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TMCNet:  COMPUTER GRAPHICS INTERNATIONAL INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

[February 19, 2013]

COMPUTER GRAPHICS INTERNATIONAL INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

(Edgar Glimpses Via Acquire Media NewsEdge) Forward Looking Statements The following discussion and analysis of the results of operations and financial condition of Computer Graphics International Inc. should be read in conjunction with the Company's financial statements, and the notes to those financial statements that are included in this quarterly report and the company's annual report for the year ended September 30, 2012. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions.

Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors and Business sections in our annual report. We use words such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," and similar expressions to identify forward-looking statements.

Our Company Business Overview We are a 3D digital visual service provider founded in 2006 based in China, specialized in providing one-stop-shop service and systems based on 3D image technology to domestic governments, real estate developers, game developers, the automotive industry and other commercial customers. We operate through our wholly-owned subsidiaries Shenzhen Digital Image Technology Co., Limited and Guangzhou Digital Image Technologies Co., Ltd.

Our headquarters are located in Shenzhen, China. We operate domestically with four branches in the PRC, including our Xi'an office, Guangzhou office, Yun'nan office and Xiamen office. Through our 3D imaging technology, we participate in the visual expression of construction-related industries and help our customers complete visual technological changes from hand painting to computer-aided visual displays. We endeavor to provide our customers with the most cost-effective 3D digital visual communication products and services through the combination of the latest visual technology and terminal display equipment.Our Corporate History and Background Computer Graphics International Inc., or the "Company", was incorporated under the laws of the State of Nevada on February 27, 2003 under the name AMP Productions, Ltd. ("AMP"), with the business purpose of developing, producing, marketing, and distributing low-budget feature-length films to movie theaters and ancillary markets. From inception until the reverse acquisition transaction described below, AMP earned no revenue and suffered recurring losses and net cash outflows from operations.

On July 30, 2010, the controlling shareholders of AMP consented to a proposed 1-for-10 reverse split of AMP's issued and outstanding common stock, an increase in AMP's authorized common stock to 900,000,000 shares, and the authorization of 100,000,000 shares of preferred stock. The corporate action was approved by FINRA on September 17, 2010 and effective in the State of Nevada on September 23, 2010.

Acquisition of China Digital On March 31, 2011, we completed a reverse acquisition transaction through a share exchange (the "Share Exchange") with China Digital and its shareholders, whereby we acquired 100% of the issued and outstanding capital stock of China Digital in exchange for (i) 14,462,684 shares of our Common Stock (after giving effect to the Reverse Stock Split described below), which collectively constituted approximately 97% of our issued and outstanding capital stock as of and immediately after the consummation of the transactions contemplated by the Share Exchange Agreement and (ii) payment (the "Cash Component") of $2,368,471. The Cash Component was payable in full within 12 months after the Closing.

As a result of the reverse acquisition, China Digital became our wholly-owned subsidiary and the former shareholders of China Digital became our controlling stockholders. The share exchange transaction with China Digital and the Shareholders was treated as a reverse acquisition, with China Digital as the acquirer and AMP as the acquired party. Unless the context suggests otherwise, when we refer in this report to business and financial information for periods prior to the consummation of the reverse acquisition, we are referring to the business and financial information of China Digital and its consolidated subsidiaries.

As a result of our acquisition of China Digital, we now own all of the issued and outstanding capital stock of China Digital, which in turn owns all of the issued and outstanding capital stock of Shenzhen Digital Image Technologies Co., Ltd. ("Shenzhen Holding Company"). Shenzhen Holding Company in turn owns our two additional Operating Subs, Shenzhen Digital Image 3D Design and Development Co., Ltd. ("Shenzhen 3D Design") and Guangzhou Digital Image Technologies Co., Ltd.

On May 31, 2011, AMP filed a certificate of amendment with the Secretary of State of Nevada changing its name to "Computer Graphics International Inc." and effecting a 1-for-2.18 reverse stock split of its common stock (the "Reverse Stock Split"). The Reverse Stock Split took effect when approved by FINRA on June 7, 2011. As a result of the Reverse Stock Split, the number of our shares outstanding was reduced from 35,428,981 shares immediately before the Reverse Stock Split to 16,251,846 shares immediately after the Reverse Stock Split.

