TMCnet News
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, Yunnan 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 (US$955,171). 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 table sets forth the key components of our results of operations for the three months and six months ended March 31, 2013 and 2012, both in dollars and as a percentage of our net sales. Three Months Ended Three Months Ended March 31, 2013 March 31, 2012 % of Net % of Net Amount Sales Amount Sales Net sales $ 1,196,367 100 % $ 1,001,034 100 % Cost of sales 711,647 59 % 664,023 66 % Gross profit 484,720 41 % 337,011 34 % Selling, general and administrative expenses (568,723 ) (48 )% (980,745 ) (98 )% Operating loss (84,003 ) (7 )% (643,734 ) (64 )% Other income (expense) 89,826 7 % (954 ) -Income (loss) before income taxes 5,823 - (644,688 ) (64 )% Provision for income taxes - - 460,554 46 % Net income (loss) $ 5,823 - $ (184,134 ) (18 )% Six Months Ended Six Months Ended March 31, 2013 March 31, 2012 % of Net % of Net Amount Sales Amount Sales Net sales $ 2,287,271 100 % $ 2,953,754 100 % Cost of sales 1,744,084 76 % 1,506,299 51 % Gross profit 538,187 24 % 1,447,455 49 % Selling, general and administrative expenses (1,256,987 ) (55 )% (2,388,425 ) (81 )% Operating income (718,800 ) (31 )% (940,970 ) (32 )% Other income (expense) 87,943 4 % (2,392 ) - Loss before income taxes (630,857 ) (27 )% (943,362 ) (32 )% Provision for income taxes - - 431,789 15 % Net loss $ (630,857 ) (27 )% $ (511,573 ) (17 )% Net sales. Our net sales increased to $1,196,367 for the three months ended March 31, 2013 from $1,001,034 for the three months ended March 31, 2012, representing a 20% increase. Our net sales decreased to $2,282,271 for the six months ended March 31, 2013 from $2,953,754 for the six months ended March 31, 2012, representing a 23% decrease. The decrease is primarily due to the overall market decline in current Chinese real estate industry. The Company's business made some progress in transitioning from generating a majority of net sales from the real estate market to generating a greater percentage of net sales from other customers for commercial computer graphics for the three months endedin March 31, 2013 Cost of sales. Our cost of sales increased to $711,647 for the three months ended March 31, 2013 from $664,023 for the three months ended March 31, 2012, representing a 7% increase. Our cost of sales increased to $1,744,084 for the six months ended March 31, 2013 from $1,506,299 for the six months ended March 31, 2012, representing a 16% increase, mainly due to increased cost on purchasing product's hardware, which was partially offset by a decrease in the salary payment on production staff due to a reduction in staff. Gross profit. Our gross profit increased to $484,720 for the three months ended March 31, 2013 from $337,011 for the three months ended March 31, 2012, representing a 44% increase. Our gross profit decreased to $538,187 for the six months ended March 31, 2013 from $1,447,455 for the six months ended March 31, 2012, representing a 63% decrease. The Gross margin increased to 41% for the three months ended March 31, 2013 from 34% for the three months ended March 31, 2012. This increase was primarily due to increased sales and decreased staff cost. The Gross margin decreased to 24% for the six months ended March 31, 2013 from 49% for the six months ended March 31, 2012. This decrease was primarily due to the developed sales on low margin products. Selling, general and administrative expenses. Our selling, general and administrative expenses decreased to $568,723 for the three months ended March 31, 2013 from $980,475 for the three months ended March 31, 2012, representing a 42% decrease. Our selling, general and administrative expenses decreased to $1,256,987 for the six months ended March 31, 2013 from $2,388,425 for the six months ended March 31, 2012, representing a 47% decrease. The selling, general and administrative expense per sales ratio decreased to 48% for the three months ended March 31, 2013 from 98% for the three months ended March 31, 2012. The selling, general and administrative expense per sales ratio decreased to 55% for the six months ended March 31, 2013 from 81% for the six months ended March 31, 2012, The changes are mainly due to decreased cost related to fewer employees than last period and advertising fees. Other income (expense). Other income increased to $ 89,826 for the three months ended March 31, 2013 from other expense of $ (954) for the three months ended March 31, 2012. Other income increased to $87,943 for the six months ended March 31, 2013 from other expense of $(2,392) for the six months ended March 31, 2012. This increase was mainly due to subsidy income from the government. Income (loss) before income taxes. Our income before income taxes increased to $5,823 for the three months ended March 31, 2013 from loss of $644,688 for the three months ended March 31, 2012, representing a 101% increase. Our loss before income taxes decreased to $630,857 for the six months ended March 31, 2013 from loss of $ 943,362 for the six months ended March 31, 2012, representing a 33% decrease. This change was mainly due to the decrease in selling, general and administrative expenses and an increase in subsidy income. Provision for income taxes.Our income tax expense was nil for the three months ended March 31, 2013, compared to income tax credit $460,554 for the three months ended March 31, 2012. Our income tax expense was nil for the six months ended March 31, 2013, compared to income tax credit $431,789 for the six months ended March 31, 2012.This change was mainly due to the loss before income tax for the six months ended March 31, 2013. Liquidity and Capital Resources As of March 31, 2013 and March 31, 2012, we had cash and cash equivalents of $97,342 and $45,737, 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) Six Months Ended March 31, 2013 2012 Net cash used in operating activities $ (205,834 ) $ (237,570 ) Net cash provided by investing activities 38,724 628,796 Net cash used in financing activities - (1,143,293 ) Effects of exchange rate change in cash 1,224 18,672 Net decrease in cash and cash equivalents (165,886 ) (733,395 ) Cash and cash equivalent at beginning of the period 263,228 779,132 Cash and cash equivalent at end of the period $ 97,342 $ 45,737 Operating activities Net cash used in operating activities was $205,834 for the six months ended March 31, 2013, as compared to net cash used in operating activities of $237,570 for the six months ended March 31, 2012. The change is attributable to the increase in net loss of $119,284, the decrease of $164 in accounts receivable, the increase of $131,357 in other receivables, the increase of $556 in rent deposits, the increase of $215,273 in amount due to a stockholder, the increase of $103,456 in accounts payable, the decrease of $311,632 in accrued expenses and other payable, the increase of $64,096 in deferred revenue. Investing activities Net cash provided by investing activities for the six months ended March 31, 2013 was $38,724, as compared to $628,796 net cash provided in investing activities for the six months ended March 31, 2012. The change was attributed by the disposal of property and equipment attributed for the six months ended March 31, 2013. Also the refund of deposit of acquisition of a leasehold property is nil for the six months ended March 31, 2013, as compared to $793,953 in same period of 2012. Financing activities No cash provided or used in financing activities for the six months ended March 31, 2013, as compared to $1,143,293 net cash used in financing activities for the six months ended March 31, 2012, which was the repayment to a stockholder. |