MULIANG VIAGOO TECHNOLOGY, INC. The information set forth in this section contains certain "forward-looking statements", including, among others (i) expected changes in our revenue and profitability, (ii) prospective business opportunities and (iii) our strategy for financing our business. Forward-looking statements are statements other than historical information or statements of current condition. Some forward-looking statements may be identified by use of terms such as "believes", "anticipates", "intends" or "expects". These forward-looking statements relate to our plans, liquidity, ability to complete financing and purchase capital expenditures, growth of our business including entering into future agreements with companies, and plans to successfully develop and obtain approval to market our product. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Although we believe that our expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of our knowledge of our business and operations, in light of the risks and uncertainties inherent in all future projections, the inclusion of forward-looking statements in this Annual Report should not be regarded as a representation by us or any other person that our objectives or plans will
be achieved. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements. Our revenues and results of operations could differ materially from those projected in the forward-looking statements as a result of numerous factors, including, but not limited to, the following: the risk of significant natural disaster, the inability of the our company to insure against certain risks, inflationary and deflationary conditions and cycles, currency exchange rates, and changing government regulations domestically and internationally affecting our products and businesses. You should read the following discussion and analysis in conjunction with the Financial Statements and Notes attached hereto, and the other financial data appearing elsewhere in this Annual Report.
US Dollars are denoted herein by "USD", "$" and "dollars".
72
Overview
We primarily engage in the manufacturing and distribution of organic fertilizer and the sales of agricultural products in the PRC. Our organic fertilizer products are sold under our brand names "Zongbao," "Fukang," and "Muliang."
Through our patented technology, we process crop straw (including corn, rice, wheat, cotton, and other crops) into high quality organic nutritious fertilizers that are easily absorbed by crops in three hours. Straws are common agricultural by-products. In PRC, farmers usually remove the straw stubble that are remains after grains, by burning them in order to continue farming on the same land. These activities have resulted in significant air pollution, and they damage the surface structure of the soil with loss of nutrients. We turn waste into treasure by transforming the straws into organic fertilizer, which also effectively reduces air pollution. The organic straw fertilizer we produce does not contain the heavy metals, antibiotics and harmful bacteria that are common in the traditional manure fertilizer. Our fertilizers also provide optimum levels of primary plant nutrients, including multi-minerals, proteins and carbohydrates that promote the healthiest soils capable of growing the healthy crops and vegetables. It can effectively reduce the use of chemical fertilizers and pesticides as well as reduce the penetration of large chemical fertilizers and pesticides into the soil, thus avoiding water pollution. Therefore, our fertilizer can effectively improve the fertility of soil, and the quality and safety of agricultural products. We generated our revenue mainly from our organic fertilizers, which accounted for approximately 93.2% and 91.5% of our total revenue for the years endedDecember 31, 2022 and 2021, respectively. We currently have two integrated factories in Weihai City,Shandong Province , PRC to produce our organic fertilizers, which have been in operations sinceAugust 2015 . We plan to improve the technology for our existing organic straw fertilizer production lines in the following aspects: (i) adopt more advanced automatic control technology for raw material feed to shorten the processing time of raw material, and (ii) manufacture powdered organic fertilizer instead of granular organic fertilizer production in order to avoid the drying and cooling process, as such will increase our production capacity. In addition, we plan to engage in the processing and distribution of black goat products, with business commencing inJune 2023 . We are currently constructing a deep-processing slaughterhouse and processing plant which is expected to have the capacity of slaughtering 200,000 black goats per year in Chuxiong City,Yunnan Province , inChina . Our black goat processing products including goat rib lets, goat loin roast, goat loin chops, goat rack, goat leg, goat shoulder, goat leg shanks, ground goat, goat stew meat, whole goat, half goat, lamb viscera, etc. We expect to start generating revenue from the black goat products in
2023.
