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WINHA INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES

WINHA INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015 (IN U.S. $) (UNAUDITED)

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WINHA INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

WINHA INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES

 

WINHA INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015 (IN U.S. $) (UNAUDITED)

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WINHA INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

WINHA INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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1.        ORGANIZATION AND BUSINESS (CONTINUED)

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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 June 30, 2016 and March 31, 2016 of approximately $110,000 and $174,000, respectively, mainly represent the prepayments for 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 $1,254,490 and $769,814 as of June 30, 2016 and March 31, 2016, 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:

2.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

  Website Development Costs (continued)

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2.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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WINHA INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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WINHA INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

7.         RELATED PARTY TRANSACTIONS

The Company obtained demand loans from the chairman of the board, which are non-interest bearing.  The loans of $580,581 and $477,199 as of June 30, 2016 and March 31, 2016, 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 three months ended June 30:

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WINHA INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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WINHA INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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10.       PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (CONTINUED)

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

Events Affecting Consolidation

We operate our business in China through Zhongshan Winha. We expect that virtually all of our revenue will be derived from Zhongshan Winha. On August 1, 2013, our subsidiary, Shenzhen Winha, entered into a set of contractual agreements with Zhongshan Winha and its equity owners, including an exclusive business cooperation agreement, exclusive option agreement, loan agreement, share pledge agreement, power of attorney and spousal consents. Shenzhen Winha, through these arrangements, assumed operational control of Zhongshan Winha and became the primary beneficiary of those operations. As a result, Zhongshan Winha was considered a variable interest entity with respect to Shenzhen Winha and, as a result, from August 1, 2013 through November 27, 2015, the financial statements of Zhongshan Winha were consolidated with our Company's financial statements.

The control of our operations through these contractual arrangements created risks for our business. If Zhongshan Winha and its shareholders failed to perform their obligations under the contractual arrangements, or if we suffered significant delay or other obstacles in the process of enforcing these contractual arrangements, or if legal remedies under PRC laws that we relied on were not available or effective, our business and operations could have been severely disrupted, which could have materially and adversely affected our results of operations and our ability to generate revenue in the PRC and could have damaged our reputation. To avoid such risk, on November 27, 2015, Shenzhen Winha exercised its option to purchase the registered equity of Zhongshan Winha from the shareholders of Zhongshan Winha.  Upon the exercise of the purchase option, Zhongshan Winha became a wholly owned subsidiary of Shenzhen Winha. The financial statements of Zhongshan Winha remain consolidated with our Company's financial statements, but now as a subsidiary.

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, 100% of the outstanding shares of Sanmei International Investment Co., Ltd ("Sanmei Investment"), a company incorporated in Anguilla on April 23, 2013, were transferred to Winha International Group Limited. Winha International Group Limited then transferred the shares of its wholly owned subsidiary, C&V, to Sanmei Investment.

In March 2016, C&V transferred the shares of Australian Winha to Sanmei Investment. Subsequently, Sanmei Investment transferred 29% of the outstanding shares of Australian Winha to persons and entities who were either affiliates of, or consultants to,  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), and transferred 11% of the shares of Australian Winha to persons who are  suppliers to Zhongshan Winha. The effect of above transaction reduced the interest of the Company in its Australian subsidiary, and indirectly in Zhongshan Winha, by 40%.

Results of Operations

 The following tables set forth key components of our results of operations during the quarters ended June 30, 2016 and 2015, and the percentage changes between 2016 and 2015.

Revenue

We commenced operations during the quarter ended June 30, 2014. During the year ended March 31, 2015, our revenue increased to $9,023,642 due to the opening of new retail stores and the initiation of custom-made sales. Our revenue continued to grow during fiscal year 2016, as recognition of our brand developed and we introduced additional revenue streams. During the year ended March 31, 2016, our total revenue increased to $42,442,485. In particular, during the year ended March 31, 2016 we sold 26 franchises and recognized revenue of $3,055,692, consisting of upfront franchise fees and monthly administrative fees.

During the quarter ended June 30, 2016, we had total revenue of $13,917,834, representing an increase of 147% when compared with the quarter ended June 30, 2015. The following table shows the components of revenue:

Gross profit

Gross profit for the quarter ended June 30, 2016 increased to $7,495,098 due to the dramatic increase in revenue. Our gross margin increased to 54% as compared to the 47% gross margin that we realized during the quarter ended June 30, 2015. However, gross profit, excluding franchise-related revenue, was only 43% for the quarter ended June 30, 2016. The reduction reflected the increased portion of our revenue attributable to our retail stores, which have lower margins than our custom-made sales.  We expect our gross margin to change as additional revenue streams are added, although the direction will depend on the relative volume of high-margin revenue sources (e.g. custom made sales, franchising, online and mobile) versus lower margin sources (e.g. retail stores).

Operating Expenses

Selling Expenses

Selling expenses represent the labor cost for our marketing department and retail stores, as well as expenses directly related to our marketing efforts. Selling expense for the quarter ended June 30, 2016 was $560,612, an increase of 181% over the quarter ended June 30, 2015. Selling expenses increased primarily due to the expanded operations of our retail stores and the addition of a second restaurant in fiscal year 2016. We expect our selling expenses to increase in proportion to the number of additional retail stores and restaurants that we open.

