LEPOTA The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this report. Our consolidated financial statements have been prepared in accordance withU.S. GAAP. In addition, our consolidated financial statements and the financial data included in this Quarterly Report reflect our reorganization and have been prepared as if our current corporate structure had been in place throughout the relevant periods. The following discussion and analysis contain forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. Overview The Company was originally incorporated inNevada under the name "Lepota Inc. " onDecember 9, 2013 . It maintains its principal executive offices at Room 1703B,Zhongzhou Building , No.3088 Jintian Road ,Futian District ,Shenzhen City,Guangdong Province ,People's Republic of China 518000. The Company was formed for the purpose of importing and distributing cosmetics into theRussian Federation . The Company filed a registration statement on Form S-1 with theSEC onSeptember 18, 2014 , which was declared effective onMay 4, 2016 . However, because the Company did not identify a viable business model or engage in any business prior to the share exchange discussed below, it was a shell company until August
12, 2020. OnFebruary 18, 2020 , as a result of a private transaction, 5,000,000 shares of the Company's Common Stock were transferred fromRene Lawrence , its controlling shareholder, to certain purchasers (the "Purchasers"), withZhao Lixin , the Company's current CEO, becoming a 53.8% holder of the voting rights of the Company, and the Purchasers becoming the controlling shareholders. As a result of the change of control, Iurii Iurtaev resigned as the Company's president, chief executive officer, chief financial officer and director andRene Lawrence resigned as the Company's secretary.Zhao Lixin was then named President, Chief Executive Officer, Chief Financial Officer, Treasurer, Secretary and Chairman of the Board of Directors of the Company. OnAugust 12, 2020 (the "Closing Date"), the Company closed on a share exchange (the "Share Exchange") withMu Yan Technology Holding Co., Limited , a limited liability company incorporated inSamoa ("Mu Yan Samoa"), and the holders of 100% of the outstanding shares of Mu Yan Samoa's common stock (the "Mu Yan Shareholders"). As a result, Mu Yan Samoa is now a wholly owned subsidiary of the Company. Under the Share Exchange Agreement, the Mu Yan Shareholders exchanged 100% of the outstanding shares of Mu Yan Samoa's common stock for 300,000,000 shares of the Company's Common Stock. As a result of the Share Exchange, effectiveSeptember 22, 2020 , the Company's name was changed toMu Yan Technology Group Co., Limited . For accounting purposes, the Share Exchange was treated as a recapitalization of the Company with Mu Yan Samoa as the acquirer. When we refer in this Quarterly Report to business and financial information for periods prior to the consummation of the Share Exchange, we are referring to the business and financial information of Mu Yan Samoa unless the context suggests otherwise. 20 As a result of the closing of the Share Exchange, the Mu Yan Shareholders own approximately 98% of the total outstanding common shares of the Company and the former shareholders of the Company own approximately 2%. The shares issued to the Mu Yan Shareholders in connection with the Share Exchange were not registered under the Securities Act in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act, which exempts transactions by an issuer not involving any public offering. These securities may not be offered or sold absent registration or an applicable exemption from the registration requirement. As a result of the recapitalization described above, management of the Company believes that the Company is no longer a shell company. The Company's operations now consist of the operations of Mu Yan Samoa and its subsidiaries. Throughout the remainder of this Quarterly Report, when we use phrases such as "we," "our," "Company" and "us," we are referring to the Company and all of its subsidiaries, as a combined entity.
China Political and Economic Risks
The Company's operations are conducted in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC and by the general state of the PRC economy. Because all of our operations are conducted in the PRC through our wholly-owned subsidiaries, the Chinese government may exercise significant oversight and discretion over the conduct of our business and may intervene in or influence our operations at any time, which could result in a material change in our operations and/or the value of our shares. Recently, the PRC government initiated a series of regulatory actions and made a number of public statements on the regulation of business operations in the PRC with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over PRC-based companies listed overseas using a variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding efforts in anti-monopoly enforcement. We do not believe that we are directly subject to these regulatory actions or statements, as we do not have a variable interest entity structure and our business does not involve the collection of user data, implicate cybersecurity, or involve any other type of restricted industry. Because these statements and regulatory actions are new, however, it is highly uncertain how soon legislative or administrative regulation making bodies in the PRC will respond to them, or what existing or new laws or regulations will be modified or promulgated, if any, or the potential impact such modified or new laws and regulations will have on our daily business operations or our ability to accept foreign investments and list on anU.S. exchange. 21
The structure of cash flows within our organization, and as summary of the applicable regulations, is as follows:
