The following discussion should be read in conjunction with our audited
financial statements and notes thereto included herein. We caution readers
regarding certain forward-looking statements in the following discussion and
elsewhere in this report and in any other statement made by, or on our behalf,
whether or not in future filings with the Securities and Exchange Commission.
Forward-looking statements are statements not based on historical information
and which relate to future operations, strategies, financial results or other
developments. Forward looking statements are necessarily based upon estimates
and assumptions that are inherently subject to significant business, economic
and competitive uncertainties and contingencies, many of which are beyond our
control and many of which, with respect to future business decisions, are
subject to change. These uncertainties and contingencies can affect actual
results and could cause actual results to differ materially from those expressed
in any forward-looking statements made by, or our behalf. We disclaim any
obligation to update forward-looking statements.
Results of Operation for the Three and Nine months Ended March 31, 2021 and 2020
Calendar year 2020 was challenging and disruptive for the world, with the
COVID-19 pandemic adding to the headwind of an already challenging global
economy. Almost no industry was unaffected by the pandemic. The unprecedentedly
adverse global operating environment had a major impact on our business and
reversed the Company's continuous growth.
The operations of the Company during the nine months ended March 31, 2021
experienced some minor delays and were adversely affected by the COVID-19 travel
restrictions and lockdowns implemented nationwide. Decreases in revenue and
operating profits during the nine months ended March 31, 2021 were a result of
the unprecedented adverse market condition caused by the outbreak of COVID-19
pandemic since January 2020.
During the nine months ended March 31, 2021, the significant decrease in sales
revenue is mainly attributable to the adverse impact of COVID-19 in various
ways, from the continuous weakening demand in the PRC consumer market and
continuous competition from other brands against the goods which the Company has
been trading coupled with the unfavorable and ongoing adverse trading
environment and the disruptions caused by COVID-19, limitation of marketing
efforts, disruptions of product delivery to the Company's customers due to
certain customers 's reducing their budgets or delaying their procurement plans,
leading to a decrease in the new orders placed with the Company. The Company
believes that such effect is temporary and will not have major impact on the
long-term performance of the Company.
During the nine months ended March 31, 2021, the gross profit decreases were
mainly attributable to: (1) the drop in production volume of the Company as a
result of the adverse impact of the COVID-19; (2) in certain areas in Northeast
of China, the PRC government, as a preventive measure in response to the
COVID-19, had implemented the movement control order which involved prohibition
of movement of people which adversely affected the Company's supply chain in raw
materials. And the poor market sentiment has led to the significant drop in
demand and selling prices of the Company's products, while the prices of glass,
which is the raw material for the Company's production, have increased
substantially due to tightened supply of glass from the supply chain reform in
the PRC; and (3) in addition to the economic contraction caused by prolonged
outbreak of COVID-19, the fact that Changchun City where Fangguan Electronics
was located had endured dozens of blizzards in November and December 2020, also
led to the slow-down of the businesses of the Company.
The significant decrease in net income from the nine months ended March 31, 2020
to the nine months ended March 31, 2021 is primarily attributed to: (1) a
decrease in the Company's revenue by approximately 48% resulting from the
disruption of the Company's business operations caused by the COVID-19; (2) a
decrease in the Company's gross profit margin from 16% for the nine months ended
March 31, 2020 to approximately 11% for the nine months ended March 31, 2021
resulting from the drop in sales price and increase in raw material price,
mainly as a result of the reduction in operation efficiency during the outbreak
of COVID-19; (3) a significant increase in non-recurring other expenses such as
change in fair value of derivative liability; and offset by (4) a decrease in
the Company's operating expenses by approximately 30% resulting from cost saving
measures including but not limited to reduction in salary, rent and R&D
expenditures. Excluding the aforementioned non-recurring change in fair value of
derivative liability, the reduction in net profit for the nine months ended
March 31, 2021 as compared with the corresponding period of last year would be
narrowed down from approximately $1.2 million to approximately $0.6 million
instead.
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Nevertheless the Company survived and thrived against all odds: besides carrying
out a more stringent cost control through the Company's persistent effort in
cost reduction, the Company implemented the workplace safety measures as per
government guidelines, including work from home arrangements whenever
appropriate, and protected the client relationships by maintaining communication
and working with them to deal with the delaying or canceling orders. With the
gradual stabilization of the domestic photoelectric display industry, the
Company would anticipate a steady increase in the sales of LCM and LCD.
