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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 FORM 10-K

 

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Fiscal Year Ended March 31, 2016

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  

Commission File No.  333-191063 

 

Issuer's Telephone Number: 86-760-8896-3655

Securities registered pursuant to Section 12(b) of the Exchange Act: None.

 

Securities registered pursuant to Section 12(g) of the Exchange Act: None.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.        Yes ☐    No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ☐    No ☒

 

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

 

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

  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

 

 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check One)  

 

Large accelerated filer ☐       Accelerated filer ☐      Non-accelerated filer ☐       Smaller reporting company ☒

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

 

The aggregate market value of the registrant's voting common stock held by non-affiliates computed by reference to the closing price as of the last business day of the quarterly period ended September 30, 2015 was $40,720,919.  

 

As of July 14, 2016, the registrant had 49,989,500 shares of common stock issued and outstanding.

 

 

DOCUMENTS INCORPORATED BY REFERENCE:

None.

 

TABLE OF CONTENTS

 

Forward-Looking Statements

 

 

PART I

 ITEM 1.     BUSINESS.

 

In this Annual Report on Form 10-K, the terms "Company," "we," "us," and "our" refer to Winha International Group Limited ("Winha International") and its subsidiaries, through which Winha International owns a 60% equity interest in a single operating company, Zhongshan Winha Electronic Commerce Company Limited ("Zhongshan Winha",) and Zhongshan Winha's several subsidiaries.

 

Overview

 

Zhongshan Winha retails specialty food products drawn from many regions across China through its chain of dedicated  stores. We provide customers with access to a large variety of local food products that can otherwise only be found in the producer's region. Our vision is to promote cultures and traditions that exist throughout China, while bolstering local economies and raising awareness of the cultural heritage.

To date, our marketing has occurred exclusively in our retail stores, which were seven in number at the end of our last fiscal year, on March 31, 2016. During the current fiscal year, we expect to add several new retail stores, and during the next two years, we also plan to develop a multi-channel marketing program, which will include an online store and a mobile app. In this manner, we plan to become a source for specialty food products throughout China.

In the summer of 2015 we expanded the scope of our brand by initiating a franchising program. To date we have granted 26 franchises to stores that purchase food products from our suppliers and retail the products under our brand and trade dress. The franchisees pay us a start-up fee and monthly management fee for the right to participate in our franchise program.

 

Our Corporate History and Structure

 

Winha International was incorporated in Nevada on April 15, 2013. On August 1, 2013, we obtained control of Zhongshan Winha through a series of contracts (the "VIE Agreements") executed on August 1, 2013 by Zhongshan Winha, the equity-holders in Zhongshan Winha, and our subsidiary, Shenzhen Winha. The practical effect of the six VIE Agreements was to guarantee that any benefit or loss realized from the operations of Zhongshan Winha would be ultimately realized by our subsidiary, Shenzhen Winha Information Technology Company, Ltd. ("Shenzhen Winha"). Because Shenzhen Winha was to realize the ultimate benefit or loss from the operations of Zhongshan Winha, Zhongshan Winha was considered a variable interest entity with respect to Shenzhen Winha under U.S. accounting principles. For that reason, the balance sheet of Zhongshan Winha and its financial results have been consolidated with those of the Company since August 1, 2013.

On November 27, 2015 Shenzhen Winha exercised its option to purchase the registered equity of Zhongshan Winha for a price equivalent to US$0.16. Since that date, therefore, Zhongshan Winha has been a subsidiary of Winha International.

On May 24, 2016 we completed a reorganization of our subsidiaries, the purpose of which was to introduce an Australian subsidiary into our corporate structure, which will subsequently effect a public offering of its securities on the Australian Stock Exchange. Winha International owns only 60% of the outstanding shares in the Australian subsidiary. Therefore, the result of the reorganization was that our equity interest in Zhongshan Winha was reduced by 40%. That 40% interest was distributed to members of the Company's management, consultants to the Company's management, and suppliers to Zhongshan Winha.

 

After completion of the reorganization in May 2016, the following chart demonstrates our current corporate structure.

Products

 

With nearly 5,000 years of history and 56 ethnic groups, China is known for the variety of its cultures, in particular its diverse locally-produced specialty goods. As China covers almost 9.6 million square kilometers of land, the variation of climate and environment nourished many distinct local folk cultures and traditions that produced myriad local specialty goods.

 

Since the turn of the century, as the living standard in China has drastically improved, the demand for diversified consumer products has risen every year. Specialty goods, which reflect local cultures, history, and tradition, have become increasingly popular gifts for families and friends. However, due to factors such as limited business investment, incomplete infrastructure in certain rural areas, low brand awareness, lack of sales channels and ineffective marketing, the local specialty product business is still at its early stage.  In addition, with the goal to promote local cultures, China's State Council has been actively working to stimulate domestic demand for local specialty goods.

Our business was founded to meet the demand for local specialty goods, both fresh and manufactured. We rely on direct suppliers across the country to supply products to us. We have established supply relationship with 85 direct suppliers across 15 provinces of China. We expect that our product sourcing will expand in proportion with the expansion of our business.

Product		Sales Revenue
Mangosteen		$	2,223,351
30-year Chenjishaodiaohuang Wine			863,461
Kiwi fruit			795,154
30-year Chenjishaodiaohuang Wine - gift box			783,569
American red pear			755,966
Pitaya fruit			745,968
Cucumis metuliferus			728,156
Taiwan sweet nectarine			659,681
Moon cake of Zunlong Yayue			642,134
Superfine gold pear			624,147

 

On May 23, 2016 we entered into a sales contract with Shenzhen Zhongbai Supply Chaim Co., Ltd., which will import and deliver to us 3,000 boxes of honeycomb honey from Australia. We intend to highlight this product in our marketing to introduce the Chinese market to the special quality of Australian honey. Our expectation, then, is that sales of honeycomb honey will represent a growing portion of our revenue in the future.

Retail Distribution

 

We currently have seven retail stores - we expect to add more during the current fiscal year. Each store holds a variety of manufactured food products in inventory, and offers farm-to-kitchen delivery of a wide variety of fresh and manufactured food products. All orders placed at a retail store are filled from our central office, using our proprietary stock-sell-storage software system. This system enables us to find products for each store with the optimal delivery performance and best pricing, while also monitoring the inventory at each store and its sales performance.

During fiscal year 2016, only 22% of our revenue was the result of purchases of inventory located at a retail store. 71% was the result of custom orders placed at one of our retail stores. Most of these orders were placed by other business establishments, primarily hotels with restaurant services. In our standard relationship, the hotel has entered into a long-term purchase contract with our local retail store. As its needs develop, the hotel places orders with the local retail store by fax, phone or email.  The order is placed into our software system, and a purchaser at our central office sends a purchase order, usually with instructions for the supplier to deliver to the hotel at a designated time.

Our custom-order business has grown quickly, as we offer significant advantages to our commercial customers over traditional food distribution systems:

In April of 2015, we expanded the marketing channels by opening our Restaurant at 19 Changyi Road in Wuguishan. The purpose of the Restaurant is less food service than food sampling. Potential customers are invited to visit the Restaurant, where our staff of chefs will prepare foods using the produce and products available at our retail stores. In this manner, our customers can preview both the quality of our products and creative ideas for incorporating our products into the customers' menus. A small retail store is located onsite at the Restaurant, where customers can place orders for our products. However, we expect the Restaurant experience to yield sales throughout our system. With the success of the Restaurant in Wuguishan, we recently opened a catering business in Shaxi Town, Yunnan Province Our plan is to open additional restaurants during the current fiscal year. 

