The following discussion should be read in conjunction with the information
contained in the preceding unaudited condensed consolidated financial statements
and footnotes and our 2021 Annual Report on Form 10-K for fiscal year ended
April 30, 2021.
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.
The COVID-19 Pandemic
Consequently, the COVID-19 pandemic may adversely affect the Company's business
operations, financial condition and operating results for 2021, 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. We believe the effect of the COVID-19
pandemic will be 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 2022.
We experienced difficulty in the delivery of our products, the ability to ship
through ground transportation was very limited, if any, across provinces in
China and in air shipments internationally was also very limited, if any, this
caused us to be unable to timely deliver our products even if sales were made.
In 2020 and 2021, China slowly resumed normal, however, as the global situation
worsen, many of our international clients are pausing their operations and no
longer making new orders. We expect this low demand and difficulty in
transportation situation to remain in fiscal 2022.
Reduction of Carbon Emission
China issued plans to reduce the carbon intensity of its economy 60%-65% per
unit of GDP by 2030, compared with 2005 levels. In order to reach this goal by
2030, China will need to strengthen regulations already in place, introduce and
strictly enforce laws and penalties, and hasten sweeping changes to how it
produces and consumes energy, goods and raw materials. China will take
additional action to reduce waste, promote renewables and unconventional fuel,
and reform its electricity network as part of its plan to significantly reduce
carbon emissions before 2030.
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In the past two months, we had been asked to lower capacity and cut production
in half due to government's carbon emission reduction requirements. Also, we
will be facing government's guidelines regarding air pollution in the overall
attempt to create a better environment for the Beijing Winter Olympic Game in
addition to the carbon emission reduction requirements for the coming
years. Those are all unpredictable facts that will significantly impair our
ability to maintain optimal production and will negatively impact our overall
ability to generate revenue.
Recent Developments
On September 7, 2021, Mr. Laiwang Zhang and Ms. Dongdong Lin resigned their
position as Directors of the Company due to health and personal reasons. Mr.
Zhang's and Ms. Lin's resignations are not due to any disagreement with the
Company on any matter related to operations, policies, or practices. After
careful consideration and discussion with the Company's management, the Board of
Directors appoints Mr. Jianjun Yan, effective September 7, 2021, and Mr. Yuyi
Liu, effective September 7, 2021 as a Director of the Company, Mr. Yan's and Mr.
Liu's responsibility and compensation shall be reasonable and in accordance with
their employment agreements.
On September 30, 2021, Ms. Dongdong Lin resigned her position as Chief Executive
Officer ("CEO") of the Company due to personal reasons. Ms. Lin's resignation is
not due to any disagreement with the Company on any matter related to
operations, policies, or practices. On September 30, 2021, the Company appointed
Mr. Jianjun Yan as CEO of the Company and as General Manager of Qufu Natural
Green Engineering Co., Ltd ("Qufu Natural Green"), a wholly owned subsidiary of
the Company. Mr. Yan, 52 years old, is currently serving as a Director of the
Company, and has over 18 years of experience in the pharmaceutical production
industry. Graduated from Hunan Medical University in 1993, Mr. Yan has worked in
various positions in multiple pharmaceutical companies, such as Hunan
Pharmaceuticals, Shandong Haisen Pharmaceuticals, Shandong Haishan
Pharmaceuticals, etc. Since June 2021, Mr. Yan has also successfully founded and
managed his own pharmaceutical production technology company, Qufu Shenghao
Biotech Co., Ltd. We believe Mr. Yan's expertise and experience in the industry
will be greatly beneficial to the future growth of the Company.
OUR PERFORMANCE
Our revenues totaled approximately $10,108,000 during the three months ended
October 31, 2021, an increase of 120.8%, as compared with the same period in
2020, and our gross margin increased to (0.7)% from (2.3)%. Our total operating
expenses in the three months ended October 31, 2021 increased by approximately
$1,199,000, or 239.8% compared to the same period in 2020 primarily due to an
increase of approximately $123,000, or 48.1% in selling expense, an increase of
approximately $355,000, or 205.7% in general and administrative expense and an
increase of approximately $721,000, or 1,014.0% in research and development
expenses. Our net loss for the three months ended October 31, 2021 was
approximately $1,893,000, compared to a net loss $658,000 in the same period in
2020.