73
Recent Development
Impact of COVID-19
Started inDecember 2019 , the outbreak of COVID-19 caused by a novel strain of the coronavirus has become widespread inChina and in the rest of the world, including in each of the areas in which the Company, its suppliers and its customers operate. In order to avoid the risk of the virus spreading, the Chinese government enacted various restrictive measures, including suspending business operations and quarantines, starting from the end ofJanuary 2020 . We followed the requirements of local health authorities to suspend operation and production and have employees work remotely in February andMarch 2020 . SinceApril 2020 , we gradually resumed production and are now operating at full capacity. As a result of the COVID-19 outbreak inDecember 2019 and continuing through 2020,2021 and 2022, the Company's businesses, results of operations, financial position and cash flows were adversely affected in 2022 with potential continuing impacts on subsequent periods, including but not limited to the material adverse impact on the Company's revenues as result of the suspension of operations and decline in demand by the Company's customers.
Though the global outbreak and spread of the novel strain of coronavirus
(COVID-19) came to en end in
Disposal of land use right and production facility for repayment of debt
The Company completed its sale of industrial land and production facility inShanghai through an administratively organized private sale onJune 16, 2021 . Through the sale, the Company's subsidiary Shanghai Zongbao is able to satisfy its debt obligations due to Agricultural Bank of China andShanghai Zhongta Construction andEngineering Co., Ltd. and improve its cash position. As a result of the sale, Agricultural Bank of China receivedRMB 35,632,193.36 ,Shanghai Zhongta Construction andEngineering Co., Ltd. receivedRMB 26,000,000 and Shanghai Zongbao received the remainingRMB 7,921,902.28 . Sale of Viagoo OnDecember 16, 2022 ,Muliang Viagoo Technology Inc. (the "Company") entered into a share purchase agreement (the "Agreement") withViagoo Inc. (the "Buyer"), pursuant to which the Buyer purchased 100% of the issued and outstanding ordinary shares ofViagoo Pte Ltd. , aSingapore private limited liability company and a 100% parent company ofNexG Pte. Ltd. , andTPS Solutions Hong Kong Limited , from the Company in exchange for a consideration ofUS$ 5,254,001.20 to be paid to the Company as follows:
(i) The Buyer agrees to issue a convertible note to a certain convertible
noteholder of the Company in exchange for the cancellation of certain debt
of the Company held by certain noteholder;
(ii)
Note"), which must be paid off by the Buyer within three (3) business days
of the closing date of the next financing transaction by the Buyer (the
"Closing Date");
(iii) 625,715 ordinary shares of the Buyer, valued at
aggregate of US$3,504,001.20 , within seven (7) business days of the
Closing Date.
(iv)
in any combination of cash or stock. Each share of stock shall be valued at
the fair market value price at the time of the Liquidity Event. "Liquidity
Event" shall mean any event that allows the Buyer to raise capital or
shareholders of the Buyer to sell or dispose for consideration part or all
of their ownership shares and list on a national stock exchange in the
public offering, SPAC merger and listing, direct listing or other such
events.
Should the Buyer fail to perform a financing transaction after the effective
date of the Agreement, shall result in the cancellation of the transaction. The
Agreement also includes customary representations, warranties, and covenants by
the parties.
74
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
are based on our consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses. We
evaluate, on an on-going basis, our estimates for reasonableness as changes
occur in our business environment. We base our estimates on experience, the use
of independent third-party specialists and various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of significant judgments, estimates and uncertainties, and potentially result in materially different results under different assumptions and conditions. We believe the following are our critical accounting policies:
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
conformity with US GAAP. The basis of accounting differs from that used in the
statutory accounts of the Company, which are prepared in accordance with the
accounting principles of the PRC ("PRC GAAP"). The differences between US GAAP
and PRC GAAP have been adjusted in these consolidated financial statements. The
Company's functional currency is the Chinese Renminbi ("RMB") and Singapore
dollar("SGD"); however, the accompanying consolidated financial statements have
been translated and presented in United States Dollars ("USD").
