PART
I
ITEM
1. DESCRIPTION OF BUSINESS
Company
Background
We
are engaged in marketing self-owned brand and wholesaling of spirits and wines in China through our operating subsidiary,
Fenyang Huanxin Wine Industry Development Co., Ltd. (“Huaxin”) and Fujian Jin’ou
Trading Co., Ltd. (“Jin’ou”). We maintain our principal executive offices at One Liberty Plaza, Suite 2310
PMB# 21, New York, NY 10006, United States. Our telephone number is (646) 759-3614.
We
run a growing alcohol marketing self-owned brand and wholesale business guided by a core purpose: to promote premium alcoholic
beverages to China’s population. We currently focus our business on the sale of Chinese Fenjiu liquor and imported wines.
We aim to achieve this purpose by catering to the ever-evolving customer tastes in alcohols through our creative marketing strategies
and innovative product designs that target different age groups of China’s population. To that end, we have hired marketing
talents who have decades of experience in effective alcohol brand building. As a result, we believe we have managed to respond
to the demand for Chinese Fenjiu liquor and imported wines in the Chinese marketplace.
We
believe that Fenjiu liquor presents great business opportunities for us to utilize creative product designs and marketing strategies
to attract Chinese consumers. Collaborating with Fenjiu Group, the sole producer of Fenjiu liquor in China, we have been focusing
on product design to convey a modern feel to our Fenjiu products while maintaining Fenjiu liquor’s historical elegance.
We believe our designer packaging, symbolized by its bright coloring and prominently fat-bellied jars, stands out from those of
our competitors. With creative designs and stylized names, our registered trademarks, such as Dagangjiu (translated as “Big
Jar Liquor”), are effective in capturing the attention of Chinese consumers, young and old.
Established
in October 2016, we believe our imported wine distribution business has high growth potential as evidenced from the market prices
of the imported wines from Spain and New Zealand, the two countries where we import most of our wine products from, in the current
Chinese market. A great majority of our competitors have priced their 750mL bottles of wine imported from Spain and New Zealand
well above RMB 200. This price falls within the premium range in the general Chinese wine market. Within the general Chinese wine
market, the premium range enjoyed the highest year-on-year growth compared to other price tiers of wine in 2018. This pricing
trend for premium wines is applicable to imported wines from Spain and New Zealand, which we believe will benefit our growth in
2019. Accordingly, our strategy is to continue pricing our imported wine products within the premium range levels to generate
higher margins. Though marketing and branding are still integral parts of the wine business in China, wine sales are highly driven
by the origin of the wines. Since Spain and New Zealand are considered prime origins for wine productions, we believe that our
imported wine products will continue to attract the attention of Chinese consumers and promote the sustainable growth of our imported
wine business.
We
believe that effective marketing strategies and creative product designs are two major contributing factors to our success. To
improve and maintain the effectiveness of our marketing strategies, we have established integrated and collaborative processes
to drive coordinated operations across our marketing efforts and sales. Our marketing strategies enable us to promote multiple
sales concepts across two major alcohol categories, effectively attracting different age and cultural groups of the Chinese population.
Our marketing plans are tailored to meet the evolving taste and demands of Chinese consumers. As a result, we believe that the
Company’s innovative and highly-customized designs draw considerable public attention, which in turns is a contributing
factor to the volume of our sales.
For
the fiscal year ended June 30, 2019, we generated revenue of approximately 97% from Fenjiu liquor wholesale and
approximately 3% from imported wine wholesale. For the year ended June 30, 2018, we generated revenue of approximately 84.9%
from Fenjiu liquor wholesale and approximately 15.1% from imported wine wholesale. We have not experienced any seasonality in
our business.
Industry
Overview
Chinese
Fenjiu Liquor Market
We
believe that the long-term demand for Chinese hard liquor, especially Fenjiu liquor, will continue to grow in China. The overall
business environment has been optimistic, due to the continuous economic growth evidenced by the significant growth of Chinese
nominal gross domestic product (“GDP”). This has led to an ever-increasing growth in China’s per capita expenditures
on food, tobacco, and alcoholic beverages, indicating increased consumers’ disposable income and willingness to spend money
on alcoholic beverages in general. According to the National Bureau of Statistics of China, the sales volumes of Chinese liquor
in China has remained relatively flat between 2012 and 2016. Given the increasing purchasing power and improving living standards,
the sales volume of Chinese liquor increased from 11,267.0 million liters in 2012 to 13,057.1 million liters in 2016, with a compound
annual growth rate (“CAGR”) of 3.8%. Overall, we believe consumers are increasingly interested in drinking better
quality liquor. We expect that with the Chinese consumers’ increasing purchasing power the consumption of Chinese liquor
will shift to higher quality products and therefore the Chinese liquor market is expected to experience growth in the near future.
According to the China Insights Consultancy (“CIC”) report, there are approximately 1,578 Chinese liquor producers
in China with annual revenue above RMB 20 million in 2016. These producers are mainly located in the southwest, northeast and
central China. Given the Chinese government’s implementation of policies designed to control and limit spending on “the
three public consumptions”, namely overseas travel, receptions, and official cars, the high-end Chinese liquor market in
China has undergone extensive restructuring since 2012.
Chinese
government officials had a long history of using high-end liquors at reception events. However, in 2012, the Chinese governments
implemented policies designed to control and limit spending on “the three public consumptions”, namely overseas travel,
receptions, and use of government vehicles. Ripples of this anti-corruption campaign are felt beyond the high-end liquor industry,
in sectors that heavily rely on China’s gifting culture and the lavish lifestyle of the privileged for growth. This extensive
restructuring of Chinese liquor market caused by the anti-corruption campaign from Chinese government lasted for several years.
As a result, the overall spending on high-end liquor market in China was limited and the sales volumes of Chinese high-end liquor
has remained relatively flat until 2016. Nowadays, the structure of Chinese liquor market is stable again and has a steady growth
supported by constant economic growth in China. Chinese consumers are expected to spend more on purchasing high-end liquors led
by their increasing purchasing power.
Fenjiu
Group and its subsidiaries are the sole suppliers of Fenjiu liquor in China. Fenjiu liquor has a relatively long history and is
one of the world-famous Chinese liquor brands. Due to the Chinese government’s implementation of policies meant to control
and limit spending on “the three public consumptions”, sales revenue in the Fenjiu liquor market have followed a downward
trend since 2012. However, with increasing per capita incomes and rising demand for mid-to-high-range products, the Fenjiu liquor
market started to rebound in 2015, the market has expanded in terms of sales revenue to reach RMB5,117.9 million in 2016. Shanxi
Province is the main market of Fenjiu liquor. Approximately 55% of Fenjiu liquor sales revenue was achieved in Shanxi in 2016.
It is expected that the sales revenue of Fenjiu liquor will reach a further RMB10,532.0 million in China by 2022, increasing at
a CAGR of 12.8% between 2016 and 2022.
According
to the CIC report, at the end of 2016, the total number of Fenjiu liquor distributors reached 987 in China. The Fenjiu liquor
distribution market is highly competitive with no single distributor occupying a major share of the market.
