and $511,111 as stock-based compensation expenses during the six months ended October 31, 2017, fiscal year ended April 30, 2017 and fiscal year ended April 30, 2016, respectively. We also have recorded the remaining balance of the stock-based compensation of $1,328,887 as prepaid compensation, of which $1,226,668 was included in prepaid expenses and other current assets and $102,219 was included in the other long-term asset in the accompanying consolidated balance sheet at October 31, 2017.

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 $463,802 as of October 31, 2017 and the remaining balance of $146,949 and $141,325 has been classified to other long-term asset at October 31, 2017 and April 30, 2017, respectively.

  

NOTE 8 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses included the following as of October 31, 2017 and April 30, 2017:

 

On October 31, 2017, other payables consists of commission payable of $190,907, general liability, worker's compensation, and medical insurance payable of $500,849, consulting fee payable of $199,058, union and education fees payable of $291,499, interest payables for short-term loans of $393,284, advanced from the employees of $249,223 and other miscellaneous payables of $2,335. On 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 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. At October 31, 2017 and April 30, 2017, short-term loans consisted of the following:

 

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. At October 31, 2017 and April 30, 2017, long-term loans consisted of the following:

 

For the three and six months ended October 31, 2017 and 2016, interest expense related to short-term loans and long-term loans amounted to $95,043 and $56,288, and $190,440 and $112,245, 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 October 31, 2017 and 2016; 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. Condensed financial information with respect to these reportable business segments for the three and six months ended October 31, 2017 and 2016 is as follows:

 

 

NOTE 11 - CONCENTRATIONS AND CREDIT RISK

 

(i)    Customer Concentrations

 

For the three months ended October 31, 2017 and 2016, customers accounting for 10% or more of the Company's revenue were as follows:

 

 For the six months ended October 31, 2017 and 2016, customers accounting for 10% or more of the Company's revenue were as follows: 

(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 and six months ended October 31, 2017 and 2016.

(ii)    Vendor Concentrations

For the three months ended October 31, 2017 and 2016, suppliers accounting for 10% or more of the Company's purchase were as follows:

For the six months ended October 31, 2017 and 2016, suppliers accounting for 10% or more of the Company's purchase were as follows:

  

*   This represents less than 10% of the Company's purchase for the three and six months ended October 31, 2017 and 2016.

(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. At October 31, 2017, we had $988,037 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 October 31, 2017.

 

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

 

             On November 29, 2017, we renewed the amount of RMB200,000 ($30,159) loan from Weifeng Kong, non-related individual, with an annual interest rate of 10% and new due date on November 28, 2018.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the information contained in the preceding unaudited condensed consolidated financial statements and footnotes and our 2017 Annual Report on Form 10-K for fiscal year ended April 30, 2017.

 

We sell stevioside, a natural sweetener, as well as herbs used in traditional Chinese medicines. Substantially all of our operations are located in the PRC. We have built an integrated company with the production and distribution capabilities designed to meet the needs of our customers.

 

Our operations were organized in two operating segments related to our product lines:

 

 

Going Concern

The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has a significant accumulated deficit, incurred recurring losses and, its overall sales decreased. 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 forces 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 capitals 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.

 

Recent Developments

We are planning to start building a new facility with annual capacity of 500 metric tons in order to meet substantially increased demand for our high-grade stevia products. In fiscal 2017 and the first two quarters of fiscal 2018, we have invested approximately $88,000 and $482,000, respectively, in this new facility. 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.

Stevioside Segment

Stevioside and rebaudioside are all natural low calorie sweeteners extracted from the leaves of the stevia rebaudiana plant. 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 synthetic chemical based sweetener replacements are not suitable.

Steviosin is a natural low calorie stevioside extract for medicinal use, containing rebaudioside A 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 is an all natural, zero calorie, dietary supplement comprised of three natural ingredients, including stevioside.  Based on our strategy to develop new products that contain our stevia products, we are evaluating our strategy for the sale and distribution of OnlySweet.

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 9001:2008 Certification and ISO 22000:2005 Food Safety Certification. We obtained these certifications in November, 2010.