Liquidity and Going Concern
As reflected in the accompanying consolidated financial statements, we had net accumulated deficit of$3,965,137 and$6,876,227 as ofDecember 31, 2022 and 2021, respectively. Our cash balances as ofDecember 31, 2022 andDecember 31, 2021 were$73,313 and$38,013 , respectively. We had current liability of$9,221,958 atDecember 31, 2022 which would be due within the next 12 months. In addition, we had a working capital of$8,112,564 and working capital of$5,403,720 atDecember 31, 2022 and 2021, respectively. Because the company is gradually recovering the accounts receivables affected by the Covid-19, and the sales are gradually returning to the normal level, the company's current cash revenue and expenditure are normal, which did not affect the normal operation. Now, after Covid-19, the company has no problems with business sustainability. IPO financing will be used for new investments to expand the operating scale and does not affect the existing operating scale. Principles of Consolidation The consolidated financial statements include the financial statements of the Company, its subsidiaries and consolidated VIE, including the VIE' subsidiaries, for which theMuliang Viagoo is the primary beneficiary.
All transactions and balances among the Company, its subsidiaries, the VIE and the VIE' subsidiaries have been eliminated upon consolidation.
As PRC laws and regulations welcome to invest in organic fertilizer industry businesses, theMuliang Viagoo operates its fertilizer business in the PRC through Muliang Industry and its subsidiaries, which are collectively referred as the "WFOEs". 75
By entering into a series of agreements (the "VIE Agreements"), theMuliang Viagoo , through WFOEs, obtained control over Muliang Industry and its subsidiaries (collectively referred as "VIE"). The VIE Agreements enable theMuliang Viagoo to (1) have power to direct the activities that most significantly affect the economic performance of the VIE, and (2) receive the economic benefits of the VIE that could be significant to the VIE. Accordingly, theMuliang Viagoo is considered the primary beneficiary of the VIE and has consolidated the VIE' financial results of operations, assets and liabilities in theMuliang Viagoo's consolidated financial statements. In making the conclusion that theMuliang Viagoo is the primary beneficiary of the VIE, theMuliang Viagoo's rights under the Power of Attorney also provide theMuliang Viagoo's abilities to direct the activities that most significantly impact the VIE' economic performance. TheMuliang Viagoo also believes that this ability to exercise control ensures that the VIE will continue to execute and renew the Master Exclusive Service Agreement and pay service fees toMuliang Viagoo . By charging service fees to be determined and adjusted at the sole discretion ofMuliang Viagoo , and by ensuring that the Master Exclusive Service Agreement is executed and remains effective,Muliang Viagoo has the rights to receive substantially all of the economic benefits from the VIE.
Details of the VIE Agreements, are set forth below:
As of As of
December 31, December 31,
2022 2021
Current assets $ 17,244,572 $ 18,972,383
Non-current assets 7,698,043 8,995,363
Total Assets 24,942,615 27,967,746
Current liabilities 7,967,596 12,794,076
Non-current liabilities 67,573 422,480
Total liabilities 8,035,169 13,216,556
Total shareholders' equity (deficit)
For the years ended
December 31,
2022 2021
Net income $ 3,190,198 $ 2,254,902 Net cash provided by (used in) operating activities (1,315,795 ) 5,484,916 Net cash provided by (used in) investment activities (126,208 ) (1,158,773 ) Net cash provided by (used in) financing activities$ 1,444,460 $ (4,328,560 )
VIE Agreements that were entered to give the
Voting Rights Proxy Agreement and Irrevocable Power of Attorney
Under which each shareholder of the VIE grant to any person designated by WFOEs
to act as its attorney-in-fact to exercise all shareholder rights under PRC law
and the relevant articles of association, including but not limited to,
appointing directors, supervisors and officers of the VIE as well as the right
to sell, transfer, pledge and dispose all or a portion of the equity interest
held by such shareholders of the VIE. The proxy and power of attorney agreements
will remain effective as long as WFOEs exist. The shareholders of the VIE do not
have the right to terminate the proxy agreements or revoke the appointment of
the attorney-in-fact without written consent of the WFOEs.
Exclusive Option Agreement
Under which each shareholder of the VIE granted 9F or any third party designated
by 9F the exclusive and irrevocable right to purchase from such shareholders of
the VIE, to the extent permitted by PRC law and regulations, all or part of
their respective equity interests in the VIE for a purchase price equal to the
registered capital. The shareholders of the VIE will then return the purchase
price to 9F or any third party designated by 9F after the option is exercised.
