ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATION
This Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and other parts of the Form 10-K contain forward looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are subject to certain events, risks and uncertainties that may be outside our control. The words "believe", "expect", "anticipate", "optimistic", "intend", "will", and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update or revise any forward-looking statements. These forward-looking statements include statements of management's plans and objectives for our future operations and statements of future economic performance, information regarding our expansion and possible results from expansion, our expected growth, our capital budget and future capital requirements, the availability of funds and our ability to meet future capital needs, the realization of our deferred tax assets, and the assumptions described in this report underlying such forward-looking statements. Actual results and developments could differ materially from those expressed in or implied by such statements due to a number of factors, including, without limitation, those described in the context of such forward-looking statements, our expansion strategy, our ability to achieve operating efficiencies, our dependence on distributors, capacity, suppliers, industry pricing and industry trends, evolving industry standards, domestic and international regulatory matters, general economic and business conditions, the strength and financial resources of our competitors, our ability to find and retain skilled personnel, the political and economic climate in which we conduct operations and the risk factors described from time to time in our other documents and reports filed with the Securities and Exchange Commission (the "Commission"). Additional factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to: 1) our ability to successfully develop and deliver our products on a timely basis and in the prescribed condition; 2) our ability to compete effectively with other companies in the same industry; 3) our ability to raise sufficient capital in order to effectuate our business plan; and 4) our ability to retain our key executives.
Critical Accounting Policies
We prepare financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the amounts reported in our combined and consolidated financial statements and related notes. We periodically evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe are 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. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.
In accordance with ASC 605-10-S99-1 for revenue recognition, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured.
(a) Advertising revenues
The Company set up its own media network by installing LCD displays in retail stores managed by a related party and provides air time for the clients' advertisement through the network. Revenue is recognized when the air time is used by the clients.
After completing the installation of the LCD displays in 2012, the Company has entered an advertising services contract (the "Contract") with a related party, pursuant to which the related party agrees to purchase a total of 15,768,000 seconds per year for LCD advertising time at a rate of no less than RMB2.54 (USD0.41), starting from June 2012. The contract was completed as of December 31, 2013. During the year of 2014 and 2013, the Company generated all its advertising revenues from the related party in amount of $0 and $6,641,060, respectively.
(b) Sales of fertilizer
The Company also recognized revenues generated from sales of fertilizer in gross basis, given that the Company had credit risk in the transaction and had been responsible for the acceptability of the fertilizer purchased by the customers. Revenue is recognized when products have been delivered, risk of ownership has been transferred, the selling price is fixed or determinable and collectability is reasonably assured.
Cost of Revenues
Cost of revenues include all direct material, labor and certain other direct costs, as well as those indirect costs related to contract performance, such as indirect labor and fringe benefits. Selling, general, and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.
Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence.
Results of Operations
We had revenues of $1,706,369 for the year ended December 31, 2014 which consisted of fertilizer sales to HeBei AMP, comparatively, the fertilizer sales in amount of $19,915,541 in 2013 were from non-related third parties. We have revenues of $6,641,060 for the year ended December 31, 2013 primarily from advertising. As discussed above, since our advertising agreement with Hebei AMP had not been extended we did not have advertising revenues since January 2014 and do not anticipate advertising revenues in the immediate future. Historically, advertising revenues were from the sales of air time through the LCD display network. We gained all of our advertising revenues from Hebei AMP pursuant to the Agreement, dated June 1, 2012. Hebei AMP was our related party and major shareholder through a trustee holding relationship. We charged Hebei AMP RMB2.54 ($0.41) per second for the air time they used for their advertisement. We are not certain as to whether the Hebei AMP agreement will be extended or whether we will enter into advertising agreements with other parties.
Cost of Revenues
Cost of revenues for the years ended December 31, 2014 and 2013 were $1,714,292 and $19,896,481, respectively, which were related to expenditures to procure fertilizer for sale. The sales in 2014 were to the related party.
Net Income (Loss)
We had net losses of $111,658 for the year ended December 31, 2014 compared to net income of $4,976,390 for the year ended December 31, 2013. The net loss during the year ended December 31, 2014 was primarily attributable to expenses incurred for daily operations since no gross profits were gained during the year, partially offset by the interest income in connection with a loan advance to a related party, which was $204,863. The loan advance to the related party is due on January 14, 2015 with interest at a rate of 4% per annum. Comparatively, the net income during the year ended December 31, 2013 was due to strong advertising revenues from our related party contract with Hebei AMP.