Our proprietary software enables the administrative staff in our central office to monitor our stores and control inventory and cash flow efficiently. Although each point-of-purchase has its own bank account, all are integrated online, so that our finance department can monitor cash balances and cross-check against inventory turnover.

Franchises

We initiated our franchising program in the summer of 2015. Today we have 26 franchisees, each operating a single store under our trademark and trade dress. Our franchisees are geographically distributed as follows:

Each franchisee signs a Joint Cooperation Agreement with Zhongshan Winha for a term of five years, renewable on application. The agreement gives the franchisee the right and obligation to use Zhongshan Winha's trademarks and trade name to operate its store as part of Zhongshan Winha's unified operating system. The franchisee is required to purchase its inventory from the suppliers engaged by Zhongshan Winha, and to otherwise comply with management policies developed by Zhongshan Winha for its franchisees. The franchisee is required to pay to Zhongshan Winha an initial franchise fee and then a monthly management fee, both of which are determined by the class of city in which the franchisee is located and the size of its store:

Since initiating our franchise program in the summer of 2015 and through March 31, 2016, we recorded $3,055,692 in franchise and management fees. We intend to increase the number of franchised stores during fiscal 2017, and expect revenue from our franchise operations to represent an increasing portion of our total revenue.

Plans for Expansion of Market Channels

 

Our goal is to become the leading provider of regional food products throughout China. Toward that end, we intend to open up retail stores as our financial and personnel resources permit. To supplement the retail stores, however, we are developing an online marketing capability, consisting of an online store and a mobile app.  We expect both channels to become functional during calendar year 2016.

 

 

Our goal is to integrate our online presence with our physical presence. We anticipate that customers will be introduced to our products at our retail stores and/or restaurants, then utilize our online store and/or mobile app for repeat orders. But we will also direct customers in the other direction, by periodically sending registered users push notifications regarding featured products and sales items, which will in most cases have a direct link for them to easily review and purchase, but may also direct them to our local retail store.

  

Government Regulation

 

Foreign Exchange Regulation Relating to Foreign Invested Enterprises

 

Under current Chinese regulations, RMB are freely convertible for trade and service-related transactions denominated in foreign currency, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions, but not for direct investment, loans, repatriation of investments or investments in securities outside China without the prior approval of the SAFE or its local branches. In May 2013, SAFE promulgated SAFE Circular 21 which provides for and simplifies the operational steps and regulations on foreign exchange matters related to direct investment by foreign investors, including foreign exchange registration, account opening and use, receipt and payment of funds, and settlement and sales of foreign exchange.

 

Foreign-invested enterprises in China may execute foreign exchange transactions without the SAFE approval for trade and service-related transactions denominated in foreign currency by providing commercial documents evidencing these transactions. Foreign exchange transactions related to direct investment, loans and investment in securities outside China are still subject to limitations and require approval from the SAFE.

 

On August 29, 2008, the SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or Circular 142. Pursuant to Circular 142, RMB capital derived from the settlement of a foreign-invested enterprise's foreign currency capital must be used within the business scope approved by the applicable government authority and cannot be used for domestic equity investment, unless specifically provided for otherwise. Documents certifying the purposes of the settlement of foreign currency capital into RMB, including a business contract, must also be submitted for the settlement of such foreign currency. In addition, foreign-invested enterprises may not change how they use such capital without the SAFE's approval and may not in any case use such capital to repay RMB loans if they have not used the proceeds of such loans. Violation of Circular 142 can result in severe penalties, including heavy fines as set forth in the Foreign Exchange Administration Rules. The SAFE promulgated a circular on November 9, 2010, or Circular 59, which tightens the regulation over settlement of net proceeds from overseas offerings like this offering and requires that the settlement of net proceeds must be consistent with the description in the prospectus for the offering. Furthermore, the SAFE promulgated the Circular on Further Clarification and Regulation of the Issues Concerning the Administration of Certain Capital Account Foreign Exchange Businesses, or Circular 45, on November 9, 2011, which expressly restricts a foreign-invested enterprise from using RMB converted from its registered capital to provide entrusted loans or repay loans between non-financial enterprises. Circular 142, Circular 59 and Circular 45may significantly limit our ability to transfer the net proceeds from this offering to our PRC subsidiary and convert the net proceeds into RMB, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC.

 

Regulation of Dividend Distributions

 

The principal regulations governing dividend distributions of wholly foreign owned companies include: the Companies Law (2005), the Wholly Foreign Owned Enterprise Law (2000), and the Wholly Foreign Owned Enterprise Law Implementing Rules (2001).

 

Under these regulations, wholly foreign owned companies in China may pay dividends only out of their accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. In addition, wholly foreign owned companies are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds, until the aggregate amount of these funds reaches 50% of the company's registered capital. Wholly foreign owned companies may, at their discretion, allocate a portion of their after-tax profits based on PRC accounting standards to staff benefits and bonus funds. These reserve funds and staff benefits and bonus funds are not distributable as cash dividends.

 

Regulations on Product Liability and Consumers Protection

 

Product liability claims may arise if the products sold have any harmful effect on the consumers. The injured party may claim for damages or compensation. The Product Quality Law of the PRC, which was enacted in 1993 and amended in 2000, strengthens the quality control of products and protects consumers' rights and interests. Under this law, manufacturers and distributors who produce or sell defective products may be subject to confiscation of earnings from such sales, revocation of business licenses and imposition of fines, and in severe circumstances, may be subject to criminal liability.

 

The Law of the PRC on the Protection of the Rights and Interests of Consumers was promulgated on October 31, 1993 and became effective on January 1, 1994 to protect consumers' rights when they purchase or use goods or services. All business operators must comply with this law when they manufacture or sell goods and/or provide services to customers.

 

The Tort Law of the PRC effective on July 1, 2010 requires that when the product defect endangers people's life or property, the injured party may hold the producer or the seller liable in tort and require that it remove obstacles, eliminate danger, or take other action. The Tort Law also requires that when a product is found to be defective after it is put into circulation, the producer and the seller shall give timely warnings, recall the defective product, or take other remedial measures.

Regulation of Franchise Operations

Article 7 of the Regulations on Administration of Commercial Franchise (State Council No. 485) requires that a franchisor, before initiating franchise operations, must operate at least two direct sale stores that have had continual operations for over one year, and must have the ability to provide operational guidance, technical support, business training, and related services to its franchisees. Zhongshan Winha met these requirements in the summer of 2015, when it initiated its franchise program.

 

Intellectual Property

 

Trademark

 

During fiscal 2016 our application for trademark protection for our Company's tradename, Winha, was approved by the Chinese government.

 

Domain Names

 

We have an Internet Content Provider License to use the domain name www.winha.com.

 

Employees

 

We currently have 153 employees, all of whom are employed full time. 37 of our employees are located in our central administrative offices; the remainder staff our stores and restaurants.

ITEM 1A.       RISK FACTORS

 

Investing in our common stock involves a high degree of risk. The risks below are those that we believe are the material risks that we currently face, but are not the only risks facing us and our business. If any of the events contemplated by the following discussion should occur, our business, financial condition and operating results could be adversely affected, and you could lose all or part of your investment.

 

 

We May Encounter Substantial Competition in Our Business and Our Failure to Compete Effectively May Adversely Affect Our Ability to Generate Revenue.