Based on the Company's well-established reputation in the market, management of
the Company believes that the demand for the Company's products would increase
during the economic rebounding and the overall financial and business positions
of the Company would remain sound, and the Company is well positioned to take
advantage of any upturn in the market.
Considering that such effects of COVID-19 is temporary and will not have major
impact on the long-term performance of the Company, the Company believes that
the increase in turnover and gross profit margin of the Company as caused by the
gradual recovery of the economy of PRC would maintain in the future. As such,
the Company remains cautiously optimistic about its sustainable development.
During the Spring of calendar year 2021, the anticipated recovery in the economy
of PRC realized gradually while the negative impact of COVID-19 remains. The
Company maintains optimistic cautious and is paying close attention to the
evolving development of, and the disruption to business and economic activities
caused by the COVID-19 outbreak and evaluates its impact on the financial
position, cash flows and operating results of the Company. Given the dynamic
nature of the COVID-19 outbreak, it is not practicable to provide a reasonable
estimate of its impacts on the Company's financial position, cash flows and
operating results at the present.
Revenues
During the three and nine months ended March 31, 2021, COVID-19 continued to
affect the operational and financial performance of the Company. However, the
gradual recovery of revenue that was ever expected previously already realized.
During the three months ended March 31, 2021 and 2020, total revenues were
$3,160,746 and $2,752,170 respectively. The total revenues increased by $408,576
or 15% from the three months ended March 31, 2020 to the three months ended
March 31, 2021.
During the nine months ended March 31, 2021 and 2020, total revenues were
$9,102,094 and $17,585,468 respectively. The total revenues decreased by
$8,483,374 or 48% from the nine months ended March 31, 2020 to the nine months
ended March 31, 2021.
Among the decrease of $8,483,374 in total revenues for the nine months ended
March 31, 2021, $5,199,704 decrease was due to the revenue decrease from
Fangguan Electronics which was acquired on December 27, 2018. In addition, the
decrease in total revenues during the nine months ended March 31, 2021 was
partially attributed to the decreases of $2,346,880 in service contract and
smart energy segments as compared with the nine months ended March 31, 2020. The
decrease during the nine months ended March 31, 2021 can be directly attributed
to the fact that the continuous outbreak of COVID-19 induced the numerous
shutdowns and suspensions of commercial activities in certain cities and
provinces which have caused the significantly adverse effects on the business of
the Company during calendar year of 2020.
Among the increase of $408,576 in total revenues for the three months ended
March 31, 2021, revenue from Fangguan Electronics increased by $824,073, offset
by the decrease of $190,631 in service contract and smart energy segments. The
increase during the three months ended March 31, 2021 can be attributed to the
gradual recovery of the Company's business following the economic rebound in the
spring of the calendar year of 2021.
The decrease in smart energy revenue for the three and nine months ended March
31, 2021 as compared with 2020 was due to the fact that the global economy is on
track to contract in calendar year of 2020 as a result of the COVID-19 pandemic
and the overseas enterprises ceased placing orders from our major customers in
smart energy segment. Then our business was hit by the chain reaction. As for
the service contract business, mainly due to COVID-19, all old contracts were
completed while new contracts have not been signed.
Cost of Revenue
Cost of revenues included the cost of raw materials, labor, depreciation,
overhead and finished products purchased.
During the three months ended March 31, 2021 and 2020, the total cost of
revenues was $2,802,497 and $2,506,518 respectively. The total cost of revenues
increased by $295,979 or 12% from the three months ended March 31, 2020 to the
three months ended March 31, 2021.
During the nine months ended March 31, 2021 and 2020, the total cost of revenues
was $8,071,941 and $14,850,194 respectively. The total cost of revenues
decreased by $6,778,253 or 46% from the nine months ended March 31, 2020 to the
nine months ended March 31, 2021.
Among the increase of $295,979 in total cost of revenues for the three months
ended March 31, 2021, $710,723 increase came from Fangguan Electronics, offset
by the decrease of $250,115 in total cost of revenues from service contract and
smart energy segments. Among the decrease of $6,778,253 in total cost of
revenues for the nine months ended March 31, 2021, $4,070,831 decrease came from
Fangguan Electronics and $2,054,015 decrease came from service contract and
smart energy segments.
The fluctuation in cost of revenues can be directly attributed to the
fluctuation of revenues.
33
Gross Profit
During the three months ended March 31, 2021 and 2020, the gross profit was
$358,249 and $245,652, respectively.
