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, advances 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 development, (ii) expansion of product offerings; (iii) geographical expansion; and (iv) 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 year-to-year 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”), 2023, and 2022, which are included herein.
Year Ended August 31,
2023
2022
Changes
%
Revenue
$ 388,038
$ 1,190,616
$ (802,578 )
(67 )%
Cost of revenues
424,189
952,228
(528,039 )
(55 )%
Gross (loss)/profit
(36,151 )
238,388
(274,539 )
(115 )%
Operating expenses
6,097,019
4,856,039
1,240,980
26 %
Loss from operations
(6,133,170 )
(4,617,651 )
(1,515,519 )
(33 )%
Other expense
(184,203 )
(938,976 )
754,773
80 %
Net Loss
(6,317,373 )
(5,556,627 )
(760,746 )
(14 )%
Revenue
Revenue
for FYE 2023 was $388,038 compared to revenue in FYE 2022 of $1,190,616, a decrease of $802,578 or approximately 67%. The drop in revenue
is mainly due to the decrease in sales in air purifier products as a result of rollback of preventative measures taken by businesses
and public from spreading infection as the World and society progresses towards living with Covid-19.
Being first mover in launching EvoAir TM , first-of-its-kind eco-friendly
air-conditioner with granted patent or utility model/ patent or utility model pending HECS system proprietary system, the Group faced
both opportunities and challenges. In the course of applying for some of the certifications, safety and performance testing, the relevant
authorities/ organizations faced the challenges in assigning our products in the appropriate category under conventional air-conditioner
regime. There are instances whereby some of these authorities/ organizations do not possess the relevant equipment to conduct testings.
It took a lot of education, discussions, deliberations and working with the authorities/ organizations to work out solutions to resolve
compliance and testing matters. On the positive note, one of the authorities advised us to apply under a new category, ‘Hybrid Air
Conditioner. The duration of the application processes were longer than that of typical certifications and testing for conventional air-conditioners.
Being
a first mover, notwithstanding many of our corporate clients who were impressed and showed keen interest in our products,
EvoAir TM , many of them took a few months to conduct study on their own accord on performance and the energy savings by
our products. The Company is building up its traction for the evoair TM hybrid air-conditioners for both residentials and
commercial/ industrial units through distribution channels, projects, building and businesses as well as private labelling and
licensing model. During the financial year, we have entered into agreements with distributors, partners, customers to build up sales
pipeline.
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Cost
of revenue
Cost
of revenues was $424,189 or 109% of revenues in the FYE 2023, as compared to $952,228 or 80% of revenues in the FYE 2022. The decline
in cost of revenue is in line with the drop in sales. Cost of revenues includes production costs and purchases
of goods.
Gross
(loss)/ profit
Gross
loss was $36,151 for FYE 2023 or 9% of revenues compared gross profit $238,388 for FYE 2022 or 20% of revenues. The decline in gross
profit margin was attributable to the drop in sales of air purifier products, of which the product range contributed higher gross profit
margin. Besides, the decrease of gross profit is mainly due to the Company’s evoair TM products 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 the improvement of revenue streams from distributor and dealership model, projects
as well as private labeling and licensing model.
Operating
expenses
Operating
expenses totaled $6,097,019 for FYE 2023, compared to $4,856,039 in operating expenses for FYE 2022, or an increase of $1,240,980 or
26%. The operating expenses include salary and related expenses, commissions, rental, patents and trademarks application/renewal and
related fee and professional and compliance fees. The increase in operating expenses were
mainly due to full year amortization of intangible assets in FYE2023 as compared to 8-month amortization of intangibles in
FYE 2022 as well as payment of commission for capital raising.
Other expense
Other
expense decreased significantly mainly due to a one-time amortization of beneficial conversion feature of convertible bonds
$1,005,645 in FYE 2022. Other expense in FYE2023 primarily included $205,949 realized foreign exchange loss net with $13,276 other
income received from Inland Revenue Authority of Singapore for Job Growth Incentive Payout.