9F may transfer all or part of its option to a third party at its own option.
The VIE and its shareholders agree that without prior written consent of 9F,
they may not transfer or otherwise dispose the equity interests or declare any
dividends. The restated option agreement will remain effective until 9F or any
third party designated by 9F acquires all equity interest of the VIE.
76
Spousal Consent
The spouse of each shareholder of the VIE has entered into a spousal consent
letter to acknowledge that he or she consents to the disposition of the equity
interests held by his or her spouse in the VIE in accordance with the exclusive
option agreement, the power of attorney and the equity pledge agreement
regarding VIE structure described above, and any other supplemental
agreement(s) may be consented by his or her spouse from time to time. Each such
spouse further agrees that he or she will not take any action or raise any claim
to interfere with the arrangements contemplated under the mentioned agreements.
In addition, each such spouse further acknowledges that any right or interest in
the equity interests held by his or her spouse in the VIE do not constitute
property jointly owned with his or her spouse and each such spouse
unconditionally and irrevocably waives any right or interest in such equityinterests. Loan Agreement Pursuant to the loan agreements between WFOEs and each shareholder of the VIE, WFOEs extended loans to the shareholders of the VIE, who had contributed the loan principal to the VIE as registered capital. The shareholders of VIE may repay the loans only by transferring their respective equity interests in VIE to9F Inc. or its designated person(s) pursuant to the exclusive option agreements. These loan agreements will remain effective until the date of full performance by the parties of their respective obligations thereunder.
VIE Agreements that enables
Equity Interest Pledge Agreement
Pursuant to equity interest pledge agreement, each shareholder of the VIE has pledged all of his or her equity interest held in the VIE to WFOEs to secure the performance by VIE and their shareholders of their respective obligations under the contractual arrangements, including the payments due to WFOEs for services provided. In the event that the VIE breach any obligations under these agreements, WFOEs as the pledgees, will be entitled to request immediate disposal of the pledged equity interests and have priority to be compensated by the proceeds from the disposal of the pledged equity interests. The shareholders of the VIE shall not transfer their equity interests or create or permit to be created any pledges without the prior written consent of WFOEs. The equity interest pledge agreement will remain valid until the master exclusive service agreement and the relevant exclusive option agreements and proxy and power of attorney agreements, expire or terminate.
Master Exclusive Service Agreement
Pursuant to exclusive service agreement, WFOEs have the exclusive right to provide the VIE with technical support, consulting services and other services. WFOEs shall exclusively own any intellectual property arising from the performance of the agreement. During the term of this agreement, the VIE may not accept any services covered by this agreement provided by any third party. The VIE agree to pay service fees to be determined and adjusted at the sole discretion of the WFOEs. The agreement will remain effective unless WFOEs terminate the agreement in writing.