 

We are a recently organized company. A number of our competitors, including Taobao, Gongtianxia.com and Techan.com, are established and have greater resources than we do. Our competitive strategy is to implement our innovative business model of selling local specialty goods retail on a shopping platform that utilizes both physical stores and virtual stores. However, we believe that new competitors will enter the market and adopt our business model to introduce new websites, mobile applications and services with competitive characteristics. We expect that we will be required to continue to invest in improving our services to compete effectively in our markets. Our competitors could develop a more efficient business model or undertake more aggressive and costly marketing campaigns than ours, which may adversely affect our marketing strategies and could have a material adverse effect on our business, results of operations and financial condition.

 

From Time to Time, We Need to Identify New Suppliers of Local Specialty Products. If We Cannot Obtain Sufficient Supply That Meet Our Standards at a Reasonable Cost or at All, Our Sales Could Be Interrupted, Our Financial Performance Could Suffer.

 

Though each local region generally has abundant sources of specialty products, we cannot assure that the specialty products will continue to be available or in the sense of quality and prices, accessible to us. Numerous factors, most of which are beyond our control, can influence the prices of the supply for local specialty products. These factors include, to name a few, general economic conditions, manufacturer capacity utilization, vendor backlogs and transportation delays, and other uncertainties.

 

If we experience insufficiency of the supply of local specialty products, our sales could be interrupted if we do not have inventory to meet the demand, which will directly lead to a decrease in our revenue and profit.

 

We May Not Be Able To Market Our Website and Mobile Store Successfully.

 

Once we establish a stable and comprehensive supply of specialty products across the country, we plan to launch a marketing campaign to fully promote and advertise our website and mobile store. The e-commerce industry is extremely competitive. Though very few, if any, specialize in local specialty goods, there are currently many general online shopping websites both in China and worldwide that sell local products.  An effective marketing plan will need to be executed in order to establish a loyal client base, and to get our website and mobile application known in the marketplace. If we fail to develop such an effective marketing plan, and if we are unable to market our website and mobile application successfully to consumers, we may not be able to sustain online business operations.

 

We May Not Be Able to Find Suitable Software Developers at an Acceptable Cost.

 

We contract with software developers to further develop and upgrade our website and mobile store and associated backend interface. Due to the current demand for skilled technological developers, we run the risk of not being able to find or retain suitable personnel at an acceptable price. We would also need to ensure that the candidates are adequately qualified to develop a website or mobile application that is user friendly, free of errors and seamless in design. Without these developers, we may not be able to further develop and upgrade the software, which is the most important aspect of our business development.

 

Food Safety Events Involving Us or Our Supply Chain Could Create Negative Publicity and Adversely Affect Sales And Operating Results.

 

Because some of our items are perishable food products, food safety is a top priority, and we dedicate resources to ensure that our customers enjoy safe and quality food products. However, food safety events, including instances of food-borne illness have often occurred in the Chinese food industry in the past, and could occur in the future. As a result, our stores could experience a significant increase in supply costs if there are food safety events whether or not such events involve our stores or those of competitors.

 

In addition, food safety events, whether or not involving us, could result in negative publicity for Winha or for the industry or market segments in which we operate. Increased use of social media could create and/or amplify the effects of negative publicity. This negative publicity, as well as any other negative publicity concerning types of food products we serve, may reduce demand for our products and could result in a decrease in guest traffic to our online, mobile store and physical stores as consumers shift their preferences to our competitors or to other products or food types. A decrease in traffic to our stores, website and/or mobile store as a result of these health concerns or negative publicity could result in a decline in sales.

 

We May Be Subject to Product Liability Claims if People or Properties Are Harmed By the Products We Sell.

 

Products sold through our stores, and those to be sold through our website and mobile store are manufactured by third parties. Some of those products may be defectively produced or manufactured. As a result, sales of such products through our stores, website or mobile store could expose us to product liability claims relating to personal injury or property damage and may require product recalls or other actions. Third parties subject to such injury or damage may bring claims or legal proceedings against us as the distributor of the products. We do not currently maintain any third-party liability insurance or product liability insurance in relation to products sold through our stores. As a result, any material product liability claim or litigation could have a material and adverse effect on our business, financial condition and results of operations. Even unsuccessful claims could result in the expenditure of funds and managerial efforts in defending them and could have a negative impact on our reputation.

 

 

Uncertainties With Respect to the PRC Legal System Could Adversely Affect Us.

 

We conduct all of our business through our subsidiary in China. Our operations in China are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws and regulations applicable to wholly foreign-owned enterprises. The PRC legal system is based on statutes. Prior court decisions may be cited for reference but have limited precedential value.

 

Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management's attention.

 

Under the Enterprise Income Tax Law, We May Be Classified as a "Resident Enterprise" of China. Such Classification Will Likely Result in Unfavorable Tax Consequences to Us and Our Non-PRC Stockholders.

 

China passed a new Enterprise Income Tax Law, or the EIT Law, and its implementing rules, both of which became effective on January 1, 2008. Under the EIT Law, an enterprise established outside of China with "de facto management bodies" within China is considered a "resident enterprise," meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as "substantial and overall management and control over the production and operations, personnel, accounting, and properties" of the enterprise.

 

On April 22, 2009, the State Administration of Taxation of China (the "SAT"), issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, further interpreting the application of the EIT Law and its implementation to offshore entities controlled by a Chinese enterprise or group. Further to the Notice, the SAT issued the Administrative Measures for Enterprise Income Tax on Chinese-controlled Offshore Incorporated Resident Enterprises (Trial) on July 27, 2011, or Bulletin No. 45, which took effect on September 1, 2011, to provide more guidance on the implementation of the Notice. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a "non-domestically incorporated resident enterprise" if (i) its senior management in charge of daily operations perform their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books, corporate stamps, board and stockholder minutes are kept in China; and (iv) at least half of its directors with voting rights or senior management often reside in China. The Bulletin No. 45 provides clarification on the resident status determination, post-determination administration and competent tax authorities. It also specifies that when provided with a copy of PRC resident determination certificate from a Chinese-controlled offshore-incorporated resident enterprise, the payer should not withhold 10% income tax when paying certain Chinese-sourced income such as dividends, interest and royalties to the Chinese-controlled offshore-incorporated resident enterprise. A resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10% when paying dividends to its non-PRC stockholders. However, it remains unclear as to whether the Notice is applicable to an offshore enterprise controlled by a Chinese natural person. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.

 

If the PRC tax authorities determine that we are a "resident enterprise" for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Currently, we do not have any non-China source income. Second, under the EIT Law and its implementing rules, dividends paid to us from our PRC subsidiary would qualify as "tax-exempt income." Finally, it is possible that future guidance issued with respect to the new "resident enterprise" classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC stockholders and with respect to gains derived by our non-PRC stockholders from transferring our shares. We are actively monitoring the possibility of "resident enterprise" treatment for the 2013 tax year and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible.

 

If we were treated as a "resident enterprise" by PRC tax authorities, we would be subject to taxation in both the U.S. and China, and our PRC tax may not be creditable against our U.S. tax.

  

PRC Regulation of Loans and Direct Investment by Offshore Holding Companies to PRC Entities May Delay or Prevent Us From Making Loans or Additional Capital Contributions to Our PRC Operating Subsidiary, Which Could Materially and Adversely Affect Our Liquidity and Our Ability to Fund and Expand Our Business.

