KENONGWO GROUP US, INC. Business Overview
We primarily engage in researching, developing, manufacturing and selling bamboo
charcoal biomass organic fertilizers, amino acid water-soluble fertilizers,
selenium-rich foliage fertilizers and other types of fertilizers in the PRC
through our subsidiary,
We generated our revenue from the sales of our organic fertilizers. We currently have one integrated factory covering a land area of 143,590 square feet in Yichun City,Jiangxi Province , PRC to produce our organic fertilizers, which has been in operations since 2017. We plan to expand our production capacity and build an automatic and standardized production line. We believe that our brand reputation and ability to tailor our products to meet the requirements of various regions of the PRC affords us a competitive advantage. We purchase the majority of our raw materials from suppliers located in the PRC and use suppliers that are located in close proximity to our manufacturing facilities, which helps us to control our cost of revenue. Amidst the COVID-19 outbreak in 2020, our business operations were adversely impacted. In particular, the lockdown policy inChina has caused delays in the logistics industry and consequently, the supply of our raw materials were impacted. In addition, the restrictions of face-to-face interactions have slowed down the process of our marketing, client meeting and new products launching activities. The spread of COVID-19 has been effectively controlled inChina . People's daily life and businesses' operations started going to normalcy. As a result, we believe these negative impacts are temporary. However, there is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the economy ofChina and the rest of the world and, as such, the extent of the business disruption and the related financial impact cannot be reasonably estimated at this time.China is the principal market for our products, which are primarily sold to our customers through distributors in over twenty provinces inChina , includingBeijing ,Henan ,Hebei ,Jiangxi ,Hunan ,Hubei ,Fujian ,Jiangsu ,Shanghai ,Zhejiang ,Sichuan ,Chongqing ,Guangdong ,Hainan ,Xinjiang ,Guizhou ,Anhui ,Shandong ,Shanxi ,Shaanxi ,Liaoning ,Jilin ,Heilongjiang ,Yunnan andGuangxi provinces. Critical Accounting Policies
Management's discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with US GAAP. Our financial statements reflect the selection and application of accounting policies that require management to make significant estimates and judgments. We believe the following critical accounting policies used in the preparation of our financial statements require significant judgments and estimates. For additional information relating to these and other accounting policies, see Note 2 to our financial statements included elsewhere in this report. Basis of Presentation
Our financial statements are prepared in accordance with generally accepted
accounting principles in
Going Concern
The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern; however, the Company has incurred a net loss of$657,863 for the nine months endedSeptember 30, 2021 . As ofSeptember 30, 2021 , the Company had an accumulated deficit of$1,693,412 , working capital deficit of$2,149,691 ; its net cash used in operating activities for the nine months endedSeptember 30, 2021 was$764,741 .
The Company plans to continue its expansion and investments, which will require continued improvements in revenue, net income, and cash flows.
Revenue Recognition The Company adopted ASC 606 "Revenue Recognition", and recognizes revenue when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The Company derives its revenues from the sale of fertilizer products. The
Company applies the following five steps in order to determine the appropriate
amount of revenue to be recognized as it fulfils its obligations under each of
its agreements:
? identify the contract with a customer;
? identify the performance obligations in the contract;
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? determine the transaction price;
? allocate the transaction price to performance obligations in the contract; and
? recognize revenue as the performance obligation is satisfied. Results of Operations
Comparison of the Three months ended
For the Three months ended
September 30, Variance
2021 2020 Amount %
$ $ $
Revenues 69,565 34,632 34,933 100.9 %
Cost of revenues 54,022 44,238 9,784 22.1 %
Gross profit 15,543 (9,606 ) 25,149 261.8 %
Operating expenses:
Selling expenses 86,592 82,736 3,856 4.7 %General and administrative expenses 139,884 313,779 (173,895 ) (55.4 )% Total operating expenses 226,476 396,515 (170,039 ) (42.9 )% Loss from operations (210,933 ) (406,121 ) 195,188 (48.1 )% Other income (expense): Interest expense (8,292 ) (1,104 ) (7,188 ) 651.1 % Other income (expense), net (2,458 ) (27,353 ) 24,895 (91.0 )% Total other (expense) income (10,750 ) (28,457 ) 17,707 (62.2 )% Loss before income taxes (221,683 ) (434,578
) 212,895 (49.0 )% Income taxes - 2,299 (2,299 ) (100.0 )% Net loss (221,683 ) (432,279 ) 210,596 (48.7 )% Revenue For the three months endedSeptember 30, 2021 , our total revenue was$69,565 , representing an increase of 100.9% compared to$34,632 for the same period in 2020. This increase was mainly due to an increase in demand of our products.
