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COMPUTER GRAPHICS INTERNATIONAL INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Edgar Glimpses Via Acquire Media NewsEdge) Forward Looking Statements
The following discussion and analysis of the results of operations and financial
condition of Computer Graphics International Inc. should be read in conjunction
with the Company's financial statements, and the notes to those financial
statements that are included in this quarterly report and the company's annual
report for the year ended September 30, 2012. Our discussion includes
forward-looking statements based upon current expectations that involve risks
and uncertainties, such as our plans, objectives, expectations and intentions.
Actual results and the timing of events could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors, including those set forth under the Risk Factors and Business sections
in our annual report. We use words such as "anticipate," "estimate," "plan,"
"project," "continuing," "ongoing," "expect," "believe," "intend," "may,"
"will," "should," "could," and similar expressions to identify forward-looking
statements.
Our Company
Business Overview
We are a 3D digital visual service provider founded in 2006 based in China,
specialized in providing one-stop-shop service and systems based on 3D image
technology to domestic governments, real estate developers, game developers, the
automotive industry and other commercial customers. We operate through our
wholly-owned subsidiaries Shenzhen Digital Image Technology Co., Limited and
Guangzhou Digital Image Technologies Co., Ltd.
Our headquarters are located in Shenzhen, China. We operate domestically with
four branches in the PRC, including our Xi'an office, Guangzhou office, Yun'nan
office and Xiamen office. Through our 3D imaging technology, we participate in
the visual expression of construction-related industries and help our customers
complete visual technological changes from hand painting to computer-aided
visual displays. We endeavor to provide our customers with the most
cost-effective 3D digital visual communication products and services through the
combination of the latest visual technology and terminal display equipment.Our Corporate History and Background
Computer Graphics International Inc., or the "Company", was incorporated under
the laws of the State of Nevada on February 27, 2003 under the name AMP
Productions, Ltd. ("AMP"), with the business purpose of developing, producing,
marketing, and distributing low-budget feature-length films to movie theaters
and ancillary markets. From inception until the reverse acquisition transaction
described below, AMP earned no revenue and suffered recurring losses and net
cash outflows from operations.
On July 30, 2010, the controlling shareholders of AMP consented to a proposed
1-for-10 reverse split of AMP's issued and outstanding common stock, an increase
in AMP's authorized common stock to 900,000,000 shares, and the authorization of
100,000,000 shares of preferred stock. The corporate action was approved by
FINRA on September 17, 2010 and effective in the State of Nevada on September
23, 2010.
Acquisition of China Digital
On March 31, 2011, we completed a reverse acquisition transaction through a
share exchange (the "Share Exchange") with China Digital and its shareholders,
whereby we acquired 100% of the issued and outstanding capital stock of China
Digital in exchange for (i) 14,462,684 shares of our Common Stock (after giving
effect to the Reverse Stock Split described below), which collectively
constituted approximately 97% of our issued and outstanding capital stock as of
and immediately after the consummation of the transactions contemplated by the
Share Exchange Agreement and (ii) payment (the "Cash Component") of
$2,368,471. The Cash Component was payable in full within 12 months after the
Closing.
As a result of the reverse acquisition, China Digital became our wholly-owned
subsidiary and the former shareholders of China Digital became our controlling
stockholders. The share exchange transaction with China Digital and the
Shareholders was treated as a reverse acquisition, with China Digital as the
acquirer and AMP as the acquired party. Unless the context suggests otherwise,
when we refer in this report to business and financial information for periods
prior to the consummation of the reverse acquisition, we are referring to the
business and financial information of China Digital and its consolidated
subsidiaries.
As a result of our acquisition of China Digital, we now own all of the issued
and outstanding capital stock of China Digital, which in turn owns all of the
issued and outstanding capital stock of Shenzhen Digital Image Technologies Co.,
Ltd. ("Shenzhen Holding Company"). Shenzhen Holding Company in turn owns our
two additional Operating Subs, Shenzhen Digital Image 3D Design and Development
Co., Ltd. ("Shenzhen 3D Design") and Guangzhou Digital Image Technologies Co.,
Ltd.
On May 31, 2011, AMP filed a certificate of amendment with the Secretary of
State of Nevada changing its name to "Computer Graphics International Inc." and
effecting a 1-for-2.18 reverse stock split of its common stock (the "Reverse
Stock Split"). The Reverse Stock Split took effect when approved by FINRA on
June 7, 2011. As a result of the Reverse Stock Split, the number of our shares
outstanding was reduced from 35,428,981 shares immediately before the Reverse
Stock Split to 16,251,846 shares immediately after the Reverse Stock Split.