There
are relatively high entry barriers for new competitors in the Fenjiu liquor distribution market. First, it is important for new
entrants to get an authorization from Fenjiu Group, which is the sole provider of Fenjiu liquor products in China, to distribute
Fenjiu Group’s products. Fenjiu Group started placing stricter requirements on its distributors, including, for example,
new sales target, proven experience in the industry, past cooperation with Fenjiu Group. Thus, it has become increasingly difficult
for new players to enter the market. Fenjiu liquor enjoys widespread popularity in and around Shanxi Province, with markets in
other parts of China being significantly smaller. It is therefore important for new entrants to have a pre-existing distribution
network in certain regions of China in order to be successful. It remains risky for new entrants to enter into new areas where
Fenjiu liquor is not yet fully established and where the distribution market is already saturated. Distributors range from mom-and-pop
stores in Shanxi Province to larger companies with years of experience in the Fenjiu liquor industry, each competing for a fair
share of the market. Intense competition arises between distributors within the same region, selling the same or different Fenjiu
brands. Fenjiu liquor includes a variety of products, differing in terms of ABV, vintage, recipe, etc. Although there are no dominant
varieties in the market, some are preferred by end consumers more than others. However, almost all of these popular varieties
have already been taken up by exclusive distributors. Thus, new entrants might find it difficult to source popular products directly
from Fenjiu Group or will be left to source them from existing distributors, which entails lower profit margins.
Chinese
Wine Market
According
to the International Organization of Vine and Wine, or OIV, the per capita wine consumption in China is much lower than the US
average level between 2012 and 2016. After the reduction of “three public consumptions” in 2013, China’s per
capita consumption showed a further decrease. However, the consumption pattern has changed and the wine consumption has grown
into a mass consumption accompanied by a decrease in wine price. Compared with the world average consumption, China’s per
capita wine consumption has been around one-third of the world’s average since 2010. The relatively low per capita wine
consumption in China indicates great growth potential for China’s wine market in the future.
According
to the CIC report, Chinese consumers should, between 2017 and 2022, develop the habit of drinking wine rather than other alcoholic
beverages, wine consumption is considered a healthier option. In addition, the development of O2O platforms selling wine will
most certainly facilitate the purchase of wine in China.
There
are three market drivers for China’s wine market. Firstly, China’s per capita disposable income has been increasing
rapidly mainly due to increasing wages. Rising disposable income translates into increasing purchasing power for Chinese people;
it also means that Chinese people tend to focus more on their quality of life. As wine is considered in China as a premium product
with some beneficial health effect, we believe that increasing purchasing power will stimulate the further growth of wine consumption.
In addition, the characteristics associated with drinking wine, such as beautification and antioxidation, play an important role
in contributing to its consumption, especially for female customers. Secondly, China’s urbanization rate has been improving
greatly during the past decades and the Chinese government sets up the goal that the urbanization rate of China is set to reach
60% by 2020. With the further improvement of the urbanization rate in China, the retail sales market is experiencing a rapid growth
in urban regions in China. Thirdly, there are favorable national and international policies for imported wine. According to bilateral
trade agreements signed by the PRC government with New Zealand, Chile and Australia, imported goods from the three countries will
benefit from low tariff rates, effective from 2019. According to those agreements, by 2019, these tariffs will be totally eliminated.
This favorable policy should reduce the wine retailing price and hence contribute to a growth in sales.
Our
Strengths
Although
we operate in a highly competitive industry, we believe that the following factors provide us with the competitive advantages
in the marketplace that could differentiate us from our potential competitors:
Our
Company has a high brand recognition in the Chinese Fenjiu liquor market
Our
Fenjiu liquor is sold under the “Dagangjiu” brand and is one of the Chinese Fenjiu liquor market’s most popular
brands. We have leveraged our business relationship with Fenjiu Group and relied on Fenjiu Group’s international fame to
become one of the leading brands in international alcohol festivals. We believe that our brand’s strong recognition reinforces
our existing customer goodwill in Shanxi province and beyond, providing us with a competitive advantage.
Our
Marketing Team’s Extensive Experience and Superior Reputation in our Industry
We
believe that our competitors’ marketing team cannot match our marketing experts’ extensive industry experience and
their superior reputation. To some degree, our commercial campaigns are well accepted by consumer trends and resonate with potential
liquor distribution partners.
Additionally,
we believe our marketing expertise and design proficiency required to successfully attract new customers combined with our ability
to generate a range of business concepts and capability to customize each sales opportunity according to customers’ need
are advantages when competing in the Chinese Fenjiu market. Our expertise also allows us to successfully manage the numerous regional
and cultural complexities involved in operating a traditional liquor business in China.
A
Flexible Business Model
Our
current business model is flexible. It can be adjusted to different products we sell and producers we sign cooperative agreements
with. While operating a mix of marketing campaigns and business concepts under our own registered trademarks “Dagangjiu”
and “Dagang Jiufang”, we entrust our liquor inventory to reputed large-scale producers. Currently, we are in a strategic
partnership with Fenjiu Group.
Our
current business strategy emphasizes on the marketing, packaging and distribution of Fenjiu liquor and imported wines. However,
should we decide to change our business strategy catering to other popular liquor products such as Luzhou-flavor liquor and Maotai-flavor
liquor, we can quickly adjust our marketing strategy and product packaging to meet customers’ evolving needs and preferences.
Since our brand is well recognized and our current business model is based on flexible dealership, we can adjust our strategic
partnerships to address new product preferences while maintaining our accumulated goodwill. This approach enables us to update
marketing concepts and product mix at any time and allows us to be flexible in our marketing approach.
This
flexible business model has contributed to the resilience of our business performance.
Service-driven
and Cohesive Management Team
Our
talented and dedicated senior management team has guided our organization through its expansion and, we believe, positioned us
for continued growth. Additionally, our management team possesses extensive experience across a broad range of disciplines, including
Chinese liquor marketing, sales, E-Commerce, finance, franchising and business management. Our management team embraces our core
purpose to “promote premium alcoholic beverages to the Chinese population of all ages”. They are the promotors of
our passionate and customer-oriented business culture, which is shared by our employees throughout our company. We believe our
management team is service-driven and cohesive, focusing on the Company’s long-term business growth.
Our
Business Ecosystem
We
help connect a large number of business partners and distributors through our vast alcoholic beverage business network, creating
business value for all participants in the ecosystem. The diagrams below illustrate the interactions amongst key participants
in the ecosystem:
For
our imported wine wholesale business, we serve as the exclusive distributor and we are authorized to customize and rebrand alcoholic
beverages produced by upstream manufacturers.
For our Fenjiu Liquor Wholesale and marketer business, we serve as a distributor and we are authorized to customize and rebrand alcoholic beverages
produced by upstream manufacturers.
We
are a diligent promoter of our own branded alcoholic beverages. We believe our unique brand names are crucial to our market success.
We cherish our relationship with our highly experienced and qualified distributors, who are our key business partners who bring
our brand named products to Chinese markets. We have adopted a business policy very favorable to these distributors to encourage
them in reaching more customers in undeveloped markets with our own brand named products. For new qualified distributors, our
sales department will help them develop sales strategies and explore potential sales opportunities. In addition, we hold free
tasting sessions for distributors’ customers and explore investment opportunities to help our distributors achieve profitability
as soon as possible.