 

As an offshore holding company of our PRC operating subsidiary, we may make loans to our PRC subsidiary, or we may make additional capital contributions to our PRC subsidiary. Any loans to our PRC subsidiary are subject to PRC regulations. For example, loans by us to our subsidiary in China to finance its activities cannot exceed statutory limits which is the difference between the total investment and the registered capital of our PRC subsidiary and must be registered with the State Administration of Foreign Exchange, or SAFE. On August 29, 2008, SAFE promulgated Circular 142, a notice regulating the conversion by a foreign-invested company of foreign currency into RMB by restricting how the converted RMB may be used. Circular 142 requires that RMB converted from the foreign currency-denominated capital of a foreign-invested company may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC unless such investments are otherwise provided for in the business scope. The foreign currency-denominated capital shall be verified by an accounting firm before converting into RMB. In addition, SAFE strengthened its oversight over the flow and use of RMB funds converted from the foreign currency-denominated capital of a foreign-invested company. To convert such capital into RMB, the foreign-invested company must report the use of such RMB to the bank, and the RMB must be used for the reported purposes. According to Circular 142, change of the use of such RMB without approval is prohibited. In addition, such RMB may not be used to repay RMB loans if the proceeds of such loans have not yet been used. Violations of Circular 142 may result in severe penalties, including substantial fines as set forth in the Foreign Exchange Administration Rules. In addition, the SAFE promulgated the Notice on Relevant Issues Concerning Strengthening the Administration of Foreign Exchange Business, or Circular 59, on November 9, 2010, which requires the government to closely examine the authenticity of settlement of net proceeds from offshore offerings and the net proceeds to be settled in the manner described in the offering documents. 

 

We may also decide to finance our subsidiary by means of capital contributions. These capital contributions must be approved by the Ministry of Commerce of China, or MOFCOM, or its local counterpart. We may not be able to obtain these government approvals on a timely basis, if at all, with respect to future capital contributions by us to our PRC subsidiary. If we fail to receive such approvals, our ability to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

 

Governmental Control of Currency Conversion May Affect the Value of Your Investment.

 

The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. Prior approval from SAFE is required where RMB is to be converted into foreign currency and remitted out of China to pay certain capital account items, such as the repayment of loans denominated in foreign currencies as well as the proceeds of the liquidation of assets.

 

We receive substantially all of our revenues in RMB. Under our current corporate structure, our cash flow is primarily derived from dividend payments from our PRC subsidiary. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. As profit and dividend are current account items, our revenues generated in the PRC may be paid to shareholders outside of the PRC as profit or dividend without prior approval from SAFE so long as we comply with certain procedural requirements.

 

However, the PRC government may at its discretion restrict access in the future to foreign currencies for payments of profit and dividend. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders.

 

Our inability to obtain the requisite approvals for converting RMB into foreign currencies, any delays in receiving such approvals or any future restrictions on currency exchanges may restrict the ability of our PRC subsidiary to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy its foreign currency denominated obligations.

 

Fluctuation in the Value of the RMB May Have a Material Adverse Effect on the Value of Your Investment.

 

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. Provisions on Administration of Foreign Exchange, as amended in August 2008, further changed China's exchange regime to a managed floating exchange rate regime based on market supply and demand. From 2008 to 2015 the exchange rate between the RMB and the U.S. dollar remained relatively stable. Since September of 2015, however, the Chinese government has reduced the value of the RMB three times, for an aggregate reduction of almost four percent. Substantially all of our revenues and costs are denominated in RMB, and a significant portion of our financial assets are also denominated in RMB. We principally rely on dividends and other distributions paid to us by our subsidiary in China. Any significant revaluation of the RMB may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our ordinary shares in U.S. dollars. Any fluctuations of the exchange rate between the RMB and the U.S. dollar could also result in foreign currency translation losses for financial reporting purposes.

 

PRC Regulations Relating to the Establishment of Offshore Special Purpose Companies by PRC Residents May Subject Our Potential PRC Resident Shareholders to Penalties and Limit Our Ability to Inject Capital Into Our PRC Subsidiary, Limit Our PRC Subsidiary's Ability to Distribute Profits to Us, or Otherwise Adversely Affect Us.

 

The SAFE has promulgated several regulations, including the Notice on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents' Financing and Roundtrip Investment through Offshore Special Purpose Vehicles, or Circular 75, effective on November 1, 2005 and its implementation rules. These regulations require PRC residents and PRC companies to register with local branches of the SAFE before SPVs conduct any overseas financing, have any change in equity interest, conduct any round-trip investments or have any other material changes in capital or equity interest in SPVs. An amendment to registration or filing with the local SAFE branch by such PRC residents or PRC companies is also required for the injection of equity interests or assets of an onshore enterprise in the offshore special purpose company or overseas funds raised by such offshore company, or any other material change involving a change in the capital of the offshore special purpose company.  Any PRC resident shareholders holding direct or indirect interest in our company may be subject to Circular 75 and its implementation rules. Failure by any such PRC residents to comply with Circular 75 and its implementation rules could subject themselves to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary's ability to distribute profits to us or affect our ownership structure, which could adversely affect our business and prospects.

  

 

The Company's Shares Currently Trade for Less Than $5.00 Per Share, and Thus are a Penny Stock. Trading in Penny Stocks Has Many Restrictions and These Restrictions Could Severely Affect the Price and Liquidity of the Company's Shares.

 

Since commencing trading in August 2014, our stock has traded below $5.00 per share. Our stock, therefore, is known as a "penny stock", which is subject to various regulations involving disclosures to be given to you prior to the purchase of any penny stock. The SEC has adopted regulations which generally define a "penny stock" to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. A penny stock is subject to rules that impose additional sales practice requirements on broker/dealers who sell these securities to persons other than established customers and accredited investors. For transactions covered by these rules, the broker/dealer must make a special suitability determination for the purchase of these securities. In addition, the broker/dealer must receive the purchaser's written consent to the transaction prior to the purchase. He must also provide certain written disclosures to the purchaser. Consequently, the "penny stock" rules may restrict the ability of broker/dealers to sell our securities, and may negatively affect the ability of holders of shares of our common stock to resell them. These disclosures require a potential purchaser to acknowledge that he understands the risks associated with buying penny stocks and that he can absorb the loss of his entire investment. Penny stocks are low priced securities that do not have a very high trading volume. Consequently, the price of the stock is often volatile and you may not be able to buy or sell the stock when you want to.

 

We Do Not Anticipate Paying Dividends in the Foreseeable Future.

 

We have never declared or paid any cash dividends or distributions on our capital stock. We currently intend to retain our future earnings, if any, to support operations and to finance expansion and therefore we do not anticipate paying any cash dividends on our common stock in the foreseeable future.

 

The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the board of directors considers relevant. There is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend.

 

The Lack of Public Company Experience of Our Management Team Could Adversely Impact Our Ability to Comply With the Reporting Requirements of U.S. Securities Laws.

 

Our management lacks public company experience, which could impair our ability to comply with legal and regulatory requirements such as those imposed by Sarbanes-Oxley Act of 2002. Our management has never been responsible for managing a publicly traded company. Such responsibilities include complying with federal securities laws and making required disclosures on a timely basis. Our management may not be able to implement programs and policies in an effective and timely manner that adequately respond to such increased legal, regulatory compliance and reporting requirements, including establishing and maintaining internal controls over financial reporting.  Any such deficiencies, weaknesses or lack of compliance could have a materially adverse effect on our ability to comply with the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") which is necessary to maintain our public company status. If we were to fail to fulfill those obligations, our ability to continue as a U.S. public company would be in jeopardy in which event you could lose your entire investment in our company.

 

ITEM 1B.       UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 2.           PROPERTIES.

