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 Years Ended June 30, 2021 and 2020
Calendar year 2020 and the first half of 2021 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 year ended June 30, 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 year ended June 30, 2021 were a result of the
unprecedented adverse market condition caused by the outbreak of COVID-19
pandemic since January 2020.
During the year ended June 30, 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 year ended June 30, 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.
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.
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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 first half 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 year ended June 30, 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 year ended June 30, 2021 and 2020, total revenues were $14,328,326
and $20,599,228 respectively. The total revenues decreased by $6,270,902 or 30%
from the year ended June 30, 2020 to the year ended June 30, 2021.
Among the significant decrease of $6,270,902 in total revenues for the year
ended June 30, 2021, the decrease of $3,998,841 came from the decrease in
revenue of Fangguan Electronics which was acquired on December 27, 2018 The
decrease during the year ended June 30, 2021 can be directly attributed to the
fact that in certain cities and provinces the continuous outbreak of COVID-19
induced the numerous shutdowns and commercial activities suspensions which have
made the significantly adverse effects on the business of the Company. In
addition, the decrease in total revenues during the year ended June 30, 2021 was
partially attributed to the decreases of $2,374,200 in service contract and
smart energy segments as compared with the year ended June 30, 2020.as under the
negative impact of COVID-19 on service contract business, none of any new
contracts were signed while majority of the existing contracts in this business
segment had been completed.
The decrease in total revenues during the year ended June 30, 2021 was partially
offset by the increase in revenues of $1,084,083 sourced from lithium battery -
related business which was the new business segment established by the Company
in 2021.
Cost of Revenue
Cost of revenues included the cost of raw materials, labor, depreciation,
overhead and finished products purchased.
During the year ended June 30, 2021 and 2020, the total cost of revenues was
$12,050,402 and $17,506,433 respectively. The total cost of revenues decreased
by $5,456,031 or 31% from the year ended June 30, 2020 to the year ended June
30, 2021.
Among the significant decrease of $5,456,031 in total cost of revenues for the
year ended June 30, 2021, the decrease of $3,649,199 came from the decrease in
cost of revenue of Fangguan Electronics which was acquired on December 27, 2018.
In addition, the decrease in total cost of revenues during the year ended June
30, 2021 was partially attributed to the decreases of $2,065,078 in cost of
revenue of service contract and smart energy segments as compared with the year
ended June 30, 2020.
The decrease in cost of revenues can be directly attributed to the decrease of
revenues.
The decrease in total cost of revenues during the year ended June 30, 2021 was
partially offset by the increase in cost of revenues of $982,814 sourced from
lithium battery - related business which was the new business segment
established by the Company in 2021.
Gross Profit
During the year ended June 30, 2021 and 2020, the gross profit was $2,277,924
and $3,092,795, respectively.
The gross profit decreased by 26% from the year ended June 30, 2020 to the year
ended June 30, 2021. Our gross profit margin maintained stable as it was 15.9%
during the year ended June 30, 2021 as compared to 15.0% for the year ended June
30, 2020.
26
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 year ended June 30, 2021 and 2020, selling, general and
administrative expenses were $1,372,589 and $1,937,054 respectively.
The decrease in selling, general and administrative expenses can be attributed
to the stricter cost control during the year ended June 30, 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 year ended June 30, 2021 and 2020, research and development expenses
were $598,338 and $805,570 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 year ended June 30,
2021 can be attributed to the decrease of materials expenditures used for
research during the year ended June 30, 2021.
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 year ended June 30, 2021 and an income for the
year ended June 30, 2020.
During the year ended June 30, 2021 and 2020, other incomes (expenses) were
$(731,080) and $(455,040) respectively. The other expenses increased by $276,040
or 61% from the year ended June 30, 2020 to the year ended June 30, 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 year ended June 30, 2021 as compared with the corresponding
period of 2020.
The subsidy income was government subsidies received by Fangguan Electronics and
Baileqi Electronic during the year ended June 30, 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 year ended June
30, 2021 as compared with corresponding period of 2020.
The gain on extinguishment of debt of $202,588 during the year ended June 30,
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 year ended June 30,
2021. The loss on extinguishment of debt can be attributed to the conversion of
convertible notes in the principal amount of $170,516 during the year ended June
30, 2020.
Net Income (Loss)
During the year ended June 30, 2021 and 2020, our net income (loss) was
$(406,607) and $(277,668), respectively. The total net loss increased by
$128,939 or 46% from the year ended June 30, 2020 to the year ended June 30,
2021.
The significant increase in net loss from the year ended June 30, 2020 to the
year ended June 30, 2021 is primarily attributed to: (1) a decrease in the
Company's revenue by approximately 30% resulting from the disruption of the
Company's business operations caused by the COVID-19; (2) a significant increase
in non-recurring other expenses such as change in fair value of derivative
liability; and offset by (3) a decrease in the Company's operating expenses by
approximately 28% resulting from cost saving measures including the reduction in
salary, rent and R&D expenditures etc. Excluding the aforementioned
non-recurring change in fair value of derivative liability, the increase
(decrease) of the net income from the year ended June 30, 2020 to the year ended
June 30, 2021 would be changed from ($ 0.1) million into approximately $0.7
million instead.