Our
own brand name series products:
|
Dagangjiu
Series (translated as “Big Jar Liquor series ”) Products
Our
customers choose our Dagangjiu series products for various purposes, such as personal enjoyment, gifts for loved ones,
and premium alcohol for special occasions and festivities. We believe that our Dagangjiu series products enjoy consider
goodwill in Shanxi province and beyond.
|
|
New
Zealand Imported Wine Series
Our
upstream business partners specializing in wine production are located at maritime and cool climate regions in New Zealand,
which is famous for its Marlborough Sauvignon Blanc and Pinot Noir.
Our
Waipara Springs series products and Bascand Estate series products are easy-drinking, medium-bodied Pinot Noir wines with
succulent berry fruit flavors and elegant citrus finish. They also have aromas of raspberries and blackberries with hints
of red cherries and cedar wood, which are further underpinned by leather notes.
|
Principal
Products
For
the year ended June 30, 2019, we generated revenue of approximately 97% from Fenjiu liquor wholesale and approximately 3% from
imported wine wholesale. For the year ended June 30, 2018, we generated revenue of approximately 84.9% from Fenjiu liquor wholesale
and approximately 15.1% from imported wine wholesale. We have not experienced any seasonality in our business.
Fenjiu
Liquor Wholesale and marketer
For
our Fenjiu Liquor Wholesale and marketer business, we secure our strategic partnerships with dealers based on our market survey data, market
positioning data, sales channels data, sales capabilities data and sales potential evaluation. We further evaluate dealers according
to their geographical and administrative areas and categorize them into provincial, municipal and county agents. We establish
cooperative relationships and strategic sales partnerships amongst dealers at different levels to further facilitate the sales
of our products. We sale our Fenjiu liquor products directly to these dealers.
For
our Fenjiu Liquor Wholesale and marketer business, we pay special attention to dealers with direct business access to retail stores and outlets.
We sell our Fenjiu products with simple and bulk packaging to these dealers. The idea is to achieve larger profit margins through
removing high-end designs and packaging, thus ensuring a relatively low price of our Fenjiu liquor products. Through this approach,
we believe we can reach a greater number of Chinese customers who are attracted by the cost-effectiveness of our simple and bulk
packaging products. We sell our simple and bulk packaging products to our targeted dealers who then directly resell these products
to local retail stores and outlets.
Revenue
generated from our Fenjiu Liquor Wholesale and marketer business accounted for 97% and 84.9%, respectively, of the total revenue derived from
our general business in fiscal year 2019 and 2018.
Imported
Wine Wholesale
For
our imported wine wholesale business, we secure our strategic partnerships with dealers based on our market survey data, market
positioning data, sales channels data, sales capabilities data and sales potential evaluation. We further evaluate dealers according
to their geographical and administrative areas and categorize them into provincial, municipal and county agents. We establish
cooperative relationships and strategic sales partnerships amongst dealers at different levels to further facilitate the sales
of our products. We wholesale our imported wines directly to these dealers.
Revenue
generated from our imported wine wholesale business accounted for 3% and 15.1%, respectively, of the total revenue derived from
our general business in fiscal year 2019 and 2018.
Competition
There
is intense competition in the Chinese liquor market. As a result, customers face a tremendous number of choices when deciding
which brand or product to choose from.
As
of June 30, 2019, Fenjiu Group has nearly 1,000 multi-layered distributors that often serve as Fenjiu brand co-builders. Although
the Fenjiu Group is now widely known as the only producer of Fenjiu throughout the market, intense competition in the wholesale
market remains since Fenjiu liquor distributors will continue working to co-build and enhance their respective brand image alongside
Fenjiu Group to capture market shares from their competitors. Distributors range from mom-and-pop stores in Shanxi Province
to larger companies with years of experience in the Fenjiu liquor industry, each competing for a fair share of the market. Competition
can be even more intense amongst the distributors within the same region.
The
Chinese wine market is also very competitive. Our competitors such as wine producers, distributors or retailers conduct various
marketing activities and pricing strategies in an effort to keep their market shares, which directly impact our sales, revenues,
and profitability. We follow the market trend closely and adjust our own advertising, promotion, pricing and sourcing strategies
accordingly. In addition, competitors in the Chinese wine market compete against us for regaining highly qualified marketing personnel
and staff members.
In
response to the intense competition in the Chinese liquor and wine markets, we have implemented a number of initiatives designed
to expand our revenues. Our revenue enhancement initiatives include expanding our marketing efforts, developing new products,
and working with start-up companies and bulk-sale customers directly to decrease our marketing costs.
Regulations
PRC
Laws and Regulations on Alcohol Wholesale
Huaxin
is in the alcohol wholesale business, including Fenjiu liquor wholesale and imported wine wholesale, in China. Huaxin is subject
to various existing and probable governmental regulations on its alcohol wholesale business.
According
to the Regulations on Administration of Liquor of Shanxi Province which came into effect on January 1, 2000, entities or individuals
who engage in liquor wholesale in Shanxi Province shall apply for Liquor Wholesale License. Huaxin has obtained the Liquor Wholesale
License and such license will expire on December 31, 2021. Jinqiang has also obtained the Liquor Wholesale License and such license
will expire on December 31, 2019. Also, Huaxin and Jinqiang are required to obtain the Food Operation License pursuant to the
Administrative Measures for Food Operation Licensing which came into effect on November 17, 2017. Huaxin has obtained Food Operation
License and such license will expire on August 31, 2022. Jinqiang has obtained Food Operation License and such license will expire
on December 22, 2021. Nevertheless, Huaxin and Jinqiang may be subject to penalties by PRC regulatory authorities if the Liquor
Wholesale License and Food Operation License is not timely renewed after expiration.
Currently,
license for liquor wholesale is no longer required in nationwide level, but it is still required in some particular Provinces,
such as Shanxi Province and Shanghai. In addition to Shanxi Province, the Company also sell liquor to other Provinces, namely
Fujian, Ningxia, Gansu, Xinjiang, Beijing, Shanghai and Hebei Province. Liquor wholesale business of the Company is operated by
its subsidiaries, Huaxin and Fenyang Jinqiang Wine Co., Ltd. (“Jinqiang”), both of which were established in Shanxi
Province and have obtained wholesale licenses in Shanxi Province. According to our telephone consultation with the competent authorities
in Beijing, Shanghai, Ningxia, Gansu and Hebei, no wholesale license is required for Huaxin or Jinqiang in such Provinces since
Huaxin and Jinqiang were established in Shanxi Province and have already obtained wholesale licenses in Shanxi Province. In conclusion,
no further wholesale license is required in other Provinces where the Company operates its business, unless the Company newly
establish operating entity in such Provinces and license is still required for liquor wholesale business in such Provinces.
Regarding
the imported wine business, pursuant to the Foreign Trade Law of the People’s Republic of China (Revised in 2016), a foreign
trade operator engaged in import and export of goods shall register with competent local regulatory authorities in Shanxi Province
that in charge of foreign trades; and pursuant to the Administrative Provisions of the Customs of the People’s Republic
of China on the Registration of Customs Declaration Entities, consignors and consignees of imported and exported goods shall go
through customs declaration entity registration formalities with their local Customs in accordance with the applicable provisions.