Chinese Medicine Segment

In our Chinese medicine segment, we manufacture and sell approximately 189 different extracts, which can be divided into the following three general categories:

 

We have evaluated the potential disposition of the Chinese medicine segment to further streamline our product offering and focus our business of producing and selling high-quality stevia products. The exit strategy contemplated for the Chinese medicine segment has also been influenced by our concerns regarding the profitability of this segment in the near future as competition in the Chinese medicine market has strengthened over the past few months. In addition, the Chinese government continues to issue more regulations covering the supply of Chinese herbal raw materials and has increased the regulatory manufacturing standards of this segment. These measures are expected to further increase our raw materials and production costs in the coming quarters and beyond. However, this segment is currently operating at full capacity and we do not expect significant growth potential from this segment in the near future. 

OUR PERFORMANCE

 

 Our revenues totaled approximately $4,970,000 during the three months ended October 31, 2017, a decrease of 8.7%, as compared with the same period in 2016, while our gross margin decreased to 0.9% from 11.6%. Our total operating expenses in the three months ended October 31, 2017 increased by approximately $210,000, or 13.8% compared to the same period in 2016 primarily due to an increase of approximately $110,000, or 156.1% in research and development expenses, an increase of approximately $44,000, or 9.8% in selling expense and an increase of $279,000, or 7,799.4% in loss on disposition of property and equipment, offset by a decrease of approximately $223,000, or 22.5% in general and administrative expense. Our net loss for the three months ended October 31, 2017 was approximately $1,932,000, compared to $911,000 in the same period in 2016, an increase of approximately $1,021,000.

Our revenues totaled $8,767,000 during the six months ended October 31, 2017, a decrease of 10.9% as compared with the same period in 2016, while our gross margin decreased to 5.5% from 12.8%. Our total operating expenses in the six months ended October 31, 2017 increased by approximately $296,000 or 10.0% compared to the same period in 2016, primarily due to an increase of approximately $257,000 or 235.1% in research and development, and an increase of approximately $279,000, or 7,799.4% in loss on disposition of property and equipment, offset by a decrease of $234,000 and $7,000, or 11.9% and 0.8% in general and administrative expense and selling expense, respectively. Our net loss for the six months ended October 31, 2017 was approximately $3,039,000, compared to the $1,745,000 in the same period in 2016, an increase of approximately $1,294,000.

Our operating performance for the three months ended October 31, 2017 was primarily driven by an increase of 5.1% in sales revenue from our Chinese medicine segment, offset by a decrease of 10.8% in sales revenue from our stevia products in our Stevioside segment, including a decrease in sales to related parties of 92.5 % for international customers. Our operating performance for the six months ended October 31, 2017 was primarily driven by an increase of 3.1% in sales revenue from our Chinese medicine segment, offset by a decrease of 13.1% in sales revenue from our stevia products in our Stevioside segment, including a decrease in sales to related parties of 92.3 % for international customers.

While we have broadened our stevia product offerings to include a number of higher quality stevia grades needed in new product formulations we are developing to introduce to the U.S. and European food and beverage industry, the demand for higher grade stevia products has yet to materialize to the degree we had anticipated, and thus we hope that our sales volume in higher grade stevia products will increase in fiscal 2018 as the demands increase. Stevia has been widely accepted by the food industry and many new stevia manufacturers have entered this industry in the past few years, and recently we introduced a new product line. We are now focusing on new types of stevia products, including tablets, liquid, High A products, and others. We expect to consistently increase our sales of our new products; however we cannot quantify this increase and its effects on future periods.

 

The slight increase in revenues in our Chinese medicine was primarily due to the increase of our unit sales price as the average market prices increased in this segment and the result of restructuring our Chinese medicine segment.

Our Outlook

We believe that there are significant opportunities for worldwide growth in our Stevioside segment, primarily in the U.S. and EU. For fiscal 2018 and beyond, we will continue to focus on our core business of producing and selling stevioside series products.

Some of the recent favorable observations related to the stevia markets in fiscal 2018 include:

Meanwhile, we are also facing challenges in competitive pricing and raw materials for fiscal 2018. During fiscal 2017, the market prices of stevioside products were impacted by strong price competition among Chinese manufacturers. We expect the pressure from pricing competition to continue in fiscal 2018. We also anticipate the price of stevia leaves, the raw material used to produce our stevioside series products, to increase in fiscal 2018.

