Item 7. Management’s Discussion and Analysis
ITEM
7.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with our financial statements, including the notes thereto, appearing elsewhere
in this Annual Report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs.
Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include but are not limited to those discussed below and elsewhere in this Annual Report. Our audited
consolidated financial statements are stated in United States Dollars and are prepared in accordance with United States Generally
Accepted Accounting Principles (“U.S. GAAP”).
Plan
of Operation and Funding
We
expect that working capital requirements will continue to be funded through internally generated funds and proceeds from issuances of securities. Our working capital requirements
are expected to increase in line with the growth of our business.
Existing
working capital, proceeds from issuance of securities, further advances, and anticipated cash flow are expected to be adequate to
fund our operations over the next twelve months. We have no lines of credit or other bank financing arrangements. Generally, we have
financed operations to date through internally generated funds and proceeds from issuance of securities. In connection with our
business plan, management anticipates additional increases in operating expenses and capital expenditures relating to: (i) research
and developmental, (ii) business expansion expenditure and (iii) marketing expenses. We intend to finance these expenses with
further issuances of securities. Thereafter, we expect we will need to raise additional capital and generate
revenues to meet long-term operating requirements. Additional issuances of equity will result in
dilution to our current shareholders. Further, such securities might have rights, preferences, or privileges senior to our common
stock. Additional financing may not be available upon acceptable terms, or at all. If adequate funds are not available or are not
available on acceptable terms, we may not be able to take advantage of prospective new business endeavors or opportunities, which
could significantly and materially restrict our business operations.
Results
of Operations
The
following table sets forth certain selected statement of operations data for the financial year indicated in U.S. Dollars. In addition, we note that
the period-to-period comparison may not be indicative of future performance.
The
following summary of our operations should be read in conjunction with our audited financial statements for the financial years
ended August 31(“FYE”), 2022, and 2021, which are included herein.
Year Ended August 31
2022
2021
Changes
%
Revenue
$ 1,190,616
$ 774,805
$ 415,811
54 %
Cost of revenues
952,228
503,116
449,112
89 %
Gross profit
238,388
271,689
(33,301 )
(12 )%
Operating expenses
4,856,039
1,413,678
3,442,361
244 %
Loss from operations
(4,617,651 )
(1,141,989 )
(3,475, 662 )
304 %
Other expense
(938,976 )
(23,036 )
(915,940 )
3,976 %
Net Loss
(5,556,627 )
(1,165,025 )
(4,391,602 )
377 %
Revenue
Revenue
for FYE 2022, were $1,190,616 compared to revenue in FYE 2021 of $774,805, an increase of $415,811 or approximately
54%. Our sales increases in the 2022 is attributable to the expansion of customers base, increase of sales from existing customers and
expansion of product offerings.
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Cost
of Sales
Cost
of revenues was $952,228 or 80% of revenues in the FYE 2022, as compared to $503,116 or 65% of revenue in FYE 2021. Cost of revenues
includes production cost and purchases of goods. Higher cost of revenues was attributable to manufacturing and related costs for
evoairTM products, comprising material costs, labor cost, R&D for product improvement, product testing and inspection, factory
rental, depreciation expense as well as sample products for market penetration.
Gross
profit
Gross
profit was $238,388 for FYE 2022 or 20% of revenues compared to $271,689 in FYE 2021 or 35% of revenues. The decrease in
gross profit as a percentage of sales (“gross margin”) was attributable to the lower gross margin from new product line which has not achieved economy
of scale. The decrease of gross profit in 2022 is attributable to the commercialization of evoair productsTM with higher cost of revenue
from manufacturing and related costs as well as lack of economy of scale during commercialization stage. The Company anticipates improvement
of income and gross profit margin with improvement of revenue streams from distributor and dealership model, projects, and licensing model.
