PORTER HOLDING INTERNATIONAL, INC. The following management's discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this report. In addition to historical information, the following discussion contains certain forward-looking information. See "Special Note Regarding Forward Looking Statements" above for certain information concerning those forward-looking statements. Our financial statements are prepared inU.S. dollars and in accordance withU.S. GAAP. Overview OnApril 7, 2017 , we completed the acquisition of PGL pursuant to the share purchase agreement. As a result of the acquisition, PGL became our wholly-owned subsidiary and the former shareholders of PGL became the holders of approximately 98.4% of our issued and outstanding capital stock on a fully-diluted basis. Since 2016, through our VIE entity,Porter Consulting , we have partnered withChina Payment Technology Co., Ltd. , a third-party online payment service provider ("China Payment") to promote China Payment's online payment platform to companies and businesses inShenzhen and in return share a portion of the processing fees earned by China Payment as commission.Porter Consulting also partners withShenzhen Xinghua Tongfu Technology Co., Ltd. , a third-party online payment service provider ("Shenzhen Tongfu"), under whichPorter Consulting agreed to promote Shenzhen Tongfu's online payment platform, including the Point of Sale (POS) system, to companies and businesses inChina and in return obtain a certain amount of commission based on the volume of trading through such online payment platform. As a newly established company with limited operation history, we are at the early stage of developing our O2O business and our goal is to become a leading innovative O2O business platform operator providing both online E- commerce and offline physical business facilities to our merchant customers, where they can conduct business, interact with their existing and potential end-consumers face to face. Different from most other O2O companies, which often lack of integrated platforms, our goal is to provide one-stop services for our customers through our integrated online and offline platforms. As described fully below, we are developing and intend to offer products and services including both hosting our online marketplaces, www.pt37.com and www.17yugo.com for our merchant clients to post and sell their products and services online and managing and operating physical business facilities, Porter City, that our online merchant clients can utilize to conduct their businesses offline. We are currently developing merchant clients who are engaged in businesses including manufacturing, real estate, trade and financing. In the future, we intend to expand our merchant client base to industries of big data, new materials, new energy, green food and environment protection. According to the development demand and future goals of our customers, in 2018 we started to offer a series of services such as business planning, financial guidance, business matching and guidance for listing primarily inthe United States . At present, in our customer pool, many small and medium-sized enterprises have increased their public awareness. They are seeking the potential advantages of being a listed company and striving for obtaining the recognition of international capital to accelerate their corporate expansion. However many enterprises themselves may not be familiar with the listing requirements, laws and regulations of different capital markets, and the process of obtaining financing from overseas markets. In order to help our customers who intend to access overseas capital markets, we have a team of experienced professionals who have professional knowledge of the listing rules and regulations of various capital markets. We will make full use of our expertise and resources in the capital markets to assist these customers to achieve their goals. Recent Developments The ongoing coronavirus pandemic that first surfaced inChina and is spreading throughout the world has had a material adverse effect on our industry and the markets in which we operate. Most of our revenues and our workforce are concentrated inChina . The epidemic has caused our customers to take longer time to make payments, which subjects us to increased credit exposures. The quarantines throughout China in the past few months impeded our ability to recruit new clients and made us postpone providing services to existing clients most of which were engaged last year. Travel restrictions also limited clients' ability to visit and meet us in person, which made it harder to build trust and engage clients. The update of products information on our e-commerce platform and the delivery of goods may be delayed due to the late resumption of work by manufacturers. The imported goods on our platform will face more challenges as the pandemic continues outside China, and our distribution channel may be disrupted if the operations of our distributors are interrupted by the outbreak. The foregoing adverse impacts might be mitigated as quarantines across China have been largely lifted as of late March and the Chinese government has rolled out an array of favorable fiscal measures. OnMarch 23, 2020 , the government ofShenzhen, China where we are headquartered announced that the city will ease travel restrictions and return to normal. We are currently negotiating with customers on their payment issues and allow them to pay after resuming operations. We will closely monitor these accounts receivable. 31
