PORTER HOLDING INTERNATIONAL, INC. The following management's discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this report. In addition to historical information, the following discussion contains certain forward-looking information. See "Special Note Regarding Forward Looking Statements" above for certain information concerning those forward-looking statements. Our financial statements are prepared inU.S. dollars and in accordance withU.S. GAAP. Overview OnApril 7, 2017 , we completed the acquisition of PGL pursuant to the share purchase agreement. As a result of the acquisition, PGL became our wholly-owned subsidiary and the former shareholders of PGL became the holders of approximately 98.4% of our issued and outstanding capital stock on a fully-diluted basis. Since 2016, through our VIE entity,Porter Consulting , we have partnered withChina Payment Technology Co., Ltd. , a third-party online payment service provider ("China Payment") to promote China Payment's online payment platform to companies and businesses inShenzhen and in return share a portion of the processing fees earned by China Payment as commission.Porter Consulting also partners withShenzhen Xinghua Tongfu Technology Co., Ltd. , a third-party online payment service provider ("Shenzhen Tongfu"), under whichPorter Consulting agreed to promote Shenzhen Tongfu's online payment platform, including the Point of Sale (POS) system, to companies and businesses inChina and in return obtain a certain amount of commission based on the volume of trading through such online payment platform As a newly established company with limited operation history, we are at the early stage of developing our O2O business and our goal is to become a leading innovative O2O business platform operator providing both online E- commerce and offline physical business facilities to our merchant customers, where they can conduct business, interact with their existing and potential end-consumers face to face. Different from most other O2O companies, which often lack of integrated platforms, our goal is to provide one-stop services for our customers through our integrated online and offline platforms. As described fully below, we are developing and intend to offer products and services including both hosting our online marketplaces, www.pt37.com and www.17yugo.com for our merchant clients to post and sell their products and services online and managing and operating physical business facilities, Porter City, that our online merchant clients can utilize to conduct their businesses offline. We are currently developing merchant clients who are engaged in businesses including manufacturing, real estate, trade and financing. In the future, we intend to expand our merchant client base to industries of big data, new materials, new energy, green food and environment protection. In addition, we are planning to collaborate with key opinion leaders ("KOLs") to promote the merchandises on our e-commerce platform. According to the development demand and future goals of our customers, in 2018 we started to offer a series of services such as business planning, financial guidance, business matching and guidance for listing primarily inthe United States . At present, in our customer pool, many small and medium-sized enterprises have increased their public awareness. They are seeking the potential advantages of being a listed company and striving for obtaining the recognition of international capital to accelerate their corporate expansion. However many enterprises themselves may not be familiar with the listing requirements, laws and regulations of different capital markets, and the process of obtaining financing from overseas markets. In order to help our customers who intend to access overseas capital markets, we have a team of experienced professionals who have professional knowledge of the listing rules and regulations of various capital markets. We will make full use of our expertise and resources in the capital markets to assist these customers to achieve their goals. Update on COVID-19 The ongoing coronavirus pandemic that first surfaced inChina and is spreading throughout the world has had a material adverse effect on our industry and the markets in which we operate. Most of our revenues and our workforce are concentrated inChina . The epidemic has caused our customers to take longer time to make payments, which subjects us to increased credit exposures. The pandemic also impeded our ability to recruit new clients and made us postpone providing services to existing clients. Travel restrictions also limited clients' ability to visit and meet us in person, which made it harder to build trust and engage clients. Updates of products information on our e-commerce platform and the delivery of goods were also delayed due to the late resumption of work by manufacturers. The imported goods on our platform face more challenges as the pandemic continues outside China, and our distribution channel has been disrupted as the operations of our distributors are interrupted by the outbreak. The foregoing adverse impacts might be mitigated as quarantines across China have been lifted as of lateMarch 2020 and the Chinese government has rolled out an array of favorable fiscal measures. We are currently negotiating with customers on their payment issues and allow them to pay after resuming operations. We will closely monitor these accounts receivable, and already recorded sufficient allowance for doubtful accounts and write-offs per our assessment. 29
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However, as the coronavirus outbreak continues to spread beyond China, the extent to which the coronavirus impacts our operations and results in the long-term will depend on future developments, including, among others, actions of the Chinese government to contain imported infections, which are highly uncertain and cannot be reasonably predicted. Our total revenues for the fiscal year endedDecember 31, 2020 have decreased significantly as compared with the fiscal year of 2019. There is no guarantee that our total revenues during the fiscal year endingDecember 31, 2021 will not continue to decline. The outbreak has been evolving rapidly. At present, management is actively looking for a business breakthrough to increase revenue in 2021. We will continue to monitor and mitigate developments affecting our workforce, our customers, and the public at large to the extent we are able to do so. See "Risks Related to Our Business-Our business operations have been and may continue to be materially and adversely affected by the outbreak of the coronavirus (COVID-19)." Results of Operations