Huaxin has completed the registration for a record as a foreign trade operator and has obtained Certificate of the Customs of
the People’s Republic of China on the Registration of Customs Declaration Entities. The registration for a record as a foreign
trade operator has no time limit; while the validity period for Certificate of the Customs of the PRC on the Registration of Customs
Declaration Entities is two years and such certificate can be renewed before the expiration date. Nevertheless, Huaxin may be
subject to penalties by PRC regulatory authorities if Huaxin fails to go through the modification formalities in the event of
a change to any of its details registered with the competent governmental authorities including its name, nature, domicile and
legal representative.
PRC
Laws and Regulations on Environmental Protection
The
Ministry of Ecology and Environment is responsible for the uniform supervision and control of environmental protection in the
PRC. It formulates national environmental quality and discharge standards and monitors the PRC’s environmental system. Ecology
and Environment bureaus at the county level and above are responsible for environmental protection within their areas of jurisdiction.
Pursuant
to the Law on Environmental Impact Evaluation of the PRC promulgated on October 28, 2002 and effective from September 1, 2003,
manufacturers must prepare and file an environmental impact report setting forth the impact that the proposed construction project
may have on the environment and the measures to prevent or mitigate the impact for approval by the relevant PRC government authority
prior to commencement of construction of the relevant project.
Pursuant
to the Environmental Protection Law of the PRC, or the Environmental Protection Law, promulgated on and effective from December
26, 1989, the environmental protection department of the State Council is in charge of promulgating national standards for environmental
protection. The Environmental Protection Law requires any facility that produces pollutants or other hazards to incorporate environmental
protection measures in its operations and establish an environmental protection responsibility system. Any entity that discharges
pollution must obtain the Pollution Discharging License from the relevant environmental protection authority. Remedial measures
for breaches of the Environmental Protection Law include a warning, payment of damages or imposition of a fine. Criminal liability
may be imposed for a material violation of environmental laws and regulations that causes loss of property, personal injuries
or death.
Huaxin
and its subsidiaries are not manufacturing, assembling or processing companies, thus are not subject to the PRC laws and regulations
on environmental protection.
PRC
Laws and Regulations on Intellectual Property Rights
Regulations
on Trademarks
The
Trademark Law of the PRC was adopted at the 24th meeting of the SCNPC on August 23, 1982. Three amendments were made
on February 22, 1993, October 27, 2001 and August 30, 2013. The last amendment was implemented on May 1, 2014.
The Regulations on the Implementation of the Trademark Law of the PRC were promulgated by the State Council of the People’s
Republic of China on August 3, 2002, which took effect on September 15, 2002. It was revised on April 29, 2014
and became effective as of May 1, 2014. According to the Trademark Law and the implementing regulations, a trademark which
has been approved and registered by the trademark office is a registered trademark, including a trademark of goods, services,
collective trademark and certification trademark. The trademark registrant shall enjoy the exclusive right to use the trademark
and shall be protected by law. The trademark law also specifies the scope of registered trademarks, procedures for registration
of trademarks and the rights and obligations of trademark owners. We are currently holding 5 registered trademarks in China and
enjoy the corresponding rights.
Regulations
on Patents
Pursuant
to the Patent Law of the PRC, or the Patent Law, promulgated by the SCNPC on March 12, 1984, as latest amended on December 27,
2008, and effective from October 1, 2009 and the Implementation Rules of the Patent Law of the PRC, promulgated by the State Council
on June 15, 2001 and latest amended on January 9, 2010, there are three types of patent in the PRC: invention patent, utility
model patent and design patent. The protection period is 20 years for invention patent and 10 years for utility model patent and
design patent, commencing from their respective application dates. Any individual or entity that utilizes a patent or conducts
any other activity in infringement of a patent without prior authorization of the patentee shall pay compensation to the patentee
and is subject to a fine imposed by relevant administrative authorities and, if constituting a crime, shall be held criminally
liable in accordance with the law. In the event that a patent is owned by two or more co-owners without an agreement regarding
the distribution of revenue generated from the exploitation of any co-owner of the patent, such revenue shall be distributed among
all the co-owners.
Existing
patents can become narrowed, invalid or unenforceable due to a variety of grounds, including lack of novelty, creativity, and
deficiencies in patent application. In China, a patent must have novelty, creativity and practical applicability. Under the Patent
Law, novelty means that before a patent application is filed, no identical invention or utility model has been publicly disclosed
in any publication in China or overseas or has been publicly used or made known to the public by any other means, whether in or
outside of China, nor has any other person filed with the patent authority an application that describes an identical invention
or utility model and is recorded in patent application documents or patent documents published after the filing date. Creativity
means that, compared with existing technology, an invention has prominent substantial features and represents notable progress,
and a utility model has substantial features and represents any progress. Practical applicability means an invention or utility
model can be manufactured or used and may produce positive results. Patents in China are filed with the State Intellectual Property
Office, or SIPO. Normally, the SIPO publishes an application for an invention patent within 18 months after the filing date, which
may be shortened at the request of applicant. The applicant must apply to the SIPO for a substantive examination within 3 years
from the date of application.
As
of the date of this annual report on Form 10-K, we had obtained two patents for liquor-making devices that can change proofs of
various liquors, both of which were registered in 2015. Our issued PRC patents will expire in 2025.
Regulations
on Domain Names
The
Ministry of Industry and Information Technology of the PRC, or the MIIT, promulgated the Measures on Administration of Internet
Domain Names, or the Domain Name Measures, on August 24, 2017, which took effect on November 1, 2017 and replaced the Administrative
Measures on China Internet Domain Name promulgated by the MIIT on November 5, 2004. According to the Domain Name Measures,
the MIIT is in charge of the administration of PRC internet domain names. The domain name registration follows a first-to-file
principle. Applicants for registration of domain names shall provide true, accurate and complete information of their identities
to domain name registration service institutions. The applicant will become the holder of such domain names upon completion of
the registration procedure.
As
of the date of this annual report on Form 10-K, we do not have any domain name used for providing non-commercial internet-based
information services.
PRC
Laws and Regulations on Foreign Exchange
General
Administration of Foreign Exchange
The
principal regulation governing foreign currency exchange in the PRC is the Administrative Regulations of the PRC on Foreign
Exchange (the “Foreign Exchange Regulations”), which were promulgated on January 29, 1996, became effective
on April 1, 1996 and were last amended on August 5, 2008. Under these rules, Renminbi is generally freely convertible
for payments of current account items, such as trade- and service-related foreign exchange transactions and dividend payments,
but not freely convertible for capital account items, such as capital transfer, direct investment, investment in securities, derivative
products or loans unless prior approval by competent authorities for the administration of foreign exchange is obtained. Under
the Foreign Exchange Regulations, foreign-invested enterprises in the PRC may purchase foreign exchange without the approval of
SAFE to pay dividends by providing certain evidentiary documents, including board resolutions, tax certificates, or for trade-
and services-related foreign exchange transactions, by providing commercial documents evidencing such transactions.
Circular
No. 37 and Circular No. 13
Circular
37 was released by SAFE on July 4, 2014 and abolished Circular 75 which had been in effect since November 1, 2005. Pursuant
to Circular 37, a PRC resident should apply to SAFE for foreign exchange registration of overseas investments before it makes
any capital contribution to a special purpose vehicle, or SPV, using his or her legitimate domestic or offshore assets or interests.
