SUNWIN STEVIA INTERNATIONAL, INC. The following discussion should be read in conjunction with the information
contained in the preceding unaudited condensed consolidated financial statements
and footnotes and our 2020 Annual Report on Form 10-K for fiscal year ended
OVERVIEW
We sell stevioside, a natural sweetener. Stevioside is a natural zero calorie sweetener extracted from the leaf of the stevia plants. 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:
- Stevioside, and - Corporate and other. 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 and incurred recurring losses. 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 forecast 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
Sunwin Stevia has approximately 1,300 metric tons of manufacturing capacity per year to produce various specifications of stevia extracts. With these manufacturing facilities,Sunwin Stevia is able to deliver stevia products containing Rebaudioside A in a range of 50% to 99% with a format of powder, granular, or tablet; as well as Rebaudioside B, Rebaudioside D, Rebaudioside M and enzyme treated stevia products. In 2020, we have made technical upgrades on our enzyme treated stevia production line, improving the production process of our enzyme treated stevia products. InApril 2020 , management made the decision to increase the operating capital of Qufu Shengren from the originalRMB 19,680,000 (approximately$2,800,000 ) toRMB 183,000,000 (approximately$26,000,000 ), this will allow for the Company to better focus on our Stevia operation and increase investment to our research and production. The increase of capital will come from additional funding ofRMB 92,470,000 (approximately$13,100,000 ) from Qufu Natural Green, andRMB 70,850,000 (approximately$10,000,000 ) debt to equity conversion of multiple creditors. OnApril 30, 2020 , seven individual creditors and three suppliers, an individual investor and Qufu Shengren entered into a series of debt transfer and conversion agreements, the individual creditors and suppliers agreed to transfer the full amount of their receivable, including principal and interest due from Qufu Shengren, at full value, to the individual investor. The individual investor then converted the full amount of the debts into equity and transferred a part of that equity toShangdong Yulong Mining Group Co., Ltd. ("Yulong"). The individual investor and Yulong became minority shareholders of Qufu Shengren as ofApril 30, 2020 , accounting for 38.4% and 0.3%, respectively. - 20 - --------------------------------------------------------------------------------
We believe this addition in capital will greatly benefit our stevia product development, manufacturing, and marketing effort. With the increased capital, we will be able to focus more on our technology advancements, improvement in manufacturing process and increase our production capacity.
Impact of COVID-19 Pandemic on the Company's Operations
Since early 2020, the epidemic of the novel strain of coronavirus (COVID-19) (the "COVID-19 pandemic") has spread acrossChina and other countries, and has adversely affected businesses and economic activities in the first quarter of 2020 and beyond. The Company followed the restrictive measures implemented inChina , by suspending onsite operation in January, 2020 and having employees work remotely until lateMarch 2020 , when the Company assessed the situation and started to gradually resume normal operation at areas deemed safe while implementing effective health measures. Consequently, the COVID-19 pandemic may adversely affect the Company's business operations, financial condition and operating results for 2020, including but not limited to material negative impact to the Company's total revenues, production capability, ability to conduct marketing and sales, and slower collection of accounts receivables. As ofJanuary 2021 , we have been able to resume some of our manufacturing operations, however, our sales and promotional efforts as still severely impacted by the global pandemic. We are able to maintain certain income from previous existing orders and finished products, however, we anticipate significant economic impact related to COVID-19. Due to the high uncertainty of the evolving situation, the Company has limited foresight on the full impact brought upon by the COVID-19 pandemic and the related financial impact cannot be estimated at this time. We are monitoring the global outbreak and spread of COVID-19 and taking steps in an effort to identify and mitigate the adverse impacts on, and risks to, our business (including but not limited to our employees, customers, and other business partners) posed by its spread and the governmental and community reactions thereto. We continue to assess and update our business continuity plans in the context of this pandemic, including taking steps in an effort to help keep our workforces healthy and safe. The spread of COVID-19 has caused us to modify our business practices (including warehouse and production procedures, employee travel, employee work locations in certain cases, and cancellation of physical participation in certain meetings, events and conferences), and we expect to take further actions as may be required or recommended by government authorities or as we determine are in the best interests of our employees, customers and other business partners. We are also working with our suppliers to understand the existing and future negative impacts, and to take actions in an effort to mitigate such impacts.
