ZZLL INFORMATION TECHNOLOGY, INC. The discussion and analysis which follows in this Report may contain trend analysis and other forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 which reflect our current views with respect to future events and financial results. These include statements regarding our future financial results, projected growth and forecasts, and similar matters which are not historical facts. We remind stockholders that forward-looking statements are merely predictions and therefore are inherently subject to uncertainties and other factors which could cause the actual future events or results to differ materially from those described in the forward-looking statements. These uncertainties and other factors include, among other things, the impact of the spread of the COVID-19 pandemic, business conditions affecting our business and general economic conditions; our ability to generate sufficient revenues to reach profitable operations; and our need to obtain additional financing. The forward-looking statements contained in this Report and made elsewhere by or on our behalf should be considered in light
of these factors.
We are a holding company incorporated inNevada with no material operations of our own. As a holding company, we conduct operations our business through our PRC operating subsidiaries,Hunan Syndicore Asia Limited ("HSAL") andShenzhen Ezekiel Technology Co. Limited ("Ezekiel"). Our corporate structure may involve unique risks for investors and could be disallowed by Chinese regulatory authorities, which would likely result in a material change in our operations and/or a material change in the value of our Common Stock, including the possibility that our shares could significantly decline in value or become worthless. Therefore, investments in our Common Stock involve a high degree
of risk. HSAL's E-commerce business HSAL is an E-commerce company operating through its self-developed online application "Bibishengjia". Bibishengjia is a shopping search engine that concurrently searches many shopping sites, preliminarily based inChina , including major shopping sites such as Taobao.com, Tmall.com, JD.com and Pinduoduo.com, and helps customers meet their one-stop online shopping needs. Bibishengjia also runs its own online shopping platforms -Bibi Mall andLianlian Nongyuan Agricultural Products Store . Bibishengjia was launched onAugust 18, 2019 and is currently available for download at theApple APP Store and other major mobile download stores. OnSeptember 26, 2019 , we, through SAL, entered into an agreement (the "Pretech Agreement") withPretech International Co., Limited ("Pretech"), a company incorporated under the laws ofHong Kong ("HK"). Pretech is a software, hardware and digital company that also specializes in the development and manufacture of consumer electronics. Under the terms of the Pretech Agreement, Pretech agreed to act as SAL's sales agent to promote and bring more customers to Bibishengjia and also make sales of its own products through the use of Bibishengjia. Pretech paid$1 million for the use of Bibishengjia, and the Company agreed to pay Pretech 5% of all sales made in the PRC and HK through Bibishengjia. The initial term of the Pretech Agreement was for 24 months from the date the Pretech Agreement was entered into and was extendable for another 24 months. OnOctober 26, 2020 , the Pretech Agreement was amended and restated whereby Pretech was given the right to use Bibishengjia for 7 years. Pretech's use of Bibishengjia is accomplished by a section on the Bibishengjia APP created specifically for Pretech. When users browse the Bibishengjia APP, they are able to click on the Pretech hyperlink and be directed to Pretech's own site where they can make purchases of Pretech's products. Additional features and functions may be added to the APP according to the Pretech's needs, markets conditions and additional requirements upon separate agreement between the parties, either in conjunction with the needs of SAL and HSAL or specifically for Pretech. Under the Pretech Agreement, the Bibishengjia APP, its contents and all related intellectual property rights including rights related to the Pretech hyperlink, are the sole property of SAL, including any additional developments or modifications made in the APP, in perpetuity. In addition to our own marketing and promotional efforts and Pretech's sales support, we started to promote the Bibishengjia APP through "Momo" by using live streaming in the third quarter of 2020. 16
Ezekiel's petroleum-based products distribution business
Ezekiel sells petroleum-based products, such as asphalt, heat conduction oil and machine (lubricating) oil, which are purchased directly from its suppliers and sold to end customers. All shipping instructions, product return, and customer services are handled by Ezekiel. Ezekiel also owns the legal title of the products before and during the transit and bears the risk of loss in transit.