SPVs are offshore enterprises directly established or indirectly controlled by domestic residents for the purpose of investment
and financing by utilizing domestic or offshore assets or interests they legally hold. Following any significant change in a registered
offshore SPV, such as capital increase, reduction, equity transfer or swap, consolidation or division involving domestic resident
individuals, the domestic individuals shall amend the registration with SAFE. Where an SPV intends to repatriate funds raised
after completion of offshore financing to the PRC, it shall comply with relevant PRC regulations on foreign investment and
foreign debt management. A foreign-invested enterprise established through return investment shall complete relevant foreign exchange
registration formalities in accordance with the prevailing foreign exchange administration regulations on foreign direct investment
and truthfully disclose information on the actual controller of its shareholders.
If
any shareholder who is a PRC resident (as determined by the Circular No. 37) holds any interest in an offshore SPV and fails to
fulfil the required foreign exchange registration with the local SAFE branches, the PRC subsidiaries of that offshore SPV may
be prohibited from distributing their profits and dividends to their offshore parent company or from carrying out other subsequent
cross-border foreign exchange activities. The offshore SPV may also be restricted in its ability to contribute additional capital
to its PRC subsidiaries. Where a domestic resident fails to complete relevant foreign exchange registration as required, fails
to truthfully disclose information on the actual controller of the enterprise involved in the return investment or otherwise makes
false statements, the foreign exchange control authority may order them to take remedial actions, issue a warning, and impose
a fine of less than RMB 300,000 on an institution or less than RMB 50,000 on an individual.
Circular
13 was issued by SAFE on February 13, 2015, and became effective on June 1, 2015. Pursuant to Circular 13, a domestic
resident who makes a capital contribution to an SPV using his or her legitimate domestic or offshore assets or interests is no
longer required to apply to SAFE for foreign exchange registration of his or her overseas investments. Instead, he or she shall
register with a bank in the place where the assets or interests of the domestic enterprise in which he or she has interests are
located if the domestic resident individually seeks to make a capital contribution to the SPV using his or her legitimate domestic
assets or interests; or he or she shall register with a local bank at his or her permanent residence if the domestic resident
individually seeks to make a capital contribution to the SPV using his or her legitimate offshore assets or interests.
As
of the date of this annual report on Form 10-K, all of our beneficial shareholders have completed registrations in accordance
with Circular 37.
Circular
19 and Circular 16
Circular
19 was promulgated by SAFE on March 30, 2015, and became effective on June 1, 2015. According to Circular 19, the foreign
exchange capital in the capital account of foreign-invested enterprises, meaning the monetary contribution confirmed by the foreign
exchange authorities or the monetary contribution registered for account entry through banks, shall be granted the benefits of
Discretional Foreign Exchange Settlement (“Discretional Foreign Exchange Settlement”). With Discretional Foreign Exchange
Settlement, foreign capital in the capital account of a foreign-invested enterprise for which the rights and interests of monetary
contribution have been confirmed by the local foreign exchange bureau, or for which book-entry registration of monetary contribution
has been completed by the bank, can be settled at the bank based on the actual operational needs of the foreign-invested enterprise.
The allowed Discretional Foreign Exchange Settlement percentage of the foreign capital of a foreign-invested enterprise has
been temporarily set to be 100%. The Renminbi converted from the foreign capital will be kept in a designated account and if a
foreign-invested enterprise needs to make any further payment from such account, it will still need to provide supporting documents
and to complete the review process with its bank.
Furthermore,
Circular 19 stipulates that foreign-invested enterprises shall make bona fide use of their capital for their own needs within
their business scopes. The capital of a foreign-invested enterprise and the Renminbi it obtained from foreign exchange settlement
shall not be used for the following purposes:
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●
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directly
or indirectly used for expenses beyond its business scope or prohibited by relevant laws or regulations;
|
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●
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directly
or indirectly used for investment in securities unless otherwise provided by relevant laws or regulations;
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directly
or indirectly used for entrusted loan in Renminbi (unless within its permitted scope of business), repayment of inter-company
loans (including advances by a third party) or repayment of bank loans in Renminbi that have been sub-lent to a third party;
or
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●
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directly
or indirectly used for expenses related to the purchase of real estate that is not for self-use (except for foreign-invested
real estate enterprises).
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Circular
16 was issued by SAFE on June 9, 2016. Pursuant to Circular 16, enterprises registered in the PRC may also convert their
foreign debts from foreign currency to Renminbi on a self-discretionary basis. Circular 16 provides an integrated standard for
conversion of foreign exchange capital items (including but not limited to foreign currency capital and foreign debts) on a self-discretionary
basis applicable to all enterprises registered in the PRC. Circular 16 reiterates the principle that an enterprise’s Renminbi
capital converted from foreign currency-denominated capital may not be directly or indirectly used for purposes beyond its business
scope or purposes prohibited by PRC laws or regulations, and such converted Renminbi capital shall not be provided as loans to
non-affiliated entities.
Our
PRC subsidiaries' distributions to their offshore parents are required to comply with the requirements as described above.
PRC
Laws and Regulations on Taxation
Enterprise
Income Tax
The Enterprise
Income Tax Law of the People’s Republic of China (the “EIT Law”) was promulgated by the Standing Committee
of the National People’s Congress on March 16, 2007 and became effective on January 1, 2008, and was later amended
on February 24, 2017. The Implementation Rules of the EIT Law (the “Implementation Rules”) were promulgated
by the State Council on December 6, 2007 and became effective on January 1, 2008. According to the EIT Law and the Implementation
Rules, enterprises are divided into resident enterprises and non-resident enterprises. Resident enterprises shall pay enterprise
income tax on their incomes obtained in and outside the PRC at the rate of 25%. Non-resident enterprises setting up institutions
in the PRC shall pay enterprise income tax on the incomes obtained by such institutions in and outside the PRC at the rate of
25%. Non-resident enterprises with no institutions in the PRC, and non-resident enterprises whose incomes having no substantial
connection with their institutions in the PRC, shall pay enterprise income tax on their incomes obtained in the PRC at a reduced
rate of 10%.
The Arrangement
between the PRC and Hong Kong Special Administrative Region for the Avoidance of Double Taxation the Prevention of Fiscal Evasion
with respect to Taxes on Income (the “Arrangement”) was promulgated by the State Administration of Taxation (“SAT”)
on August 21, 2006 and came into effect on December 8, 2006. According to the Arrangement, a company incorporated in
Hong Kong will be subject to withholding tax at the lower rate of 5% on dividends it receives from a company incorporated in the
PRC if it holds a 25% interest or more in the PRC company. The Notice on the Understanding and Identification of the Beneficial
Owners in the Tax Treaty (the “Notice”) was promulgated by SAT and became effective on October 27, 2009.
According to the Notice, a beneficial ownership analysis will be used based on a substance-over-form principle to determine whether
or not to grant tax treaty benefits.