OUR PERFORMANCE
Our revenues totaled approximately$6,987,000 during the three months endedJanuary 31, 2021 , an increase of 34.3%, as compared with the same period in 2020, and our gross margin decreased to (4.5)% from 9.9% due to significant increase in COVID related costs. Our total operating expenses in the three months endedJanuary 31, 2021 decreased by approximately$12,000 , or 0.8% compared to the same period in 2020 primarily due to a decrease of approximately$40,000 , or 8.4% in general and administrative expenses and a decrease of approximately$92,000 , or 14.5% in research and development expenses, offset by an increase of approximately$120,000 , or 33.2% in selling expense. Our net loss from continuing operations for the three months endedJanuary 31, 2021 was approximately$1,779,000 , compared to a net loss from continuing operations of$960,000 in three months endedJanuary 31, 2020 . Our revenues totaled approximately$18,460,000 during the nine months endedJanuary 31, 2021 , a decrease of 4.1%, as compared with the same period in 2020, and our gross margin decreased to (1.4)% from 16.2%. Our total operating expenses in the nine months endedJanuary 31, 2021 decreased by approximately$574,000 , or 15.6% compared to the same period in 2020 primarily due to a decrease of approximately$190,000 , or 15.3% in selling expense, a decrease of approximately$79,000 , or 6.8% in general and administrative expense, and a decrease of approximately$305,000 , or 23.9% in research and development expenses. Our net loss from continuing operations for the nine months endedJanuary 31, 2021 was approximately$3,475,000 , compared to a net loss from continuing operations of$1,120,000 in nine months endedJanuary 31, 2020 .
Our Outlook
We believe that there are significant opportunities for worldwide growth in our Stevioside segment, not only in theU.S. and EU markets but also in our domestic market. For the fiscal year endedApril 30, 2020 and beyond, we will continue to focus on our core business of producing and selling stevioside series products. - 21 - -------------------------------------------------------------------------------- Currently there is a world-wide movement of lowering sugar intake, and more and more consumers are becoming aware of the health benefits associated with reduction of sugar intake. According to research data, 40% of Chinese consumers stated that they "will not mind paying more for food and beverages with more natural ingredients" and 80% of the interview consumers express a goal of "having a healthier diet". We believe that, in this search of a more natural and healthy diet and lifestyle, natural sweeteners such as stevia will become the mainstream sweetener in the food and beverage markets.
Some of the recent favorable observations related to the stevia markets in fiscal 2020 include:
- Chinese domestic food and beverages, particularly herbal tea
manufacturers and the pharmaceutical industry, have increased the use
of steviosides, and new health awareness trends have alsoresulted in
some new governing laws supporting the growth of this industry;
- Southeast and
stevia, particularly high grade stevia;
- New global product launches mentioning stevia have increased 13% per
year on average from 2014 to 2018; and- Stevia has been growing in popularity in the last 10 years throughout
all the global markets.
Meanwhile, we are also facing challenges in competitive pricing and raw
materials for the fiscal years ended April 30, 2020 and 2021, as well as
negative impact from the global COVID-19 pandemic. During the fiscal year ended
April 30, 2021 , the market prices of stevioside products continue to be impacted
by strong price competition among Chinese manufacturers. With this being a
product gaining large market shares in China , in the recent years we have seen
many competitors entering the market. These new competitors use lower pricing as
their effort to gain market share as they initially entering the market, thus
driving down the average prices for stevia products. We expect the pressure from
pricing competition to continue in fiscal 2021. We anticipate the price of
stevia leaves, the raw material used to produce our stevioside series products,
will also continue to increase in fiscal 2021 since the demand for raw material
may increase as the market grows, while the production of the raw material
experiences negative impact due to the global pandemic.
We intend to make adjustments internally in order to better operate in this
market; our goal is to increase sales and develop new client bases through our
marketing effort, decrease our production expenses while maintaining the
stability and quality of our products, and decrease our overall expenditures. We
believe while there are challenges and risks in this market, our high quality
high grade product and the formulations developed by our internal research and
development team differentiates us from other competitors and our efforts will
lead to sustainable growth in the future.