The following table summarizes our results from operations for the three month periods ended October 31, 2017 and 2016. The percentages represent each line item as a percent of revenues: 

The following table summarizes our results from operations for the six month periods ended October 31, 2017 and 2016.

Revenues

Total revenues in the three months ended October 31, 2017 decreased by approximately 8.7%, as compared to the same period in 2016. Stevioside revenues, which accounts for 85.1% and 87.0% of our total revenues in the three months ended October 31, 2017 and 2016, respectively, decreased by 10.8%, while Chinese medicine revenues increased by 5.1%.

Within our Stevioside segment, revenues from sales to third parties increased by 46.3% and sales to the related party decreased by 92.5% in the three months ended October 31, 2017, as compared to the same period in 2016. We have been trying to develop our domestic and international market in the past three months, and we have increased the dependence of our sales to domestic market. Revenues from the sales to our domestic clients increased from 64.2% to 94.6% of our total revenue in the three months ended October 31, 2017, as compared to the same period in 2016. Since we do not have the authorization to export products from China, we used to outsource all of our exporting business to a related party, Qufu Shengwang Import and Export, which has authorizations to export. We started to outsource our exporting business to Yi-Da Tong, which is a third party export agent since March 2016. Revenues from the sales to our international clients decreased from 35.8% to 2.9% of our total revenue in the three months ended October 31, 2017, as compared to the same period in 2016. We sold total quantity amount of 118 metric tons of stevioside for the three months ended October 31, 2017, increased by 21.9% as compared to 97 metric tons during the same period in 2016.

Our unit sale price fluctuated from month to month in the three months ended October 31, 2017, which was mainly affected by the market environment; the average unit sale price decreased by approximately 24.4% compare to the same period in 2016. Facing challenges in competitive pricing and raw materials in the three months ended October 31, 2017, the market prices of stevioside products were impacted by strong price competition among Chinese manufacturers. We anticipate the price of stevia leaves, the raw material we use to produce our stevioside series products, to increase in the near future baed on data availible to us and we purchase stevia leaves in bulk.

Total revenues in the six months ended October 31, 2017 decreased by 10.9% as compared to the same period in 2016.  Stevioside revenues, which accounts for 83.8% and 86.0% of our total revenues in the six months ended October 31, 2017 and 2016, respectively, decreased by 13.1%, and Chinese medicine revenues increased by approximately $43,000 or 3.1%. During the six months ended October 31, 2017, within our Stevioside segment, we increased our sales volume by approximately 209 metric tons, a 3.2% increase; the average unit price of our stevia products was decreased by 18.3% as to stay ahead of competition and to gain market share, as compared to the same period in 2016. Stevioside revenues from sales to third parties increased by 41.8% while sales to the related party decreased by 92.3% in the six months ended October 31, 2017, as compared to the same period in 2016.We believe that the increase of sales in Chinese Medicine segment is primarily due to our marketing efforts resulting to the sales quantity of approximately 208.6 metric tons, which is an increase of 8.1%. As the result of higher sales quantity, the sales amount increased by approximately $43,000 or 3.1% in the six months ended by October 31, 2017, as compared to the same period in 2016. We have more than 150 products in the Chinese Medicine segment, and their prices fluctuate depend on the market. We expect demand to increase in the future as we expand our client base, however, we are not able to quantify this future increase.

 

Cost of Revenues and Gross Margin

Selling Expenses

For the three months ended October 31, 2017, we had an increase of approximately $44,000, or 9.8% in selling expenses, as compared to the same period in 2016. The increase was primarily due to the approximately $12,000 increase in US warehouse expense, $97,000 increase in promotion and marketing expenses, $14,000 increase in salary and wage, $10,000 increase in travel and entertainment expenses, $6,000 increase in office expense, and $4,000 increase in miscellaneous expense, offset by a $74,000 decrease in shipping and freight, $10,000 decrease in commission, and $15,000 decrease in advertising expenses in the three months ended October 31, 2017.