There can be no assurance we will generate any revenue or achieve or maintain profitability in the future.
We had operating expenses of $368,117 and $767,183 for the years ended December 31, 2014 and 2013, respectively. The expenses in both years were primarily composed of salaries, rent and other administrative expenses related to daily operations. The decrease in operating expenses during 2014 was primarily due to the lower expenses needed to support our operations due to our drop in revenues.
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Liquidity and Capital Resources
Cash flows provided by (used in) operating activities were ($55,731) and $4,003,316 for the years ended December 31, 2014 and 2013, respectively. Negative cash flows from operations during the year ended December 31, 2014 were due primarily to our net loss of $111,658. Cash flows from operations during the year ended December 31, 2013 were due primarily to net income of $4,976,390, plus the increase in taxes payable by $919,502, partially offset by the increase in advances to related parties in connection with business trade by $1,343,995.
Cash flows used in investing activities were $5,326,437 and $10,960 during the years ended December 31, 2014 and 2013, respectively. During the year ended December 31, 2014, there was a loan advance to Parko (Hong Kong) Limited ("Parko"), Hebei AMP's business affiliate for $5,326,437, which is due on January 14, 2015 with interest at a rate of 4% per annum. The business purpose of this advance was to gain interest income in a low risk business environment, which is for rrelated party. Comparatively, cash flows used in investing activities during the year ended December 31, 2013 was primarily due to purchase of accounting software of $10,960.
Cash flows provided by financing activities were $243,027 and $275,505 during the years ended December 31, 2014 and 2013, respectively. Positive cash flows from financing activities during the year ended December 31, 2014 were primarily due to proceeds from a shareholder loan, which bear zero interest and due on demand. Comparatively, cash flows from financing activities during the year ended September 30, 2013 were due primarily to the sale of common stock of $300,000, partially offset by the repayment of $24,495 to the related party's loan.
We project that we will need capital to fund operations over the next 12 months. We anticipate we will need a minimum of $1,000,000 additional funds starting during 2015 to meet our objectives.
Overall, we have funded our cash needs from inception through December 31, 2014 with a series of debt and equity transactions, primarily with related parties. If we are unable to receive additional cash from our related parties, we may need to rely on financing from outside sources through debt or equity transactions. Our related parties are under no legal obligation to provide us with capital infusions. Failure to obtain such financing could have a material adverse effect on our operations and financial condition.
We had cash of $411,000 on hand as of December 31, 2014. Currently, we have enough cash to fund our operations for the next six months. This is based on our working capital surplus. We currently have limited revenues and gross profits. We may require capital if we decide to expand our business plan. There can be no assurance that additional capital will be available to us when needed or available on terms favorable to us.
On a long-term basis, liquidity is dependent on the receipt of revenues from new or historical sources of revenues (there being no revenues at this time), and additional infusions of capital and debt financing. Our current capital and lack of revenues are insufficient to fund any growth or expansion of our business. If we choose to launch such an expansion campaign, we will require substantially more capital. However, there can be no assurance that we will be able to obtain additional equity or debt financing in the future, if at all. If we are unable to raise additional capital, our ability to generate revenues will be adversely affected and we will have to significantly modify our plans. For example, if we are unable to raise sufficient capital to develop our business plan, we may need to:
· Curtail number of stores in the Network
· Limit our future marketing efforts to areas that we believe would be the most profitable.
Demand for the products and services will be dependent on, among other things, market acceptance of our services, advertising market in Hebei Province, PRC, and general economic conditions, which are cyclical in nature. Inasmuch as a major portion of our activities has been the receipt of revenues from the sales of our products, our business operations will be adversely affected until we reestablish a revenue stream.
Our success will be dependent upon the sale of advertising time from the renewal of the agreement with Hebei AMP or entering into new agreements, and subject to the risks associated with our business plans. We provide air time for the clients' advertisement through our own media network. We plan to strengthen our position in these markets. We also plan to expand our operations through aggressively marketing our concept.
Off-balance sheet arrangements
We have not entered into, nor do we expect to enter into, any off-balance sheet arrangements. We also have not entered into any financial guarantees or other commitments to guarantee the payment obligations of third parties. In addition, we have not entered into any derivative contracts that are indexed to our equity interests and classified as shareholders' equity. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.
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Apr 15, 2015