Comparison of Years Ended
The following table sets forth key components of our results of operations during the years endedDecember 31, 2020 and 2019, both in dollars and as a percentage of our revenue. Years Ended December 31, 2020 2019 % of % of Amount Revenue Amount Revenue Revenue$ 550,249 100.00$ 3,382,586 100.00 Cost of revenue (404,625 ) (73.53 ) (1,544,166 ) (45.65 ) Gross profit 145,624 26.47 1,838,420 54.35 Operating expenses General and administrative expenses (2,488,857 ) (452.32 ) (2,519,338 ) (74.48 ) Loss from operations (2,343,233 ) (425.85 ) (680,918 ) (20.13 ) Other income 33,106 6.02 111,325 3.29 Loss before income taxes (2,310,127 ) (419.83 ) (569,593 ) (16.84 ) Income tax expense - - (1,055 ) (0.03 ) Net loss (2,310,127 ) (419.83 ) (570,648 ) (16.87 ) Less: Net (loss) income attributable to non-controlling interests (21,643 ) (3.93 ) 3,688 0.11 Net loss attributable toPorter Holding International Inc. common stockholders$ (2,288,484 ) (415.90 )$ (574,336 ) (16.98 ) Revenue. Our revenue was$550,249 for the year endedDecember 31, 2020 , compared to$3,382,586 for the same period last year. One of our major revenue streams is to provide various consulting services to our customers, especially those who have the intention to be publicly listed primarily on the stock exchanges inthe United States , and service income from the provision of these consulting services totaled$306,297 and$2,801,340 for the years endedDecember 31, 2020 and 2019, respectively. The significant decrease was mainly attributable to the impacts of COVID-19 and depressed market demand. Starting in 2019, the Company provides various training services to its clients, primarily related to e-commerce platform operation, expansion of channels and promotion strategy and capital market operation, through live and online sessions. The service income from providing training services totaled$138,776 and$380,223 for the year endedDecember 31, 2020 and 2019. ThroughPorter Consulting we also promote the payment service of a third-party payment service provider to merchants inShenzhen and in return share a portion of the processing fees earned by the third-party payment service provider as commission. Our commission totaled$46,491 and$84,930 for the years endedDecember 31, 2020 and 2019, respectively. The approximately 50% decline in commission for 2020 was also the result of the COVID-19 pandemic and nationwide economic slowdowns. Revenue of$28,996 and$31,697 were generated from cosmetic trading business for the years endedDecember 31, 2020 and 2019, respectively. Revenue of others were$29,689 and$84,396 for the year endedDecember 31, 2020 and 2019, respectively. Due to the impact of COVID-19, the Company, starting from the first quarter of 2020, determines to require upfront payments prior to performing investment and corporate management consulting services in order to ensure collection of service fees. Cost of revenue. Our cost of revenue was$404,625 for the year endedDecember 31, 2020 , compared to$1,544,166 for the same period last year. Cost of revenue refers to the cost incurred in performing consulting services, third-party payment service and other business. The cost of consulting service arises from shell acquisitions, and legal and accounting advisory service outsourced to third-party service providers. The decrease of cost of revenue is in line with the decrease of revenue. 30
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Gross profit and gross margin. Our gross profit was$145,624 for the year endedDecember 31, 2020 , compared with a gross profit of$1,838,420 for the same period last year. Gross profit as a percentage of revenue (gross margin) was 26.47% for year endedDecember 31, 2020 , compared to 54.35% for year endedDecember 31, 2019 . The decrease of gross profit was mainly due to the decrease of business demand and suspension of business operations as a result of COVID-19. General and administrative expenses. As shown below, our general and administrative expenses consist primarily of bad debt provision, compensation and benefits to our general management, finance and administrative staff, professional fees and other expenses incurred in connection with general operations.$1,051,816 of bad debt provision was recorded during the year endedDecember 31, 2020 which was increased by$578,187 compared to year 2019. The major reason was due to the impact of COVID-19 that the Company encountered further uncertainties in accounts collectability related to the receivables incurred during year 2019. The Company assessed that the collectability being not probable and hence provide bad debt provision for majority of receivable from the investment and corporate management consulting services. Besides, our general and administrative expenses decreased by$30,481 to$2,488,857 for the year endedDecember 31, 2020 , from$2,519,338 for the same period in 2019. Salary and staff benefits decreased$585,938 was due to the reduction of the basic salary as a result of fewer working days than usual as employees had to stay at home caused by COVID-19 since the beginning of 2020. In addition, there was a decrease of legal and professional fees by$26,537 compared to the prior year. 2020 2019 Fluctuation Amount % Amount % Amount % Salary and staff benefits$ 491,104 19.73$ 1,077,042 42.75$ (585,938 ) (54.40 ) Lease and management fee 336,534 13.52 314,213 12.47 22,321 7.10 Legal and professional fees 423,030 17.00 449,567 17.84 (26,537 ) (5.90 ) Depreciation and amortization 38,627 1.55 33,131 1.32 5,496 16.59 Bad debt provision 1,051,816 42.26 473,629 18.80 578,187 122.08 Impairment 86,428 3.47 - - 86,428 - Others 61,318 2.46 171,756 6.82 (110,438 ) (64.30 ) Total$ 2,488,857 100.00$ 2,519,338 100.00$ (30,481 ) (1.21 )
Income tax expense. Our Income tax expense was nil and
Net loss. As a result of the cumulative effect of the factors described above, our net loss was$2,310,127 for the year endedDecember 31, 2020 compared with the net loss of$570,648 in 2019.