In the six months ended October 31, 2017, we had a decrease of approximately $7,000, or 0.8% in selling expenses, as compared to the same period in 2016. The decrease was primarily due to the approximately $89,000 decrease in shipping and freight, $16,000 decrease in commission, offset by an increase of $19,000 in salary and wage, $39,000 increase in promotion and marketing expenses, $10,000 increase in office expense, $12,000 increase in US warehouse expense, $10,000 increase in travel and entertainment expenses and approximately $15,000 increase in miscellaneous expense in the six months ended October 31, 2017.

General and Administrative Expenses

 

Our general and administrative expenses for the three months ended October 31, 2017 decreased by approximately $223,000, or 22.5% from the same period in 2016. The decrease was primarily due to a decrease of approximately $117,000 in bad debt expense, $17,000 decrease in stock based compensation for consulting services in connection with our common stock issued, $66,000 decrease in depreciation and amortization expenses since the disposition of property and equipment, $10,000 decrease in office expense, $24,000 decrease in salary and wage expenses, $59,000 decrease in product testing fee, and $61,000 decrease in travel expense, offset by $14,000 increase in auto expense, $23,000 increase in repairs and maintenance fee, $22,000 increase in property tax and other tax expense, $9,000 increase in marketing expense, $9,000 increase in meals and entertainment expenses, and $54,000 increase in miscellaneous expense in three months ended October 31, 2017.

Total general and administrative expenses for the six months ended October 31, 2017 decreased by approximately $234,000, or 11.9% from the comparable period in 2016. The decrease was primarily due to approximately $76,000 in bad debt expense, $63,000 decrease in stock based compensation for consulting services in connection with our common stock issued, $102,000 decrease in depreciation and amortization expenses since the disposition of property and equipment, $27,000 decrease in office expense, $47,000 decrease in salary and wage expenses, $71,000 decrease in product testing fee, $66,000 decrease in travel expense, and $31,000 decrease in miscellaneous expense, offset by $13,000 increase in auto expense, $79,000 increase in repairs and maintenance fee, $115,000 increase in property tax and other tax expense, $11,000 increase in marketing expense, and $31,000 increase in meals and entertainment expenses in six months ended October 31, 2017.

Research and Development Expense

For the three and six months ended October 31, 2017, our research and development expenses amounted to approximately $180,000 and $366,000, as compared to $70,000 and $109,000 for the same period in 2016, respectively. The increase of $110,000 and $257,000 was primarily due to the increase in spending for third party technical consulting fees on the research and development of stevioside products in the three and six months ended October 31, 2017, respectively.

 Other Income (Expenses)

For the three months ended October 31, 2017, other expense, net of other income, amounted to approximately $253,000, an increase of $223,000 as compared to the other expense, net of other income, amounted to approximately $30,000 for the three months ended October 31, 2016. The increase was primarily attributable to an increase of interest expense of $38,000 and an increase in other expense of $194,000, offset by interest expense – related party in the decreased amount of approximately $9,000.

For the six months ended October 31, 2017, other expense, net of other income, amounted to approximately $274,000, an increase of $221,000 as compared to the other expense, net of other income, amounted to approximately $52,000 for the six months ended October 31, 2016. The increase was primarily attributable to an increase of interest expense of $78,000 and an increase in other expense of $156,000, offset by interest expense – related party in the decreased amount of approximately $13,000.

Net Loss

Net loss in the three and six months ended October 31, 2017 was approximately $1,932,000 and $3,039,000, compared to $911,000 and $1,745,000 in the three and six months ended October 31, 2016, respectively. The increase was primarily due to decrease in revenues, hence decrease in gross profit with higher operating expenses mainly from higher research and development expense.

Foreign currency translation adjustment

Comprehensive loss

 As a result of our foreign currency translation gain, we had a comprehensive loss for the three months ended October 31, 2017 of approximately $1,779,000, compared to $1,175,000 for the same in 2016. We had a comprehensive loss for the six months ended October 31, 2017 of approximately $2,603,000, compared to $2,382,000 for the six months ended October 31, 2016.

 

Liquidity is the ability of a company to generate sufficient cash to meet its operational cash requirements.  