In
April 2009, the Ministry of Finance, or MOF, and SAT jointly issued the Notice on Issues Concerning Process of Enterprise
Income Tax in Enterprise Restructuring Business, or Circular 59. In December 2009, SAT issued the Notice on Strengthening
Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or Circular 698. Both Circular 59
and Circular 698 became effective retroactively as of January 2008. In February 2011, SAT issued the Notice on
Several Issues Regarding the Income Tax of Non-PRC Resident Enterprises, or SAT Circular 24, effective April 2011. By
promulgating and implementing these circulars, the PRC tax authorities have enhanced their scrutiny over the direct or indirect
transfer of equity interests in a PRC resident enterprise by a non-resident enterprise.
Under
Circular 698, where a non-resident enterprise conducts an “indirect transfer” by transferring the equity interests
of a PRC “resident enterprise” indirectly by disposing of the equity interests of an overseas holding company, the
non-resident enterprise, being the transferor, may be subject to PRC enterprise income tax, if the indirect transfer is considered
to be an abusive use of company structure without reasonable commercial purposes. As a result, gains derived from such indirect
transfer may be subject to PRC tax at a rate of up to 10%. Circular 698 also provides that, where a non-PRC resident enterprise
transfers its equity interests in a PRC resident enterprise to its related parties at a price lower than the fair market value,
the relevant tax authority has the power to make a reasonable adjustment to the taxable income of the transaction.
In
February 2015, the SAT issued Circular 7 to replace the rules relating to indirect transfers in Circular 698. Circular 7 has introduced
a new tax regime that is significantly different from that under Circular 698. Circular 7 extends its tax jurisdiction to not
only indirect transfers set forth under Circular 698 but also transactions involving transfer of other taxable assets, through
the offshore transfer of a foreign intermediate holding company. In addition, Circular 7 provides clearer criteria than Circular
698 on how to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the
purchase and sale of equity through a public securities market. Circular 7 also brings challenges to both the foreign transferor
and transferee (or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise
conducts an “indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests
of an overseas holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity which directly
owned the taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form”
principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial
purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect
transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer
is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident
enterprise.
On
October 17, 2017, the SAT issued a Notice Concerning Withholding Income Tax of Non-Resident Enterprise, or SAT Notice No. 37,
which abolishes Circular 698 and certain provisions of Circular 7. SAT Notice No. 37 reduces the burden of the
withholding obligator, such as revocation of contract filing requirements and tax liquidation procedures, strengthens the cooperation
of tax authorities in different places, and clarifies the calculation of tax payable and mechanism of foreign exchange.
Value-added
Tax
Pursuant
to the Provisional Regulations on Value-added Tax of the PRC, or the VAT Regulations, which were promulgated by the State Council
on December 13, 1993, took effect on January 1, 1994, and were amended on November 10, 2008, February 6, 2016, and November 19,
2017, respectively, and the Rules for the Implementation of the Provisional Regulations on Value-added Tax of the PRC, which were
promulgated by the MOF on December 25, 1993, and were amended on December 15, 2008, and October 28, 2011, respectively, entities
and individuals that sell goods or labor services of processing, repair or replacement, sell services, intangible assets, or immovables,
or import goods within the territory of the People’s Republic of China are taxpayers of value-added tax. The VAT rate
is 17% for taxpayers selling goods, labor services, or tangible movable property leasing services or importing goods, except otherwise
specified; 11% for taxpayers selling services of transportation, postal, basic telecommunications, construction and lease of immovable,
selling immovable, transferring land use rights, selling and importing other specified goods including fertilizers; 6% for taxpayers
selling services or intangible assets.
According
to the Notice on the Adjustment to the Value-added Tax Rates issued by the SAT and the MOF on April 4, 2018, where taxpayers make
VAT taxable sales or import goods, the applicable tax rates shall be adjusted from 17% to 16% and from 11% to 10%, respectively.
Subsequently, the Notice on Policies for Deepening Reform of Value-added Tax was issued by the SAT, the MOF and the General Administration
of Customs on March 30, 2019 and took effective on April 1, 2019, which further adjusted the applicable tax rate for taxpayers
making VAT taxable sales or importing goods. The applicable tax rates shall be adjusted from 16% to 13% and from 10% to 9%, respectively.
Dividend
Withholding Tax
The
Enterprise Income Tax Law provides that since January 1, 2008, an income tax rate of 10% will normally be applicable to dividends
declared to non-PRC resident investors that do not have an establishment or place of business in the PRC, or that have such establishment
or place of business but the relevant income is not effectively connected with the establishment or place of business, to the
extent such dividends are derived from sources within the PRC.
PRC
Laws and Regulations on Employment and Social Welfare
Labor
Law of the PRC
Pursuant
to the Labor Law of the PRC, which was promulgated by the Standing Committee of the NPC on July 5, 1994 with an effective
date of January 1, 1995 and was last amended on August 27, 2009 and the Labor Contract Law of the PRC, which was promulgated
on June 29, 2007, became effective on January 1, 2008 and was last amended on December 28, 2012, with the amendments
coming into effect on July 1, 2013, enterprises and institutions shall ensure the safety and hygiene of a workplace, strictly
comply with applicable rules and standards on workplace safety and hygiene in China, and educate employees on such rules and standards.
Furthermore, employers and employees shall enter into written employment contracts to establish their employment relationships.
Employers are required to inform their employees about their job responsibilities, working conditions, occupational hazards, remuneration
and other matters with which the employees may be concerned. Employers shall pay remuneration to employees on time and in full
accordance with the commitments set forth in their employment contracts and with the relevant PRC laws and regulations. Huaxin
and its subsidiary company have entered into written employment contracts with all the employees and performed their obligations
under the relevant PRC laws and regulations.
Social
Insurance and Housing Fund
Pursuant
to the Social Insurance Law of the PRC, which was promulgated by the Standing Committee of the NPC on October 28, 2010
and became effective on July 1, 2011, employers in the PRC shall provide their employees with welfare schemes covering basic
pension insurance, basic medical insurance, unemployment insurance, maternity insurance, and occupational injury insurance. Huaxin
has not deposited the social insurance fees in full for all the employees in compliance with the relevant regulations. Huaxin
may be ordered by the social security premium collection agency to make or supplement contributions within a stipulated period,
and shall be subject to a late payment fine computed from the due date at the rate of 0.05% per day; where payment is not made
within the stipulated period, the relevant administrative authorities shall impose a fine ranging from one to three times the
amount of the amount in arrears. Huaxin’s subsidiaries have deposited the social insurance fees as required by relevant
regulations.
In
accordance with the Regulations on Management of Housing Provident Fund, which were promulgated by the State Council on April 3,
1999 and last amended on March 24, 2002, employers must register at the designated administrative centers and open bank accounts
for depositing employees’ housing funds. Employers and employees are also required to pay and deposit housing funds, with
an amount no less than 5% of the monthly average salary of the employee in the preceding year in full and on time. Huaxin and
its subsidiaries have not registered at the designated administrative centers and opened bank accounts for depositing employees’
housing funds. They also have not deposited employees’ housing funds. Huaxin and its subsidiaries may be ordered by the
housing provident fund management center to complete the registration formalities, open bank accounts, make the payment and deposit
within a prescribed time limit. Failing to register or open bank accounts at the expiration of the time limit could result in
fines of not less than 10,000 yuan nor more than 50,000 yuan. And an application may be made to a people’s court for compulsory
enforcement if payment and deposit has not been made after the expiration of the time limit.