 

Our principal executive office is located at Suite 3F of the Tianbo Office Building, No. 19 Changyi Road, Changmingshui Industry District, Wuguishan, China. The property at this location is leased by the Company, at monthly rental expenses of RMB 13,710 (approximately $2,117) with 10% annual increases, for a term of ten years ending June 30, 2025.

Our subsidiaries now lease commercial space for our seven retail stores and one restaurant, as follows:

We currently do not own any real property.  

 

ITEM 3.           LEGAL PROCEEDINGS.

 

There are no material pending legal proceedings to which we are a party or of which any of our property is the subject.  

 

ITEM 4.           MINE SAFETY DISCLOSURES.

 

Not applicable.

 

PART II

 

ITEM 5.           MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Market Information

 

Our common stock has been listed for quotation on the OTC Pink Market since August 14, 2014.  It is currently listed under the symbol "WINH."  The following table sets forth for the respective periods indicated the prices of the common stock, as reported by the OTC Pink Market.  Such prices are based on inter-dealer bid and asked prices, without markup, markdown, commissions, or adjustments and may not represent actual transactions.

Holders

 

As of June 30, 2016, there were 411 holders of record of our common stock.

 

Dividends

 

To date, we have not declared or paid any dividends on our common stock. We currently do not anticipate paying any cash dividends in the foreseeable future on our common stock. Although we intend to retain our earnings, if any, to finance the expansion and growth of our business, our board of directors has the discretion to declare and pay dividends in the future.

 

Payment of dividends in the future will depend upon our earnings, capital requirements, and any other factors that our board of directors deems relevant.

 

Recent Sales of Unregistered Securities

 

The Company did not effect any unregistered sale of securities during the fourth quarter of fiscal year 2015.

 

ITEM 6.           SELECTED FINANCIAL DATA.

 

Not applicable.

  

ITEM 7.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

 

Years ended March 31, 2016 and 2015

 

During the year ended March 31, 2016, we had total revenue of $42,442,485, representing an increase of 370% when compared with the year ended March 31, 2015. The following table shows the components of revenue:

 

ITEM 7A.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable.

 

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Index to the Consolidated Financial Statements

 

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

See accompanying notes to the consolidated financial statements.

See accompanying notes to the consolidated financial statements.

 

See accompanying notes to the consolidated financial statements.

 

 

See accompanying notes to the consolidated financial statements.

 

See accompanying notes to the consolidated financial statements.

 

See accompanying notes to the consolidated financial statements.

 

Winha International Group Limited ("Winha International") was incorporated in Nevada on April 15, 2013.  The subsidiaries of the Company and their principal activities are described as follows:

Winha International and its subsidiaries are collectively referred to as the "Company". The Company retails local specialty products from different regions across China through its seven self-operated physical stores.  The stores are supplemented by two restaurants, the first of which the Company opened in April 2015. In addition, the Company has granted 26 franchises to use the Company's tradename, store dress, other resources. The Company plans to open additional stores and restaurants and add additional franchisees during fiscal 2017. The Company also plans to develop its website and mobile store, as it expands its sales platform. The Company's business model utilizes a multi-channel shopping platform to sell locally-produced food, beverages, and arts and crafts that are well-known across China. Through this comprehensive shopping platform, the Company will provide customers with access to a variety of local products that can typically only be found in local stores or markets in specific regions of China.

 

Until November 27, 2015, the Company operated its business through a variable interest entity, Zhongshan Winha Electronic Commerce Company Limited ("Zhongshan Winha"), which has two wholly owned limited liability subsidiaries, Zhongshan Supermarket Limited ("Zhongshan Supermarket") and Zhongshan Winha Catering Management Co., Ltd. ("Winha Catering"), as well as three incorporated branches.  The Company had the controlling interest in Zhongshan Winha via its wholly owned subsidiary Shenzhen Winha Information Technologies Company Ltd. ("Shenzhen Winha") through a series of contractual arrangements. On November 27, 2015, the shareholders of Zhongshan Winha transferred their stock to Shenzhen Winha upon the exercise of its option to purchase all of the registered equity. The purchase price was $0.16.  Zhongshan Winha, therefore, is now a wholly owned subsidiary of Shenzhen Winha.

 

In May 2015, C&V International Company Limited ("C&V"), a wholly owned subsidiary of Winha International, set up a wholly owned subsidiary, Australia Winha Commerce and Trade Limited ("Australian Winha"). In February 2016, Sanmei International Investment Co., Ltd ("Sanmei Investment"), a company incorporated in Anguilla on April 23, 2013, transferred 100% of its shares to Winha International. Subsequently, Winha International transferred theshares of C&V to Sanmei Investment, and C&V transferred the shares of  Australian Winha to Sanmei Investment.

 

In March 2016, 40% of the 72,000,000 shares of Australian Winha were transferred from the sole shareholder of Sanmei Investment to the following which has direct or indirect relationships with the major shareholder and consultants of the Company: 5% to Beijing Ruihua Future, 5% to Donghe Group, 7% to Zhuowei Zhong, 5% to Xinxi Zhong, 4% to Zhifei Huang and 3% to Chun Yan Winne Lam. Immediately after the transfer, 20,880,000 bonus shares were issued at no consideration for every existing share held as follows:

 

           Foreign Currency Translation (continued)

           The exchange rates used to translate amounts in RMB into US dollars for the purposes of preparing the financial statements are as follows:

 The exchange rates used to translate amounts in AUD into US dollars for the purposes of preparing the consolidated financial statements are as follows:

The Company's operations may be adversely affected by significant political, economic and social uncertainties in the PRC.  Although the PRC government has been pursuing economic reform policies for more than twenty years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC's political, economic and social conditions.  There is also no guarantee that the PRC government's pursuit of economic reforms will be consistent, effective or will continue.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates.

 

Prepaid Expenses

 

Prepaid expenses as of March 31, 2016 and 2015 mainly represent the prepayments of approximately $174,000 and $146,000, respectively, for prepaid decoration expenses of the Company's new stores.

Advances from Customers

Advances from customers represents prepaid cards purchased by customers at our retail locations. We believe that prepaid cards are principally purchased for gift purposes and usually used quickly. Accordingly the Company records the related obligation as a current liability.

Advances from customers was $769,814 and $732,212 as of March 31, 2016 and 2015, respectively.

Website Development Costs

The Company accounts for website development costs in accordance with ASC 350-50, "Accounting for Website Development Costs", wherein website development costs are segregated into three activities:

 

The Company has a website and ongoing website development costs of $45,676 and $39,014 as of March 31, 2016 and 2015, respectively.  The online sales platform is currently in use and the related costs are being amortized over five years. Amortization expense was $790 and $812 for the years ended March 31, 2016 and 2015, respectively.

  Revenue Recognition

The Company recognizes revenue from the following channels: 

 Revenue Recognition (continued)

Zhongshan Winha grants certain commercial customers limited rights to return products and provides price protection for inventories held by resellers at the time of published price reductions. Zhongshan Winha establishes an estimated allowance for future product returns based upon historical return experience when the related revenue is recorded and provides for appropriate price protection reserves when pricing adjustments are approved.

Zhongshan Winha's return policy allows customers to return their merchandise in the original box and/or packaging within 7 days of purchase.  The Company has not experienced material returns.