Operating
expenses
Operating
expenses totaled $4,856,039 for FYE 2022, compared to $1,413,678 in operating expenses for FYE 2021, or an increase of $3,442,361 or
244%. The operating expenses include salary and related expenses, commissions, rental and professional fees. The
increase in operating expenses was in line with the growth in business operations and business development, comprising
predominantly professional fee, amortization of intangible assets, and compliance cost in relation to our financial
reporting, patent, and trademark filings.
Other
income and (expense)
Other
income and expense are comprised of other income and interest expense. Interest expenses was $1,005,498 for the FYE 2022, compared
to $25,659 in interest expense for FYE 2021. The increases in other expense were primary attributable
to the amortization of beneficial conversion feature of convertible bonds $1,005,645 and offset with other income
$66,522. The other income primarily included $26,357 government subsidy, $31,004
product line income, and $9,152 product testing income.
Net
loss
Premised
on the factors discussed above, the Company incurred a net loss from of
$5,556,627 for FYE 2022, compared to a net loss of $1,165,025 for FYE 2021. The continuous net loss was attributable to building up of infrastructure and resource to meet the business expansion needs of the
Group’s as well as lack of economies of scale.
Liquidity
and Capital Resources
Working
Capital
Year Ended
August 31,
2022
2021
Changes
%
Current assets
$ 1,688,926
$ 3,224,772
$ (1,535,846 )
(48 )%
Current liabilities
892,004
1,639,090
(747,086 )
(46 )%
Working capital
796,922
1,585,682
(788,760 )
(50 )%
As
of August 31, 2022, our company’s current liabilities stood at $892,004, which included accounts payable and accruals of
$216,830, other payable of $31,980, deferred revenue $513,072, current portion hire purchase creditor
$10,135, amount due to shareholders $2,301, and current portion operating lease
liabilities of $117,686.
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As
of August 31, 2022, the Company recorded a positive working capital of $796,922 compared with the positive working capital of $1,585,682 as
of August 31, 2021. The decrease in working capital was primarily due to decrease in cash and the increase in operation activities.
Cash
Flows
Year Ended
August 31,
2022
2021
Changes
%
Cash flows used in operating activities
$ (1,540,167 )
$ (2,001,253 )
$ 461,086
(23 )%
Cash flows used in investing activities
(561,315 )
(94,045 )
(467,270 )
497 %
Cash flows generated from financing activities
454,722
3,288,033
(2,833,311 )
(86 )%
Net changes in cash
(1,646,760 )
1,192,735
(2,839,495 )
(238 )%
The
Company’s cash and cash equivalents stood at $152,304 as of August 31, 2022. Cash used in operating activities for the year ended
August 31, 2022, was $1,540,178. The change was primarily due to increase in net loss offset with increased
ROU and intangible assets amortization and more inventories purchased this year.
Cash
used in investing activities resulted from purchase of fixed assets amounting to $561,315 for the year ended August 31, 2022.
During
the FYE 2022, cash generated from financing activities resulted from proceeds from issuance of common stock amounting
to $185,185, payments of hire purchase amounting to $5,308, proceeds from shares to be issued amounting to $75,000, and proceeds
from capital contribution amounting to $199,845.
Seasonality
The
Company’s business is not subject to seasonality.
Off-Balance
Sheet Arrangements.
As of the date of this Annual Report, 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 are material to investors.
Critical
Accounting Policies
Revenue
recognition
Our
revenue recognition policy is in compliance with ASC 606, Revenue from Contracts with Customers whereby revenue is recognized when
a customer obtains control of promised goods and is recognized in an amount that reflects the consideration that we expect to receive
in exchange for those goods. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue
and cash flows arising from contracts with customers. The amount of revenue that is recorded reflects the consideration that we expect
to receive in exchange for those goods. We apply the following five-step model to determine this amount:
(i)
identification of the promised
goods and services in the contract;
(ii)
determination of whether
the promised goods and services are performance obligations, including whether they are distinct in the context of the contract;
(iii)
measurement of the transaction
price, including the constraint on variable consideration;
(iv)
allocation of the transaction
price to the performance obligations; and
(v)
recognition of revenue
when (or as) the Company satisfies each performance obligation.