Customers
Our
customers are downstream distributors. We rely upon several of our large customers from whom we generated substantial revenue
each year, and the composition of our largest customers has changed from year to year. For the year ended June 30, 2019, five
of our customers accounted for 13%, 12%, 12%, 11% and 10% of Huaxin’s revenue, respectively. For the year ended June 30,
2018, five of our customers, Beijing Huaxin Rongfa Trading Co., Ltd., Fuqing Jing Hong Trading Co., Ltd., Shanghai Baiwang Trading
Co., Ltd., New Venus Trade (Fujian) Group Co., Ltd. and Shanxi Moneng Trading Co., Ltd. represented approximately 16.3%, 16.2%,
11.5%, 11.2% and 10.6% of Huaxin’s revenue, respectively. Huaxin currently engages its major customers with purchase agreements
negotiated on an arm’s length basis. These purchase agreements customarily cover a one-year period and contain material
subsections such as targeted customers’ selling goals, representation and warranties of the customers, rights and responsibility
of the customers, pricing adjustment, logistics and shipping, payment methods, downstream management and dispute resolutions.
While we believe that one or more of our major customers could account for a significant portion of our sales for at least the
year 2019, we anticipate that our customer’s base will continue to expand and that in the future we will be less dependent
on major customers.
Suppliers
We
primarily rely upon a few main suppliers from whom we purchase materials each year. For the year ended June 30, 2019, three of
our suppliers accounted for 52%, 21%, and 13% of our total supply purchases. For the year ended June 30, 2018, five of our suppliers,
Shanxi Xinghuacun Liquor Group Wine Industry Development Zone Sales Co., Ltd., Fuzhou Tongshunda Trading Co., Ltd., Fenyang Xinghua
Haokoufu Wine Industry Flagship Store, Shanxi Yuanquan Drinking Co., Ltd. and Shanxi Xinjin Merchants Wine Group Co., Ltd., accounted
for 41%, 17%, 10%, 8% and 8% of our total supply purchases. All supplier contracts with large suppliers were entered from year
to year on an arm’s length basis.
In
general, we enter into procurement agreements in the ordinary course of business with our suppliers, pursuant to a form of supply
order typically on a “deal by deal” basis. However, we have a strategic partnership with Fenjiu Group. Most recently,
we entered into a partnership agreement with Fenjiu Group on June 30, 2017, pursuant to which Fenjiu Group has agreed to supply
us with $4,379,850 worth of Fenjiu liquor during a three-year period from June 30, 2017 to June 29, 2020. We agreed to buy $4,379,850
worth of Fenjiu liquor using our best effort pursuant to this strategic partnership agreement, he underwriter has no obligation
or commitment to purchase any securities. If the contract is renewed, the two parties must agree on the terms of contract cooperation
for the next year before June 29 of each year and sign a cooperation contract for the next year. The foregoing description of
the strategic agreement and the terms and conditions of such agreement is qualified in their entirety by the complete text of
the strategic agreement, which is filed as Exhibit 10.2 (the “Partnership Agreement”) to the Form S-1 with SEC on
July 3, 2019 and is incorporated herein by reference.
Intellectual
Property
Protection
of our intellectual property is a strategic priority for our business. We rely on a combination of patent, copyright, trademark
and trade secret laws, as well as confidentiality agreements, to establish and protect our proprietary rights. We do not rely
on third-party licenses of intellectual property for use in our business.
As
of the date of this annual report on Form 10-K, we had obtained two patents for liquor-making devices that can change proofs of
various liquors, both of which were registered in 2015. Our issued PRC patents will expire in 2025. As of the date of this annual
report on Form 10-K, we had registered 10 trademarks and had submitted 11 additional trademark applications. Our registered PRC
trademarks will expire between 2024 and 2028 but can be renewed before the trademarks’ respective expiration date. As of
the date of this annual report on Form 10-K, we do not have any registered domain names.
In
addition to the foregoing protections, we generally control access to and use of our proprietary and other confidential information
through the use of internal and external controls, such as the use of confidentiality agreement with our employees.
Employees
As
of the date of this annual report on Form 10-K, we had 60 employees throughout our operations in 4 offices and 3 warehouses. None
of our employees are covered by a collective bargaining agreement. We have not experienced any work stoppages. The following table
sets forth the number of our employees by function as of the same date:
Functional Area
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Number of Employees
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Management
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13
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Financial Department
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|
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9
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Sales and Marketing Department
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35
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Inventory Department
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3
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Total
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60
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|
As
of September 3, 2019, our employees were located in the United States, Hong Kong, Fuqing city of Fujian Province and
Fenyang City of Shanxi Province, China.
As
required by PRC laws and regulations, we participate in various employee social security plans that are organized by municipal
and provincial governments, including housing, pension, medical insurance and unemployment insurance programs. We are required
under Chinese law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain
allowances of our employees, up to a maximum amount specified by the local government from time to time.
We
believe that we maintain a good working relationship with our employees, and we have not experienced any labor disputes.
WHERE
YOU CAN FIND MORE INFORMATION
The
registrant is subject to the requirements of the Exchange Act, and files reports, proxy statements and other information with
the SEC. You may read and copy these reports, proxy statements and other information at the public reference room maintained by
the SEC at its Public Reference Room, located at 100 F Street, N.E. Washington, D.C. 20549. You may obtain information on the
operation of the public reference room by calling the SEC at (800) SEC-0330. In addition, we are required to file electronic versions
of those materials with the SEC through the SEC’s EDGAR system. The SEC also maintains a website at http://www.sec.gov,
which contains reports, proxy statements and other information regarding registrants that file electronically with the SEC.
ITEM
1A. RISK FACTORS
Risks
Related to Our Business
Our
Company is heavily dependent on its strategic partnership with Fenjiu Group, which is the sole producer of Chinese Fenjiu liquor
in China. Any disruptions in our relationship with Fenjiu Group may have an adverse effect on our profitability and operating
results.
Our
business model focuses on the sale and distribution of Chinese Fenjiu liquor. Revenue generated from our Fenjiu Liquor Wholesale and marketer business accounted for 97% and 84.9%, respectively,
of the total revenue derived from our general business in fiscal year 2019 and 2018. We rely on Fenjiu Group to provide and deliver
our Fenjiu product inventory on a continuous basis. We could suffer significant losses in the event of the loss of our strategic
partnership with Fenjiu Group due to our inability to renew our partnership agreement, disruption of Fenjiu Group’s distribution
network, damage to Fenjiu Group’s reputation or other occurrences that are beyond our control.
Any
harm to the reputation of our Fenjiu liquor producer, Fenjiu Group, may materially and adversely affect our business and results
of operations.
The
success of our business depends heavily upon the reputation of Fenjiu Group since a large majority of our revenue comes from our
Fenjiu Liquor Wholesale and marketer business. We believe that the recognition and reputation of Fenjiu Group among our customers, distributors,
and dealers have contributed significantly to the growth and success of our business. Maintaining and enhancing the recognition
and reputation of Fenjiu Group are critical to our business and market position. Any harm to the reputation of Fenjiu Group may
materially and adversely affect our business and results of operations.
We
face intense competition, and if we fail to compete effectively, we may lose market share and customers.