Ezekiel's multi-function lottery tickets machine business
In late 2020, Ezekiel started a new business where it purchases custom-made multi-function lottery ticket machines and re-sells them to third parties. The machines are designed and manufactured by third parties with third party technologies. Ezekiel doesn't own any intellectual property rights relating to the machines. Besides dispensing lottery tickets for which the machine owner retains 7-8% of the ticket sales price, the machines also function as a cell phone charging station for about$0.45 per hour and a disinfectant wipes dispenser at cost. The machine has a LED screen which allows a customer to browse the Bibishengjia APP and make purchases there. Ezekiel has obtained licenses from several second and third-tier cities in the PRC where competition for lottery tickets sales and lottery tickets machines is manageable. The licenses allow its machines to dispense lottery tickets in these cities, besides selling the machines to third parties. Due to the global pandemic, local lockdown and other restrictive policies, Ezekiel was unable able to sell any machines since 2021. Going Concern Uncertainties Our unaudited condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. We had an accumulated deficit of$4,196,715 and a working capital deficit of$2,378,191 as ofSeptember 30, 2022 , and have incurred operating losses in most periods since inception. The recoverability of a major portion of the recorded asset amounts and realization of the portion of current liabilities into revenue shown in the accompanying balance sheets are dependent upon continued operations of the Company, which in turn are dependent upon the Company's ability to raise additional financing and to succeed in its future operations. The Company will need additional cash resources to operate during the upcoming 12 months, and the continuation of the Company will be dependent upon the continuing financial support of investors, directors and/or shareholders of the Company. However, there is no assurance that efforts to raise equity or debt will be successful in raising sufficient funds to assure the eventual profitability of the Company. These conditions raise substantial doubt about the Company's ability to continue as a going concern. These accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Management plans to support the Company in operation and to maintain its business strategy to raise funds through public and private offerings and to rely on officers and directors to perform essential functions with minimal compensation. If we do not raise all of the money we need from such offerings, we will have to find alternative sources including, loans from our officers, directors or others. Management has actively taken steps to revise its operating and financial requirements, which they believe will allow the Company to continue its operations for the next 12 months. Impact of the COVID-19 The COVID-19 outbreak has resulted in travel restrictions, closed international borders, enhanced health screenings at ports of entry and elsewhere, disruption of and delays in healthcare service preparation and delivery, prolonged quarantines, cancellations, supply chain disruptions, and lower consumer demand, layoffs, defaults and other significant economic impacts, as well as general concern and uncertainty. The current severity of the pandemic and the uncertainty regarding the length of its effects could have negative consequences for our company. Ezekiel did not make any sales of multi-function lottery machines in the nine months endedSeptember 30, 2022 because of COVID-19 lockdowns across Chinese cities and travel restrictions across communities. 17
Ezekiel does not have any long-term customers or supply agreements with its customers at petroleum-based product sales. During the nine months endedSeptember 30, 2022 , there were no sales of petroleum-based products because of COVID-19 control measures in the PRC, which include city lockdowns and travel restrictions among communities. City lockdowns and travel restrictions in various Chinese cities impacted our sales team's ability to visit potential customers and also caused our customers to be conservative in their business operations and developments which temporarily or permanently ceased their purchase plans of our petroleum-based products.Russia /Ukraine
In response to the military conflict betweenRussia andUkraine ,the United States and otherNorth Atlantic Treaty Organization member states, as well as certain non-member states, announced targeted economic sanctions and export controls onRussia andBelarus . These include restrictions on the export and transfer of products containing certain toxins toRussia andBelarus . ZZLL and its subsidiaries do not have operations or sales inRussia ,Belarus andUkraine . If the conflict escalates and results in broader economic and political concerns, ZZLL's business could be adversely impacted. Segment Reporting Since the fourth quarter of 2020 we have been engaged in two business segments, the E-commerce business, consisting of HSAL and SAL's E-commerce operation, and trading business covering Ezekiel's sales of petroleum-based products and multi-function lottery machines.
Critical Accounting Estimates
Our financial statements have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The policies discussed below are considered by management to be critical to an understanding of our financial statements because their application places the most significant demands on management's judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. For all of these policies, management cautions that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment. Revenue Recognition. We adopted Accounting Standard Codification ("ASC") Topic 606, Revenues from Contract with Customers ("ASC 606") for all periods presented. Under ASC 606, revenue is recognized when control of the promised goods and services is transferred to the Company's customers, in an amount that reflects the consideration that we expect to be entitled to in exchange for those goods and services, net of value-added tax. We determine revenue recognition through
the following steps:
? Identify the contract with a customer;
? Identify the performance obligations in the contract;
? Determine the transaction price;
? Allocate the transaction price to the performance obligations in the contract;
and
? Recognize revenue when (or as) the entity satisfies a performance obligation.