Fair Value of Financial Instruments

FASB ASC 820, "Fair Value Measurement," specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs).  In accordance with ASC 820, the following summarizes the fair value hierarchy:

ASC 820 requires the use of observable market data, when available, in making fair value measurements.  When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.  Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.  As of March 31, 2016 and 2015, none of the Company's assets and liabilities were required to be reported at fair value on a recurring basis.  Carrying values of non-derivative financial instruments, including cash, accounts receivable, inventory, advances to suppliers, accounts payable and accrued expenses, and advances from customers approximate their fair values due to the short term nature of these financial instruments.  There were no changes in methods or assumptions during the periods presented.

 Cash and Cash Equivalents

The Company considers all demand and time deposits and all highly liquid investments with an original maturity of three months or less to be cash equivalents.

 

Accounts Receivable

 

Accounts receivable is stated at cost, net of an allowance for doubtful accounts, if required.  Receivables outstanding longer than the payment terms are considered past due.  The Company maintains an allowance for doubtful accounts for estimated losses when necessary resulting from the failure of customers to make required payments.  The Company reviews the accounts receivable on a periodic basis and makes allowances where there is doubt as to the collectability of individual balances.

 

In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, the customer's payment history, its current credit-worthiness and current economic trends.  The Company considers all accounts receivable at March 31, 2016 and 2015 to be fully collectible and, therefore, did not provide an allowance for doubtful accounts.  For the periods presented, the Company did not write off any accounts receivable as bad debts.

Inventory

Inventory, comprised principally of merchandise and food products, is stated at the lower of cost or market.  The value of inventory is determined using the weighted average cost method.

The Company estimates an inventory allowance for excessive or unusable inventories.  Inventory amounts are reported net of such allowances, if any.  There was no allowance for excessive or unusable inventories as of March 31, 2016 and 2015.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost, less accumulated depreciation.  Cost includes the price paid to acquire the asset, and any expenditure that substantially increases the asset's value or extends the useful life of an existing asset.  Depreciation is computed using the straight-line method over the estimated useful lives of the assets.  Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the periods benefited.  Maintenance and repairs are generally expensed as incurred.

  Impairment of Long-Lived Assets

The Company applies FASB ASC 360, "Accounting for the Impairment and Disposal of Long-Lived Assets," which addresses the financial accounting and reporting for the recognition and measurement of impairment losses for long-lived assets.  In accordance with ASC 360, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  The Company may recognize the impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to those assets.  No impairment of long-lived assets was recognized for the periods presented.

Income Taxes

The Company accounts for income taxes in accordance with FASB ASC 740, "Income Taxes" ("ASC 740"), which requires the recognition of deferred income taxes for differences between the basis of assets and liabilities for financial statement and income tax purposes.  Deferred tax assets and liabilities represent the future tax consequences for those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.  Deferred taxes are also recognized for operating losses that are available to offset future taxable income.  A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.  ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.

Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.  The tax benefits recognized in the financial statements from such a position would be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.  ASC 740 also provides guidance on the de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties associated with these tax positions.  As of March 31, 2016 and 2015, the Company did not record any liabilities for unrecognized income tax benefits.

  United States

The Company is subject to United States tax at graduated rates from 15% to 35%.  No provision for income tax in the United States has been made as the Company had no U.S. taxable income for the years ended March 31, 2016 and 2015.

 

Anguilla

Sanmei International Investment Co, Ltd is incorporated in Anguilla and is governed by the income tax laws of Anguilla. According to current Anguilla income tax law, the applicable income tax rate for the Company is 0%.

 

Australia

 

Winha Commerce and Trade Limited is incorporated in Australia.  Pursuant to the income tax laws of Australia, the Company is not subject to tax on non-Australian source income.

 

Cayman Islands

C&V International Holdings Company Limited is incorporated in Cayman Islands and is governed by the income tax laws of the Cayman Islands.  According to current Cayman Islands income tax law, the applicable income tax rate for the Company is 0%.

 

Hong Kong

 

Winha International Investment Holdings Company Limited is incorporated in Hong Kong.  Pursuant to the income tax laws of Hong Kong, the Company is not subject to tax on non-Hong Kong source income.

 

PRC

Shenzhen Winha, Zhongshan Winha Electronic Commerce Company Limited together with Zhongshan Winha Catering Management Company Limited and Zhongshan Supermarket Limited are subject to an Enterprise Income Tax at 25% and each files its own tax return.

The Company computes net income (loss) per common share in accordance with FASB ASC 260, "Earnings Per Share" ("ASC 260").  Under the provisions of ASC 260, basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of shares of common stock outstanding during the period.  Diluted income per common share is computed by dividing the net income by the weighted average number of shares of common stock outstanding plus the effect of any potential dilutive shares outstanding during the period. There were no dilutive shares outstanding during the years ended March 31, 2016 and 2015.  Accordingly, the number of weighted average shares outstanding as well as the amount of net income per share are presented for basic and diluted per share calculations for the period reflected in the accompanying consolidated statement of income and other comprehensive income.

 

Statutory Reserve

 

The Company's China-based subsidiaries and related entities are required to make appropriations of retained earnings for certain non-distributable reserve funds.

 

Pursuant to the China Foreign Investment Enterprises laws, the Company's China-based subsidiaries, are required to make appropriations from their after-tax profit as determined under generally accepted accounting principles in the PRC (the "after-tax-profit under PRC GAAP") to a general non-distributable reserve fund. Each year, at least 10% of each entities after-tax-profit under PRC GAAP is required to be set aside as a general reserve fund until  the fund equals 50% of the registered capital of the applicable entity.

 

The statutory reserve fund is restricted as to use and can only be used to set-off against losses, expansion of production and operations and increasing registered capital of the respective company. The fund is not allowed to be transferred to the Company in terms of cash dividends, loans or advances, nor is it allowed for distribution except under liquidation.

 

The required transfer to the statutory reserve fund was $258,336 and $252,053, respectively, for the years ended March 31, 2016 and 2015.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. The new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements.

 

In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015-17), which simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the balance sheet. This accounting standard update is not expected to have a material impact on the Company's consolidated financial statements.

 

In September 2015, the FASB issued Accounting Standards Update ("ASU") 2015-16: Simplifying the Accounting for Measurement-Period Adjustments ("ASU 2015-16"), which eliminates the requirement to restate prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. ASU 2015-16 is effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. This accounting standard update is not expected to have a material impact on the Company's consolidated financial statements.

 

In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendment in this ASU defers the effective date of ASU No. 2014-09 for all entities for one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods within that reporting period. This accounting standard update is not expected to have a material impact on the Company's consolidated financial statements.

3.        RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)

In March 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") ASU 2015-03 – Interest – Imputation of Interest (Subtopic 835-30). This ASU addressed the simplification of debt issuance costs presentation by presenting debt issuance costs in the balance sheet as a direct deduction from the carrying amount of the debt, consistent with debt discounts or premiums. This accounting standard update is not expected to have a material impact on the Company's consolidated financial statements.

In January 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") ASU 2015-01 – Income Statement – Extraordinary and Unusual Items (Subtopic 225-20).  This ASU addressed the simplification of income statement presentation by eliminating the concept of extraordinary items.  The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.  A reporting entity may apply the amendments prospectively.  A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements.  Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption.  This accounting standard update is not expected to have a material impact on the Company's consolidated financial statements.

4.         PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are summarized as follows:

		March 31, 2016				March 31, 2015
Furniture, fixtures and equipment		$	1,131,124			$	380,979
Leasehold improvements			629,536				18,908
Motor vehicles			361,967				71,658
			2,122,627				471,545
Less: accumulated depreciation			(274,650	)			(80,232	)
		$	1,847,977			$	391,313

For the years ended March 31, 2016 and 2015, depreciation and amortization expense was $202,604 and $79,573, respectively.