RESULTS OF OPERATIONS
The following table summarizes our results from operations for the three month periods endedJanuary 31, 2021 and 2020. The percentages represent each line item as a percent of revenues: For the Three Months ended January 31, 2021 Stevioside Corporate and Other Consolidated Revenues$ 6,881,811 100.0 %$ 104,866 100.0 %$ 6,986,677 100.0 % Cost of goods sold 7,246,458 105.3 % 56,802 54.2 % 7,303,260 104.5 % Gross profit (364,647 ) (5.3 )% 48,064 45.8 % (316,583 ) (4.5 )% Selling expenses 480,210 7.0 % 11 0.0 % 480,221 6.9 % General and administrative expenses 440,634 6.4 % 110 0.1 % 440,744 6.3 % Research and development expenses 541,733 7.9 % - - 541,733 7.8 % Income (loss) from operations (1,827,224 ) (26.6 )% 47,943 45.7 % (1,779,281 ) (25.5 )% Other income (expenses) 18,435 0.3 % - - 18,435 0.3 % Income (loss) from continuing operations before income taxes$ (1,808,789 ) (26.3 )%$ 47,943 45.7 %$ (1,760,846 ) (25.2 )% - 22 -
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For the Three Months ended January 31, 2020
Stevioside Corporate and Other Consolidated
Revenues $ 5,104,858 100.0 % $ 98,571 100.0 % $ 5,203,429 100.0 %
Cost of goods sold 4,688,555 91.8 % 48 0.0 % 4,688,603 90.1 %
Gross profit 416,303 8.2 % 98,523 100.0 % 514,826 9.9 %
Selling expenses 360,440 7.1 % - - 360,440 6.9 %
General and
administrative
expenses 474,548 9.3 % 6,539 6.6 % 481,087 9.2 %
Research and
development expenses 633,668 12.4 % - - 633,668 12.2 %
Income (loss) from
operations (1,052,351 ) (20.6 )% 91,982 93.4 % (960,369 ) (18.5 )%
Other expenses (221,503 ) (4.3 )% - - (221,503 ) (4.3 )%
Income (loss) from
continuing operation
before income taxes $ (1,273,854 ) (25 )% $ 91,982 93.4 %
The following table summarizes our results from operations for the nine month
periods ended
For the Nine Months ended January 31, 2021
Stevioside Corporate and Other Consolidated
Revenues $ 18,157,132 100.0 % $ 303,067 100.0 % $ 18,460,199 100.0 %
Cost of goods sold 18,550,208 102.2 % 163,508 54.0 % 18,713,716 101.4 %
Gross profit (393,076 ) (2.2 )% 139,559 46.0 % (253,517 ) (1.4 )%
Selling expenses 1,047,115 5.8 % 587 0.2 % 1,047,702 5.7 %
General and
administrative
expenses 1,050,924 5.8 % 35,380 11.7 % 1,086,304 5.9 %
Research and
development expenses 974,300 5.4 % - - 974,300 5.3 %
Income (loss) from
operations (3,465,415 ) (19.1 )% 103,592 34.2 % (3,361,823 ) (18.2 )%
Other expenses (113,301 ) (0.6 )% - - (113,301 ) (0.6 )%
Income (loss) from
continuing operations
before income taxes $ (3,578,716 ) (19.7 )% $ 103,592 34.2 % $ (3,475,124 ) (18.8 )%
For the Nine Months ended January 31, 2020
Stevioside Corporate and Other Consolidated
Revenues $ 18,499,696 100.0 % $ 755,389 100.0 % $ 19,255,085 100.0 %
Cost of goods sold 15,727,024 85.0 % 417,589 55.3 % 16,144,613 83.8 %
Gross profit 2,772,672 15.0 % 337,800 44.7 % 3,110,472 16.2 %
Selling expenses 1,215,596 6.6 % 22,049 2.9 % 1,237,645 6.4 %
General and
administrative
expenses 1,009,492 5.5 % 155,690 20.6 % 1,165,182 6.1 %
Research and
development expenses 1,277,972 6.9 % 1,648 0.2 % 1,279,620 6.6 %
Income (loss) from
operations (730,388 ) (3.9 )% 158,413 21.0 % (571,975 ) (3.0 )%
Other expenses (504,871 ) (2.7 )% (42,939 ) (5.7 )% (547,810 ) (2.8 )%
Income (loss) from
continuing operation
before income taxes $ (1,235,259 ) (6.7 )% $ 115,474 15.3 % $ (1,119,785 ) (5.8 )%
- 23 ---------------------------------------------------------------------------------
Revenues
Total revenues in the three months ended
Within our Stevioside segment, revenues from sales to third parties increased by 24.2% and sales to the related party increased by 54.5% in the three months endedJanuary 31, 2021 , as compared to the same period in 2020, primarily due to the results of our sales efforts in both domestic and international markets after removal of travel restrictions inChina as the markets gradually recover from the global pandemic. We sold 227 metric tons and 168 metric tons of stevioside for the three months endedJanuary 31, 2021 and 2020, respectively. We generated approximately$1,166,000 and$605,000 in revenue from producing 42 metric tons and 29 metric tons of the customized orders for restructuring by enzyme based on our Stevioside products. Restructuring by enzyme based on our Stevioside products accounted for approximately 19.5% and 11.5% in the three months endedJanuary 31, 2021 and 2020, respectively, of our total Stevioside segment revenues. Our low grade ordinary stevia products generated an amount of approximately$2,242,000 , 37.5% of total revenue of our Stevioside segment for three months endedJanuary 31, 2021 . Total revenues in the nine months endedJanuary 31, 2021 