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However, as the coronavirus outbreak continues to spread beyond China, the extent to which the coronavirus impacts our operations and results in the long-term will depend on future developments, including, among others, actions of the Chinese government to contain imported infections, which are highly uncertain and cannot be reasonably predicted. We expect our total revenues in the fiscal quarter endingMarch 31, 2020 to decrease year over year, and there is no guarantee that our total revenues during the fiscal year endingDecember 31, 2020 will not decline from the prior year. The outbreak has been evolving rapidly. We will continue to monitor and mitigate developments affecting our workforce, our customers, and the public at large to the extent we are able to do so. See "Risks Related to Our Business-Our business operations have been and may continue to be materially and adversely affected by the outbreak of the coronavirus (COVID-19)." Results of Operations
Comparison of Years Ended
The following table sets forth key components of our results of operations during the years endedDecember 31, 2019 and 2018, both in dollars and as a percentage of our revenue. Years Ended December 31, 2019 2018 % of % of Amount Revenue Amount Revenue Revenue$ 3,382,586 100.00$ 3,454,247 100.00 Cost of revenue (1,544,166 ) (45.65 ) (146,296 ) (4.24 ) Gross profit 1,838,420 54.35 3,307,951 95.76 Operating expenses General and administrative expenses (2,519,338 ) (74.48 ) (1,915,256 ) (55.45 ) (Loss) profit from operations (680,918 ) (20.13 ) 1,392,695 40.31 Other income 111,325 3.29 11,693 0.34 (Loss) income before income taxes (569,593 ) (16.84 ) 1,404,388 40.65 Income tax expense (1,055 ) (0.03 ) - - Net (loss) income (570,648 ) (16.87 ) 1,404,388 40.65 Less: Net income (loss) attributable to non-controlling interests 3,688 0.11 (2,454 ) (0.07 ) Net (loss) income attributable toPorter Holding International Inc. common stockholders (574,336 ) (16.98 ) 1,406,842 40.72 Revenue. Our revenue was$3,382,586 for the year endedDecember 31, 2019 , compared to$3,454,247 for the same period last year. Starting from the second quarter of 2018, we commence to provide various consulting services to our customers, especially those who have the intention to be publicly listed primarily on the stock exchanges inthe United States , and service income from the provision of these consulting services totaled$2,801,340 and$3,279,074 for the years endedDecember 31, 2019 and 2018, respectively. Moreover, starting from the first quarter of 2019, the Company provides various training services to its clients, primarily related to e-commerce platform operation, expansion of channels and promotion strategy and capital market operation, through live and online sessions. The service income from providing training services totaled$380,223 for the year endedDecember 31, 2019 . ThroughPorter Consulting we also promote the payment service of a third-party payment service provider to merchants inShenzhen and in return share a portion of the processing fees earned by the third-party payment service provider as commission. Our commission totaled$84,930 and$153,693 for the years endedDecember 31, 2019 and 2018, respectively.$31,697 and$6,669 revenues generated from cosmetic trading business for the years endedDecember 31, 2019 and 2018, respectively. Cost of revenue. Our cost of revenue was$1,544,166 for the year endedDecember 31, 2019 , compared to$146,296 for the same period last year. Cost of revenue refers to the cost of consulting services, third-party payment service and other business. The project cost of consulting service at the later stage is usually higher than that of the earlier stage. The increase was due to several projects finished during the second half year endedDecember 31, 2019 , while projects just started during the last year. The cost of consulting service refers to the shell company acquisitions, legal and accounting advisory service outsourced to third-party service providers. 32
