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 was 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 , includingJiangxi ,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. The Company has reported a net income of$460,512 for the nine months endedSeptember 30, 2022 . As ofSeptember 30, 2022 , the Company had an accumulated deficit of$1,976,445 , working capital deficit of$372,583 and net cash used in operating activities for the nine months endedSeptember 30, 2022 was$514,182 .
The Company plans to continue its expansion and investments, which will require continued improvements in revenue, net income, and cash flows.
17
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; ? 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
2022 2021 Amount %
$ $ $
Revenues 1,662,135 69,565 1,592,570 2289.33 %
Cost of revenues 1,233,295 54,022 1,179,273 2182.95 %
Gross profit 428,840 15,543 413,297 2659.06 %
Operating expenses:
Selling expenses 46,503 86,592 (40,089 ) (46.30 )%General and administrative expenses 151,561 139,884 11,677 8.35 % Total operating expenses 198,064 226,476 (28,412 ) (12.55 )% Income (Loss) from operations 230,776 (210,933 ) 441,709 (209.41 )% Other income (expense): Interest expense (7,815 ) (8,292 ) 477 (5.75 )% Other income (expense), net (9,940 ) (2,458 ) (7,482 ) 304.39 % Total other (expense) income (17,755 ) (10,750 ) (7,005 ) 65.16 % Income (Loss) before income taxes 213,021 (221,683
) 434,704 (196.09 )% Income taxes - - - - Net income (loss) 213,021 (221,683 ) 434,704 (196.09 )% Revenue
For the three months endedSeptember 30, 2022 , our total revenue was$1.66 million , representing an increase of 2289.33% compared to$0.07 million for the same period in 2021. This increase was mainly due to an increase in demand of our products after the Company developed and obtained more customers. 18
The Company's disaggregate revenue streams are summarized as follows:
For the Three months ended
September 30,
2022 2021
Revenues - Solid organic fertilizers
- 34,161
Total revenues $ 1,662,135 $ 69,565
Cost of revenues
Cost of revenues for the fertilizers was $1.23 million and $0.05 million for the
three months ended September 30, 2022 and 2021, respectively, representing an
increase of 2182.95%. 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 Three months ended
September 30,
2022 2021
Cost of revenues - Bamboo charcoal biomass organic fertilizers $ 1,233,295 $ 25,818
Cost of revenues - Others - 28,204
Total cost of revenues $ 1,233,295 $ 54,022
Gross Profit
Our gross profit was $0.43 million and $0.02 million with gross margin of 25.80%
and 22.34%, for the three months ended September 30, 2022 and 2021,
respectively. The gross margin increased because the revenue increased 2289.33%
while the cost of revenue increased 2182.95% for the three months ended
September 30, 2022 compared to the same period in 2021.
Selling Expenses
Our selling expenses were$46,503 for the three months endedSeptember 30, 2022 , representing a decrease of$40,089 or 46.30% compared to$86,592 for the three months endedSeptember 30, 2021 . It was mainly the Company controls costs, reduces travel expenses, advertising expenses, etc.
General and Administrative Expenses
General and administrative expenses increased by$11,677 , or 8.35% from$139,884 for the three months endedSeptember 30, 2021 to$151,561 for the same period in 2022 due to the fact that salary increased. 19
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$75,387 and$42,538 for the three months endedSeptember 30, 2022 and 2021, respectively. Net Income/(Loss) Our net income (loss) was$213,021 and ($221,683 ) for the three months endedSeptember 30, 2022 and 2021, respectively, representing an increase of$434,704 . The Company is at its developing stage and we have incurred more promotion fee by introducing our products to more customers acrossChina during the three months endedSeptember 31, 2021 resulting in significant increase in revenue for the three months endedSeptember 30, 2022 . The Company also incurred more material cost by developing new product lines. 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
2022 2021 Amount %
$ $ $
Revenues 5,210,549 349,259 4,861,290 1391.89 %
Cost of revenues 3,965,173 517,826 3,447,347 665.73 %
Gross profit (loss) 1,245,376 (168,567 ) 1,413,943 (838.80 )%
Operating expenses:
Selling expenses 165,306 215,984 (50,678 ) (23.46 )%
General and administrative expenses 495,378 263,670 231,708 87.88 %
Total operating expenses 660,684 479,654 181,030 37.74 %
Loss from operations 584,692 (648,221 ) 1,232,913 (190.20 )%
Other income (expense):
Interest expense (24,177 ) (21,406 ) (2,771 ) 12.94 %
Other (expense) income, net (100,003 ) 11,764 (111,767 ) (950.08 )%
Total other income (124,180 ) (9,642 ) (114,538 ) 1187.91 %
Loss before income taxes 460,512 (657,863 ) 1,118,375 (170.00 )%
Income taxes - - - -
Net income (loss) 460,512 (657,863 )
1,118,375 (170.00 )%
Revenue
For the nine months ended September 30, 2022 , our total revenue was $5.21
million , representing an increase of 1391.89% compared to $0.35 million for the
same period in 2021. This increase was mainly due to an increase in demand of
our products after the Company developed and obtained more customers.