decreased by 4.1% as compared to the same period in 2020. Stevioside revenues, which accounts for 98.4% and 96.1% of our total revenues in the nine months endedJanuary 31, 2021 and 2020, respectively. During the nine months endedJanuary 31, 2021 , within our Stevioside segment, our sales volume increased by approximately 35 metric tons, a 6.1% increase. Stevioside revenues from sales to third parties increased by 4.2%, but sales to the related parties decreased by 14.8% in the nine months endedJanuary 31, 2021 , as compared to the same period in 2020. Restructuring by enzyme based on our Stevioside products accounted for approximately 16.6% and 20.4% in the nine months endedJanuary 31, 2021 and 2020, respectively, of our total Stevioside segment revenues. With the restructuring of our product line, we also continue to increase the sales of our low grade stevia products. Our low grade stevia and A3-97 products generated more than 46.8% and 56.5% of total revenue of our Stevioside segment for three and nine months endedJanuary 31, 2021 , respectively. Our unit sale price fluctuated from month to month in the three and nine months endedJanuary 31, 2021 , which was mainly affected by the market environment; the average unit sale price decreased by approximately 17.9% and 10.7%, compared to the same period in 2020, respectively. We face challenges due to competitive pricing and difficulties sourcing raw materials in 2021; the market prices of stevioside products were impacted by strong price competition among Chinese manufacturers.
Cost of Revenues and Gross Margin
Cost of revenues in the three and nine months endedJanuary 31, 2021 increased by 55.8% and 15.9%, compared to the same period in 2020, respectively. Cost of revenues as a percentage of revenues increased from 90.1% to 104.5% during the three months ended 2020 compared to the same period in 2020. Cost of revenues as a percentage of revenues increased from 83.8% to 101.4% during the nine months ended 2020 compared to the same period in 2020. Our consolidated gross margin for the three and nine months ended byJanuary 31, 2021 was (4.5)% and (1.4)%, as compared to 9.9% and 16.2% in the same period in 2020, which was primarily due to the epidemic of the novel strain of coronavirus COVID-19 pandemic adversely affected businesses and economic activities in 2020, and our efforts to insure safety in production and transportation. We believe the effect of the COVID-19 pandemic is the most significant in our raw material purchasing and our sales. Due to the effect of the global COVID-19 pandemic, we expect the sourcing and availability of stevia raw material will have increased difficulties and costs for fiscal 2021 and 2022. February to March is normally the nursing period for stevia plants; as a result of COVID-19 related gathering laws, farmers are not able to have the same amount of nursery workers as previous years, resulting in a decrease of stevia plants, and relevant safety measures also resulted in an increase of general planting costs. We expect this to cause a shortage of stevia leaves harvest this year and along with the effect of the rain seasons, we expect to see an increase in our cost of raw material. After we resumed production, the effect of the COVID-19 pandemic on transportation has also made it difficult for us to efficiently procure our raw materials. Selling Expenses For the three months endedJanuary 31, 2021 , we had an increase of approximately$120,000 , or 33.2% in selling expenses, as compared to the same period in 2020. The increase was primarily due to the approximately$210,000 increase in promotion expense, a$35,000 increase in commission expense, and a$11,000 increase in miscellaneous expense, offset by a$54,000 decrease in advertising expenses, a$25,000 decrease in travel expense, a$28,000 decrease in salary, and a$29,000 decrease in office expense in the three months endedJanuary 31, 2021 . - 24 - -------------------------------------------------------------------------------- For the nine months endedJanuary 31, 2021 , we had a decrease of approximately$190,000 , or 15.3% in selling expenses, as compared to the same period in 2020. The decrease was primarily due to the approximately$206,000 decrease in marketing expense, a$248,000 decrease in advertising expenses, a$59,000 decrease in travel expense, a$47,000 decrease in salary, a$21,000 decrease in selling expense on Metformin product, a$12,000 decrease in shipping and freight, and a$29,000 decrease in miscellaneous expense, offset by approximately$409,000 increase in promotion expense and a$23,000 increase in commission expense in the nine months endedJanuary 31, 2021 .