Our revenues totaled approximately $16,377,000 during the six months ended
October 31, 2021, an increase of 42.7%, as compared with the same period in
2020, and our gross margin increased to 5.0% from 0.5%. Our total operating
expenses in the six months ended October 31, 2021 increased by approximately
$1,193,000, or 72.5% compared to the same period in 2020 primarily due to an
increase of approximately $181,000, or 31.9% in selling expense, an increase of
approximately $296,000, or 45.9% in general and administrative expense, and an
increase of approximately $716,000, or 165.4% in research and development
expenses. Our net loss for the six months ended October 31, 2021 was
approximately $2,643,000, compared to a net loss of $1,714,000 in six months
ended October 31, 2020.
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 we hope that our sales volume in higher grade stevia
products will increase in fiscal 2022 as demand resumes and increases after the
effects of the global pandemic. Stevia has become more widely accepted by the
food industry and many new stevia manufacturers have entered this industry in
the past few years; recently we have 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.
Our Outlook
We believe that there are significant opportunities for worldwide growth in our
Stevioside segment, not only in the U.S. and EU markets but also in our domestic
market. For the fiscal year ended April 30, 2021 and beyond, we will continue to
focus on our core business of producing and selling stevioside series products.
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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 2021 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 also resulted in
some new governing laws supporting the growth of this industry;
- Southeast and South Asia have renewed and increased their interest in
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, 2021 and 2020, as well as
negative impact from the global COVID-19 pandemic. During the fiscal years 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 2022. We anticipate the price of
stevia leaves, the raw material used to produce our stevioside series products,
will also continue to increase in fiscal 2022 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 ended October 31, 2021 and 2020. The percentages represent each line
item as a percent of revenues:
For the Three Months ended October 31, 2021
Stevioside Corporate and Other Consolidated
Revenues $ 10,001,477 100.0% $ 106,647 100.0% $ 10,108,124 100.0%
Cost of goods sold 10,121,030 101.2% 57,715 54.1% 10,178,745 100.7%
Gross profit (119,553 )(1.2)% 48,932 45.9% (70,621) (0.7)%
Selling expenses 379,977 3.8% - - 379,977 3.8%
General and
administrative
expenses 527,010 5.3% - - 527,010 5.2%
Research and
development expenses 792,367 7.9% - - 792,367 7.8%
Income (loss) from
operations (1,818,907) (18.2)% 48,932 45.9% (1,769,975) (17.5)%
Other (expenses)
income (122,818) (1.2)% 20 0.0% (122,798) (1.2)%
Income (loss) from
operations before
income taxes $ (1,941,725) (19.4)% $ 48,952 45.9% $ (1,892,773) (18.7)%
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For the Three Months ended October 31, 2020
Stevioside Corporate and Other Consolidated
Revenues $4,333,035 100.0% $100,809 100.0% $4,433,844 100.0%
Cost of goods sold 4,483,351 103.5% 54,605 54.2% 4,537,956 102.3%
Gross profit (150,316) (3.5)% 46,204 45.8% (104,112) (2.3)%
Selling expenses 255,990 5.9% 576 0.6% 256,566 5.8%
General and
administrative
expenses 173,979 4.0% (1,595) (1.6)% 172,384 3.9%
Research and
development expenses 71,129 1.6% - - 71,129 1.6%
Income (loss) from
operations (651,414) (15.0)% 47,223 46.8% (604,191) (13.6)%
Other expenses (54,260) (1.3)% - - (54,260) (1.3)%
Income (loss) from
operations before
income taxes $(705,674) (16.3)% $47,223 46.8% $(658,451) (14.9)%
The following table summarizes our results from operations for the six month
periods ended October 31, 2021 and 2020.