Risks in relation to the VIE structure
Muliang Viagoo believes that the contractual arrangements with the VIE and their current shareholders are in compliance with PRC laws and regulations and are legally enforceable. However, uncertainties in the PRC legal system could limit theMuliang Viagoo's ability to enforce the contractual arrangements. If the legal structure and contractual arrangements were found to be in violation of PRC laws and regulations, the PRC government could: ? Revoke the business and operating licenses of theMuliang Viagoo's PRC subsidiaries or consolidated affiliated entities;
? Discontinue or restrict the operations of any related-party transactions
among the
entities;
? Impose fines or other requirements on the Muliang Viagoo's PRC
subsidiaries or consolidated affiliated entities;
? Require the
entities to revise the relevant ownership structure or restructure
operations; and/or;
? Restrict or prohibit the Muliang Viagoo's use of the proceeds of the
additional public offering to finance the Muliang Viagoo's business and
operations in China ;
? Shut down the
online platform;
? Discontinue or place restrictions or onerous conditions on the Muliang
Viagoo's operations; and/or
? Require the
77
Muliang Viagoo's ability to conduct its business may be negatively affected if the PRC government were to carry out any of the aforementioned actions. As a result,Muliang Viagoo may not be able to consolidate the VIE in its consolidated financial statements as it may lose the ability to exert effective control over the VIE and its shareholders, and it may lose the ability to receive economic benefits from the VIE.Muliang Viagoo currently does not believe that any penalties imposed or actions taken by the PRC government would result in the liquidation of the Company, WFOEs, or the VIE. The following table sets forth the assets, liabilities, results of operations and cash flows of the VIE and their subsidiaries, which are included inMuliang Viagoo's consolidated financial statements after the elimination of intercompany balances and transactions: Under the VIE Arrangements,Muliang Viagoo has the power to direct activities of the VIE and can have assets transferred out of the VIE. Therefore,Muliang Viagoo considers that there is no asset in the VIE that can be used only to settle obligations of the VIE, except for assets that correspond to the amount of the registered capital and PRC statutory reserves, if any. As the VIE are incorporated as limited liability companies under the Company Law of the PRC, creditors of the VIE do not have recourse to the general credit ofMuliang Viagoo for any of the liabilities of the VIE. Currently there is no contractual arrangement which requiresMuliang Viagoo to provide additional financial support to the VIE. However, asMuliang Viagoo conducts its businesses primarily based on the licenses held by the VIE,Muliang Viagoo has provided and will continue to provide financial support to the VIE. Revenue-producing assets held by the VIE include certain internet content provision ("ICP") licenses and other licenses, domain names and trademarks. The ICP licenses and other licenses are required under relevant PRC laws, rules and regulations for the operation of internet businesses in the PRC, and therefore are integral toMuliang Viagoo's operations. The ICP licenses require that core PRC trademark registrations and domain names are held by the VIE that provide the relevant services.
Muliang Viagoo consolidates the following entities, including wholly-owned subsidiaries, Muliang HK, Shanghai Mufeng, Viagoo, and its wholly controlled variable interest entities, Muliang Industry, and Zhongbao, 60% controlledAgritech Development , 99% controlled Fukang, 65% controlled Zhonglian, 80% controlled Yunnan Muliang, 100% controlled Anhui Muliang, 65% controlled Maguan, and 51% controlledHeilongjiang . Accordingly, the 40% equity interest holder ofAgritech Development , 1% equity interest holders in Fukang, 35% equity interest holders in Zhonglian, 20% interest in Yunnan Muliang, 35% equity interest in Maguan, and 49% equity interest inHeilongjiang are accounted as non-controlling interest in the Company's consolidated financial statements. Use of Estimates
In preparing financial statements in conformity withU.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates, required by management, include the recoverability of long-lived assets and the valuation of inventories. Actual results could differ from those estimates. Accounts Receivable We state accounts receivable at cost, net of allowance for doubtful accounts. Based on our past experience and current practice in the PRC, management provides for an 100% allowance for doubtful accounts equivalent to those accounts that are not collected within one year, and 50% for receivables outstanding for longer than six months. It is management's belief that the current bad debt allowance adequately reflects an appropriate estimate based on management's judgment. Inventory Valuation We value our fertilizer inventories at the lower of cost, determined on a weighted average basis, and net realizable value (the estimated market price). Substantially all inventory expenses, packaging and supplies are valued by
the
weighted average method.
78
Revenue Recognition
On January 1, 2018 , the Company adopted ASC 606 using the modified retrospective
method. Results for the reporting period beginning after January 1, 2018 are
presented under ASC 606, while prior period amounts have not been adjusted and
continue to be reported in accordance with the Company's historic accounting
under Topic 605.
Management has determined that the adoption of ASC 606 did not impact the Company's previously reported financial statements in any prior period nor did it result in a cumulative effect adjustment to opening retained earnings.