General and Administrative Expenses
Our general and administrative expenses for the three months endedJanuary 31, 2021 decreased by approximately$40,000 , or 8.4% from the same period in 2020. The decrease was primarily due to a decrease of approximately$116,000 in insurance expense, a decrease of approximately$42,000 in service and consulting expense, a decrease of approximately$13,000 in repairs and maintenance fees, a decrease of approximately$44,000 in office expense, and a decrease of approximately$20,000 in travel expense, offset by a$32,000 increase in safety production fund, a$51,000 increase in marketing expense and a$29,000 increase in salary and welfare benefit expenses and a$83,000 decrease in miscellaneous expense in the three months endedJanuary 31, 2021 . Our general and administrative expenses for the nine months endedJanuary 31, 2021 decreased by approximately$79,000 , or 6.8% from the same period in 2020. The decrease was primarily due to a decrease of approximately$37,000 in repairs and maintenance fees, a decrease of approximately$52,000 in depreciation expense, a decrease of approximately$126,000 in insurance expense, a decrease of approximately$50,000 in office expense, and a decrease of approximately$26,000 in travel expense, offset by a$90,000 increase in safety production fund, a$66,000 increase in salary and welfare benefit expenses, a$54,000 increase in marketing expense, and a$2,000 increase in miscellaneous expense in the nine months endedJanuary 31, 2021 .
Research and Development Expense
For the three and nine months endedJanuary 31, 2021 , our research and development expenses amounted to approximately$542,000 and$974,000 , as compared to$634,000 and$1,280,000 for the same period in 2020, respectively. The decreases were primarily due to the decrease in spending for third party technical consulting fees in the three and nine months endedJanuary 31, 2021 .
Other Income (Expenses)
For the three months endedJanuary 31, 2021 , other income, net of other expense, amounted to approximately$18,000 , an increase of$240,000 as compared to the other expense, net of other income, amounted to approximately$222,000 for the three months endedJanuary 31, 2020 . The decrease of other expenses was primarily attributable to a decrease of interest expense to third parties and related parties of$179,000 , and a decrease in other expenses of$79,000 for sales tax rebate, offset by a decrease in grant income of approximately$18,000 . For the nine months endedJanuary 31, 2021 , other expense, net of other income, amounted to approximately$113,000 , a decrease of$435,000 as compared to the other expense, net of other income, amounted to approximately$548,000 for the nine months endedJanuary 31, 2020 . The decrease of other expenses was primarily attributable to a decrease of interest expense to third parties and related parties of$349,000 , and a decrease in other expenses of$117,000 , offset by an increase in grant income of$31,000 .