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Gross profit and gross margin. Our gross profit was$1,838,420 for the year endedDecember 31, 2019 , compared with a gross profit of$3,307,951 for the same period last year. Gross profit as a percentage of revenue (gross margin) was 54.35% for year endedDecember 31, 2019 , compared to 95.76% for year endedDecember 31, 2018 . The decrease of gross profit was mainly due to the higher project cost of consulting service at the later stage as compared to the earlier stage. General and administrative expenses. As shown below, our general and administrative expenses consist primarily of compensation and benefits to our general management, finance and administrative staff, professional fees and other expenses incurred in connection with general operations. Our general and administrative expenses increased by$604,082 to$2,519,338 for year endedDecember 31, 2019 , from$1,915,256 for the same period in 2018. Legal and professional fees increased due to the change in auditors and consultants in 2019. Increase in others was mainly due to addition of$476,694 allowance for doubtful accounts reserved during year endedDecember 31, 2019 . 2019 2018 Fluctuation Amount % Amount % Amount % Salary and staff 1,077,042 42.75 1,101,426 57.51 (24,384 (2.21 benefits $ $ $ ) )
Lease and management 314,213 12.47 312,445
16.31 1,768 0.57 fee Legal and 17.84 301,402 15.74 148,165 49.16 professional fees 449,567 Depreciation and 1.32 17,860 0.93 15,271 85.50 amortization 33,131 Others 645,385 25.62 182,123 9.51 463,262 254.37 Total G&A$ 2,519,338 100.00$ 1,915,256 100.00$ 604,082 31.54
Income tax expense. Our Income tax expense was
Net (loss) income. As a result of the cumulative effect of the factors described above, our net loss was$570,648 for the year endedDecember 31, 2019 and net income$1,404,388 for the same period in 2018.
Limited Operating History; Need for
There is limited historical financial information about us on which to base an evaluation of our performance. We cannot guarantee we will be successful in our business operations. Our business is subject to risks inherent in the establishment of a new business enterprise, including limited capital resources, a narrow client base, limited sources of revenue, and possible cost overruns due to the price and cost increases in supplies and services. Without additional funding, management believes that we will not have sufficient funds to meet our obligations beyond one year after the date our consolidated financial statements are issued. These conditions give rise to substantial doubt as to our ability to continue as a going concern. We have been, and intend to continue, working toward identifying and obtaining new sources of financing. To date we have been dependent on related parties for our source of funding. No assurances can be given that we will be successful in obtaining additional financing in the future. Any future financing that we may obtain may cause significant dilution to existing stockholders. Any debt financing or other financing of securities senior to common stock that we are able to obtain will likely include financial and other covenants that will restrict our flexibility. Any failure to comply with these covenants would have a negative impact on our business, prospects, financial condition, results of operations and cash flows. If adequate funds are not available, we may be required to delay, scale back or eliminate portions of our operations or obtain funds through arrangements with strategic partners or others that may require us to relinquish rights to certain of our assets. Accordingly, the inability to obtain such financing could result in a significant loss of ownership and/or control of our assets and could also adversely affect our ability to fund our continued operations and our expansion efforts. Currently we spend approximately$200,000 per month for basic operations. During the next 12 months, we expect to incur the same amount of expenses each month. However, as we work to expand our operations, we expect to incur significant research, marketing and development costs and expenses on our online service platforms that meet the constantly evolving industry standards and consumer demands. We will also need to hire additional employees in order to provide new services and accommodate new clients. 33
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Liquidity and Capital Resources
Working Capital
December 31, 2019 December 31, 2018
Current Assets $ 1,398,210 $ 1,486,197
Current Liabilities 2,435,885 2,192,678Working Capital Deficiency $ ( 1,037,675 ) $ (706,481 )
As of
Going Concern Uncertainties