The gross profit increased by 46% from the three months ended March 31, 2020 to
the three months ended March 31, 2021, which is primarily attributed to the
gradual recovery of revenue following the rebound of economy in the spring of
the calendar year of 2021. Our gross profit margin maintained at 11% during the
three months ended March 31, 2021 as compared to 9% for the three months ended
March 31, 2020.
During the nine months ended March 31, 2021 and 2020, the gross profit was
$1,030,153 and $2,735,274, respectively.
The gross profit decreased by 62% from the nine months ended March 31, 2020 to
the nine months ended March 31, 2021. Our gross profit margin maintained at 11%
during the nine months ended March 31, 2021 as compared to 16% for the nine
months ended March 31, 2020. The decrease in the Company's gross profit margin
is attributed to the drop in sales price and increase in raw material price in
calendar year of 2020, mainly as a result of the reduction in operation
efficiency during the outbreak of COVID-19.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses are mainly comprised of payroll
expenses, transportation, office expense, professional fees, freight and
shipping costs, rent, and other miscellaneous expenses.
During the three months ended March 31, 2021 and 2020, selling, general and
administrative expenses were $327,372 and $499,616, respectively.
During the nine months ended March 31, 2021 and 2020, selling, general and
administrative expenses were $985,273 and $1,378,241, respectively.
The decrease in selling, general and administrative expenses can be attributed
to the stricter cost control during the three and nine months ended March 31,
2021.
Research and Development Expenses
Our research and development expenses are mainly comprised of payroll expenses
of research staff, costs of materials used for research and other miscellaneous
expenses.
During the three months ended March 31, 2021 and 2020, research and development
expenses were $147,871 and $139,029, respectively. During the nine months ended
March 31, 2021 and 2020, research and development expenses were $425,111 and
$645,880 respectively. All research and development expenses were incurred by
Fangguan Electronics (a variable interest entity of the Company since December
27, 2018).
The decrease in research and development expenses during the nine months ended
March 31, 2021 can be attributed to the decrease of materials expenditures
during the period.
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Other Incomes (Expenses)
Other expenses consisted of interest expense, net of interest income. Other
incomes consisted primarily of subsidy income and gain on extinguishment of
debt, net of loss on extinguishment of debt. Change in fair value of derivative
liability was an expense for the nine months ended March 31, 2021 and an income
for the nine months ended March 31, 2020.
During the three months ended March 31, 2021 and 2020, other incomes (expenses)
were $3,349 and $(273,191) respectively. The other income (expense) increased by
$276,540 or 101% from the three months ended March 31, 2020 to the three months
ended March 31, 2021.
During the nine months ended March 31, 2021 and 2020, other incomes (expenses)
were $(647,342) and $(348,954) respectively. The other income (expense)
decreased by $298,388 or 86% from the nine months ended March 31, 2020 to the
nine months ended March 31, 2021.
The difference of interest expense was mainly due to the decrease of debt
discount as the convertible notes either approached the maturity date or were
settled during the nine months ended March 31, 2021 as compared with the same
period of 2020.
The subsidy income was from Fangguan Electronics and Baileqi Electronic which
received government subsidies during the three and nine months ended March 31,
2021 and 2020.
The change in fair value of derivative liability can be attributed to the fact
that stock price of the Company were more volatile during the nine months ended
March 31, 2021 as compared with same period of 2020.
The gain on extinguishment of debt of $202,588 during the nine months ended
March 31, 2021 can be primarily attributed to the gain of $459,227 from
settlement of four convertible notes (including warrants and all accrued and
unpaid interests), offset by loss of $256,639 from the conversion of convertible
notes to 9,470,630 common shares in the principal amount of $273,200 for the
nine months ended March 31, 2021. The loss on extinguishment of debt can be
attributed to the conversion of convertible notes in the principal amount of
$34,000 during the three and nine months ended March 31, 2020.
Net Income (Loss)
During the three months ended March 31, 2021 and 2020, our net income (loss) was
$(115,594) and $(636,222) respectively. The total net loss decreased by $520,628
or 82% from the three months ended March 31, 2020 to the three months ended
March 31, 2021.
During the nine months ended March 31, 2021 and 2020, our net income (loss) was
$(1,004,018) and $210,712, respectively. The total net income (loss) decreased
by $1,214,730 or 576% from the nine months ended March 31, 2020 to the nine
months ended March 31, 2021.
