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.
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.
- 18 - --------------------------------------------------------------------------------
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 ofOctober 2020 , 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$4,434,000 during the three months endedOctober 31, 2020 , a decrease of 38.1%, as compared with the same period in 2019, and our gross margin decreased to (2.3)% from 20.6%. Our total operating expenses in the three months endedOctober 31, 2020 decreased by approximately$624,000 , or 55.5% compared to the same period in 2019 primarily due to a decrease of approximately$246,000 , or 49.0% in selling expense, a decrease of approximately$109,000 , or 38.8% in general and administrative expense, and a decrease of approximately$268,000 , or 79.0% in research and development expenses. Our net loss from continuing operations for the three months endedOctober 31, 2020 was approximately$658,000 , compared to a net income from continuing operations of$192,000 in three months endedOctober 31, 2019 . Our revenues totaled approximately$11,474,000 during the six months endedOctober 31, 2020 , a decrease of 18.3%, as compared with the same period in 2019, and our gross margin decreased to 0.5% from 18.5%. Our total operating expenses in the six months endedOctober 31, 2020 decreased by approximately$562,000 , or 25.4% compared to the same period in 2019 primarily due to a decrease of approximately$310,000 , or 35.3% in selling expense, a decrease of approximately$39,000 , or 5.6% in general and administrative expense, and a decrease of approximately$213,000 , or 33.0% in research and development expenses. Our net loss from continuing operations for the six months endedOctober 31, 2020 was approximately$1,714,000 , compared to a net income from continuing operations of$62,000 in six months endedOctober 31, 2019 .
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. 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. - 19 - --------------------------------------------------------------------------------
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 also
resulted 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 endedApril 30, 2020 and 2019, as well as negative impact from the global COVID-19 pandemic. During the fiscal years endedApril 30, 2020 , 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 inChina , 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 endedOctober 31, 2020 and 2019. The percentages represent each line item as a percent of revenues: 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 4,481,914 103.4 % 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 %
Loss from operations (651,414 ) (15.0 )% 47,223
46.8 % (604,191 ) (13.6 )% Other expenses (54,260 ) (1.3 )% - - (54,260 ) (1.2 )% (Loss) income from continuing operations before income taxes$ (705,674 ) (16.3 )%$ 47,223 46.8 %$ (658,451 ) (14.9 )% For the Three Months ended October 31, 2019 Stevioside Corporate and Other Consolidated Revenues$ 7,083,279 100.0 %$ 78,302 100.0 %$ 7,161,581 100.0 % Cost of goods sold 5,648,003 79.7 % 39,139 50.0 % 5,687,142 79.4 % Gross profit 1,435,276 20.3 % 39,163 50.0 % 1,474,439 20.6 % Selling expenses 502,773 7.1 % - - 502,773 7.0 % General and administrative expenses 273,733 3.9 % 8,000 10.2 % 281,733 3.9 % Research and development expenses 339,401 4.8 % - - 339,401 4.7 % Income from operations 319,369 5.5 % 31,163 39.8 % 350,532 4.9 % Other expenses (115,701 ) (1.6 )% (42,940 ) (54.8 )% (158,641 ) (2.2 )% Income (loss) from continuing operation before income taxes$ 203,668 2.9 %$ (11,777 ) (15.0 )%$ 191,891 2.7 % - 20 -
--------------------------------------------------------------------------------
The following table summarizes our results from operations for the six month
periods ended
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 continuing operations before income taxes$ (1,769,927 ) (15.7 )%$ 55,649 28.1 %$ (1,714,278 ) (14.9 )% For the Six Months ended October 31, 2019 Stevioside Corporate and Other Consolidated Revenues$ 13,394,838 100.0 %$ 656,818 100.0 %$ 14,051,656 100.0 % Cost of goods sold 11,038,469 82.4 % 417,541 63.6 % 11,456,010 81.5 % Gross profit 2,356,369 17.6 % 239,277 36.4 % 2,595,646 18.5 % Selling expenses 855,157 6.4 % 22,048 3.4 % 877,205 6.2 % General and administrative expenses 534,945 4.0 % 149,150 22.7 % 684,095 4.6 % Research and development expenses 644,304 4.8 % 1,648 0.3 % 645,952 4.6 % Income from operations 321,963 2.4 % 66,431 10.1 % 388,394 2.8 % Other expenses (283,367 ) (2.1 )% (42,940 ) (6.5 )% (326,307 ) (2.3 )% Income from continuing operation before income taxes$ 38,596 0.3 %$ 23,491 10.1 %$ 62,087 0.4 % Revenues