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We
only apply the five-step model to contracts when it is probable that we will collect the consideration it is entitled to in exchange
for the goods or services it transfers to the customer. Once a contract is determined to be within the scope of ASC 606 at contract inception,
we review the contract to determine which performance obligations we must deliver and which of these performance obligations are distinct.
We recognize as revenues the amount of the transaction price that is allocated to the respective performance obligation when the performance
obligation is satisfied or as it is satisfied. Generally, our performance obligations are transferred to customers at a point in time,
typically upon delivery for local sales and upon shipment of the products for export sale.
For
all reporting periods, we have not disclosed the value of unsatisfied performance obligations for all product revenue contracts with
an original expected length of one year or less, which is an optional exemption that is permitted under the adopted rules.
Estimates
and Assumptions
In
preparing our consolidated financial statements, we use estimates and assumptions that affect the reported amounts and disclosures. Our
estimates are often based on complex judgments, probabilities, and assumptions that we believe to be reasonable, but that are inherently
uncertain and unpredictable. We are also subject to other risks and uncertainties that may cause actual results to differ from estimated
amounts. Significant estimates in 2022 and 2021 include the assumptions used to value tax liabilities, derivative financial instruments,
estimates of the allowance for deferred tax assets, accounts receivable allowance, impairment of long-lived assets and
inventory write-offs.
Going
Concern
As
of August 31, 2022, and August 31, 2021, the Company had an accumulated deficit of $7,465,373 and $2,233,496 respectively. The Company
incurred net loss of $5,556,627 and $1,165,025 for FYE 2022, and FYE 2021, respectively. The cash used
in operating activities for the year ended August 31, 2022, was $1,540,167. It was brought to the attention of the Management to assess
going concern considering all facts and circumstances about the foreseeable future of the Company as well as its assets and liabilities
on the basis that it will be able to realize and discharge them in the normal course of business.
With
the injection of New Business into the Company contemplated under the Transactions (defined in Note 1 to the consolidated financial statements), the Management believes
that the actions to be taken by the Management to further implement the business plans for the New Business including expansion in
product offerings, geographical expansion, generate revenue through expansion of revenue streams and customer base (retail,
commercial and industrial as well as private label and licensing clientele), as well as improvement of profitability by achieving
economies of scale provide the opportunity for the Company to continue as a going concern. In addition, the Company is also working
on raising additional funding to finance the operations as well as business expansion.
The
consolidated financial statements have been prepared assuming that the Company will continue as a going concern and, accordingly the financial
statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification
of liabilities that might be necessary should the Company be unable to continue as a going concern.
Material
Commitments
We
have no material commitments as of August 31, 2022.
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Recent
Accounting Pronouncements
Except
for rules and interpretive releases of the SEC under the authority of federal securities laws and a limited number of grandfathered
standards, the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification™
(“ASC”) is the sole source of authoritative U.S. GAAP literature recognized by the FASB and applicable to the Company.
Management has reviewed the aforementioned rules and releases and believes any effect will not have a material impact on the
Company’s present or future financial statements.
In
October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities
from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized
and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers. This ASU should
be applied prospectively to acquisitions occurring on or after the effective date of December 15, 2022, and early adoption is permitted.
There is no material impact on the Company’s financial statements.
In
June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments”. In November 2019, the FASB issued ASU No. 2019-10 “Financial Instruments—Credit Losses
(Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates”. In March 2020, the FASB issued ASU
No. 2020-03 “Codification Improvements to Financial Instruments”; which modifies the measurement of expected credit
losses of certain financial instruments. This ASU is effective for fiscal years and interim periods within those years beginning
after December 15, 2022. The Company is currently assessing the impact of these ASUs on its consolidated financial
statements.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public
Accountants, and the SEC did not or are not believed by management to have a material impact on the Company’s present or future
CFS.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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