The significant decrease in net income from the nine months ended March 31, 2020
to the nine months ended March 31, 2021 is primarily attributed to: (1) a
decrease in the Company's revenue by approximately 48% resulting from the
disruption of the Company's business operations caused by the COVID-19; (2) a
decrease in the Company's gross profit margin from 16% for the nine months ended
March 31, 2020 to approximately 11% for the nine months ended March 31, 2021
resulting from the drop in sales price and increase in raw material price,
mainly as a result of the reduction in operation efficiency during the outbreak
of COVID-19; (3) a significant increase in non-recurring other expenses such as
change in fair value of derivative liability; and offset by (4) a decrease in
the Company's operating expenses by approximately 30% resulting from cost saving
measures including but not limited to reduction in salary, rent and R&D
expenditures. Excluding the aforementioned non-recurring change in fair value of
derivative liability, the reduction in net profit for the nine months ended
March 31, 2021 as compared with the corresponding period of last year would be
narrowed down from approximately $1.2 million to approximately $0.6 million
instead.
The significant decrease in net loss from the three months ended March 31, 2020
to the three months ended March 31, 2021 is primarily attributed to the gradual
recovery of revenue following the rebound of economy in the spring of calendar
year of 2021.
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Liquidity and Capital Resource
Cash Flow from Operating Activities
During the nine months ended March 31, 2021, net cash used in operating
activities was $1,411,451 compared to the cash provided by operating activities
of $641,370 for the nine months ended March 31, 2020. The change was mainly due
to a decrease of $1,214,730 in net income and an increase of $1,012,057 in cash
outflow from changes in operating assets and liabilities in the nine months
ended March 31, 2021 compared to the same period in 2020.
Cash Flow from Investing Activities
During the nine months ended March 31, 2021, net cash used in investing
activities was $192,524 compared to net cash used in investing activities of
$71,895 for the same period in 2020. The change was primarily due to the fact
that there were proceeds from sale of equipment of $121,715 during the nine
months ended March 31, 2020 while no sales of fixed assets or intangible assets
during the same period in 2021.
Cash Flow from Financing Activities
During the nine months ended March 31, 2021, cash provided by financing
activities was $787,342 compared to net cash provided by financing activities of
$787,503 for the same period in 2020. The change was immaterial during the nine
months ended March 31, 2021 compared to same period of 2020.
As of March 31, 2021, we have a working capital of $2,165,185.
Our total current liabilities as of March 31, 2021 were $7,748,280 and mainly
consisted of $1,217,415 for short-term bank loans, $2,650,376 in accounts
payable, the amount due to related parties of $2,879,635, advance from customers
of $351,225 and the self-amortized promissory notes of $571,093. The Company's
major shareholder is committed to providing for our minimum working capital
needs for the next 12 months, and we do not expect the previous related party
loan be payable for the next 12 months. However, we do not have a formal
agreement that states any of these facts. The remaining balance of our current
liabilities relates to audit and consulting fees and such payments are due on
demand and we expect to settle such amounts on a timely basis based upon
shareholder loans to be granted to us in the next 12 months.
Going Concern
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company had an
accumulated deficit of $741,820 as of March 31, 2021. The Company incurred loss
from operation and did not generate sufficient cash flow from its operating
activities for the nine months ended March 31, 2021. These factors, among
others, raise substantial doubt about the Company's ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
The Company plans to rely on the proceeds from loans from both unrelated and
related parties to provide the resources necessary to fund the development of
the business plan and operations. The Company is also pursuing other revenue
streams which could include strategic acquisitions or possible joint ventures of
other business segments. However, no assurance can be given that the Company
will be successful in raising additional capital.
Future Financings
We consider taking on any long-term or short-term debt from financial
institutions in the immediate future. Besides for the bank funding, we are
dependent upon our director and the major shareholder to provide continued
funding and capital resources. If continued funding and capital resources are
unavailable at reasonable terms, we may not be able to implement our plan of
operations. The financial statements do not include any adjustments related to
the recoverability of assets and classification of liabilities that might be
necessary should the Company be unable to continue in operation.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on the Company's financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to
investors.
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Critical Accounting Policies
Our critical accounting policies are disclosed Note 3 to the consolidated
financial statements.
Recently Issued Accounting Pronouncements
There were no recent accounting pronouncements that have or will have a material
effect on the Company's financial position or results of operations.
Contractual Obligations
We are a smaller reporting company as defined by Rule 12b-2 of the Securities
Exchange Act of 1934 and are not required to provide the information under this
item.
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