The transaction price is allocated to each performance obligation on a relative
standalone selling price basis. The transaction price allocated to each
performance obligation is recognized when that performance obligation is
satisfied by the control of the promised goods and services is transferred to
the customers, which at a point in time or over time as appropriate.
18
Our revenues are net of value added tax ("VAT") collected on behalf of PRC tax
authorities in respect to the sales of merchandise. VAT collected from
customers, net of VAT paid for purchases, is recorded as a liability in the
accompanying consolidated balance sheets until it is paid to the relevant PRC
tax authorities
Ezekiel's petroleum-based product distribution business generates revenue from
its sales, when made. No petroleum- based products were sold in the first nine
months of 2022 due to the increased frequency of city shutdowns in China as one
of China's COVID-19 control measures. Ezekiel's multi-function lottery ticket
machine business generates revenue from the sale of machines when made to third
parties and from its retention of a percentage of all lottery ticket sales made
by such machines. No revenues were generated from the sale of multi-function
lottery ticket machines in the nine-month periods ended September 30, 2022 and
2021 due to the increased frequency of COVID-19 lockdowns across Chinese cities.
Accounts Receivable. - The receivables of $10,894 and $848,181 reported as of
September 30, 2022 and December 31, 2021 relate to the sale of petroleum-based
products. For our e-commence segment, our customers are required to pay when
placing their orders per our policy, and therefore we don't record any accounts
receivable. Purchasers of our multi-function lottery machines are required paid
in full per our sales policy and we don't record account receivable for this
business. During the three months and the nine months ended September 30, 2022 ,
we reported a credit loss of $816,372 on a doubtful account. For the three
months and the nine months ended September 30, 2021 , we reported no credit loss.
Equipment. Equipment is stated at cost less accumulated depreciation. Cost
represents the purchase price of the asset and other costs incurred to bring the
asset into its existing use. Maintenance, repairs and betterments, including
replacement of minor items, are charged to expense; major additions to physical
properties are capitalized. Depreciation of plant and equipment is provided
using the straight-line method over their estimated useful lives ranged from 3
to 5 years.
Income Taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. Result of Operations
Three Months Ended
The following table sets forth a summary of our consolidated statements of operations for the periods indicated.
For the Three Months
Ended September 30, Variance
2022 2021 Amount %
Revenue $ 138,868 $ 34,222,798 (34,083,930 ) (99 )%
Cost of revenue 68,959 34,011,105 (33,942,146 ) (99 )%
Gross profit 69,909 211,693 (141,784 ) (67 )%
General and administrative and other
operating expenses 1,049,291 239,085 810,206 339 %
Loss from operations (979,382 ) (27,392 ) (951,990 ) 3475 %
Interest expense, net (3,410 ) (140 ) (3,270 ) 2336 %
Other income, net 6,120 5 6,115 121900 %
Loss before income taxes (976,672 ) (27,527 )
(949,145 ) 3448 %
Income taxes - - - n/a
Net loss $ (976,672 ) $ (27,527 ) $ (949,145 ) 3448 %
19
Revenue for the three months ended September 30, 2022 was $138,868 , a decrease
of $34,083,930 , or 99%, from revenue of $34,222,798 for the three months ended
September 30, 2021 . HSAL's E-commerce business, the Bibiishengjia platform,
generated revenues of $138,868 in the three months ended September 30, 2022
compared to revenues of $255,194 in the three months ended September 30, 2021 .
Our online sale platform benefited from the health concerns related to COVID-19
as more customers took advantage of the online platform and door to door
delivery services for their daily grocery shopping and meals. However, the same
concerns brought in opposite effects at Ezekiel's industry product wholesale
business. There were no sales of petroleum-based products in the third quarter
of 2022 due to the continuing quarantine requirements to control COVID-19 spray
in China . During the third quarter of 2022, we faced strict disease control
implementations from Chinese government which include shutdown of all business
activities and public contact. Due to unpredictable government actions or
enforcements, most of Ezekiel's customers stopped or slowed down their purchase
plans until the economic trend is clearer. In addition, we did not make any
sales of multi-function lottery machines in the third quarter of 2022 because of
the same health concerns of COVID-19.
Our cost of revenue decreased to $68,959 for the three months ended September
30, 2022 , a decrease of $33,942,146 , or 99%, from $34,011,105 for the three
months ended September 30, 2021 . Such decrease was mainly attributable to the
lack of sales by Ezekiel.