Revenue for sale of products is derived from contracts with customers, which primarily include the sale of fertilizer products and environmental protection equipment. The Company's sales arrangements do not contain variable consideration. The Company recognizes revenue at a point in time based on management's evaluation of when performance obligations under the terms of a contract with the customer are satisfied and control of the products has been transferred to the customer. For vast majority of the Company's product sales, the performance obligations and control of the products transfer to the customer when products are delivered, and customer acceptance is made. Revenue for logistics-related service is derived from Viagoo subsidiaries. Through an online service platform, the company provides the operation management service to support customers. For VTM service, revenue is charged to carriers based on certain percentage of the freight charges. For VES service, revenue is recognized based on monthly subscription by vehicles and by users. For system integration service, revenue is recognized over time based on the progress of project and annual maintenance service. Pursuant to the guidance of ASC Topic 840, rent shall be reported as income by lessors over the lease term as it becomes receivable. The Company leased part of the building of theShanghai new plant to third parties as a warehouse. The Company recognizes building leasing revenue over the beneficial period described by the agreement, as the revenue is realized or realizable and earned. Income Taxes The Company accounts for income taxes under the provision of FASB ASC 740-10, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. New Accounting Standards InFebruary 2016 , the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02) "Leases (Topic 842)". ASU 2016-02 requires a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. ASU 2016-02 is effective for interim and annual reporting periods beginning afterDecember 15, 2018 . Early adoption is permitted. For finance leases, a lessee is required to do the following:
? Recognize a right-of-use asset and a lease liability, initially measured at
the present value of the lease payments, in the statement of financial
position
? Recognize interest on the lease liability separately from amortization of the
right-of-use asset in the statement of comprehensive income
? Classify repayments of the principal portion of the lease liability within
financing activities and payments of interest on the lease liability and
variable lease payments within operating activities in the statement of cash
flows.
79
For operating leases, a lessee is required to do the following:
? Recognize a right-of-use asset and a lease liability, initially measured at
the present value of the lease payments, in the statement of financial
position
? Recognize a single lease cost, calculated so that the cost of the lease is
allocated over the lease term on a generally straight-line basis
? Classify all cash payments within operating activities in the statement of
cash flows.
InJuly 2018 , the FASB issued Accounting Standards Update No. 2018-11 (ASU 2018-11), which amends ASC 842 so that entities may elect not to recast their comparative periods in transition (the "Comparatives Under 840 Option"). ASU 2018-11 allows entities to change their date of initial application to the beginning of the period of adoption. In doing so, entities would: ? Apply ASC 840 in the comparative periods.
? Provide the disclosures required by ASC 840 for all periods that continue
to be presented in accordance with ASC 840.
? Recognize the effects of applying ASC 842 as a cumulative-effect
adjustment to retained earnings for the period of adoption.
In addition, the FASB also issued a series of amendments to ASU 2016-02 that
address the transition methods available and clarify the guidance for lessor
costs and other aspects of the new lease standard.
The management has reviewed the accounting pronouncements and adopted the new
standard on
InAugust 2018 , the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820), - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement," which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. The amendments in this Update modify the disclosure requirements on fair value measurements based on the concepts in FASB Concepts Statement, Conceptual Framework for Financial Reporting-Chapter 8: Notes to Financial Statements, including the consideration of costs and benefits. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments are effective for all entities for fiscal years beginning afterDecember 15, 2019 , and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the potential impacts of ASU 2018-13 on its consolidated financial statements. InDecember 2019 , the FASB issued ASU 2019-12 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU provides an exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. This update also (1) requires an entity to recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax, (2) requires an entity to evaluate when a step-up in the tax basis of goodwill should be considered part of the business combination in which goodwill was originally recognized for accounting purposes and when it should be considered a separate transaction, and (3) requires that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The standard is effective for the Company for fiscal years beginning afterDecember 15, 2020 , with early adoption permitted. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements. InFebruary 2020 , the FASB issued ASU 2020-02, "Financial Instruments - Credit Losses (Topic 326) and Leases (topic 842) Amendments to SEC Paragraphs Pursuant toSEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (topic 842)". This ASU provides guidance regarding methodologies, documentation, and internal controls related to expected credit losses. This ASU is effective for interim and annual periods beginning afterDecember 15, 2019 , and early adoption is permitted. The Company is evaluating the impact of this guidance on its consolidated financial statements.