General and Administrative Expenses

General and administrative expenses for the quarter ended June 30, 2016 totaled $531,886, representing an increase of 48% from quarter ended June 30, 2015. The increase was primarily due to the expansion of our overall operations, including the introduction of franchise operations and a second restaurant. As we expand our operations, particularly as we initiate our multi-faceted marketing program, we expect general and administrative expenses to increase, reflecting the staffing requirements of more complex and expanded operations.

Net Income

After taking into account insignificant amounts of other income, we recorded pre-tax net income of $6,406,682 and $2,070,958 for the quarters ended June 30, 2016 and 2015, respectively.  Corporate income in China is subject to income tax at a rate of 25%. Our provision for income taxes was $1,531,143 and $555,537 for the quarters ended June 30, 2016 and 2015, respectively, primarily representing the enterprise income tax on the income of our Chinese operating entity. After deducting the income tax, we had a net income before non-controlling interests of $4,875,539 and $1,515,421, respectively, during the quarters ended June 30, 2016 and 2015. However, because of the 40% of Australian Winha that we do not own, we are required to allocate 40% of the net income (loss) realized by Australian Winha and its subsidiaries to the non-controlling interest. As a result, net income attributed to the non-controlling interests was $1,950,216 and $0 for the quarters ended June 30, 2016 and 2015, respectively. Our net income attributable to the common stockholders of the Company (i.e. after the allocation to the non-controlling interest) was $2,925,323, representing $0.06 per share and $1,515,421, representing $0.03 per share, for the quarters ended June 30, 2016 and 2015, respectively.

Foreign Currency Translation Adjustment

Our reporting currency is the U.S. dollar. Our local currency, Renminbi, is our functional currency. All asset and liability accounts have been translated using the exchange rate in effect at the balance sheet date.  Equity accounts have been translated at their historical exchange rates when the capital transactions occurred.    Statements of income and other comprehensive income and cash flows have been translated using the average exchange rate for the periods presented.  Adjustments resulting from the translation of our consolidated financial statements are recorded as other comprehensive income (loss).    Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. For the quarters ended June 30, 2016 and 2015, foreign currency translation adjustments of $(925,980) and $100,082, respectively, have been reported as other comprehensive income (loss) in the consolidated statements of income and other comprehensive income (loss), respectively. The significant increase in the translation adjustments was due to the PRC's devaluation of its currency. Further devaluation could occur.

Liquidity and Capital Resources 

As of June 30, 2016, the Company had cash and cash equivalent of $26,524,122, compared to $21,548,630 as of March 31, 2016. The increase of $4,975,492 in cash was approximately equal to our net income for the quarter ended June 30, 2016.

The following table summarizes our cash flows for the quarters ended June 30, 2016 and 2015: 

Our operations yielded $4,875,539 in net income and provided cash totaling $5,929,199, as the net income was supplemented by a $328,798 decrease in our inventory balance  and an increase of $484,676 in our advance from customers balance.

As noted, we received loans of $103,382 from a stockholder who paid our professional fees in the United States and in Australia during the quarter ended June 30, 2016. With a portion of those loans, we paid Australian listing expenses of $23,393, which is classified as a financing activity. As a result, net cash provided by financing activities for the quarter ended June 30, 2016 was $79,989. For the quarter ended June 30, 2015, a capital contribution to our Chinese operating company of $489,601, partially offset by a repayment of shareholder loan of $7,167, resulted in net cash provided by financing activities of $482,434.

With the cash from operations and financing activities, we used only $2,265 to purchase fixed assets during the quarter ended June 30, 2016, which was classified as cash used in investing activities. During the quarter ended June 30, 2015, we purchased fixed assets for $304,650 and spent $13,082 to further develop our website, resulting in total cash used in investing activities of $317,732.

We had working capital of approximately $20,000,000 as of June 30, 2016, an increase of approximately $4,000,000 compared to March 31, 2016. The increase was principally the result of the cash provided by operations.

Our debt obligations at June 30, 2016 consisted of $580,581 in stockholder loans payable on demand and convertible debt of $5,276,350 issued by Australian Winha, which matures during the next four months. Since our cash balance far exceeds our debt obligations, we believe that our capital resources will be adequate to fund our Company's operations for at least the next 12 months.

Transfer of Cash

According to PRC laws and regulations, in the event that we need to finance our PRC operations in the future, we are allowed to provide funding by means of capital contributions to Shenzhen Winha and/or loans to Zhongshan Winha. The loans would be subject to applicable government registration and approval requirements. We may not be able to complete the registration or obtain these government approvals on a timely basis. If we fail to complete such registration or receive such approvals, our ability to finance our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

Current PRC regulations permit our PRC subsidiaries to pay dividends to us. However, payment of dividends is subject to applicable regulatory requirements. Furthermore, cash transfers from our PRC subsidiaries to their parent companies outside of China are subject to PRC government control of currency conversion. We receive substantially all of our revenues in RMB. Under our current corporate structure, our income is primarily derived by our PRC subsidiaries. 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 the State Administration of Foreign Exchange ("SAFE") by complying with certain procedural requirements. As profits and dividends are current account items, any revenue generated in the PRC may be paid to shareholders outside of the PRC as profit or dividends without prior approval from SAFE so long as we comply with certain procedural requirements. However, the PRC government may also, at its discretion, restrict access in the future to foreign currencies for current account transactions. 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. 

There were no recent accounting pronouncements that have or will have a material effect on the Company's financial position or results of operations.

Off Balance Sheet Transactions 

We do not currently have any off-balance sheet arrangements.

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