The accompanying consolidated financial statements have been prepared assuming we will continue as a going concern. We have incurred net loss of$570,648 during the year endedDecember 31, 2019 , resulting in an accumulated deficit of$2,200,932 as ofDecember 31, 2019 , and we currently have net working capital deficit of$1,037,675 . These conditions raise substantial doubt about our ability to continue as a going concern. The ability to continue as a going concern is dependent upon generating profitable operations in the future and/or obtaining the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they become due. We may have to rely on additional debt financing, loans from existing directors and shareholders and private placements of capital stock for additional funding. Our sources of capital in the past have included borrowings from our stockholders and related parties. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. If we are unable to generate profitable operations and/ or obtaining the necessary financing, we may be forced to curtail operations. Years EndedDecember 31, 2019 2018
Net cash (used in) provided by operating activities
2,278 (73,072 )
Net cash provided by (used in) financing activities 153,978 (423,236 )
Effect of exchange rate changes on cash (71,069 ) (27,061 )
Net (decrease) increase in cash (503,388 ) 488,049
Cash at the beginning of year 728,121 240,072
Cash at the end of year $ 224,733 $ 728,121
Operating Activities
Net cash used in operating activities was $588,575 for the year ended December
31, 2019 , as compared to $1,011,418 net cash provided by operating activities
for the year ended December 31, 2018 . The net cash used in operating activities
for the year ended December 31, 2019 was mainly due to our net loss of $570,648 ,
an increase in account receivables of $840,464 , an increase in prepayments and
other receivables of $65,901 and a decrease in operating lease liability of
$241,476 , partially offset by the increase in accounts payable of $128,739 , and
deferred revenue of $262,876 . The net cash provided by operating activities for
the year ended December 31, 2018 was mainly due to our net income of $1,404,388 ,
a decrease in prepayments and other receivables of $126,602 and an increase in
accruals and other payables of $193,544 , partially offset by increase in
accounts receivable of $726,500 .
Investing Activities
Net cash provided by investing activities was $ 2,278 for the year ended
December 31, 2019 , as compared to $73,072 net cash used in investing activities
for the year ended December 31, 2018 . The net cash provided by investing
activities for the year ended December 31, 2019 was mainly attributable to the
business combination of Maihuolang E-commerce. The net cash used in investing
activities for the year ended December 31, 2018 was mainly attributable to
purchase of equipment.
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Table of Contents Financing Activities Net cash provided by financing for the year endedDecember 31, 2019 was$153,978 , as compared to$423,236 net cash used in financing activities for the year endedDecember 31, 2018 . For the year endedDecember 31, 2019 , we obtained proceeds from sales of non-controlling interests of$289,514 , advances of$7,120,343 from shareholders, repaid$6,905,449 to shareholders and$350,430 to related parties. During the year of 2018, we obtained capital contribution from non-controlling interests of$58,178 , advances of$719,142 from shareholders and repaid$1,200,556 to related parties.
Contractual Obligations and Commercial Commitments
We had the following contractual obligations and commercial commitments as ofDecember 31, 2019 : Less than 1 More than 5
Contractual Obligations Total year 1-3 years 3-5 years years Amounts due to shareholders$ 1,433,151 $ 1,433,151 - - $ - Amount due to related parties 1,106 1,106 - - - Leases 804,442 298,985 469,286 36,171 - TOTAL$ 2,238,699 $ 1,733,242 $ 469,286 $ 36,171 $ - We believe that our current cash and financing from our existing stockholders are adequate to support operations for at least the next 12 months. We may, however, in the future, require additional cash resources due to changed business conditions, implementation of our strategy to expand our business or other investments or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects. Capital Expenditures
We incurred capital expenditures of
Off-Balance Sheet Transactions
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 is material to investors. Critical Accounting Policies We regularly evaluate the accounting policies and estimates that we use to make budgetary and financial statement assumptions. A complete summary of these policies is included in the notes to our financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management. The discussion of our critical accounting policies contained in Note 2 to our consolidated financial statements, "Summary of Significant Accounting Policies," is incorporated herein by reference.
Recent Accounting Pronouncements
For further information on recently issued accounting pronouncements, see Note 2-Summary of Significant Accounting Policies in the accompanying notes to consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
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