Our gross profit decreased by $141,784 or 67%, to $69,909 in the quarter ended
September 30, 2022 from $211,693 in the same quarter in 2021. The decrease was
mainly due to health concerns relating to physical contact which caused a
significant decline in demand for industrial products, including petroleum-based
products. Although our online sale platform benefited from these health
concerns, this trend also attracts more competitors joining the market which
further reduced our margin from our E-commerce business. With more lockdowns
among Chinese cities, many traditional companies began to develop their online
operations because physical stores could not be opened. We believe that this
will result in more companies developing shopping platforms. Accordingly, the
Company may need to offer more cash bonuses or discounts to customers to compete
with such platforms.
During the third quarter of 2022, our operating expenses increased by $810,206 ,
or 339%, to $1,049,291 , compared to the same quarter in 2021. The increase was
mainly due to the credit loss relating to a doubtful account receivable of
$816,372 .
Our loss from operations was $979,382 for the quarter ended September 30, 2022
compared to the loss from operations of $27,392 for the quarter ended September
30, 2021 . This increase was mainly due to the aforesaid shut-downs related to
COVID-19 in China and a credit loss of $816,372 on a doubtful account
receivable.
For the three months ended September 30, 2022 , our net loss was $976,672
compared to a net loss of $27,527 for the three months ended September 30, 2021 .
This was mainly due to decrease in our petroleum product sales and a credit loss
on a doubtful account receivable.
Nine Months Ended
The following table sets forth a summary of our consolidated statements of operations for the periods indicated.
For the Nine Months
Ended September 30, Variance
2022 2021 Amount %
Revenue $ 797,812 $ 54,342,548 (53,544,736 ) (99 )%
Cost of revenue 395,687 53,511,342 (53,115,655 ) (99 )%
Gross profit 402,125 831,206 (429,081 ) (52 )%
General and administrative and other
operating expenses 1,967,677 690,770 1,276,907 185 %
Income (loss) from operations (1,565,552 ) 140,436 (1,705,988 ) (1215 )%
Interest income (expense), net 146,652 (6,436 ) 153,088 (2379 )% Other income (expense), net 14,036 (4,169 )
18,205 (437 )%
Income (loss) before income taxes (1,404,864 ) 129,831
(1,534,695 ) (1182 )%
Income taxes 1,043 - 1,043 n/a
Net income (loss) $ (1,405,907 ) $ 129,831 $ (1,535,738 ) (1183 )%
20
Revenue. For the nine months endedSeptember 30, 2022 , revenue was$797,812 compared to$54,342,548 for the nine months endedSeptember 30, 2021 , a decrease of$53,544,736 or 99%. The reduction was mainly caused by the decline in activity in our trading business segment. Historically, our trading business segment was engaged in wholesale sales of industrial products to our customers through the traditional method, such as site visits of our sales team and face to face negotiation and discussions with our customers to understand their demand and needs. However, starting in 2022, various Chinese cities started to execute immediate quarantine actions which increased the uncertainty of future business development among our customers. Accordingly, we made no sales during the nine months endedSeptember 30, 2022 . Cost of revenue. The cost of revenue mainly includes payroll to streamers and online platform maintenance expenditures. For the nine months endedSeptember 30, 2022 , cost of revenue was$395,687 compared to$53,511,342 for the nine months endedSeptember 30, 2021 , a decrease of$53,115,655 , or 99%. This decrease was mainly due to the decrease in sales in our trading business segment. Gross profit. Our gross profit decreased by$429,081 or 52% to$402,125 for the nine months endedSeptember 30, 2022 , compared to$831,206 for the nine months endedSeptember 30, 2021 . This decrease was due to the decrease in trading sales. Our gross margin increased from 2% for the nine months endedSeptember 30, 2021 to 50% for the nine months endedSeptember 30, 2022 . This increase was mainly due to the increase in gross margin in our e-commence business segment and the decrease in sales. Although our e-commence business segment contributes a higher margin rate, the segment faces strong competition and lower customer loyalty. Therefore, to reach higher market share we will need to improve our operations and build up customer awareness and loyalty. Operating expenses. Our total operating expenses consist of sales and marketing expenses and general and administrative expenses. Our total operating expenses increased by$1,276,907 , or 185%, from$690,770 for the nine months endedSeptember 30, 2021 to$1,967,677 for the nine months endedSeptember 30, 2022 . This increase was mainly due to the increased development expenses and maintenance spending for our online platform program, an credit loss on a doubtful account receivable, and an impairment loss of$121,814 on other assets. Other assets were accrued VAT credits in 2021. In the second quarter of 2022, after reviewing the nature of the other assets and our operations, we reported an impairment loss of$121,814 on other assets. Income (loss) from operations. As a result of the foregoing, our loss from operations was$1,565,552 for the nine months endedSeptember 30, 2022 , compared to income from operations of$140,436 for the nine months endedSeptember 30, 2021 . Income taxes. Our income taxes were$1,043 for the nine months endedSeptember 30, 2022 , compared to no income taxes for the nine months endedSeptember 30, 2021 . Net loss. Our net loss was$1,405,907 for the nine months endedSeptember 30, 2022 , compared to net income of$129,831 for the nine months endedSeptember 30, 2021 . Our net loss was mainly due to the decrease in revenues from our trading business segment and a credit loss on a doubtful account receivable and an impairment loss with respect to our other assets, which was partially offset by an increase in our interest income from an early collection of a long-term other receivable during the second quarter of 2022.