Total revenues in the three months ended
Within our Stevioside segment, revenues from sales to third parties decreased by 19.7% and sales to the related party decreased by 78.3% in the three months endedOctober 31, 2020 , as compared to the same period in 2019, primarily due to the effect of the global COVID-19 pandemic, decreasing the demand from the domestic and international market, and our restricted sales and promotion efforts due to current travel restrictions. Since the adoption rate for stevia in the food and beverage sector has been slower than expected, we sold 149 metric tons and 225 metric tons of stevioside for the three months endedOctober 31, 2020 and 2019, respectively. We generated approximately$400,000 and$1,995,000 in revenue from producing over 20 metric tons and 56 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 9.0% and 28.1% in the three months endedOctober 31, 2020 and 2019, respectively, of our total Stevioside segment revenues. Our low grade ordinary stevia products generated an amount of approximately$1,369,000 , 30.9% of total revenue of our Stevioside segment for three months endedOctober 31, 2020 . Total revenues in the six months endedOctober 31, 2020 decreased by 18.3% as compared to the same period in 2019. Stevioside revenues, which accounts for 98.3% and 95.3% of our total revenues in the six months endedOctober 31, 2020 and 2019, respectively. During the six months endedOctober 31, 2020 , within our Stevioside segment, our sales volume decreased by approximately 24 metric tons, a 5.8% decrease. Stevioside revenues from sales to third parties decreased by 7.4% and sales to the related parties decreased by 45.0% in the six months endedOctober 31, 2020 , as compared to the same period in 2019. 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 45.2% and 39.3% of total revenue of our Stevioside segment for three and six months endedOctober 31, 2020 , respectively. Our unit sale price fluctuated from month to month in the three and six months endedOctober 31, 2020 , which was mainly affected by the market environment; the average unit sale price decreased by approximately 4.3% and 6.1%, compared to the same period in 2019, respectively. We face challenges due to competitive pricing and difficulties sourcing raw materials in 2020, the market prices of stevioside products were impacted by strong price competition among Chinese manufacturers. - 21 - --------------------------------------------------------------------------------
Cost of Revenues and Gross Margin
Cost of revenues in the three and six months endedOctober 31, 2020 decreased by 20.2% and 0.4%, compared to the same period in 2019, respectively. Cost of revenues as a percentage of revenues increased from 79.4% to 102.3% during the three months ended 2020 compared to the same period in 2019. Cost of revenues as a percentage of revenues increased from 81.5% to 99.5% during the six months ended 2020 compared to the same period in 2019. Our consolidated gross margin for the three and six months ended byOctober 31, 2020 was negative 2.3% and 0.5%, as compared to 20.6% and 18.5% in the same period in 2019, which was primarily due to the epidemic of the novel strain of coronavirus COVID-19 pandemic adversely affected businesses and economic activities in 2020. 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 endedOctober 31, 2020 , we had a decrease of approximately$246,000 , or 49.0% in selling expenses, as compared to the same period in 2019. The decrease was primarily due to the approximately a$127,000 decrease in marketing expense, a$168,000 decrease in advertising expenses, a$13,000 decrease in travel expense, a$5,000 decrease in salary, a$6,000 decrease in shipping and freight, and a$8,000 decrease in miscellaneous expense, offset by approximately$81,000 increase in promotion expense in the three months endedOctober 31, 2020 . For the six months endedOctober 31, 2020 , we had a decrease of approximately$310,000 , or 35.3% in selling expenses, as compared to the same period in 2019. The decrease was primarily due to the approximately$208,000 decrease in marketing expense, a$193,000 decrease in advertising expenses, a$34,000 decrease in travel expense, a$20,000 decrease in salary, a$21,000 decrease in selling expense on Metformin product, a$12,000 decrease in shipping and freight, and a$21,000 decrease in miscellaneous expense, offset by approximately$199,000 increase in promotion expense in the six months endedOctober 31, 2020 .