Net
loss
Premised
on the factors discussed above, the Company incurred a net loss of $6,317,373 for FYE 2023, compared to a net loss of $5,556,627 for
FYE 2022. The continuous net loss is attributable to the Group’s focused effort in building
up the traction and sales pipeline, applying necessary certifications, testings, patents and trademark and creating resources 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,
2023
2022
Changes
%
Current assets
$ 2,071,164
$ 1,688,926
$ 382,238
23 %
Current liabilities
964,642
892,004
72,638
8 %
Working capital
1,106,522
796,922
309,600
39 %
As
of August 31, 2023, our company’s current liabilities stood at $964,642, which included accounts payable and accruals of $170,888,
other payables of $27,487, deferred revenue $440,069, current portion hire purchase creditor $9,224, amount due to shareholders $232,095,
and current portion operating lease liabilities of $84,879. The increased in current liabilities was mainly attributable to amount due to shareholders.
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As
of August 31, 2023, the Company recorded a positive working capital of $1,106,522 compared with the positive working capital of $796,922
as of August 31, 2022. The increase in working capital was mainly attributable to the increase in cash from issuance of common stock
pursuant to capital raising activities.
Cash
Flows
Year Ended
August 31,
2023
2022
Changes
%
Cash flows used in operating activities
$ (1,674,395 )
$ (1,540,167 )
$ (134,167 )
(9 )%
Cash flows used in investing activities
(14,189 )
(561,315 )
547,126
97 %
Cash flows generated from financing activities
2,392,710
454,722
1,937,988
426 %
Net changes in cash
704,126
(1,646,760 )
2,350,886
143 %
The
Company’s cash and cash equivalents stood at $779,049 as of August 31, 2023. Cash used in operating activities for FYE 2023,
was $1,674,395. The change was primarily due to an increase in net loss offset with an increase in amortization of intangible assets.
Cash
used in investing activities arose from purchase of property, plant and equipment amounting to $14,189 for FYE 2023.
During
the FYE 2023, cash generated from financing activities resulted from proceeds from issuance of common stock amounting to $1,068,728,
payments of hire purchase amounting to $8,587, proceeds from shares to be issued amounting to $1,066,052, and proceeds from capital contribution
amounting to $266,517.
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, revenue 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 FYE 2023 and 2022 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
The
Company’s financial statements as of August 31, 2023, is prepared using U.S. GAAP
applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of
business. The Company has not yet established a sustainable ongoing source of revenue sufficient to cover its operating costs and
allow it to continue as a going concern.
As
of August 31, 2023, and August 31, 2022, the
Company had an accumulated deficit of $13,523,266 and $7,465,373 respectively. The Company
incurred net loss of $6,057,893 and $5,231,877 for the years ended August 31, 2023, and August 31, 2022, respectively. The cash used
in operating activities were $1, 674 , 395
and $1,540,167 for FYE 2023 and 2022, respectively. 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 a HVAC business into the Company (“HVAC Business”) pursuant
to the Transactions (defined in Part I, Item I of this Form 10K ), the Management believes that the actions to be taken by the Management to further
implement the business plans for the HVAC Business including expansion in product offerings, geographical expansion, generate
revenue through expansion of revenue streams and customer base (retail, commercial, industrial, projects as well as private label
and licensing clientele), 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
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, 2023.
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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
June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 adds the CECL
impairment model to U.S. GAAP that is based on expected losses rather than incurred losses. Modified retrospective adoption is required
with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption. ASU 2016-13 is effective
for fiscal years beginning after December 15, 2022, including interim periods within the year of adoption. Early adoption is permitted
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company does not expect
the application of the CECL impairment model to have a significant impact on its allowance for uncollectible amounts for accounts receivable.
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.
The
Company has implemented all new applicable accounting pronouncements that are in effect. These pronouncements did not have any material
impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting
pronouncements that have been issued that might have a material impact on its financial position or results of operations.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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