The Company's disaggregate revenue streams are summarized as follows:
For the Three months ended
September 30,
2021 2020
Revenues - Solid organic fertilizers
12,303
Total revenues $ 69,565 $ 34,632
Cost of revenues
Cost of revenues for the fertilizers was
The Company's disaggregate cost of revenues streams are summarized as follows:
For the Three months ended
September 30,
2020 2020
Cost of revenues - Solid organic fertilizers
1,918 Total cost of revenues$ 54,022 $ 44,238 17 Gross Profit
Our gross profit was$15,543 and negative$9,606 with gross margin of 22.3% and negative 27.7%, for the three months endedSeptember 30, 2021 and 2020, respectively. The increase in gross margin because the revenue increased 100.9% while the cost of revenue increased 22.1% for the three months endedSeptember 30, 2021 compared to the same period in 2020. Selling Expenses
Our selling expenses were$86,592 for the three months endedSeptember 30, 2021 , representing an increase of$3,856 or 4.7% compared to$82,736 for the three months endedSeptember 30, 2020 . The increase in our selling expenses was mainly due to the fact that we incurred more costs in promotion and transportation cost compared with 2020. The increase in our selling expenses is also in line with the increase in revenue.
General and Administrative Expenses
General and administrative expenses decreased by$173,895 , or 55.4% from$313,779 for the three months endedSeptember 30, 2020 to$139,884 for the same period in 2021 due to the fact that we incurred more professional fee in third quarter of 2020 compared with the third quarter of 2021.
Research and Development ("R&D") Expenses
Research and development expenses include salaries and other compensation-related expenses paid to the Company's research and product development personnel while they are working on R&D projects, as well as raw materials used for the R&D projects. R&D expenses incurred by the Company are included in the general and administrative expenses and totaled$42,538 and$11,728 for the three months ended September30, 2021 and 2020, respectively. Net Loss
Our net loss was$221,683 and$432,279 for the three months endedSeptember 30, 2021 and 2020, respectively, representing a decrease of$210,596 . The Company is at its developing stage and we incurred more promotion fee by introducing our products to more customers acrossChina during the third quarter of 2020. The Company also incurred more material cost by developing more new product lines during the third quarter of 2020. The Company expects that more time is needed to achieve a better balance between our operating expenses and revenues.
Comparison of the Nine months ended
For the Nine months ended
September 30, Variance
2021 2020 Amount %
$ $ $
Revenues 349,259 207,965 141,294 67.9 %
Cost of revenues 517,826 234,249 283,577 121.1 %
Gross profit (168,567 ) (26,284 ) (142,283 ) 541.3 %
Operating expenses:
Selling expenses 215,984 161,099 54,885 34.1 %General and administrative expenses 263,670 515,402
(251,732 ) (48.8 )%
Total operating expenses 479,654 676,501 (196,847 ) (29.1 )%
Loss from operations (648,221 ) (702,785 ) 54,564 (7.8 )%
Other income (expense):
Interest expense (21,406 ) (2,668 ) (18,738 ) 702.3 %
Other income, net 11,764 24,960 (13,196 ) (52.9 )%
Total other (expense) income (9,642 ) 22,292 (31,934 ) (143.3 )%
Loss before income taxes (657,863 ) (680,493 ) 22,630 (3.3 )%
Income taxes - 2,299 (2,299 ) (100.0 )%
Net loss (657,863 ) (678,194 ) 20,331 (3.0 )%
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Revenue
For the nine months ended September 30, 2021 , our total revenue was $349,259 ,
representing an increase of 67.9% compared to $207,965 for the same period in
2020. This increase was mainly due to an increase in demand of our products.
The Company's disaggregate revenue streams are summarized as follows:
For the Nine months ended
September 30,
2021 2020
Revenues - Solid organic fertilizers
28,402
Total revenues $ 349,259 $ 207,965
Cost of revenues
Cost of revenues for the fertilizers was $517,826 and $234,2491 for the nine
months ended September 30, 2021 and 2020, respectively, representing an increase
of 121.1%. The increase in cost of revenues was in line with an increase in
revenue.
The Company's disaggregate cost of revenues streams are summarized as follows:
For the Nine months ended
September 30,
2021 2020
Cost of revenues - Solid organic fertilizers $ 415,749 $ 212,125
Cost of revenues - Liquid organic fertilizers 102,077 22,124
Total cost of revenues $ 517,826 $ 234,249
Gross Profit
Our gross profit was negative $168,567 and negative $26,284 with gross margin of
negative 48.3% and negative 12.6%, for the nine months ended September 30, 2021
and 2020, respectively. The negative gross margin increased because the revenue
increased only 67.9% while the cost of revenue increased 121.1% for the nine
months ended September 30, 2021 compared to the same period in 2020.