The Company believes that there were no other accounting standards recently issued that had or are expected to have a material impact on our financial position or results of operations.
80
Results of Operations
We are principally engaged in the organic fertilizer manufacture and
distribution business in the PRC, which account for 93.2% of our total revenue
for the year ended
As a result of the COVID-19 outbreak inDecember 2019 and continuing in the year of 2020,2021,and 2022, the Company's businesses, results of operations, financial position and cash flows were adversely affected in 2022. However, the COVID-19 came to an end in November, 2022 inChina . And we are growing our revenue and net income steadily currently and expect to keep growing for the coming years.
Operating Results for the Years Ended
Years Ended December 31,
2022 2021 Fluctuation
$ $ $ %
Revenues-fertilizer 11,049,883 9,730,962 1,318,921 13.6 %
Reveues-logistic 803,369 904,320 (100,951 ) -11.2 %
Reveues-others - 120 (120 ) -100.0 %
Subtoal of revenue 11,853,252 10,635,402 1,217,850 11.5 %
Cost-fertilizer 6,358,418 5,910,703 447,715 7.6 %
Cost- logistic 565,299 477,978 87,321 18.3 %
Cost- others - 90 (90 ) -100.0 %
Subtotal of cost 6,923,717 6,388,771 534,946 8.4 %
Gross profit 4,929,535 4,246,631 682,904 16.1 %
Gross margin 41.59 % 39.93 %
Operating expenses:General and administrative expenses 897,822 2,033,234
(1,135,412 ) -55.8 % Selling expenses 323,789 467,859 (144,070 ) -30.8 % Total operating expenses 1,221,611 2,501,093 (1,279,482 ) -51.2 % Income(loss) from operations 3,707,,924 1,745,538 1,962,386 112.4 % Other income (expense): Interest expense (124,730 ) (151,720 ) 26,990 -17.8 % Asset impairment loss (237,191 ) - (237,191 ) N/A Other income (expense), net 12,418 352,340 (339,922 ) -96.5 % Total other income (expense) (349,503 ) 200,620 (550,123 ) -274.2 % Income before income taxes 3,358,421 1,946,158 1,412,263 72.6 % Income taxes 438,885 214,981 223,904 104.2 % Net income (loss) 2,919,536 1,731,177 1,188,359 68.6 % Revenue. Revenue for fertilizer increased from$9,730,962 for the year endedDecember 31, 2021 to$11,049,883 for the year endedDecember 31, 2022 , which represented an increase of$1,318,921 , or approximately 13.6%. The increase in revenue was mainly due to the end of economic depression resulting from continuous impact of COVID-19 inNovember 2022 . We expect to see a trend of improving sales as the epidemic moves further into the past.
Revenue for logistic decreased from
Cost of sales
Cost of sales for fertilizer increased from
Cost of sales for logistic decreased from$477,978 for the year endedDecember 31, 2021 to$565,299 for the year endedDecember 31, 2022 , which represented an increase of$87,321 , or 18.3%. 81 Gross profit The gross profit for fertilizer increased from$3,820,259 for the year endedDecember 31, 2021 to gross profit of$4,691,465 for the year endedDecember 31, 2022 . The gross margin inreased from 39.3% for the year endedDecember 31, 2021 to 42.5% for the year endedDecember 31, 2022 . The increased gross margin was due to the decrease in material cost.. The gross profit for logistic decreased from$426,342 for the year endedDecember 31, 2021 to gross profit of$238,070 for the year endedDecember 31, 2022 . The gross margin decreased from 47.1% for the year endedDecember 31, 2021 to 29.6% for the year endedDecember 31, 2022 . Expenses. We incurred$323,789 in selling expenses for the year endedDecember 31, 2022 , compared to$467,859 for the year endedDecember 31, 2021 . We incurred$897,822 in general and administrative expenses for the year endedDecember 31, 2022 , compared to$2,033,234 for the year endedDecember 31, 2021 . Total selling, general and administrative expenses decreased by$1,279,482 , or 51.2% for the year endedDecember 31, 2022 as compared to the same period in 2021. Our selling expenses decreased by$144,070 and our general and administrative expenses decreased by$1,135,412 . The decrease in general and administrative expenses was due to the improved management for the year endedDecember 31, 2022 . We expect our general and administrative expense to increase for the next year, if we successfully complete our public offering. Interest expense
We incurred$124,730 in interest expense during the year endedDecember 31, 2022 , compared with interest expense of$151,720 for the year endedDecember 31, 2021 . The decreased interest expense reflects the decreased loan balance as
ofDecember 31, 2022 . Net Income. Our net income was$2,919,536 for the year endedDecember 31, 2022 , compared with net income of$1,731,177 for the year endedDecember 31, 2021 , representing an increase of$1,188,359 , or 68.6%. The significant increase in net income was mainly due to the significant decrease in General and administrative expenses, the significant increase in gross profit for the year endedDecember 31, 2022 . Liquidity and Capital Resources Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. AtDecember 31, 2022 andDecember 31, 2021 our working capital was$8,112,564 and$5,403,720 , respectively. The improvement in our working capital deficit was reflecting faster decrease in our current liability, especially the significant decrease in account payable and accrued liability balance.