For the Six Months ended October 31, 2021
Stevioside Corporate and Other Consolidated
Revenues $ 16,163,155 100.0% $ 213,429 100.0% $ 16,376,584 100.0%
Cost of goods sold 15,461,999 95.7% 102,377 48.0% 15,564,376 95.0%
Gross profit 701,156 4.3% 111,052 52.0% 812,208 5.0%
Selling expenses 748,789 4.6% - - 748,789 4.6%
General and
administrative
expenses 941,653 5.8% - - 941,653 5.7%
Research and
development expenses 1,148,080 7.1% - - 1,148,080 7.0%
Income (loss) from
operations (2,137,366) (13.2)% 111,052 52.0% (2,026,314) (12.4)%
Other (expenses)
income (616,596) (3.8)% 20 0.0% (616,576) (3.8)%
Income (loss) from
operations before
income taxes $ (2,753,962) (17.0)% $ 111,072 52.0% $ (2,642,890) (16.1)%
For the Six Months ended October 31, 2020
Stevioside Corporate and Other Consolidated
Revenues $11,275,321 100.0% $198,201 100.0% $11,473,522 100.0%
Cost of goods sold 11,303,750 100.3% 106,706 53.8% 11,410,456 99.5%
Gross profit (28,429) (0.3)% 91,495 46.2% 63,066 0.5%
Selling expenses 566,905 5.0% 576 0.3% 567,481 4.9%
General and
administrative
expenses 610,290 5.4% 35,270 17.8% 645,560 5.6%
Research and
development expenses 432,567 3.8% - - 432,567 3.8%
Income (loss) from
operations (1,638,191) (14.5)% 55,649 28.1% (1,582,542) (13.8)%
Other expenses (131,736) (1.2)% - - (131,736) (1.1)%
Income (loss) from
operations before
income taxes $(1,769,927) (15.7)% $55,649 28.1% $(1,714,278) (14.9)%
Revenues
Total revenues in the three months ended October 31, 2021 increased by
approximately 128.0%, as compared to the same period in 2020, primarily due to
an increasing demand from domestic and international markets after COVID-19
pandemic. Our Stevioside segment, revenues from sales increased by 130.8%, from
97.7% to 98.9% of our total revenues in the three months ended October 31, 2020
and 2021. We sold 359 metric tons and 149 metric tons of stevioside for the
three months ended October 31, 2021 and 2020, respectively.
Total revenues in the six months ended October 31, 2021 increased by 42.7% as
compared to the same period in 2020. Stevioside revenues, accounts for 98.7% and
98.3% of our total revenues in the six months ended October 31, 2021 and 2020,
respectively. During the six months ended October 31, 2021, within our
Stevioside segment, our sales volume increased by approximately 191 metric tons,
from 382 metric tons to 573 metric tons, a 50.1% increase. 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 44.3% and 41.7% of total revenue of our Stevioside segment for three
and six months ended October 31, 2021, respectively.
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Our products including enzyme treated stevia have been well accepted by the
market, especially in the U.S. We generated approximately $2,416,000 and
$4,105,000 in revenue from producing over 86 metric tons and 142 metric tons of
the customized orders for restructuring by enzyme based on our Stevioside
products which accounted for approximately 23% and 25% of our total revenues of
Stevioside segment in the three and six months ended October 31, 2021,
respectively.
Our unit sale price fluctuated from month to month in the three and six months
ended October 31, 2021, which was mainly affected by the market environment; the
average unit sales price of our stevia products has decreased because of our
effort to stay ahead of competition and to gain market share for the three and
six months ended October 31, 2021, as compared to the same period in 2020. We
are facing challenges in competitive pricing and sourcing of raw materials, and
the market prices of stevioside products were impacted by strong price
competition among Chinese manufacturers. We also anticipate the price of stevia
leaves, the raw material used to produce our stevioside series products, to
continue to increase in the near future. In the six months ended October 31,
2021, some of our stevia products, such as A3-95, A3-80, A3-50, and A3-99, were
sold for a loss in order to avoid further losses resulting from spoilage of
overstocked inventory.
Cost of Revenues and Gross Margin
Cost of revenues in the three and six months ended October 31, 2021 increased by
124.3% and 36.4%, compared to the same period in 2020, respectively. Cost of
revenues as a percentage of revenues decreased from 102.3% and 99.5% to 100.7%
and 95.0% during the three and six months ended October 31, 2021 compared to the
same period in 2020, respectively. Gross margin in Stevioside segment increased
from (3.5)% to (1.2)% for the three months ended by October 31, 2021, compared
the same period in 2020. Gross margin in Stevioside segment increased from
(0.3)% to 4.3% for the six months ended by October 31, 2021, compared 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 fiscal year 2021.