Net Loss from Continuing Operations
As a result of the foregoing, our loss from continuing operations was$1,761,000 for the three months endedJanuary 31, 2021 , as compared with loss from continuing operations of$1,182,000 for the three months endedJanuary 31, 2020 , a change of$579,000 , or 49.0%. The increase in net loss was primarily due to increased negative gross profit and increased operating expenses, offset by decreased other expenses in the three months endedJanuary 31, 2021 , compared to the three months endedJanuary 31, 2020 . As a result of the foregoing, our loss from continuing operations was$3,475,000 for the nine months endedJanuary 31, 2021 , as compared with loss from continuing operations of$1,120,000 for the nine months endedJanuary 31, 2020 , a change of$2,355,000 , or 210.3%. The increase in net loss was primarily due to increased negative gross profit, offset by decreased operating expenses and decreased other expenses in the nine months endedJanuary 31, 2021 , compared to the nine months endedJanuary 31, 2020 , as we discussed above. - 25 - --------------------------------------------------------------------------------
Loss from Discontinued Operations
We did not have discontinued operations incurred in the nine months endedJanuary 31, 2021 . Our loss from discontinued operations amounted to$20,000 for the nine months endedJanuary 31, 2020 , and the Company also recorded a loss from disposal discontinued operations of approximately$233,000 atJanuary 31, 2020 . Our total loss from discontinued operations amounted to$253,000 or$0.00 per share (basic and diluted) for the nine months endedJanuary 2020 .
The summarized operating result of discontinued operations included in our unaudited condensed consolidated statements of operations is as follows:
Three Months Ended January 31, Nine Months Ended January 31,
2021 2020 2021 2020
Revenues $ - $ - $ - $ 733,441
Cost of revenues - - - 572,357
Gross profit - - - 161,084
Operating expenses - - - 172,142
Other income, net - - - 8,958
Loss before income taxes - - - 20,016
Income tax expense - - - -
Loss from discontinued
operations - - - 20,016
Loss from disposal, net of taxes - - - 960
Loss from sales of subsidiary - - - 232,455
Total loss from discontinued
operations $ - $ - $ - $ 253,431 Net Loss Attributable to Noncontrolling Interest
Noncontrolling interest represents the ownership interests an individual investor and Yulong hold in Qufu Shengren. The amount recorded as noncontrolling interest in our unaudited condensed consolidated statements of loss and comprehensive loss is computed by multiplying the after-tax loss for three months endedJanuary 31, 2021 by the percentage ownership in Qufu Shengren not directly attributable to us. For the three and nine months endedJanuary 31, 2021 , the noncontrolling interest attributable to ownership interests in Qufu Shengren not directly attributable to us was 38.7%. Net loss attributable to noncontrolling interest amounted to approximately$681,000 and$1,330,000 for the three and nine months endedJanuary 31, 2021 , respectively.
Net Loss Attributable to
Our net loss attributable toSunwin Stevia International, Inc. in the three months endedJanuary 31, 2021 was approximately$1,080,000 , or$(0.01) per share (basic and diluted), compared to net loss of$1,182,000 , or$(0.01) per share (basic and diluted), in the three months endedJanuary 31, 2020 . Our net loss attributable toSunwin Stevia International, Inc. in the nine months endedJanuary 31, 2021 was approximately$2,146,000 , or$(0.01) per share (basic and diluted), compared to net loss of$1,373,000 , or $$(0.01) per share (basic and diluted), in the nine months endedJanuary 31, 2020 .
Foreign Currency Translation Gain
The functional currency of our subsidiaries and variable interest entities
operating in the PRC is the Chinese Yuan or Renminbi ("RMB"). The financial
statements of our subsidiaries are translated to U.S. dollars using period end
rates of exchange for assets and liabilities, and average rates of exchange (for
the period) for revenues, costs, and expenses. Net gains and losses resulting
from foreign exchange translations are included in the Comprehensive loss on the
unaudited condensed consolidated statements of operations and comprehensive
loss. As a result of foreign currency translations, which are a non-cash
adjustment, we reported a foreign currency translation gain of $420,000 and
$62,000 for the three months ended January 31, 2021 and 2020, respectively. We
also reported a foreign currency translation gain of $1,101,000 and $225,000 for
the nine months ended January 31, 2021 and 2020, respectively. This non-cash
gain had the effect of reducing our reported comprehensive loss.
- 26 -
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LIQUIDITY AND CAPITAL RESOURCESLiquidity is the ability of a company to generate sufficient cash to meet its operational cash requirements.