On September 26, 2011, the Company's wholly owned subsidiary Shenzhen Holding Company entered into a Letter of Intent for Share Purchase (the "Acquisition Agreement") with Li Dongxiang and Zeng Xianguang (together, the "Sellers") with respect to the shares of Guangzhou Fanyutuo 3D Technology Co., Ltd. ("Guangzhou "). Pursuant to the terms of the Acquisition Agreement, the Sellers agreed to sell all of the capital stock of Guangzhou to Shenzhen Holding Company in exchange for RMB six million (approximately US$952,215). Guangzhou is a recently formed start-up company involved in three dimensional technology. On December 27, 2011, the parties closed the purchase and sale of shares of Guangzhou pursuant to terms of the Acquisition Agreement. In connection with the closing, Guangzhou's name was changed to "Guangzhou Digital Image Technologies Co., Ltd." Principal Factors Affecting Our Financial Performance We believe our operating results will be primarily affected by the following factors: · Our ability to expand our presence in the PRC market as we plan, including the client base, and our industry presence.

· Our ability to maintain a good relationship with our suppliers for continued supply of hardware equipment at a competitive price and quality in order to continue carrying out our current pricing strategy.

· Our ability to attract and retain key management personnel as well as technical staff for technology integration and new product development in this competitive market.

Taxation United States and Hong Kong We are subject to United States federal income tax at a tax rate of 34%. No provision for income taxes in the United States has been made as we have no taxable income derived from business effectively connected to the United States.

China Digital is incorporated in Hong Kong and is subject to Hong Kong profits tax. In accordance with the relevant tax laws and regulations of Hong Kong, a company, irrespective of its residential status, is subject to tax on all profits (excluding profits arising from the sale of capital assets) arising in or derived from Hong Kong. No tax is levied on profits arising abroad, even if they are remitted to Hong Kong. Therefore, China Digital is exempt from Hong Kong income tax since all the profits were derived from subsidiaries in the PRC and there were no assessable profits generated in Hong Kong. The income taxrate in Hong Kong is 16.5%.

People's Republic of China Because all of our operations are conducted in the PRC, we are governed by the Enterprise Income Tax Law of the PRC (the "EIT Law"). This law and its implementing rules impose a unified EIT rate of 25% on all enterprises, unless they qualify for certain limited exceptions.

Under the EIT Law, an enterprise established outside of China with "de facto management bodies" within China is considered a resident enterprise and will normally be subject to an EIT of 25% on its global income. The implementing rules define the term "de facto management bodies" as "an establishment that exercises, in substance, overall management and control over the production, business, personnel, accounting, etc., of a Chinese enterprise." If the PRC tax authorities subsequently determine that we should be classified as a resident enterprise, then our organization's global income will be subject to PRC income tax at the rate of 25%. Such classification would likely result in unfavorable tax consequences to us and our non-PRC shareholders.

Since 2008, we have been subject to tax at a statutory rate of 25% on income reported in our statutory financial statements filed after appropriate tax adjustments in the relevant periods. Our future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of our pre-tax income and non-tax deductible expenses incurred.

On April 6, 2012, the Company obtained the approval from the tax authority of PRC that it fulfills certain tax requirements of a company engaging in the design of software and integrated circuit and thereby it is entitled to preferential tax relief for EIT. The Company is exempted from EIT in the first two profitable financial years of operation and is further granted a 50% relief from the EIT for the following three financial years. As the approval is officially given to the Company in April, 2012, no refund of tax would be made in respect of the EIT paid by the Company for the fiscal years ended December 31, 2009 and 2010, with the 50% relief from EIT becomes effective from the financial year commencing on January 1, 2011.

Value Added Taxes - We are also subject to value added tax, or VAT, on the sale of our products. The applicable VAT rate is 17% for products sold in the PRC.

The amount of VAT liability is determined by applying the applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT paid on purchases made with the relevant supporting invoices (input VAT). Under the commercial practice in the PRC, we pay VAT based on tax invoices issued. The tax invoices may be issued subsequent to the date on which revenue is recognized, and there may be a considerable delay between the date on which the revenue is recognized and the date on which the tax invoice is issued. In the event that the PRC tax authorities dispute the date on which revenue is recognized for tax purposes, the PRC tax office has the right to assess a penalty, which can range from zero to five times the amount of the taxes which are determined to be late or deficient. Any tax penalty assessed is expensed as a period expense if and when a determination has been made by the taxing authorities that a penalty is due.

Results of Operations The following tables set forth key components of our results of operations for the three months ended December 31, 2012 and December 31, 2011, both in dollars and as a percentage of our net sales.