Accounts receivable, net of allowance for doubtful accounts, including accounts receivable from related parties, increased by approximately $497,000 during the six months ended October 31, 2017. The days for sales outstanding in accounts receivable increased to 29 days as of October 31, 2017, as compared to 20 days as of April 30, 2017. The days for sales outstanding in accounts receivable for third party sales increased to 27 days as of October 31, 2017, as compared to 15 days as of April 30, 2017.  We will reevaluate accounts receivable for sales and will adjust to improve our collection efforts in accounts receivable for related party sales and accounts receivable for third party sales in fiscal 2018.

At October 31, 2017 inventories, net of reserve for obsolescence, totaled approximately $10,157,000, as compared to $8,816,000 as of April 30, 2017. We predicted the price of raw material will be increased based on information available to us and we increased in procurements of raw materials volume during the six months ended October 31, 2017. This inventory has not yet been sold also due to the market demand not raising as much as we predicted, however the higher inventory balance will prepare us for our anticipated upcoming increase in demand.

Our accounts payable and accrued expenses were approximately $7,340,000 at October 31, 2017, an increase of approximately $304,000 from April 30, 2017. The increase is primarily due to in purchasing and the timing of payments for balances related to raw material purchases made in the ordinary course of business.

Loans payable at October 31, 2017 and April 30, 2017 totaled approximately $8,948,000 (RMB59,339,000) and $7,267,000 (RMB50,108,000), respectively. These loans payable consisted of short-term loans of approximately $4,319,000 (RMB28,639,000) and long-term loans of $4,629,000 (RMB30,700,000) from multiple non-related individuals, which bear annual interest rates of 10% - 4%. The maturity dates of the loans payable at October 31, 2017 range from March 6, 2018 to September 27, 2019.  

Cash Flows Analysis

 

NET CASH FLOW USED IN OPERATING ACTIVITIES:

Net cash used in operating activities was approximately $1,002,000 during the six months ended October 31, 2017, as compared to net cash used in operating activities of $576,000 in the same period in 2016. The increase of  cash used in operating activities was primarily due to depreciation and amortization expenses of approximately $869,000, stock issued for employees' compensation of $613,000, loss on disposition of property and equipment of $283,000, $26,000 decrease in accounts receivable-related party, increase in allowance for doubtful accounts of $39,000, and a $1,971,000 decrease in prepaid expense and other current assets, offset by a net loss of approximately $3,039,000, $977,000 increase in inventories, $376,000 increase in accounts receivable, $236,000 decrease in accounts payable and accrued expenses, and a $1,000 decrease in taxes payables and a recovery of bad debts reserve of $173,000.

Net cash used in operating activities was approximately $576,000 during the six months ended October 31, 2016, as compared to net cash provided by operating activities of $393,000 in the same period in 2015. The increase of cash used in operating activities was primarily due to depreciation and amortization expenses of approximately $849,000, allowance for doubtful accounts of $290,000, stock issued for services of $73,000, stock issued for employees' compensation of $613,000, $409,000 decrease in accounts receivable-related party, a $4,136,000 increase in accounts payable and accrued expenses, offset by a net loss of approximately $1,745,000, $3,903,000 increase in inventories, $748,000 increase in accounts receivable, and a $418,000 increase in prepaid expense and other current assets and a $139,000 decrease in taxes payables. 

NET CASH FLOW USED IN BY INVESTING ACTIVITIES:

Net cash used in investing activities amounted to approximately $220,000 during the six months ended October 31, 2017 due to capital expenditures for property and equipment of approximately $221,000, offset by the proceed received from disposal of equipment of approximately $1,000.

 Net cash used in investing activities amounted to approximately $148,000 during the six months ended October 31, 2016 due to purchases of property and equipment of $449,166, offset by the proceeds received from disposal of real estate investments of approximately $301,000.

NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES:

Net cash provided by financing activities amounted to approximately $2,023,000 in the six months ended October 31, 2017, primarily due to proceeds from loans of approximately $1,623,000 and repayment for the short-term loan of approximately $372,000. We also recoreded advances received from related party as working capital, net of repayments made to related party advances. During the six months ended October 31, 2017, we received advances from related parties totaling of approximately $4,247,000 for working capital purposes and we also made repayments to related parties of approximately $3,475,000.