AtJanuary 31, 2021 , we had working capital of approximately$416,000 , including cash of approximately$225,000 , as compared to working capital of approximately$3,470,000 , including cash of approximately$1,138,000 atApril 30, 2020 . The approximate$912,000 decrease in our cash atJanuary 31, 2021 fromApril 30, 2020 is primarily attributable to net cash used in operating activities of approximately$1,537,000 and net cash used in investing activities of approximately$529,000 , offset by cash provided by financing activities of approximately$1,108,000 during the nine months endedJanuary 31, 2021 . 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 COVID-19 Pandemic. OnJanuary 30, 2020 , theWorld Health Organization declared the coronavirus outbreak a "Public Health Emergency of International Concern" and onMarch 10, 2020 , declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, quarantines in certain areas, and forced closures for certain types of public places and businesses. The coronavirus and actions taken to mitigate it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical areas inChina in which the Company operates. Consequently, the COVID-19 pandemic may adversely affect the Company's business operations, financial condition and operating results for 2020 and 2021, including but not limited to material negative impact to the Company's total revenues, slower collection of accounts receivables and significant impairment to the Company's equity investments. Due to the high uncertainty of the evolving situation, the Company has limited visibility on the full impact brought upon by the COVID-19 pandemic and the related financial impact cannot be estimated at this time.
Capital Resources
The following table provides certain selected balance sheets comparisons as of
January 31, April 30, Increase
2021 2020 (Decrease) %
Cash and cash equivalents $ 225,471 $ 1,137,920 $ (912,449 ) (80.2 )%
Accounts receivable, net 2,193,000 2,713,567 (520,567 ) (19.2 )%
Accounts receivable - related
party 3,142,845 3,034,365 108,480 3.6 %
Inventories, net 14,261,652 12,874,497 1,387,155 10.8 %
Prepaid expenses and other
current assets 785,830 693,552 92,278 13.3 %
Total current assets 20,608,798 20,453,901 154,897 0.8 %
Property and equipment, net 9,580,776 8,901,548 679,228 7.6 %
Total assets $ 30,189,574 $ 29,355,449 $ 834,125 2.8 %
Accounts payable and accrued
expenses $ 9,647,602 $ 8,533,131 $ 1,114,471 13.1 %
Short-term loans 2,923,674 3,378,380 (454,706 ) (13.5 )%
Due to related parties 7,621,248 5,072,451 2,548,797 50.2 %
Total current liabilities 20,192,524 16,983,962 3,208,562 18.9 %
Total liabilities $ 20,192,524 $ 16,983,962 $ 3,208,562 18.9 %
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We maintain cash and cash equivalents in
January 31, April 30,
Country 2021 2020
United States $ 63,628 $ 83,830
China 161,843 1,054,090
Total $ 225,471 $ 1,137,920
The majority of our cash balances at January 31, 2021 are in the form of RMB
stored in bank account of China . Cash held in banks in the PRC is not insured.
The value of cash on deposit in mainland China of $161,843 as of January 31,
2021 has been converted based on the exchange rate as of January 31, 2021 . 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 use outside of China .
Accounts receivable, net of allowance for doubtful accounts, including accounts
receivable from related parties, decreased by approximately $412,000 during the
nine months ended January 31, 2021 , as a result of the decrease in accounts
receivable from the third parties in amount of approximately $521,000 , and
offset by an increase of $108,000 in accounts receivable from related party as
of January 31, 2021 . The days for sales outstanding in accounts receivable
increased to 27 days as of January 31, 2021 , as compared to 20 days as of April
30, 2020 . The days for sales outstanding in accounts receivable for third party
sales increased to 17 days as of January 31, 2021 , as compared to 15 days as of
April 30, 2020 . We will reevaluate and categorize accounts receivable for sales
and will target to improve our collection effort in accounts receivable for
related party sales and accounts receivable for third party sales in fiscal
2021.
Inventories at January 31, 2021 , net of reserve for obsolescence, totaled
approximately $14,262,000 , as compared to $12,874,000 as of April 30, 2020 . The
increase is primarily due to our increase in procurements of raw materials in
order to meet our anticipated higher sales volume during the fiscal year ended
April 30, 2020 . These inventories have not yet been sold due to the market
demands not raising as much as we predicted; however, the current inventory
level will prepare us for our anticipated upcoming increase in price.
Our accounts payable and accrued expenses were approximately $9,648,000 at
January 31, 2021 , an increase of approximately $1,114,000 from April 30, 2020 .