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 2022. 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 ended October 31, 2021, we had an increase of approximately
$123,000, or 48.1% in selling expenses, as compared to the same period in 2020.
The increase was primarily due to the approximately $43,000 increase in local
sales taxes, $51,000 increase in commission expenses, $82,000 increase in
promotion and marketing expenses, $10,000 increase in shipping and freight, and
$7,000 increase in salary, offset by $23,000 decrease in office expenses, $6,000
decrease in travel expense, $40,000 decrease in advertising expenses and $1,000
decrease in miscellaneous expense in the three months ended October 31, 2021.
For the six months ended October 31, 2021, we had an increase of approximately
$181,000, or 31.9% in selling expenses, as compared to the same period in 2020.
The increase was primarily due to the approximately $62,000 increase in local
sales taxes, $66,000 increase in commission expenses, $96,000 increase in
promotion and marketing expenses, $14,000 increase in shipping and freight,
$7,000 increase in travel expense, and $2,000 increase in salary, offset by
$5,000 decrease in office expenses, $55,000 decrease in advertising expenses and
$6,000 decrease in miscellaneous expense in the six months ended October 31,
2021.
General and Administrative Expenses
Our general and administrative expenses for the three months ended October 31,
2021 increased by approximately $355,000, or 205.7% from the same period in
2020. The increase was primarily due to an increase of approximately $68,000 in
depreciation and amortization expenses, $54,000 increase in salary and wage
expenses, $34,000 increase in safety production fund, $120,000 increase in
repairs and maintenance fees, $12,000 increase in office expense, $10,000
increase in travel expense and $83,000 increase in miscellaneous expense, offset
by a decrease of $26,000 in service and professional fee.
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Our general and administrative expenses for the six months ended October 31,
2021 increased by approximately $296,000, or 45.9% from the same period in 2020.
The increase was primarily due to an increase of approximately $111,000 in
depreciation and amortization expenses, due to a land use right we purchased in
2021, $110,000 increase in salary and wage expenses, $30,000 increase in safety
production fund, $22,000 increase in repairs and maintenance fees, $12,000
increase in insurance expense, $10,000 increase in office expense, $11,000
increase in travel expense, and $12,000 increase in miscellaneous expenses,
offset by a decrease of $22,000 in hospitality expenses.
Research and Development Expense
For the three and six months ended October 31, 2021, our research and
development expenses amounted to approximately $792,000 and $1,148,000, as
compared to $71,000 and $433,000 for the same period in 2020, respectively. The
increase of $721,000 and $715,000 were primarily due to the increase in
materials used for R&D purpose in the three and six months ended October 31,
2021.
Other Income (Expenses)
For the three months ended October 31, 2021, other expense, net of other income,
amounted to approximately $123,000, an increase of $69,000 as compared to the
other expense, net of other income, amounted to approximately $54,000 for the
three months ended October 31, 2020. The increase of other expenses was
primarily attributable to an increase of $91,000 in interest expenses to related
parties and an increase other expense of $1,000, offset by a decrease of $23,000
in interest expense to third parties.
For the six months ended October 31, 2021, other expense, net of other income,
amounted to approximately $617,000, an increase of $485,000 as compared to the
other expense, net of other income, amounted to approximately $132,000 for the
six months ended October 31, 2020. The increase of other expenses was primarily
attributable to an increase in other expenses of $425,000 mainly attributable to
a loss on disposition of property and equipment in the six months ended October
31, 2021, and an increase of $133,000 in interest expenses to related parties,
offset by a decrease of $72,000 in interest expense to third parties, net of an
increase of $1,000 in interest income.
Net Loss
As a result of the foregoing, our loss was $1,893,000 and $2,643,000 for the
three and six months ended October 31, 2021, as compared with loss from
operations of $658,000 and $1,714,000 for the three and six months ended October
31, 2020, a change of $1,234,000 and $929,000, or 187.5% and 54.2%,
respectively. The increase in net losses were primarily due to increased
operating expenses and increased other expenses in the three and six months
ended October 31, 2021, compared to the three and six months ended October 31,
2020.
Net Loss Attributable to Sunwin Stevia International, Inc.