Limited Operating History; Need for
There is limited historical financial information about us on which to base an evaluation of our performance. We cannot guarantee we will be successful in our business operations. Our business is subject to risks inherent in the establishment of a new business enterprise, including limited capital resources, a narrow client base, limited sources of revenue, and possible cost overruns due to the price and cost increases in supplies and services. Without additional funding, management believes that we will not have sufficient funds to meet our obligations beyond one year after the date our consolidated financial statements are issued. These conditions give rise to substantial doubt as to our ability to continue as a going concern. We have been, and intend to continue, working toward identifying and obtaining new sources of financing. To date we have been dependent on related parties for our source of funding. No assurances can be given that we will be successful in obtaining additional financing in the future. Any future financing that we may obtain may cause significant dilution to existing stockholders. Any debt financing or other financing of securities senior to common stock that we are able to obtain will likely include financial and other covenants that will restrict our flexibility. Any failure to comply with these covenants would have a negative impact on our business, prospects, financial condition, results of operations and cash flows. If adequate funds are not available, we may be required to delay, scale back or eliminate portions of our operations or obtain funds through arrangements with strategic partners or others that may require us to relinquish rights to certain of our assets. Accordingly, the inability to obtain such financing could result in a significant loss of ownership and/or control of our assets and could also adversely affect our ability to fund our continued operations and our expansion efforts. Currently we spend approximately$200,000 per month for basic operations. During the next 12 months, we expect to incur the same amount of expenses each month. However, as we work to expand our operations, we expect to incur significant research, marketing and development costs and expenses on our online service platforms that meet the constantly evolving industry standards and consumer demands. We will also need to hire additional employees in order to provide new services and accommodate new clients. 31
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Liquidity and Capital Resources
Working Capital
December 31, 2020 December 31, 2019
Current Assets $ 425,149 $ 1,398,210
Current Liabilities 3,539,288 2,435,885
Working Capital Deficiency
As ofDecember 31, 2020 , we had cash of$24,912 . To date, we have financed our operations primarily through borrowings from our stockholders, related and unrelated parties. The working capital deficiency was improved subsequently due to loans from shareholder with approximately$1.4 million as well as compensation of approximately$0.5 million received due to the termination of investment project at Weifang. DuringJanuary 2021 , Weifang Portercity has agreed with the local government to terminate a project, which was signed onAugust 25, 2018 for Weifang Portercity to facilitate the investment and promote business opportunities for Weifang region, as the local government changed the development strategy. Consequently, Weifang Portercity received a compensation of approximately$0.5 million as compensation for its up front establishment including office renovation, office equipment and supplies.
Going Concern Uncertainties
The accompanying consolidated financial statements have been prepared assuming we will continue as a going concern.
As of
As ofDecember 31, 2020 , our cash balance was$24,912 and our current liabilities exceed current assets by$3,114,139 which together with continued losses from operations raises substantial doubt about our ability to continue as a going concern. The Company's operating results for future periods are subject to uncertainties and it is uncertain if the management will be able to achieve profitability and continued growth for the foreseeable future. If the management is not able to increase revenue and manage operating expenses in line with revenue forecasts, the Company may not be able to achieve profitability. Historically, the Company financed its operations through loans from shareholders. The Company's actions to improve operation efficiency, cost reduction, and develop core cash-generating business include the following: seeking advances from the major shareholders, pursuing additional public and/or private issuance of securities, and looking for strategic business partners to optimize our operations. We have considered whether there is substantial doubt about our ability to continue as a going concern due to (1) our recurring losses from operations, including approximately$2,288,484 net loss attributable to our stockholders for the year endedDecember 31, 2020 , (2) our accumulated deficit of approximately$4,489,416 as ofDecember 31, 2020 and (3) the fact that we had negative operating cash flows of approximately$916,939 for the year endedDecember 31, 2020 . In evaluating if there is substantial doubt about our ability to continue as a going concern, we are trying to alleviate the going concern risk through (1) increasing cash generated from operations by controlling operating expenses and increasing more live steaming e-commerce events to bring up e-commerce revenue, (2) financing from domestic banks and other financial institutions, and (3) equity or debt financing. We have certain plans to mitigate these adverse conditions and to increase the liquidity of the Company.