General and Administrative Expenses
Our general and administrative expenses for the three months endedOctober 31, 2020 decreased by approximately$109,000 , or 3.9% from the same period in 2019. The decrease was primarily due to a decrease of approximately$129,000 in repairs and maintenance fees, a decrease of approximately$20,000 in depreciation expense, a decrease of approximately$11,000 in hospitality expense, and a$36,000 decrease in miscellaneous expense, offset by a$23,000 increase in safety production fund and a$64,000 increase in salary and welfare benefit expenses. Our general and administrative expenses for the six months endedOctober 31, 2020 decreased by approximately$39,000 , or 5.6% from the same period in 2019. The decrease was primarily due to a decrease of approximately$24,000 in repairs and maintenance fees, a decrease of approximately$47,000 in depreciation expense, a decrease of approximately$10,000 in insurance expense, and a$52,000 decrease in miscellaneous expense, offset by a$58,000 increase in safety production fund and a$36,000 increase in salary and welfare benefit expenses.
Research and Development Expense
For the three and six months ended
Other Income (Expenses)
For the three months endedOctober 31, 2020 , other expense, net of other income, amounted to approximately$54,000 , a decrease of$104,000 as compared to the other expense, net of other income, amounted to approximately$159,000 for the three months endedOctober 31, 2019 . The decrease of other expenses was primarily attributable to a decrease of interest expense to third parties and related parties of$68,000 , and a decrease in other expenses of$36,000 . - 22 - -------------------------------------------------------------------------------- For the six months endedOctober 31, 2020 , other expense, net of other income, amounted to approximately$132,000 , a decrease of$194,000 as compared to the other expense, net of other income, amounted to approximately$326,000 for the six months endedOctober 31, 2019 . The decrease of other expenses was primarily attributable to a decrease of interest expense to third parties and related parties of$170,000 , and a decrease in other expenses of$38,000 , offset by an increase in grant income of$14,000 .
Net Income (Loss) from Continuing Operations
As a result of the foregoing, our loss from continuing operations was$658,000 for the three months endedOctober 31, 2020 , as compared with income from continuing operations of$192,000 for the three months endedOctober 31, 2019 , a change of$850,000 , or 443.1%. The increase in net loss was primarily due to decreased gross profit and increased operating expenses, offset by decreased other expenses in the three months endedOctober 31, 2020 , compared to the three months endedOctober 31, 2019 . As a result of the foregoing, our loss from continuing operations was$1,714,000 for the six months endedOctober 31, 2020 , as compared with income from continuing operations of$62,000 for the six months endedOctober 31, 2019 , a change of$1,776,000 , or 2,861.1%. The increase in net loss was primarily due to decreased gross profit and decreased operating expenses, offset by decreased other expenses in the six months endedOctober 31, 2020 , compared to the six months endedOctober 31, 2019 , as we discussed above.
Loss from Discontinued Operations
We did not have discontinued operations incurred in the six months endedOctober 31, 2020 . Our loss from discontinued operations amounted to$20,000 for the six months endedOctober 31, 2019 , and the Company also recorded a loss from disposal discontinued operations of approximately$233,000 atOctober 31, 2019 . Our total loss from discontinued operations amounted to$253,000 or$0.00 per share (basic and diluted) for the six months endedOctober 2019 .