Our net loss attributable to Sunwin Stevia International, Inc. in the three and
six months ended October 31, 2021 was approximately $1,169,000 and $1,629,000,
or $(0.01) and $(0.01) per share (basic and diluted), compared to net loss of
$403,000 and $1,066,000, or $(0.00) and $(0.01) per share (basic and diluted),
in the three and six months ended October 31, 2020, respectively.
Net Loss Attributable to Noncontrolling Interest
Noncontrolling interest represents the ownership interests an individual
investor and Shangdong Yulong Mining Group Co., Ltd. ("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 by 38.7%, the percentage ownership in Qufu
Shengren not directly attributable to us. Net loss attributable to
noncontrolling interest amounted to $724,000 and $1,014,000 for the three and
six months ended October 31, 2021, compared to net loss attributable to
noncontrolling interest of $255,000 and $648,000 for the three and six months
ended October 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 $62,000 and
$72,000, and $550,000 and $681,000 for the three and six months ended October
31, 2021 and 2020, respectively. This non-cash gain had the effect of reducing
our reported comprehensive loss.
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LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of a company to generate sufficient cash to meet its
operational cash requirements.
On October 31, 2021, we had working capital deficit of approximately $4,865,000,
including cash of approximately $699,000, as compared to working deficit of
$1,089,000, including cash of approximately $1,566,000 at April 30, 2021. The
approximate $867,000 decrease in our cash at October 31, 2021 from April 30,
2021 is primarily attributable to net cash used in operating activities of
approximately $2,446,000 and net cash used in investing activities of
approximately $2,198,000, offset by net cash provided by financing activities of
approximately $3,769,000 during the six months ended October 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. On January 30, 2020, the World Health Organization
declared the coronavirus outbreak a "Public Health Emergency of International
Concern" and on March 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 in China in which the Company operates. Consequently, the
COVID-19 pandemic may adversely affect the Company's business operations,
financial condition and operating results for 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
October 31, 2021 and April 30, 2021:
October 31, 2021 April 30, 2021 Increase (Decrease) %
Cash and cash
equivalents $698,635 $1,565,829 $(867,194) (55.4)%
Accounts receivable,
net 7,500,106 1,693,801 5,806,305 342.8%
Accounts receivable -
related party - 5,999,791 (5,999,791) (100.0)%
Inventories, net 9,233,808 12,930,461 (3,969,653) (28.6)%
Prepaid expenses and
other current assets 4,199,309 661,882 3,537,427
534.4%
Total current assets 21,631,858 22,851,764 (1,219,906) (5.3)%
Property and
equipment, net 8,385,563 9,217,115 (831,552) (9.0)%
Land use rights 2,037,635 - 2,037,635 100%
Total assets $32,055,056 $32,068,879 $(13,823) (0.0)%
Accounts payable and
accrued expenses $15,693,489 $11,141,408 $4,552,081 40.9%
Short-term loans 1,669,373 2,955,304 (1,285,931) (43.5)%
Due to related
parties 9,134,337 9,843,636 (709,299) (7.2)%
Total current
liabilities 26,497,199 23,940,348 2,556,851 10.7%
Total liabilities 26,497,199 $23,940,348 $2,556,851 10.7%
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We maintain cash and cash equivalents in China and United States. On October 31,
2021 and April 30, 2021, bank deposits were as follows:
Country October 31, 2021 April 30, 2021
United States $181,373 $161,860
China 517,262 1,403,969
Total $698,635 $1,565,829
The majority of our cash balances on October 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 $517,262 as of October 31,
2021 has been converted based on the exchange rate as of October 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 $193,000 during the
six months ended October 31, 2021. The days for sales outstanding in accounts
receivable decreased to 85 days as of October 31, 2021, as compared to 97 days
as of April 30, 2021. Accounts receivable, net of allowance for doubtful
accounts, excluding accounts receivable from the related parties, increased by
approximately $5,806,000 during the six months ended October 31, 2021, but
accounts receivable from related parties decreased by approximately $6,000,000,
due to no revenue from related parties from fiscal 2022 and reclassification
partial receivables from a related party to account receivable from third
parties from fiscal 2022. We will reevaluate and categorize accounts receivable
for sales and will target to improve our collection effort in accounts
receivable in fiscal 2022.