1. Our equity structure is a direct holding structure, that is, the overseas entity trading in theU.S. ,Mu Yan Technology Group Co., Limited ("Mu Yan Technology"), through our 100% owned Samoan subsidiary controlsMu Yan (Hong Kong )Technology Co., Limited ("Mu Yan Hong Kong"), which owns 100% ofMu Yan (Shenzhen) Media Technology Co. , ("Mu Yan Shenzhen") (the "WFOE"), which owns 100% ofMu Yan (Shenzen Digital Technology Co., Limited ("Mu Yan Digital ). 2. Within our direct holding structure, the cross-border transfer of funds within our corporate group is legal and compliant with the laws and regulations of the PRC. After foreign investors' funds enterMu Yan Technology , the funds can be directly transferred to Mu Yan Hong Kong, and then to Mu Yan Shenzhen in the PRC and then transferred to subordinate operating entities through the WFOE. If the Company intends to distribute dividends, the Company will transfer the dividends to Mu Yan Hong Kong in accordance with the laws and regulations of the PRC, and then Mu Yan Hong Kong will transfer the dividends toMu Yan Technology , and the dividends will be distributed fromMu Yan Technology to all shareholders respectively in proportion to the shares they hold, regardless of whether the shareholders are U.S. investors or investors in other countries or regions. 3. In the reporting periods presented in this Form 10-Q, no cash and other asset transfers have occurred among the Company and its subsidiaries; and no dividends or distributions of a subsidiary has been made to the Company. For the foreseeable future, the Company intends to use any earnings for research and development, to develop new products and to expand its distribution and production capacity. As a result, we do not expect to pay any cash dividends. 4. Our PRC subsidiaries' ability to distribute dividends is based upon their distributable earnings. Current PRC regulations permit our PRC subsidiaries to pay dividends to their respective shareholders only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each of our PRC subsidiaries is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of each of their registered capitals. These reserves are not distributable as cash dividends. To address persistent capital outflows and the RMB's depreciation against theU.S. dollar in the fourth quarter of 2016, thePeople's Bank of China and theState Administration of Foreign Exchange , or SAFE, have implemented a series of capital control measures in the subsequent months, including stricter vetting procedures for PRC-based companies to remit foreign currency for overseas acquisitions, dividend payments and shareholder loan repayments. The PRC government may continue to strengthen its capital controls and our PRC subsidiaries' dividends and other distributions may be subject to tightened scrutiny in the future. The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from our profits, if any. Furthermore, if our subsidiaries in the PRC incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments. In addition, the Enterprise Income Tax Law and its implementation rules provide that a withholding tax at a rate of 10% will be applicable to dividends payable by Chinese companies to non-PRC-resident enterprises unless reduced under treaties or arrangements between the PRC central government and the governments of other countries or regions where the non-PRC resident enterprises are tax resident. Pursuant to the tax agreement between Mainland China and theHong Kong Special Administrative Region , the withholding tax rate in respect to the payment of dividends by a PRC enterprise to aHong Kong enterprise may be reduced to 5% from a standard rate of 10%. However, if the relevant tax authorities determine that our transactions or arrangements are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future. Accordingly, there is no assurance that the reduced 5% withholding rate will apply to dividends received by ourHong Kong subsidiary from our PRC subsidiaries. This withholding tax will reduce the amount of dividends we may receive from our PRC subsidiaries. Results of Operations for the three months endedOctober 31, 2021 and 2020 The following summarizes our results of operations for the three months endedOctober 31, 2021 and 2020. The table and the discussion below should be read in conjunction with our financial statements and the notes thereto appearing elsewhere in this Quarterly Report. Revenue Revenue generated from selling our mobile advertisement backpack contributed$168,235 and$4,551,255 to our total revenue for the three months endedOctober 31, 2021 and 2020, respectively. The decrease in revenue for the three months endedOctober 31, 2021 was due to a significant decrease in the number of mobile advertisement backpack sold during the three months endedOctober 31, 2021 as a result of the suspension of sales while the Company worked on upgrading and updating the hardware and the software utilized in the backpacks as well as a shortage raw materials. 22 Cost of Revenue Increase Three months ended October 31, (decrease) in 2021 2020 2021 compared to 2020 (In U.S. dollars, except for percentages) Net revenue for mobile advertisement backpack$ 168,235 100.0 %$ 4,551,255 100.0 %$ (4,383,020 ) (96.3 )% Inventory$ 25,658 15.3 %$ 1,955,934 43.0 %$ (1,930,276 ) (98.7 )% Total cost of revenue for mobile advertisement backpack$ 25,658 15.3 %$ 1,955,934 43.0 %$ (1,930,276 ) (98.7 )% Gross profit for mobile advertisement backpack$ 142,577 84.7 %$ 2,595,321 57.0 %$ (2,452,744 ) (94.5 )% Cost of revenue for mobile advertisement backpack for the three months endedOctober 31, 2021 and 2020 was$25,658 and$1,955,934 respectively. The significant decrease in cost of revenue was a result of our having sold 207 mobile advertisement backpacks during the three months endedOctober 31, 2021 compared to 11,816 backpacks having been sold during the three months endedOctober 31, 2020 .