On September 26, 2011, the Company's wholly owned subsidiary Shenzhen Holding
Company entered into a Letter of Intent for Share Purchase (the "Acquisition
Agreement") with Li Dongxiang and Zeng Xianguang (together, the "Sellers") with
respect to the shares of Guangzhou Fanyutuo 3D Technology Co., Ltd. ("Guangzhou
"). Pursuant to the terms of the Acquisition Agreement, the Sellers agreed to
sell all of the capital stock of Guangzhou to Shenzhen Holding Company in
exchange for RMB six million (approximately US$952,215). Guangzhou is a recently
formed start-up company involved in three dimensional technology. On December
27, 2011, the parties closed the purchase and sale of shares of Guangzhou
pursuant to terms of the Acquisition Agreement. In connection with the closing,
Guangzhou's name was changed to "Guangzhou Digital Image Technologies Co., Ltd."
Principal Factors Affecting Our Financial Performance
We believe our operating results will be primarily affected by the following
factors:
· Our ability to expand our presence in the PRC market as we plan, including
the client base, and our industry presence.
· Our ability to maintain a good relationship with our suppliers for continued supply of hardware equipment at a competitive price and quality
in order to continue carrying out our current pricing strategy.
· Our ability to attract and retain key management personnel as well as technical staff for technology integration and new product development in
this competitive market.
Taxation
United States and Hong Kong
We are subject to United States federal income tax at a tax rate of 34%. No
provision for income taxes in the United States has been made as we have no
taxable income derived from business effectively connected to the United States.
China Digital is incorporated in Hong Kong and is subject to Hong Kong profits
tax. In accordance with the relevant tax laws and regulations of Hong Kong, a
company, irrespective of its residential status, is subject to tax on all
profits (excluding profits arising from the sale of capital assets) arising in
or derived from Hong Kong. No tax is levied on profits arising abroad, even if
they are remitted to Hong Kong. Therefore, China Digital is exempt from Hong
Kong income tax since all the profits were derived from subsidiaries in the PRC
and there were no assessable profits generated in Hong Kong. The income taxrate
in Hong Kong is 16.5%.
People's Republic of China
Because all of our operations are conducted in the PRC, we are governed by the
Enterprise Income Tax Law of the PRC (the "EIT Law"). This law and its
implementing rules impose a unified EIT rate of 25% on all enterprises, unless
they qualify for certain limited exceptions.
Under the EIT Law, an enterprise established outside of China with "de facto
management bodies" within China is considered a resident enterprise and will
normally be subject to an EIT of 25% on its global income. The implementing
rules define the term "de facto management bodies" as "an establishment that
exercises, in substance, overall management and control over the production,
business, personnel, accounting, etc., of a Chinese enterprise." If the PRC tax
authorities subsequently determine that we should be classified as a resident
enterprise, then our organization's global income will be subject to PRC income
tax at the rate of 25%. Such classification would likely result in unfavorable
tax consequences to us and our non-PRC shareholders.
Since 2008, we have been subject to tax at a statutory rate of 25% on income
reported in our statutory financial statements filed after appropriate tax
adjustments in the relevant periods. Our future effective income tax rate
depends on various factors, such as tax legislation, the geographic composition
of our pre-tax income and non-tax deductible expenses incurred.
On April 6, 2012, the Company obtained the approval from the tax authority of
PRC that it fulfills certain tax requirements of a company engaging in the
design of software and integrated circuit and thereby it is entitled to
preferential tax relief for EIT. The Company is exempted from EIT in the first
two profitable financial years of operation and is further granted a 50% relief
from the EIT for the following three financial years. As the approval is
officially given to the Company in April, 2012, no refund of tax would be made
in respect of the EIT paid by the Company for the fiscal years ended December
31, 2009 and 2010, with the 50% relief from EIT becomes effective from the
financial year commencing on January 1, 2011.
Value Added Taxes - We are also subject to value added tax, or VAT, on the sale
of our products. The applicable VAT rate is 17% for products sold in the PRC.
The amount of VAT liability is determined by applying the applicable tax rate to
the invoiced amount of goods sold (output VAT) less VAT paid on purchases made
with the relevant supporting invoices (input VAT). Under the commercial practice
in the PRC, we pay VAT based on tax invoices issued. The tax invoices may be
issued subsequent to the date on which revenue is recognized, and there may be a
considerable delay between the date on which the revenue is recognized and the
date on which the tax invoice is issued. In the event that the PRC tax
authorities dispute the date on which revenue is recognized for tax purposes,
the PRC tax office has the right to assess a penalty, which can range from zero
to five times the amount of the taxes which are determined to be late or
deficient. Any tax penalty assessed is expensed as a period expense if and when
a determination has been made by the taxing authorities that a penalty is due.