27
Liquidity and Capital Resources
Cash Flow from Operating Activities
During the year ended June 30, 2021, net cash used in operating activities was
$578,073 compared to the cash provided by operating activities of $936,479 for
the year ended June 30, 2020. The change was mainly due to a decrease of
$128,939 in net income and an increase of $1,496,437 in cash outflow from
changes in operating assets and liabilities in the year ended June 30, 2021
compared to the year ended June 30, 2020.
Cash Flow from Investing Activities
During the year ended June 30, 2021, net cash used in investing activities was
$189,974 compared to net cash provided by investing activities of $50,492 during
the year ended June 30, 2020. The change was primarily due to the fact that
there were proceeds from sale of equipment at the amount of $244,189 during the
year ended June 30, 2020 while proceeds from sale of equipment was merely
$15,687 during the year ended June 30, 2021.
Cash Flow from Financing Activities
During the year ended June 30, 2021, cash provided by financing activities was
$38,557 compared to net cash used in financing activities of $190,591 during the
year ended June 30, 2020. The change was primarily due to the further advances
from the major shareholders of the Company, the proceeds from issuance of
promissory notes ,and the proceeds from issuance of common stock for private
placement during the year ended June 30, 2021.
As of June 30, 2021, we have a working capital of $3,009,020.
Our total current liabilities as of June 30, 2021 were $9,886,398 and mainly
consisted of $904,832 for short-term bank loans, $4,942,881 in accounts payable,
the amount due to related parties of $3,053,818 advance from customers of
$334,101 and the self-amortized promissory notes of $533,316. 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.
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Future Financings
We consider taking on 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.
We will require approximately $430,000 to fund our working capital needs as
follows:
Audit and accounting 220,000
Legal Consulting fees 70,000
Salary and wages 100,000
Edgar/XBRL filing, transfer agent and miscellaneous 40,000
Total
$ 430,000
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.
Critical Accounting Policies
While our significant accounting policies are more fully described in Note 2 to
our financial statements, we believe the following accounting policies are the
most critical to aid you in fully understanding and evaluating this management
discussion and analysis
Revenue recognition
The Company adopted the new accounting standard, ASC 606, Revenue from Contracts
with Customers, and all the related amendments (new revenue standard) to all
contracts using the modified retrospective method beginning on July 1, 2018. The
adoption did not result in an adjustment to the retained earnings as of June 30,
2018. The comparative information was not restated and continued to be reported
under the accounting standards in effect for those periods. The adoption of the
new revenue standard has no impact on either reported sales to customers or net
earnings.
The Company bases its estimates of return on historical results, taking into
consideration the type of customers, the type of transactions and the specifics
of each arrangement.
Revenues are recognized when control of the promised goods or services are
transferred to a customer, in an amount that reflects the consideration that the
Company expects to receive in exchange for those goods or services. The Company
applies the following five steps in order to determine the appropriate amount of
revenue to be recognized as it fulfills its obligations under each of its
agreements:
· identify the contract with a customer;
· identify the performance obligations in the contract;
29
· determine the transaction price;
· allocate the transaction price to performance obligations in the contract; and
· recognize revenue as the performance obligation is satisfied.
Under these criteria, for revenues from sale of products, the Company generally
recognizes revenue when its products are delivered to customers in accordance
with the written sales terms. For service revenue, the Company recognizes
revenue when services are performed and accepted by customers.
Comprehensive income
ASC Topic 220, "Comprehensive Income", establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income as defined includes all changes in equity during a period
from non-owner sources. Accumulated other comprehensive income, as presented in
the accompanying consolidated statement of stockholders' equity, consists of
changes in unrealized gains and losses on foreign currency translation. This
comprehensive income is not included in the computation of income tax expense or
benefit.
Accounts receivable
Accounts receivable are recorded at the invoiced amount and do not bear
interest, which are due within contractual payment terms, generally 30 to 90
days from shipment. Credit is extended based on evaluation of a customer's
financial condition, the customer's credit-worthiness and their payment history.
Accounts receivable outstanding longer than the contractual payment terms are
considered past due. Past due balances over 90 days and over a specified amount
are reviewed individually for collectability. At the end of each period, the
Company specifically evaluates individual customer's financial condition, credit
history, and the current economic conditions to monitor the progress of the
collection of accounts receivables. The Company will consider the allowance for
doubtful accounts for any estimated losses resulting from the inability of its
customers to make required payments. For the receivables that are past due or
not being paid according to payment terms, the appropriate actions are taken to
exhaust all means of collection, including seeking legal resolution in a court
of law. Account balances are charged off against the allowance after all means
of collection have been exhausted and the potential for recovery is considered
remote. The Company does not have any off-balance-sheet credit exposure related
to its customers.