On an on-going basis, the Company also received and will continue to receive financial support commitments from the Company's related parties.
Our cash balance as ofDecember 31, 2020 will not be sufficient to support our operations for the next 12 months after the date that the financial statements issued. We have several actions to implement as mentioned above. However, if we are unable to obtain the necessary additional capital on a timely basis and on acceptable terms, we will be unable to implement our current plans for expansion, repay debt obligations or respond to competitive market pressures, which will have negative influence upon our business, prospects, financial condition and results of operations. The negative operating results of cash flow and working capital for the year endedDecember 31, 2020 raise substantial doubt about our ability to continue as a going concern. Our continued operations are highly dependent upon our ability to increase revenues and if needed complete equity and/or debt financing. 32
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We believe if we are unable to obtain our resources to fund operations, we may
be required to delay, scale back or eliminate some or all of our planned
operations, which may have a material adverse effect on our business, results of
operations and ability to operate as a going concern.
Years Ended December 31,
2020 2019
Net cash used in operating activities
2,278
Net cash provided by financing activities 608,542 153,978 Effect of exchange rate changes on cash
41,082 (71,069 )
Net decrease in cash (199,821 ) (503,388 )
Cash at the beginning of year 224,733 728,121
Cash at the end of year $ 24,912 $ 224,733
Operating Activities
Net cash used in operating activities was $916,939 for the year ended December
31, 2020 , as compared to $588,575 net cash used in operating activities for the
year ended December 31, 2019 . The net cash used in operating activities for the
year ended December 31, 2020 was mainly due to our net loss of $2,310,127 , the
decrease in operating lease liability of $317,389 , partially offset by a
decrease in prepayments and other receivables of $12,615 and an increase in
accrual and other payables of $202,791 . The net cash used in operating
activities for the year ended December 31, 2019 was mainly due to our net loss
of $570,648 , an increase in account receivables of $840,464 , an increase in
prepayments and other receivables of $65,901 and a decrease in operating lease
liability of $241,476 , partially offset by the increase in accounts payable of
$128,739 , and deferred revenue of $262,876 .
Investing Activities
Net cash provided by investing activities was $67,494 for the year ended
December 31, 2020 , as compared to $2,278 net cash provided by investing
activities for the year ended December 31, 2019 . The net cash provided by
investing activities for the year ended December 31, 2020 was mainly
attributable to the purchase of $3,594 of equipment, $20,277 of intangible
assets and offset by $91,365 proceeds from disposal of investments. The net cash
provided by investing activities for the year ended December 31, 2019 was mainly
attributable to the business combination of Maihuolang E-commerce.
Financing Activities
Net cash provided by financing for the year ended December 31, 2020 was
$608,542 , as compared to $153,978 provided by financing activities for the year
ended December 31, 2019 . For the year ended December 31, 2020 , we obtained
proceeds from sales of non-controlling interests of $71,502 , advances of
$3,352,297 from shareholders, repaid $2,815,257 to shareholders. During the year
of December 31, 2019 , we obtained proceeds from sales of non-controlling
interests of $289,514 , advances of $7,120,343 from shareholders, repaid
$6,905,449 to shareholders and $350,430 to related parties.
Contractual Obligations and Commercial Commitments
We had the following contractual obligations and commercial commitments as ofDecember 31, 2020 : Less than 1 More than 5 Contractual Obligations Total year 1-3 years 3-5 years years Amounts due to shareholders$ 2,046,988 $ 2,046,988 - - $ - Leases 419,432 164,126 255,306 - - TOTAL$ 2,466,420 $ 2,211,114 $ 255,306 $ - $ - Our cash balance as ofDecember 31, 2020 will not be sufficient to support our operations for the next 12 months after the date that the financial statements issued. We may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects. 33
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Table of Contents Capital Expenditures
We incurred capital expenditures of
Off-Balance Sheet Transactions
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors. Critical Accounting Policies We regularly evaluate the accounting policies and estimates that we use to make budgetary and financial statement assumptions. A complete summary of these policies is included in the notes to our consolidated financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management. The discussion of our critical accounting policies contained in Note 2 to our consolidated financial statements, "Summary of Significant Accounting Policies," is incorporated herein by reference.
Recent Accounting Pronouncements
For further information on recently issued accounting pronouncements, see Note 2-Summary of Significant Accounting Policies in the accompanying notes to consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
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