Results of Operations
The following tables set forth key components of our results of operations for
the three months ended December 31, 2012 and December 31, 2011, both in dollars
and as a percentage of our net sales.
Three months ended Three months ended
December 31, 2012 December 31, 2011
% of Net % of Net
Amount Sales Amount Sales
Net Sales $ 1,085,904 100 % $ 1,952,720 100 %
Cost of sales 1,032,437 95 % 842,276 43 %
Gross profit 53,467 5 % 1,110,444 57 %
Selling, General and Administrative
Expenses 688,264 63 % 1,407,679 72 %
Loss from operation (634,797 ) (58 )% (297,235 ) (15 )%
Other expenses (1,883 ) 0 % (1,439 ) 0 %
Loss Before Income Taxes (636,680 ) (58 )% (298,674 ) (15 )%
Income tax expense - - 28,765 2 %
Net loss $ (636,680 ) (58 )% $ (327,439 ) (17 )%
Net Sales. Our net sales decreased to $1,085,904 for the three months ended
December 31, 2012 from $1,952,720 for the three months ended December 31, 2011,
representing a 44% decrease. The decrease is primarily due to the overall market
decline in the current Chinese real estate industry
Cost of Sales. Our cost of sales increased to $1,032,437 for the three months
ended December 31, 2012 from $842,276 for the three months ended December 31,
2011, representing a 23% increase. The cost of goods sold per sales ratio
increased to 95% for the three months ended December 31, 2012 from 43% for the
three months ended December 31, 2011, mainly due to increased cost related to
developed sales on low margin products.
Gross Profit. Our gross profit decreased to $53,467 for the three months ended
December 31, 2012 from $1,110,444 for the three months ended December 31, 2011,
representing a 95% decrease. This decrease was primarily due to the decreased
sales and the increased cost of sales.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses decreased to $688,264 for the three months ended
December 31, 2012 from $1,407,679 for the three months ended December 31, 2011,
representing a 51% decrease. The Selling, General and Administrative Expense per
sales ratio decreased to 63% for the three months ended December 31, 2012 from
72% for the three months ended December 31, 2011, mainly due to decreased cost
related to fewer employees than last period.
Other Expenses. Other expenses increased to $1,883 for the three months ended
December 31, 2012 from $1,439 for the three months ended December 31, 2011. This
increase was mainly due to one time non-operation expense.
Loss Before Income Taxes. Our loss before income taxes increased to $636,680 for
the three months ended December 31, 2012 from $298,674 for the three months
ended December 31, 2011, representing a 113% increase. The increase was mainly
due to the decrease in sales and increase in cost of sales.
Income tax expenses. Our income tax expense was nil for the three months ended
December 31, 2012, compared to income tax expense $28,765 for the three months
ended December 31, 2011. This change was mainly due to the loss before income
taxed for the three months ended December 31, 2012.
Liquidity and Capital Resources
As of December 31, 2012 and September 30, 2012, we had cash and cash equivalents
of $333,386 and $263,228, respectively, primarily consisting of cash on hand and
demand deposits. The following table provides detailed information about our net
cash flow for all financial statement periods presented in this report. To date,
we have financed our operations primarily through cash flows from operations and
equity contributions by our shareholders.
The following table sets forth a summary of our cash flows for the periods
indicated:
Cash Flow
(all amounts in U.S. dollars)
The three months Ended
December 31,
2012 2011
Net cash provided by operating activities $ 30,720 $ 606,454
Net cash provided by (used in) investing activities 38,745 (142,925 )
Effects of Exchange Rate Change in Cash
693 6,354
Net Increase in Cash and Cash Equivalents 70,158 469,883
Cash and Cash Equivalent at Beginning of the Period 263,228 779,132
Cash and Cash Equivalent at End of the Period $ 333,386 $ 1,249,015
Operating activities
Net cash provided by operating activities was $30,720 for the three months ended
December 31, 2012, as compared to net cash provided by operating activities of
$606,454 for the three months ended December 31, 2011. The change is
attributable to the increase in net loss of $309,241, the decrease of $91,644 in
accounts receivable, the decrease of $58,251 in other receivables, the increase
of $252,014 in amount due to a shareholder, the increase of $142,494 in accounts
payable, the decrease of $101,768 in accrued expenses and other payable, the
decrease of $19,334 in value-added tax liability.
Investing activities
Net cash provided by investing activities for the three months ended December
31, 2012 was $38,745, as compared to $142,925 net cash used in investing
activities for the three months ended December 31, 2011. The change was mainly
attributable to disposal of property and equipment.
Financing activities
No cash provided or used in financing activities for the three months ended
December 31, 2012 and the three months ended December 31, 2011.
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