For our mobile advertisement backpack business, we outsourced the assembly processes of our products to subcontractors, and we maintained stable relationships with them. We outsource our delivery services to two courier companies. Delivery fees are paid by the ultimate customers upon delivery of the products. We have not experienced difficulty in obtaining inventory for our business, and we believe we maintain good relationships with our suppliers.
Inventory costs for our mobile advertisement backpack business were 15.3% of our total mobile advertisement backpack business revenue in the three months endedOctober 31, 2021 , compared with 43% in the three months endedOctober 31, 2020 . The decreased percentage was mainly due to a 50% increment in the selling price of our mobile advertisement backpacks due to a shortage of raw materials fromSeptember 2021 toOctober 2021 . 23 Net Profit Three months ended 2021 compared to 2020 October 31, October 31, Amount of % of 2021 2020 Increase Increase Gross Profit for mobile advertisement backpack$ 142,577 $ 2,595,321 $ (2,452,744 ) (95 )% Additional Tax$ (3,426 ) $ (39,527 ) $ 36,101 (91 )% Gross Profit$ 139,151 $ 2,555,794 $ (2,416,643 ) (95 )% Operating Expenses:
Selling and Marketing Expenses$ (525 ) $ (141,005 ) $
140,480 (100 )% General and Administrative Expenses$ (490,421 ) $ (326,233 ) $ (164,188 ) 50 % Research and Development Expenses$ (269,349 ) $ (86,782 ) $ (182,567 ) 210 % Operating Expenses$ (760,295 ) $ (554,020 ) $ (206,275 ) 37 % Other Income, net$ 357,920 $ 46$ 357,874 777,987 % Income from Operations$ (263,224 ) $ 2,001,820 $ (2,265,044 ) (113 )% Revenue Related Tax$ (596 ) $ (506,818 ) $ 506,222 (100 )% Net (Loss) Profit$ (263,820 ) $ 1,495,002 $ (1,758,822 ) (118 )% Gross profit for our mobile advertisement backpack for the three months endedOctober 31, 2021 and the three months endedOctober 31, 2020 was$139,151 and$2,555,794 , respectively. Gross profit margin for our mobile advertisement backpack for the three months endedOctober 31, 2021 and the three months endedOctober 31, 2020 were 84.7% and 57%, respectively. The decrease in gross profit was primarily due to the reduction in revenue that resulted from reduced sales while the Company worked on upgrading and updating the hardware and the software utilized in the mobile advertisement backpack. The increase in gross profit margin was principally due to the selling price of the backpacks was increased by 50% fromSeptember 2021 toOctober 2021 , and a further reduction in revenue that resulted from reduced sales while the Company worked on upgrading and updating the hardware and the software utilized in the mobile advertisement backpack. Management believes that, now that the upgrades and updates have been completed, the Company's dependence upon third party suppliers will decrease and unit savings in production will be realized.
Net (loss) profit for the three months ended
Selling and Marketing Expenses
Our selling and marketing expenses for the three months endedOctober 31, 2021 and 2020 were$525 and$141,005 , respectively. Selling and marketing expenses during both of those periods consisted primarily of marketing expenses. The decrease in selling and marketing expenses from the three months endedOctober 31, 2021 to the three months endedOctober 31, 2020 was primarily attributable to a decrease in selling expenses related to our mobile advertisement backpack due to a reduction in sales of that product. During the three months endedOctober 31, 2021 , we sold 207 backpacks, whereas during the three months endedOctober 31, 2020 , we sold 11,816. 24
General and Administrative Expenses
Our general and administrative expenses for the three months endedOctober 31, 2021 and 2020 were$490,421 and$326,233 , respectively. General and administrative expenses consisted primarily of administrative payroll, office expense, depreciation charges and other office expenses that are not directly attributable to our revenues. The general and administrative expenses increase during the three months endedOctober 31, 2021 was primarily attributable to the increment of administrative payroll for professional managers and depreciation charges in Vehicle and the Vehicle maintenance fee, such as vehicle insurance and fuel cost.
Research and Development Expenses
Our research and development expenses for the three months endedOctober 31, 2021 and 2020 were$269,349 and$86,782 , respectively. Research and development expenses consist primarily of researchers' payroll and IT services expenses. The research and development expenses increase during the three months endedOctober 31, 2021 was primarily attributable to the upgrading and updating of the hardware and the software utilized in the Company's mobile advertisement backpack. Other Income Other income in the three months endedOctober 31, 2021 was$357,920 compared to other income of$46 in the three months endedOctober 31, 2020 . Other income in the three months endedOctober 31, 2021 was attributable to the sale of IT servers, acquired during the year endedJuly 31, 2021 . OnMay 10, 2021 , the Company entered into a contract with Mr.Zhao Lixin , the Company's CEO, to sell these IT servers to him for$2,554,100 . The IT servers were delivered toMr. Zhao onAug 10, 2021 . Income Taxes
Income tax for the three months ended
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