The increase is primarily due to our increase in procurements of raw material as
a result of the raising sales of such materials during the nine months ended
January 31, 2021 .
Loans payable at
Due to related parties atJanuary 31, 2021 andApril 30, 2020 totaled approximately$7,621,000 and$5,072,000 , respectively. As ofJanuary 31, 2021 , the balance we owedQufu Shengren Pharmaceutical Co., Ltd. ("Pharmaceutical Corporation "),Qufu Shengwang Import and Export Co., Ltd. and Mr.Weidong Chai , a management member ofPharmaceutical Corporation , amounted to approximately$3,542,000 ,$3,863,000 , and$217,000 , respectively. OnApril 30, 2020 , the balance we owed toPharmaceutical Corporation , Qufu Shengwang Import and Export and Mr.Weidong Chai amounted to approximately$3,982,000 ,$907,000 , and$184,000 , respectively. - 28 - --------------------------------------------------------------------------------
Cash Flows Analysis
NET CASH FLOW PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net cash used in operating activities was approximately$1,537,000 for the nine months endedJanuary 31, 2021 , primarily due to a net loss of approximately$3,475,000 , adjusted by non-cash working capital, depreciation expense of$976,000 and provision for obsolete inventory of approximately$665,000 , an increase of approximately$806,000 in inventories, an increase of approximately$14,000 in prepaid expenses and other current assets, offset by a decrease of approximately$727,000 in accounts receivable and note receivable from a third party, a decrease of approximately$173,000 in accounts receivable - related party an increase in accounts payable and accrued expenses of approximately$80,000 , and an increase of approximately$137,000 in taxes payable. Net cash provided by operating activities from continuing operations was approximately$1,246,000 (total net cash provided by operating activities of$906,000 including net cash used in discontinued operations of$341,000 ) for the nine months endedJanuary 31, 2020 , primarily due to a net loss of approximately$1,120,000 adjusted by loss from discontinued operations of$253,000 and offset by non-cash working capital that primarily included depreciation expense of$902,000 and a loss on disposition of property and equipment of$49,000 . The increase in net cash from operating activities was also primarily due to a decrease of approximately$1,558,000 in accounts receivable and note receivable from a third party, a decrease of approximately$99,000 in prepaid expenses and other current assets, an increase in accounts payable and accrued expenses of approximately$1,113,000 , an increase of approximately$48,000 in taxes payable, and offset by an increase of approximately$238,000 in accounts receivable - related party and an increase of approximately$1,165,000 in inventories.
Net cash used in investing activities from operations amounted to approximately
Net cash used in investing activities from continuing operations amounted to$214,000 in investment activities, including the proceeds received from disposal of discontinued subsidiary of approximately$1,145,000 and a proceed received from disposal of equipment of$30,000 , offset by approximately$1,389,000 in purchases of property and equipment in the nine months endedJanuary 31, 2020 .
NET CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net cash provided by financing activities from operations amounted to approximately$1,108,000 in the nine months endedJanuary 31, 2021 , primarily due to proceeds from loan of approximately$21,000 and advances received from related parties of approximately$10,413,000 , offset by repayment of short term loans in a total amount of approximately$912,000 and repayment of related party advances of approximately$8,414,000 . Net cash used in financing activities from continuing operations amounted to approximately$806,000 in the nine months endedJanuary 31, 2020 , primarily due to the repayment of related party advances of approximately$6,215,000 and offset by proceeds from short-term loan of$429,000 and advances received from related parties of approximately$4,980,000 . Net cash used in financing activities from discontinued operations amounted to$0 in the nine months endedJanuary 31, 2020 .
Off Balance Sheet Arrangements
UnderSEC 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: - Any obligation under certain guarantee contracts, - Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets,
- Any obligation under a contract that would be accounted for as a derivative
instrument, except that it is both indexed to our stock and classified in
stockholder's equity in our statement of financial position, and
- Any obligation arising out of a material variable interest held by us in an
unconsolidated entity that provides financing, liquidity, market risk or
credit risk support to us, or engages in leasing, hedging or research and
development services with us.
- 29 --------------------------------------------------------------------------------- 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 theU.S. ("U.S. GAAP").
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity withU.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. TheSEC 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.
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