Net cash provided by financing activities amounted to approximately $275,000 in the six months ended October 31, 2016, primarily due to proceeds from short-term loan of approximately $201,000 and advances received from related party as working capital, net of repayments made to related party advances. During the six months ended October 31, 2016, we received advances from related parties totaling approximately $2,036,000 for working capital purposes and we also made repayments to related parties of approximately $1,962,000.

CASH ALLOCATION BY COUNTRIES

The functional currency of our Chinese subsidiaries is the Chinese RMB. Substantially all of our cash is held in the form of RMB at financial institutions located in the PRC, where there is no equivalent of federal deposit insurance as in the United States. As a result, cash accounts at financial institutions in the PRC are not insured. We have not experienced any losses in such accounts as of October 31, 2017.

In 1996, the Chinese government introduced regulations which relaxed restrictions on the conversion of the RMB; however restrictions still remain, including but not limited to restrictions on foreign invested entities. Foreign invested entities may only buy, sell or remit foreign currencies after providing valid commercial documents at only those banks authorized to conduct foreign exchanges. Furthermore, the conversion of RMB for capital account items, including direct investments and loans, is subject to PRC government approval. Chinese entities are required to establish and maintain separate foreign exchange accounts for capital account items. We cannot be certain Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB, especially with respect to foreign exchange transactions. Accordingly, cash on deposit in banks in the PRC is not readily deployable by us for purposes outside of the PRC. Our cash position by geographic area is as follow:

Off Balance Sheet Arrangements

Under SEC regulations, we are required to disclose our off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement or contractual arrangement to which any entity that is not consolidated with us as a party, under which we have:

 

We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with accepted accounting principles generally accepted in the U.S. ("U.S. GAAP").

 

The preparation of financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company's critical accounting policies as the ones that are most important to the portrayal of the company's financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 2 to our unaudited condensed consolidated financial statements. Although we believe that our estimates, assumptions and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.  

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable to smaller reporting company.

 

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act") that are designed to ensure that information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported as specified in the SEC's rules and forms and that such information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer ("CEO"), and our Chief Financial Officer ("CFO"), to allow timely decisions regarding required disclosure.

 

Management, with the participation of our CEO and CFO, performed an evaluation of the effectiveness of our disclosure controls and procedures as of October 31, 2017.  

Based on this evaluation our management concluded that our disclosure controls and procedures were not effective as of October 31, 2017 such that the information relating to our company, required to be disclosed in our Securities and Exchange Commission reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our CEO, to allow timely decisions regarding required disclosure.

 

Management's Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act. Our management is also required to assess and report on the effectiveness of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 ("Section 404"). As reported in our Form 10-K for the year ended April 30, 2017, management assessed the effectiveness of our internal control over financial reporting as of April 30, 2017 and, during our assessment, management identified significant deficiencies related to (i) the U.S. GAAP expertise of our internal accounting staff, (ii) our internal audit functions and (iii) a lack of segregation of duties within accounting functions. Although management believes that these deficiencies do not amount to a material weakness, our internal controls over financial reporting were not effective at April 30, 2017.

Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. As a result, we have not been able to take steps to improve our internal controls over financial reporting during the three months ended October 31, 2017. However, to the extent possible, we will implement procedures to assure that the initiation of transactions, the custody of assets and the recording of transactions will be performed by separate individuals.

A material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company's financial reporting.

 

In light of this significant deficiency, we performed additional analyses and procedures in order to conclude that our consolidated financial statements for the three months ended October 31, 2017 included in this quarterly report on Form 10-Q were fairly stated in accordance with the U.S. GAAP. Accordingly, management believes that despite our significant deficiency, our consolidated financial statements for the three months ended October 31, 2017 are fairly stated, in all material respects, in accordance with the U.S. GAAP.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation of our controls performed during the quarter ended October 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

None.

ITEM 1A.RISK FACTORS.

Risk factors describing the major risks to our business can be found under Item 1A, "Risk Factors", in our fiscal 2017 Annual Report on Form 10-K. There has been no material change in our risk factors from those previously discussed in the fiscal 2017Annual Report on Form 10-K.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.  MINE SAFETY DISCLOSURE.

 

None.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6.  EXHIBITS

 

 

* - Filed herewith.

** - In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise Exhibit 101 to this Quarterly Report on Form 10-Q/A shall be deemed "furnished" and not "filed".

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.