The summarized operating result of discontinued operations included in our unaudited condensed consolidated statements of operations is as follows:
Three Months Ended October 31, Six Months Ended October 31, 2020 2019 2020 2019 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 endedOctober 31, 2020 by the percentage ownership in Qufu Shengren not directly attributable to us. For the three and six months endedOctober 31, 2020 , 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$255,000 and$648,000 for the three and six months endedOctober 31, 2020 , respectively.
Net Income (Loss) Attributable to
Our net loss attributable toSunwin Sunwin Stevia International, Inc. in the three months endedOctober 31, 2020 was approximately$403,000 , or$(0.00) per share (basic and diluted), compared to net income of$192,000 , or$0.00 per share (basic and diluted), in the three months endedOctober 31, 2019 . - 23 - -------------------------------------------------------------------------------- Our net loss attributable toSunwin Sunwin Stevia International, Inc. in the six months endedOctober 31, 2020 was approximately$1,066,000 , or$(0.01) per share (basic and diluted), compared to net loss of$191,000 , or$0.00 per share (basic and diluted), in the six months endedOctober 31, 2019 .
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 toU.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$550,000 for the three months endedOctober 31, 2020 , as compared to a foreign currency translation loss of$106,000 for the three months endedOctober 31, 2019 . We also reported a foreign currency translation gain of$681,000 for the six months endedOctober 31, 2020 , as compared to a foreign currency translation gain of$162,000 for the six months endedOctober 31, 2019 . This non-cash gain had the effect of reducing our reported comprehensive loss. LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of a company to generate sufficient cash to meet its operational cash requirements.
AtOctober 31, 2020 , we had working capital deficit of approximately$2,213,000 , including cash of approximately$397,000 , as compared to working capital of approximately$3,470,000 , including cash of approximately$1,138,000 atApril 30, 2020 . The approximate$741,000 decrease in our cash atOctober 31, 2020 fromApril 30, 2020 is primarily attributable to net cash used in investing activities of approximately$97,000 and cash used in financing activities for repayment loans and repayment of related party advances of approximately$895,000 , offset by net cash provided by operating activities of approximately$222,000 during the six months endedOctober 31, 2020 . 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. - 24 - --------------------------------------------------------------------------------
Capital Resources
The following table provides certain selected balance sheets comparisons as of
October 31, April 30, Increase 2020 2020 (Decrease) % Cash and cash equivalents$ 396,579 $ 1,137,920 $ (741,341 ) (65.1 )% Accounts receivable, net 2,200,198 2,713,567 (513,369 ) (18.9 )% Accounts receivable - related party 1,458,545 3,034,365 (1,575,820 ) (51.9 )% Inventories, net 15,328,881 12,874,497 2,454,384 19.1 % Prepaid expenses and other current assets 960,832 693,552 267,280 38.5 % Total current assets 20,345,035 20,453,901 (108,866 ) (0.5 )% Property and equipment, net 9,125,596 8,901,548 224,048 2.5 % Total assets$ 29,470,631 $ 29,355,449 $ 115,182 0.4 % Accounts payable and accrued expenses$ 10,040,575 $ 8,533,131 $ 1,507,444 17.7 % Short-term loans 2,997,613 3,378,380 (380,767 ) (11.3 )% Due to related parties 5,094,261 5,072,451 21,810 0.4 % Total current liabilities 18,132,449 16,983,962 1,148,487 6.8 % Total liabilities$ 18,132,449 $ 16,983,962 $ 1,148,487 6.8 %
We maintain cash and cash equivalents in
October 31, April 30, Country 2020 2020 United States$ 55,762 $ 83,830 China 340,817 1,054,090 Total$ 396,579 $ 1,137,920 The majority of our cash balances atOctober 31, 2020 are in the form of RMB stored in bank account ofChina . Cash held in banks in the PRC is not insured. The value of cash on deposit in mainlandChina of$340,817 as ofOctober 31, 2020 has been converted based on the exchange rate as ofOctober 31, 2020 . 