Inventories on October 31, 2021, net of reserve for obsolescence, totaled
approximately $9,234,000, as compared to $12,930,000 as of April 30, 2021. The
decrease is primarily due to our increase in revenue, thus inventory turnover
rate increased. Accordingly, inventory ending balance decreased. Meanwhile, we
did impairment on the inventories.
Our accounts payable and accrued expenses were approximately $15,693,000 on
October 31, 2021, an increase of approximately $4,552,000 from April 30, 2021.
The increase is primarily result from reclassification partial liabilities from
related parties to other payables from third parties from fiscal 2022.
Loans payable on October 31, 2021 and April 30, 2021 totaled approximately
$1,669,000 and $2,955,000, respectively. These loans payable consisted of
short-term loans from multiple non-related individuals, which bear annual
interest rates of 4% - 12%. Range of maturity dates of the loans payable was
from November 28, 2021 to October 18, 2022. During the six months ended October
31, 2021, the Company borrowed new short term loans and received proceeds in a
total amount of approximately $1,008,000 in cash.
Due to related parties on October 31, 2021 and April 30, 2021 totaled
approximately $9,134,000 and $9,844,000, respectively. The decrease was a result
of the reclassification partial liabilities from related parties to other
payables from third parties from fiscal 2022. As of October 31, 2021, the
balance we owed Pharmaceutical Corporation, Mr. Jianjun Yan and Mr. Weidong Chai
amounted to approximately $4,764,000, $4,138,000 and $232,000, respectively. On
April 30, 2021, 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., approximately amounted to $3,484,000,
$6,140,000 and $219,000, respectively.
Cash Flows Analysis
NET CASH FLOW (USED IN) PROVIDED BY OPERATING ACTIVITIES:
Net cash used in operating activities was approximately $2,446,000 for the six
months ended October 31, 2021, primarily due to a net loss of approximately
$2,643,000 adjusted by non-cash working capital, depreciation and amortization
expenses of $737,000, provision for obsolete inventories of $654,000 and loss on
disposition of property and equipment of $387,000. Changes in operating assets
and liabilities include an increase of approximately $3,560,000 in prepaid
expenses and other current assets and a decrease in accounts payable and accrued
expenses of approximately $1,488,000, offset by a decrease of approximately
$317,000 in accounts receivable and note receivable from third party, a decrease
of approximately $3,142,000 in inventories and an increase of approximately
$9,000 in taxes payable.
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Net cash provided by operating activities was approximately $222,000 for the six
months ended October 31, 2020, primarily due to a decrease of approximately
$648,000 in accounts receivable and note receivable from a third party, a
decrease of approximately $1,677,000 in accounts receivable - related party and
an increase in accounts payable and accrued expenses of approximately
$1,074,000, offset by an increase of approximately $1,680,000 in inventories, an
increase of approximately $321,000 in prepaid expenses and other current assets,
a decrease of approximately $89,000 in taxes payable, and a net loss of
approximately $1,714,000 adjusted by non-cash working capital, depreciation
expense of $627,000.
NET CASH FLOW USED IN INVESTING ACTIVITIES:
Net cash used in investing activities from operations amounted to approximately
$2,198,000 during the six months ended October 31, 2021 due to capital
expenditures for property and equipment of approximately $150,000 and land use
rights of approximately $2,056,000, offset by proceed from disposal of equipment
of $8,000.
Net cash used in investing activities from operations amounted to approximately
$97,000 during the six months ended October 31, 2020 due to capital expenditures
for property and equipment.
NET CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net cash provided by financing activities from operations amounted to
approximately $3,769,000 in the six months ended October 31, 2021, primarily due
to proceeds from short term loans in a total amount of $1,008,000 and advances
received from related parties of approximately $6,303,000, offset by repayment
of related party advances of approximately $3,542,000.
Net cash used in financing activities from operations amounted to approximately
$895,000 in the six months ended October 31, 2020, primarily due to repayment of
short term loans in a total amount of approximately $678,000 and repayment of
related party advances of approximately $7,755,000 and offset by advances
received from related parties of approximately $7,539,000.
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:
- 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.
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").
CRITICAL ACCOUNTING POLICIES
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. We have 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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