We have financed our operations over the years ended
The components of cash flows are discussed below:
For the Years Ended
December 31,
2022 2021
Net cash provided by (used in) operating activities $ (1,302,022 ) $ 4,930,236
Net cash provided by (used in) investing activities (126,208 ) (1,158,773 )
Net cash (used in) provided by financing activities 1,444,460 (4,363,568 )
Exchange rate effect on cash 19,070 281,284
Net cash inflow (outflow) $ 35,300 $ (310,821 ) Cash provided by (used ini)Operating Activities
Net cash used in operating activities was$1,302,022 for the year endedDecember 31, 2022 . Cash used in operating activities for the year endedDecember 31, 2022 consisted primarily of an increase of$1,488,529 in account receivable, an increase of$1,655,546 in other receivable, and a decrease of$4,332,753 in account payable and accrued liability, which was offset by net income of$2,919,536 , depreciation and amortization of$494,439 , and a decrease of$2,720,957 in prepayment, and the assets impairment loss of$237,191 . Net cash provided by operating activities was$4,930,236 for the year endedDecember 31, 2021 . Cash provided by operating activities for the year endedDecember 31, 2021 consisted primarily of net income of$1,731,177 which was adjusted by depreciation and amortization of$513,563 . The Company had a decrease of$1,978,747 in account receivable, a decrease of$10,758,708 in other receivable, which was offset by an increase of$6,292,144 in prepayment and a decrease of$2,393,158 in accounts payable and accrued payables. 82
Cash used in Investing Activities
Net cash used in investing activities was
Net cash used in investing activities was
Cash provided by (used in) Financing Activities
Net cash provided by financing activities was
Net cash used in financing activities was
We anticipate that our current cash reserves plus cash from our operating
activities will not be sufficient to meet our ongoing obligations and fund our
operations for the next twelve months. As a result, we will need to seek
additional funding in the near future. We are looking to obtain additional
funding through equity financing in the secondary market, and/or renewing our
current obligations with loaners. We may also seek to obtain short-term loans
from our directors or unrelated parties. Additional funding may not be
available, or at acceptable terms, to us at this time. If we are unable to
obtain additional financing, we may be required to reduce the scope of our
business development activities, which could harm our business plans, financial
condition and operating results.
Contractual Commitments and Commitments for Capital Expenditure
Contractual Commitments
The following table summarizes our contractual obligations as of December 31,
2022 and the effect those obligations are expected to have on our liquidity
and
cash flow in future periods.
Payments Due by
Period as of
Less than 1 - 3 3 - 5 Over
Total 1 Year Years Years 5 Years
Contractual obligations
Loans $ 1,039,243 $ 1,039,243 $ - $ - $ -
Others - - - - -
$ 1,039,243 $ 1,039,243 $ - $ - $ -
Commitments for Capital Expenditure
There is no commitment for capital expenditure as of
Off-Balance Sheet Items We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with generally accepted accounting principles inthe United States .
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