Use of Estimates
The Company's consolidated financial statements have been prepared in accordance
with US GAAP. This requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and reported amounts of revenue and expenses during the reporting
period. The significant areas requiring the use of management estimates include,
but are not limited to, the allowance for doubtful accounts receivable,
estimated useful life of intangible assets, provision for staff benefits,
recognition and measurement of deferred income taxes and valuation allowance for
deferred tax assets. Although these estimates are based on management's
knowledge of current events and actions management may undertake in the future,
actual results may ultimately differ from those estimates and such differences
may be material to our consolidated financial statements.
Foreign currencies translation
Transactions denominated in currencies other than the functional currency are
translated into the functional currency at the exchange rates prevailing at the
dates of the transaction. Monetary assets and liabilities denominated in
currencies other than the functional currency are translated into the functional
currency using the applicable exchange rates at the balance sheet dates. The
resulting exchange differences are recorded in the statement of operations.
The reporting currency of the Company is the United States Dollar ("US$"). The
Company's subsidiaries in the People's Republic of China ("PRC") maintain their
books and records in their local currency, the Renminbi Yuan ("RMB"), which is
the functional currency as being the primary currency of the economic
environment in which these entities operate.
In general, for consolidation purposes, assets and liabilities of its
subsidiaries whose functional currency is not the US$ are translated into US$,
in accordance with ASC Topic 830-30, "Translation of Financial Statement", using
the exchange rate on the balance sheet date. Revenues and expenses are
translated at average rates prevailing during the period. Stockholders' equity
is translated at historical rates. The gains and losses resulting from
translation of financial statements of foreign subsidiaries are recorded as a
separate component of accumulated other comprehensive income within the
statement of stockholders' equity.
30
The exchange rates used to translate amounts in RMB into U.S. Dollars for the
purposes of preparing the consolidated financial statements are as follows:
2021 2020
Balance sheet items, except for equity accounts 6.4601 7.0795
Items in statements of comprehensive income (loss) and cash flows 6.7698 7.0307
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under this
guidance, lessees will be required to recognize on the balance sheet a lease
liability and a right-of-use asset for all leases, with the exception of
short-term leases. The lease liability represents the lessee's obligation to
make lease payments arising from a lease, and will be measured as the present
value of the lease payments. The right-of-use asset represents the lessee's
right to use a specified asset for the lease term, and will be measured at the
lease liability amount, adjusted for lease prepayment, lease incentives received
and the lessee's initial direct costs. The standard also requires a lessee to
recognize a single lease cost allocated over the lease term, generally on a
straight-line basis. The new guidance is effective for fiscal years beginning
after December 15, 2018. ASU 2016-02 is required to be applied using the
modified retrospective approach for all leases existing as of the effective date
and provides for certain practical expedients. Early adoption is permitted. The
Company is currently evaluating the potential impact of adopting this new
standard on its consolidated statements and related disclosures.
In February 2018, FASB issued ASU 2018-02, Income Statement - Reporting
Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income. ASU 2018-02 provides entities the option
to reclassify certain "stranded tax effects" resulting from the recent US tax
reform from accumulated other comprehensive income ("AOCI") to retained
earnings. Under the ASU, reporting entities will select an accounting policy to
either reclassify all stranded tax effects caused by tax reform from AOCI to
retained earnings, or continue recycling stranded effects (including those
caused by tax reform) through earnings in future periods. Further, disclosure of
either policy is required in all cases. The reclassification from AOCI to
retained earnings is presented in the statement of shareholders equity. The ASU
is effective for all entities in fiscal years beginning after December 15, 2018,
and interim periods within those fiscal years. Early adoption is permitted for
public business entities for which financial statements have not yet been
issued, and for all other entities for which financial statements have not yet
been made available for issuance. Entities have the option to record the
reclassification either retrospectively to each period in which the income tax
effects of tax reform are recognized, or at the beginning of the annual or
interim period in which the amendments are adopted. The Company determined that
the adoption of this new standard has no material impact on its consolidated
statements and related disclosures.
Compensation-Stock Compensation. In June 2018, the FASB issued ASU 2018-07,
Compensation-Stock Compensation (Topic 718): Improvement to Nonemployee
Share-based Payment Accounting to amend the accounting for share-based payment
awards issued to nonemployees. Under the revised guidance, the accounting for
awards issued to nonemployees will be similar to the model for employee awards.
The update is effective for public business entities for fiscal years beginning
after December 15, 2018, including interim periods within that fiscal year. The
Company adopted this new standard effective on January 1, 2019. The adoption of
ASU 2018-07 did not have a material impact on the Group's consolidated financial
statements.
Fair Value Measurement. In August 2018, the FASB issued ASU 2018-13, Fair Value
Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure
Requirements for Fair Value Measurement, which eliminates, adds and modifies
certain disclosure requirements for fair value measurements. Under the guidance,
public companies will be required to disclose the range and weighted average
used to develop significant unobservable inputs for Level 3 fair value
measurements. The guidance is effective for all entities for fiscal years
beginning after December 15, 2019 and for interim periods within those fiscal
years, but entities are permitted to early adopt either the entire standard or
only the provisions that eliminate or modify the requirements. The Company is
currently in the process of evaluating the impact of the adoption of this
guidance on its consolidated financial statements.
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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IONIX TECHNOLOGY, INC. 