5.        LEASES

The Company leases its offices, warehouse and stores under operating leases expiring in various years through 2023.

 

The total future minimum lease payments as of March 31, 2016 are as follows:

 

  Rent expense was $252,154 and $212,092 for the years ended March 31, 2016 and 2015, respectively.

6.        CONVERTIBLE NOTES

In May 2015, C&V International Company Limited, a wholly owned subsidiary of Winha International Group Limited, set up a wholly owned subsidiary, Australia Winha Commerce and Trade Limited ("Australian Winha").

On September 1, 2015, Australia Winha borrowed $542,570 (AUD$750,000) in the form of a twelve month convertible promissory note with interest at 6% per annum. The note is convertible into 750,000 shares of Australia Winha at $0.70401 per share (AUD$1.00) and is convertible at the option of the Company. The accrued interest of $ 18,990 was not paid prior to March 31, 2016.

On December 17, 2015, Australia Winha borrowed another $4,892,896 (AUD$6,750,000) in the form of a twelve month convertible promissory note with interest at 6% per annum. The note is convertible into 6,750,000 shares of Australia Winha at $0.71012 per share (AUD$1.00) and is convertible at the option of the Company. The accrued interest of $ 73,393 was not paid prior to March 31, 2016.

There was no beneficial conversion feature associated with both notes.

7.        RELATED PARTY TRANSACTIONS

The Company obtained demand loans from the chairman of the board, which are non-interest bearing.  The loans of $477,199 and $72,228 as of March 31, 2016 and 2015, respectively, are reflected as loan from stockholder in the consolidated balance sheets.

8.        INCOME TAXES

The Company is required to file income tax returns in both the United States and the PRC.  Its operations in the United States have been insignificant and income taxes have not been accrued.

The provision for income taxes consisted of the following for the years ended March 31:

 The following table reconciles the effective income tax rates with the statutory rates for the years ended March 31, respectively:

The Company did not recognize any tax benefit related to Parent's loss of approximately $(15,865,000) since it has no income. The stock compensation of approximately $15,865,000 would be deductible only to the U.S. Parent Company and accordingly there is no deferred tax benefit to be recognized. The stock compensation of approximately $6,017,000 is not deductible by the Operating Company under PRC tax laws.

8.  INCOME TAXES (CONTINUED)

Deferred tax assets and liabilities are recognized for expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse. The laws of China permit the carry-forward of net operating losses for a period of five years. U.S. federal net operating losses can generally be carried forward twenty years.

Deferred tax assets are comprised of the following:

 

		March 31, 2016				March 31, 2015
Net operating loss carryforwards		$	6,333,864			$	40,168
Inventory intercompany profit			2,596				20,760
Less: valuation allowance			(6,303,650	)			(60,928	)
Net deferred tax asset			32,810			$	-

At March 31, 2016 and 2015, the Company had unused operating loss carry-forwards of approximately $16,214,870 and $161,000 respectively, expiring in various years through 2019.  The Company has established a valuation allowance of $6,303,650 and $60,928 against the deferred tax asset related to net operating loss carry-forwards at March 31, 2016 and 2015, respectively, due to the uncertainty of realizing the benefit. The carryforwards are principally in China and the United States.

 

The Company's tax filings are subject to examination by the tax authorities.  The tax years for 2015, 2014 and 2013 remain open to examination by the tax authorities in the PRC.  The Company's U.S. tax returns are subject to examination by the tax authorities for the years ended March 31, 2015, 2014, 2013 and 2012. In August, 2015, the Company was assessed a penalty of $30,000 by the Internal Revenue Service for failure to file timely Form 5471's.  The penalty was waived by IRS on March 14, 2016.

 

9.        CONCENTRATION OF CREDIT RISK

Substantially all of the Company's bank accounts are located in The People's Republic of China and are not covered by protection similar to that provided by the FDIC on funds held in United States banks.

10.      PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION

The following is the condensed financial information of Winha International Group Limited only, the US parent, balance sheet as of March 31, 2016 and the related statements of income and cash flows for the twelve months ended March 31, 2016:

Condensed Balance Sheet

10.      PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION  (CONTINUED)

 Condensed Statement of Income

 

10.      PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (CONTINUED)

Basis of Presentation

The Company records its investment in its subsidiaries under the equity method of accounting.  Such investments are presented as "Investment in subsidiaries" on the condensed balance sheet and the subsidiaries' profits are presented as "Share of earnings from investment in subsidiaries" in the condensed statement of income.

 

Certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted.  The parent only financial information has been derived from the Company's consolidated financial statements and should be read in conjunction with the Company's consolidated financial statements.

 

There were no cash transactions in the US parent company during the twelve months ended March 31, 2016.

 

 Restricted Net Assets

Under PRC laws and regulations, the Company's PRC subsidiaries are restricted in their ability to transfer certain of their net assets to the Company in the form of dividend payments, loans or advances. The restricted net assets of the Company's PRC subsidiaries amounted to approximately $11,050,554 as of March 31, 2016.

 

The Company's operations and revenues are conducted and generated in the PRC, and all of the Company's revenues being earned and currency received are denominated in RMB.  RMB is subject to the foreign exchange control regulations in China, and, as a result, the Company may be unable to distribute any dividends outside of China due to PRC foreign exchange control regulations that restrict the Company's ability to convert RMB into US Dollars.

ITEM 9.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

None.

 

ITEM 9A.          CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures.  Our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule13a-15(e) promulgated by the Securities and Exchange Commission) as of March 31, 2016.  The evaluation revealed that there are material weaknesses in our disclosure controls, specifically:

 

Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company's system of disclosure controls and procedures was not effective as of March 31, 2016.

 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.  We have assessed the effectiveness of those internal controls as of March 31, 2016, using the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") Internal Control – Integrated Framework (1992) as a basis for our assessment.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.  All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

A material weakness in internal controls is a deficiency in internal control, or combination of control deficiencies, that adversely affects the Company's ability to initiate, authorize, record, process, or report external financial data reliably in accordance with accounting principles generally accepted in the United States of America such that there is more than a remote likelihood that a material misstatement of the Company's annual or interim financial statements that is more than inconsequential will not be prevented or detected. In the course of making our assessment of the effectiveness of internal controls over financial reporting, we identified four material weaknesses in our internal control over financial reporting.  These material weaknesses consisted of the material weaknesses in our disclosure controls itemized above. .

Because of the above conditions, management's assessment is that the Company's internal controls over financial reporting were not effective as of March 31, 2016.

 

There were no changes that occurred during the fourth quarter of the fiscal year 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act).

 

ITEM 9B.          OTHER INFORMATION.

 

None.

 

PART III

 

ITEM 10.        DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Winha International:

The following table sets forth the name and age of the sole officer and director of Winha International.

 

 

Set forth below is a brief description of the background and business experience of our executive officer and director .

 

Chung Yan Winnie Lam is the owner and a director of Blaze Group Limited, a bridal shop in Hong Kong, which wholesales, retails and rents wedding dresses and evening gowns. Additionally, Ms. Lam is one of the owners, and the Marketing Director of, Jonathon Arndt Gallery of Jewels, a jewelry shop in Beverly Hills, California. Ms. Lam holds a Bachelor of Science from the University of Southern California Marshall School of Business.

 

Zhongshan Winha:

The following table sets forth the name and age of the senior executive officers of Zhongshan Winha.

 

Set forth below is a brief description of the background and business experience of our executive officer and director .