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 ofChina . Accounts receivable, net of allowance for doubtful accounts, including accounts receivable from related parties, decreased by approximately$2,089,000 during the six months endedOctober 31, 2020 , as a result of the decrease in both accounts receivable from the third parties and accounts receivable from related party as ofOctober 31, 2020 . The days for sales outstanding in accounts receivable increased to 37 days as ofOctober 31, 2020 , as compared to 20 days as ofApril 30, 2020 . Accounts receivable, net of allowance for doubtful accounts, excluding accounts receivable from the related parties, decreased by approximately$513,000 during the six months endedOctober 31, 2020 . The days for sales outstanding in accounts receivable for third party sales increased to 24 days as ofOctober 31, 2020 , as compared to 15 days as ofApril 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 atOctober 31, 2020 , net of reserve for obsolescence, totaled approximately$15,329,000 , as compared to$12,874,000 as ofApril 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 endedApril 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. - 25 - -------------------------------------------------------------------------------- Our accounts payable and accrued expenses were approximately$10,041,000 atOctober 31, 2020 , an increase of approximately$1,507,000 fromApril 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 six months endedOctober 31, 2020 . Loans payable atOctober 31, 2020 andApril 30, 2020 totaled approximately$2,998,000 and$3,378,000 , respectively. These loans payable consisted of short-term loans from multiple non-related individuals, which bear annual interest rates of 4% - 10%. Range of maturity dates of the loan payable was fromNovember 28, 2020 toOctober 6, 2021 . During the six months endedOctober 31, 2020 , loan amount of approximately$678,000 was repaid in cash. Due to related parties atOctober 31, 2020 andApril 30, 2020 totaled approximately$5,094,000 and$5,072,000 , respectively. As ofOctober 31, 2020 , 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$3,418,493 ,$1,471,087 , and$204,681 , 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.
Cash Flows Analysis
NET CASH FLOW PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net cash provided by operating activities was approximately
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 used in operating activities from continuing operations was approximately$213,000 (total net cash used in operating activities of$552,000 including net cash used in discontinued operations of$340,000 ) for the six months endedOctober 31, 2019 , primarily due to a net loss of approximately$191,000 adjusted by loss from discontinued operations of$253,000 and offset by non-cash working capital that primarily included depreciation expense of$568,000 and a loss on disposition of property and equipment of$20,000 . The increase in net cash from operating activities was also primarily due to an increase of approximately$511,000 in accounts receivable - related party, an increase of approximately$1,816,000 in inventories, an increase of approximately$1,947,000 in prepaid expenses and other current assets and offset by an increase in accounts payable and accrued expenses of approximately$2,564,000 , a decrease of approximately$740,000 in accounts receivable and note receivable from a third party and an increase of approximately$107,000 in taxes payable.
NET CASH FLOW PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Net cash used in investing activities from operations amounted to approximately$97,000 during the six months endedOctober 31, 2020 due to capital expenditures for property and equipment. Net cash provided by investing activities from continuing operations amounted to$148,000 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$1,028,000 in purchases of property and equipment in the six months endedOctober 31, 2019 .
NET CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net cash used in financing activities from operations amounted to approximately$895,000 in the six months endedOctober 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 . Net cash provided by financing activities from continuing operations amounted to approximately$447,000 in the six months endedOctober 31, 2019 , primarily due to proceeds from short-term loan of$429,000 advances received from related parties of approximately$3,814,000 and offset by repayment of related party advances of approximately$3,795,000 . Net cash used in financing activities from discontinued operations amounted to$0 in the six months endedOctober 31, 2019 . - 26 - --------------------------------------------------------------------------------
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.
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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