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Selling Expenses
Our selling expenses were$215,984 for the nine months endedSeptember 30, 2021 , representing an increase of$54,885 or 34.1% compared to$161,099 for the nine months endedSeptember 30, 2020 . The increase in our selling expenses was mainly due to the fact that we incurred more costs in promotion and transportation cost compared with 2020. The increase in our selling expenses is also in line with the increase in revenue.
General and Administrative Expenses
General and administrative expenses decreased by$251,732 , or 48.8% from$515,402 for the nine months endedSeptember 30, 2020 to$263,670 for the same period in 2021 due to the fact that we incurred more professional fee in first three quarters of 2020 compared with the first three quarters of 2021.
Research and Development ("R&D") Expenses
Research and development expenses include salaries and other compensation-related expenses paid to the Company's research and product development personnel while they are working on R&D projects, as well as raw materials used for the R&D projects. R&D expenses incurred by the Company are included in the general and administrative expenses and totaled$52,856 and$52,838 for the nine months endedSeptember 30, 2021 and 2020, respectively. Net Loss
Our net loss was$657,863 and$678,194 for the nine months endedSeptember 30, 2021 and 2020, respectively, representing a decrease of$20,331 . The Company is at its developing stage and we incurred more promotion fee and hired more employees by introducing our products to more customers acrossChina during the first third quarter of 2020. The Company expects that more time is needed to achieve a better balance between our operating expenses and revenues.
Liquidity and Capital Resources
Our working capital deficit was
We have respectively financed our operations over the nine months ended
The components of cash flows are discussed below:
For the Nine months ended
September 30,
2021 2020
Net cash used in operating activities
(463,008 ) (336,248 )
Net cash provided by financing activities 1,232,933 1,033,908
Exchange rate effect on cash (6,337 ) 2,185
Net cash outflow $ (1,153 ) $ (118,672 )
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Cash used in Operating Activities
For the nine months endedSeptember 30, 2021 , net cash used in operating activities was$764,741 , which consisted primarily of net loss of$657,863 , which was adjusted by depreciation and amortization of$40,899 . The Company had an increase of$370,068 in account payables and accrued payables in which it was due to the Company purchased more raw materials and pay off the bills in longer terms, an increase of$10,798 in accounts receivable which was due to longer payment terms were offered to loyal customers , an increase of$190,971 in prepayments to the suppliers for procurement of raw materials and deposit for the building materials and equipment, and an increase of$306,913 in inventories and an increase in other receivable of$12,693 in which it was due to an increase in the borrowing from our employees. For the nine months endedSeptember 30, 2020 , net cash used in operating activities was$818,517 , which consisted primarily of net loss of$678,194 , which was adjusted by depreciation and amortization of$29,435 , bad debt expenses of$185,323 , loss from disposal of investment of$28,151 and conversion of convertible bond of$14,006 . The Company had a decrease of$13,648 in account payables and accrued payables which was due to the Company purchased raw materials and pay off the bills in shorter terms, an increase of$17,573 in accounts receivable which was due to longer payment terms were offered to loyal customers, an increase of$308,804 in prepayments to the suppliers for procurement of raw materials and deposit for the building materials and equipment, which were offset by a decrease of$8,917 in inventories and an increase in other receivable of$62,582 which was due to an increase in the borrowing from our employees, an increase of$24,464 in advances from customers which was due to the Company received more purchasing orders from more customers.
Cash used in Investing Activities
Net cash used in investing activities was$463,008 for the nine months endedSeptember 30, 2021 . The activities consisted of our investments of$461,942 in purchasing plant and equipment and an adjustment of$1,066 of intangible assets due to currency exchange effect. Net cash used in investing activities was$336,248 for the nine months endedSeptember 30, 2020 . The activities consisted of our investments of$336,248 in purchasing plant and equipment and construction in progress.
Cash Provided by Financing Activities
Net cash provided by financing activities was
Net cash provided by financing activities was$1,033,908 for the nine months endedSeptember 30, 2020 . During this period, cash provided by financing activities mainly included proceeds from related parties of$833,562 , proceeds from issuance of common stocks of$186,048 and long-term loan of$14,298 for operating expenses. 21
Off-balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to its shares and classified as shareholder's equity or that are not reflected in its consolidated financial statements. 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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