Zhuowei Zhong has been involved in the management of marketing enterprises for the past twenty years. Prior to joining Zhongshan Winha as Chairman in 2013, Mr. Zhong was employed for three years as Managing Director of Zhongshan Winha Culture Media Co., Ltd. From 2003 to 2010, Mr. Zhong was employed as General Manager of Guangdong Xiangdao Marketing Planning Co.  From 1999 to 2003, Mr. Zhong was employed as General Manager of Zhongshan Xinyuzhou Electrical Appliance Co., Ltd. From 1995 to 1999, he served as Marketing Director of Zhongshan Like Chongcao Manufacturing Co., Ltd. In 2006, Mr. Zhong was awarded an Executive Masters Degree in Business Administration by Zhongshan University.

Zhifei Huang  joined Zhongshan Winha in 2013 after serving for two years as General Manager of Zhongshan Wanyin Investment and Management Co., Ltd. From 2007 to 2010 Mr. Huang was employed as Sales Director by Guangzhou Caihe Education Investment Group. From 2000 to 2006 Mr. Huang served as Customer Service Manager for Guangzhou Kangpu Health Industry Co., Ltd.  From 1997 to 2000 he was a Traffic Supervisor with the Foshan Highway Bureau. In 2008, Mr. Huang was awarded an Executive Masters Degree in Business Administration by Zhongshan University.

Huiwen Huang joined Zhongshan Winha in 2013 after six years involvement with Guangzhou Hongda Ceramic Co., Ltd. which he founded in 2006. Previously, from 2000 to 2006, Mr. Huang was employed as Marketing Operations Manager by the Gaoming Branch of China Union. From 1996 to 2000, he served as Company Manager for the Gaoming Subsidiary Company of the Foshan Branch of PICC. Mr. Huang was awarded a Bachelor of Law Degree by Zhongshan University in 1993. In 2004, Mr. Huang was awarded a Masters Degree in Business Administration by Zhongshan University

Family Relationship

 

There are no family relationships between any of our directors or executive officers.

 

Employment Agreements

 

We have not entered into an employment agreement with our executive officer and director.

 

Board of Directors

 

Our director holds office until the next annual meeting of shareholders and until her successor has been duly elected and qualified. Officers are elected by and serve at the discretion of the board of directors.

 

Code of Ethics

 

We currently do not have a code of ethics that applies to our executive officers, as we have only one executive officer.

 

Board Committees

 

We have not formed an Audit Committee, Compensation Committee or Nominating and Corporate Governance Committee. Our Board of Directors performs the principal functions of each such committee. We currently do not have an audit committee financial expert on our Board of Directors.  We believe that the cost of hiring an audit committee financial expert to act as one of our directors and to be a member of an Audit Committee outweighs the benefits of having an audit committee financial expert at this time.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

The Company does not have a class of securities registered under the Exchange Act and therefore its directors, executive officers, and any persons holding more than ten percent of the Company's common stock are not required to comply with Section 16 of the Exchange Act.

 

ITEM 11.         EXECUTIVE COMPENSATION. 

 

Summary Compensation Table

  

The following table sets forth all compensation awarded to, earned by, or paid by Winha International or its subsidiaries to Chung Yan Winnie Lam, the Company's Chief Executive Officer, for services rendered in all capacities to the Company during the years ended March 31, 2016, 2015 and 2014.  There were no executive officers whose total salary and bonus for the fiscal year ended March 31, 2016 exceeded $100,000.

 

Compensation of Our Director

 

From inception to March 31, 2014, our sole director Chung Yan Winnie Lam did not receive any compensation solely for service as a director.

 

It is our current policy that our director is reimbursed for reasonable out-of-pocket expenses incurred in attending each board of directors meeting.

 

Outstanding Equity Awards at Fiscal Year-End Table

 

None.

  

ITEM 12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

  

The following table sets forth certain information with respect to the beneficial ownership of our voting securities by (i) each director and named executive officer, (ii) all executive officers and directors as a group; and (iii) each shareholder known to be the beneficial owner of 5% or more of the outstanding common stock of the Company.

 

Beneficial ownership is determined in accordance with the rules of the SEC. Generally, a person is considered to beneficially own securities: (i) over which such person, directly or indirectly, exercises sole or shared voting or investment power, and (ii) of which such person has the right to acquire beneficial ownership at any time within 60 days (such as through exercise of stock options or warrants). For purposes of computing the percentage of outstanding shares held by each person or group of persons, any shares that such person or persons has the right to acquire within 60 days are deemed to be outstanding, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated below, the address of each person listed in the table below is 3rd Floor, No. 19 Changyi Road, Changmingshui Village, Wuguishan Town,  Zhongshan City, China.  

 

---------------------------------

(1)  Except as otherwise noted, all shares are owned of record and beneficially.

(2)  Includes 35,181,844 shares owned of record by Pilot International Investment Co., Inc., of which Zening Lai  is the sole shareholder.

ITEM 13.        CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

 

In March 2016 our subsidiary, Sanmei International Investment Co., Ltd., distributed, for no consideration, 40% of the capital stock of its subsidiary, Australian Winha Multimedia Commerce and Trade Co., Ltd. ("Australian Winha"). The distribution had the effect of assigning 40% of our equity interest in our operating subsidiary, Zhongshan Winha, which is a wholly-owned subsidiary of Australian Winha. Among the individuals who received interests in Australian Winha at this time were:

 

Except as set forth above, there have been no transactions since the beginning of the 2016 fiscal year, or any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years, and in which any related person had or will have a direct or indirect material interest (other than compensation described under "Executive Compensation").

There are no members of our Board of Directors who are independent, as "independent" is defined in the rules of the NYSE MKT.

 ITEM 14.        PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

Audit Fees

Wei, Wei & Co., LLP billed $64,000 to the Company for professional services rendered for the audit of financial statements for the year ended March 31, 2016. Wei, Wei & Co., LLP billed $51,000 to the Company for professional services rendered for the audit of financial statements for the year ended March 31, 2015.

Audit-Related Fees

Wei, Wei & Co., LLP billed $0 to the Company during the year ended March 31, 2016 for assurance and related services that are reasonably related to the performance of the 2016 audit or review of the quarterly financial statements.  Wei, Wei & Co., LLP billed $0 to the Company during the year ended March 31, 2015 for assurance and related services that are reasonably related to the performance of the 2015 audit or review of the quarterly financial statements

Tax Fees

Wei, Wei & Co., LLP billed $0 to the Company during the year ended March 31, 2016 for professional services rendered for tax compliance, tax advice and tax planning.  Wei, Wei & Co., LLP billed $3,100 to the Company during the year ended March 31, 2015 for professional services rendered for tax compliance, tax advice and tax planning.

All Other Fees

Wei, Wei & Co., LLP billed $0 to the Company in the year ended March 31, 2016 for services not described above.  Wei, Wei & Co., LLP billed $0 to the Company during the year ended March 31, 2016 for services not described above.

 It is the policy of the Company that all services other than audit, review or attest services must be pre-approved by the Board of Directors.  No such services were performed by Wei, Wei & Co., LLP.

Subcontracted Services

The hours expended on Wei, Wei & Co., LLP's engagement to audit the Company's financial statements for the year ended March 31, 2016 that were attributed to work performed by persons other than full-time permanent employees of Wei, Wei & Co., LLP was not greater than 50% of the total hours expended.

PART IV

 

ITEM 15.        EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

  

 

 

 

SIGNATURES

 

 

 

 

 

54

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