Three months ended Three months ended December 31, 2012 December 31, 2011 % of Net % of Net Amount Sales Amount Sales Net Sales $ 1,085,904 100 % $ 1,952,720 100 % Cost of sales 1,032,437 95 % 842,276 43 % Gross profit 53,467 5 % 1,110,444 57 % Selling, General and Administrative Expenses 688,264 63 % 1,407,679 72 % Loss from operation (634,797 ) (58 )% (297,235 ) (15 )% Other expenses (1,883 ) 0 % (1,439 ) 0 % Loss Before Income Taxes (636,680 ) (58 )% (298,674 ) (15 )% Income tax expense - - 28,765 2 % Net loss $ (636,680 ) (58 )% $ (327,439 ) (17 )% Net Sales. Our net sales decreased to $1,085,904 for the three months ended December 31, 2012 from $1,952,720 for the three months ended December 31, 2011, representing a 44% decrease. The decrease is primarily due to the overall market decline in the current Chinese real estate industry Cost of Sales. Our cost of sales increased to $1,032,437 for the three months ended December 31, 2012 from $842,276 for the three months ended December 31, 2011, representing a 23% increase. The cost of goods sold per sales ratio increased to 95% for the three months ended December 31, 2012 from 43% for the three months ended December 31, 2011, mainly due to increased cost related to developed sales on low margin products.

Gross Profit. Our gross profit decreased to $53,467 for the three months ended December 31, 2012 from $1,110,444 for the three months ended December 31, 2011, representing a 95% decrease. This decrease was primarily due to the decreased sales and the increased cost of sales.

Selling, General and Administrative Expenses. Our selling, general and administrative expenses decreased to $688,264 for the three months ended December 31, 2012 from $1,407,679 for the three months ended December 31, 2011, representing a 51% decrease. The Selling, General and Administrative Expense per sales ratio decreased to 63% for the three months ended December 31, 2012 from 72% for the three months ended December 31, 2011, mainly due to decreased cost related to fewer employees than last period.

Other Expenses. Other expenses increased to $1,883 for the three months ended December 31, 2012 from $1,439 for the three months ended December 31, 2011. This increase was mainly due to one time non-operation expense.

Loss Before Income Taxes. Our loss before income taxes increased to $636,680 for the three months ended December 31, 2012 from $298,674 for the three months ended December 31, 2011, representing a 113% increase. The increase was mainly due to the decrease in sales and increase in cost of sales.

Income tax expenses. Our income tax expense was nil for the three months ended December 31, 2012, compared to income tax expense $28,765 for the three months ended December 31, 2011. This change was mainly due to the loss before income taxed for the three months ended December 31, 2012.

Liquidity and Capital Resources As of December 31, 2012 and September 30, 2012, we had cash and cash equivalents of $333,386 and $263,228, respectively, primarily consisting of cash on hand and demand deposits. The following table provides detailed information about our net cash flow for all financial statement periods presented in this report. To date, we have financed our operations primarily through cash flows from operations and equity contributions by our shareholders.

The following table sets forth a summary of our cash flows for the periods indicated: Cash Flow (all amounts in U.S. dollars) The three months Ended December 31, 2012 2011 Net cash provided by operating activities $ 30,720 $ 606,454 Net cash provided by (used in) investing activities 38,745 (142,925 ) Effects of Exchange Rate Change in Cash 693 6,354 Net Increase in Cash and Cash Equivalents 70,158 469,883 Cash and Cash Equivalent at Beginning of the Period 263,228 779,132 Cash and Cash Equivalent at End of the Period $ 333,386 $ 1,249,015 Operating activities Net cash provided by operating activities was $30,720 for the three months ended December 31, 2012, as compared to net cash provided by operating activities of $606,454 for the three months ended December 31, 2011. The change is attributable to the increase in net loss of $309,241, the decrease of $91,644 in accounts receivable, the decrease of $58,251 in other receivables, the increase of $252,014 in amount due to a shareholder, the increase of $142,494 in accounts payable, the decrease of $101,768 in accrued expenses and other payable, the decrease of $19,334 in value-added tax liability.

Investing activities Net cash provided by investing activities for the three months ended December 31, 2012 was $38,745, as compared to $142,925 net cash used in investing activities for the three months ended December 31, 2011. The change was mainly attributable to disposal of property and equipment.

Financing activities No cash provided or used in financing activities for the three months ended December 31, 2012 and the three months ended December 31, 2011.

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