Liquidity and Capital Resources
As ofSeptember 30, 2022 , we had$20,396 in cash and a working capital deficit of$2,378,191 compared with$1,932,693 in cash and a working capital deficit of$982,680 atDecember 31, 2021 . Our accumulated deficit atSeptember 30, 2022 was$4,196,715 . To date the Company has funded its operations by advances from related parties which are interest free, unsecured, and have no fixed repayment terms and in 2020 from cash provided from operations including the prepayment made under
the
Pretech Agreement.
21
Management has continued to support the Company's operations and has actively
taken steps to monitor its operating and financial requirements. The Company has
relied on its officers and directors to perform essential functions with minimal
compensation. If the Company is unable to raise the funds it requires from third
parties it will have to find alternative sources, such as loans from our
officers and directors.
The following table summarizes our cash flows for the periods presented:
For the Nine Months
Ended September 30,
2022 2021
Net cash used in operating activities $ (1,143,523 ) $ (599,865 )
Net cash provided by (used in) investing activities (237,468 ) 75,575
Net cash provided by (used in) financing activities (516,165 ) 217,441
Net decrease in cash $ (1,897,156 ) $ (306,849 ) Net cash used in operating activities during the nine months endedSeptember 30, 2022 , was$1,143,523 compared to net cash used in operating activities of$599,865 in the same period of 2021. For the nine months endedSeptember 30, 2022 , cash was mainly used to cover our loss of$1,405,907 . During the nine months endedSeptember 30, 2022 , we reported add-backs of$183,204 of depreciation and amortization, a credit loss of$816,372 a doubtful account receivable,$121,814 impairment charge, and an income of$106,683 derived from deferred income for non-cash expenses (income) and an increase of$130,866 from other receivables, partially offset by our rental payments of$149,627 and an increase in other payables and accrued liabilities of$743,223 .
Net Cash Provided by (Used in) Investing Activities
Net cash used in investing activities was$237,468 for the nine months endedSeptember 30, 2022 , compared to net cash provided by investing activities of$75,575 for the nine months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , the cash expenditure of$237,468 was used for the purchase of a vehicle for business purposes.
Net Cash Provided by (Used in) Financing Activities
For the nine months ended
We believe our existing cash atSeptember 30, 2022 and the cash flows expected from operations will not be sufficient to support our operating and capital requirements during the next twelve months. We plan to seek financial support from our shareholders and we may also raise funds through public and private offerings and to rely on officers and directors to perform essential functions with minimal compensation. If we do not raise all of the money we need, we will have to find alternative sources including, loans from our officers, directors or others. Management has actively taken steps to revise its operating and financial requirements, which they believe will allow ZZLL to continue its operations for the next 12 months. 22 Inflation and Seasonality
We do not believe that our operating results have been materially affected by inflation during the preceding two years.
Off-Balance Sheet Arrangements
UnderSEC regulations, we are required to disclose off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement or contractual arrangement to which any entity that is not consolidated with us is a party, under which we have:
? any obligation under certain guarantee contracts,
? any retained or contingent interest in assets transferred to an unconsolidated
entity or similar arrangement that serves as credit, liquidity or market risk
support to that entity for such assets,
? any obligation under a contract that would be accounted for as a derivative
instrument, except that it is both indexed to our stock and classified in
shareholder equity in our statement of financial position, and
? any obligation arising out of a material variable interest held by us in an
unconsolidated entity that provides financing, liquidity, market risk or credit
risk support to us, or engages in leasing, hedging or research and development
services with us. We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with generally accepted accounting principles inthe United States .
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