The Company's disaggregate revenue streams are summarized as follows:
For the Nine months ended
September 30,
2022 2021
Revenues - Solid organic fertilizers
- 71,008
Total revenues $ 5,210,549 $ 349,259
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Cost of revenues
Cost of revenues for the fertilizers was $3.97 million and $0.52 million for the
nine months ended September 30, 2022 and 2021, respectively, representing an
increase of 665.73%. 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,
2022 2021
Cost of revenues - Solid organic fertilizers
- 102,077
Total cost of revenues $ 3,965,173 $ 517,826
Gross Profit (Loss)
Our gross profit (loss) was$1.25 million and negative($0.17) million with gross margin of 23.90% and (48.26%), for the nine months endedSeptember 30, 2022 and 2021, respectively. The negative gross margin improved because the revenue increased 1391.89% while the cost of revenue increased 665.73% for the nine months endedSeptember 30, 2022 compared to the same period in 2021. Selling Expenses
Our selling expenses were$165,306 for the nine months endedSeptember 30, 2022 , representing a decrease of$50,678 or 23.46% compared to$215,984 for the nine months endedSeptember 30, 2021 . It was mainly the Company controls costs, reduces travel expenses, advertising expenses, etc.
General and Administrative Expenses
General and administrative expenses increased by
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$116,342 and$52,856 for the nine months endedSeptember 30, 2022 and 2021, respectively. Net Income (Loss)
Our net income (loss) was$460,512 and ($657,863 ) for the nine months endedSeptember 30, 2022 and 2021, respectively, representing an increase of$1,118,375 . The Company is at its developing stage and we have incurred more promotion fee by introducing our products to more customers acrossChina during the nine months endedSeptember 30, 2021 resulting in significant increase in revenue for the nine months endedSeptember 30, 2022 . The Company also incurred more material cost by developing new product lines. 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 financed our operations over the nine months ended
21
The components of cash flows are discussed below:
For the Nine months ended
September 30,
2022 2021
Net cash used in operating activities
(39,157 ) (463,008 )
Net cash provided by financing activities 588,736 1,232,933
Exchange rate effect on cash (39,120 ) (6,337 )
Net cash inflow $ (3,723 ) $ (1,153 ) Cash used in Operating Activities
For the nine months endedSeptember 30, 2022 , net cash used in operating activities was$514,182 , which consisted primarily of net income of$460,512 , which was adjusted by depreciation and amortization of$103,869 . The Company had an increase of$36,834 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$1,120,167 in accounts receivable which was due to the Company increase of revenue, a decrease of$112,931 in prepayments to the suppliers for procurement of raw materials and deposit for the building materials and equipment, which were offset by an increase of$66,097 in inventories and an increase in other receivable of$42,461 in which it was due to an increase loan receivables. 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 loan receivables.
Cash used in Investing Activities
Net cash used in investing activities was$39,157 for the nine months endedSeptember 30, 2022 . The activities consisted of our investments of$38,806 in purchasing plant and equipment and an adjustment of$1,713 of intangible assets due to currency exchange effect, and an increase in disposal of equipment of$1,362 . 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.
Cash Provided by Financing Activities
Net cash provided by financing activities was$588,736 for the nine months endedSeptember 30, 2022 . During this period, cash provided by financing activities mainly included proceeds from related parties of$588,736 .
Net cash provided by financing activities was
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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