The
Chinese alcohol distribution and retail markets that we are in are highly competitive. We face competition from long-established
traditional Chinese alcohol distributors and retailers as well as new companies which rely on modern technology such as E-commerce
platforms. China’s alcohol industry is growing and changing rapidly. Our current or future competitors may have longer operating
histories, greater brand recognition, better supplier relationships, larger customer bases, more cost-effective fulfillment capabilities
or greater financial, technical or marketing resources than we do. Competitors may leverage their brand recognition, experience
and resources to compete with us in a variety of ways, including investing more heavily in research and development and making
acquisitions for the expansion of their products and services. Some of our competitors may be able to secure more favorable terms
from suppliers, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing or inventory policies
and devote substantially more resources to their website and system development than us. Increased competition may reduce our
profitability, market share, customer base and brand recognition. There can be no assurance that we will be able to compete successfully
against current or future competitors, and such competitive pressures may have a material and adverse effect on our business,
financial condition and results of operations.
Our
limited operating history makes it difficult to evaluate our business and prospects.
We
commenced our Fenjiu liquor distribution business in 2014 and our imported wine distribution business in October 2016. Thus,
we have a limited operating history. Since our inception, we have experienced consistent growth in our business. Our total
net revenues increased by 2.5% from RMB 101,759,660 in 2018 to RMB 104,270,083 in 2019. And our total net revenues increased by
11.6% from RMB 91,144,666 in 2017 to RMB 101,759,660 in 2018. However, our historical growth rate may not be indicative of our future performance. We
cannot assure you that we will be able to achieve similar results or grow at the same rate as we did in the past. Growth
may slow and net revenues or net income may decline for a number of possible reasons, some of which are beyond our control,
including decreasing consumer spending, increasing competition, slowing growth of our overall market, fulfillment
bottlenecks, emergence of alternative business models, changes in government policies or general economic conditions. It is
difficult to evaluate our prospects, as we may not have sufficient experience in addressing the risks to which companies
operating in rapidly evolving markets may be exposed. You should consider our prospects in light of the risks and
uncertainties that fast-growing companies with a limited operating history may encounter.
If
we are unable to manage our growth or execute our strategies effectively, our business and prospects may be materially and adversely
affected.
Business
expansion has placed, and continues to place, significant strain on our management and resources. To accommodate our growth, we
anticipate that we will need to implement a variety of new and upgraded operational management systems, procedures and controls,
including the improvement of our accounting and other internal management systems. We will also need to continue to expand, train,
manage and motivate our workforce and manage our relationships with our distributors, dealers and supplier. As we selectively
increase our product and service offerings, we will need to work with different groups of new distributors, dealers and other
suppliers efficiently and establish and maintain mutually beneficial relationships with our existing distributors, dealers and
supplier. All of these endeavors involve risks, and will require substantial management effort and significant additional expenditures.
We cannot assure you that we will be able to manage our growth or execute our strategies effectively, and any failure to do so
may have a material adverse effect on our business and prospects.
Our
future expansion into new product categories may expose us to new challenges and more risks.
Since
our inception, we primarily focused on the Chinese Fenjiu liquor market. However, we have started imported wine distribution in
October 2016. We plan to expand the product offerings to include selected categories of other alcohol products such as Luzhou-flavor
liquor and Maotai-flavor liquor. Expansion into new product categories involve new risks and challenges. Our lack of relevant
customer data relating to these products may make it more difficult for us to keep pace with the evolving customer demands and
preferences.
We
have limited experience and operating history in our future product categories and related marketplace services such as sample
tasting and custom bottle making, which makes predicting our future results of operations more difficult than it otherwise would
be. Therefore, our past results of operations should not be taken as indicative of our future performance. If we cannot successfully
address new challenges and compete effectively, we may not be able to recover costs of our investments and eventually achieve
profitability, and our future results of operations and growth prospects may be materially and adversely affected.
If
counterfeit products are sold under our brand names and trademarks, our reputation and financial results could be materially and
adversely affected.
Third-party
merchants and dealers are separately responsible for sourcing counterfeit products that are sold under our brand names and trademarks.
Although we have adopted measures to help consumers verify the authenticity of products sold on the general Chinese market and
to remove any counterfeit products found by us, these measures may not always be successful. Counterfeit products may be defective
or inferior in quality as compared to authentic products and may pose safety and health risks to our customers. If our customers
are injured by counterfeit products sold under our brand names and trademarks, we may be subject to lawsuits, severe administrative
penalties and criminal liability. We believe our brand and reputation are extremely important to our success and our competitive
position. The discovery of counterfeit products sold under our brand names and trademarks may severally damage our reputation
and cause customers to refrain from making future purchases from us, which would materially and adversely affect our business
operations and financial results.
If
we are unable to offer premium products and services at attractive prices to meet customer needs and preferences, our business,
financial condition and results of operations may be materially and adversely affected.
Our
future growth depends on our ability to continue attracting new customers and increasing the spending level of our existing customers.
Constantly changing consumer preferences have affected and will continue to affect the general Chinese alcohol market. We must
stay abreast of emerging lifestyle and consumer preferences and anticipate product and services trends that will appeal to existing
and potential customers. Our customers choose to purchase quality products or services from us due in part to the attractive prices
and premium services that we offer, and they may choose to shop elsewhere if we cannot match the prices, products or services
offered by our competitors. If our customers cannot find their desired products or services within our portfolio, they may lose
interest in us and stop buying our products or using our services, which in turn may materially and adversely affect our business,
financial condition and results of operations.
We
rely on the Fenjiu liquor product marketing and distribution for a substantial portion of our net revenues.
Since
our inception, we have been relying on Fenjiu liquor product marketing and distribution for a substantial portion of our net revenues.
We expect that this business segment to continue representing a substantial portion of our total net revenues in the near future.
We have increased our offerings to include other product categories in 2017, mainly through the imported wine marketing and distribution;
we also have plan to expand our product offerings in the future to include other popular Chinese liquors such as Luzhou-flavor
liquor and Maotai-flavor liquor. However, our sales of these new products may not increase to a level that would substantially
reduce our dependence on Fenjiu liquor product marketing and distribution business. Any event that results in a reduction in our
branded Fenjiu liquor products or short-term lodging and hospitality services could materially and adversely affect our ability
to maintain or increase our current level of net revenue and business prospects.
If
we fail to manage and expand our relationships with distributors, dealers or suppliers, or otherwise fail to source products or
services at favorable terms, our business and growth prospects may suffer.
We
worked with approximately 111 distributors and they have over 1,000 sale points over China in 2018 and 2017. In 2018, our major
suppliers are 11 in Fenjiu liquor and 2 for imported wines. In 2017, our major suppliers are 6 in Fenjiu liquor and 2 for imported
wines. Maintaining strong relationships with these distributors, dealers and suppliers is important to the growth of our business.
In
particular, we depend significantly on our ability to attract reputable liquor and wine suppliers to offer their products or services
on commercially attractive terms and to procure products from suppliers on favorable pricing terms. However, some of our agreements
for imported wines do not ensure the long-term availability of products or the continuation of particular pricing practices or
payment terms beyond the end of the contractual terms. Even if we maintain good relationships with our distributors, dealers and
suppliers, they may be unable to remain in business due to economic conditions, labor actions, regulatory or legal decisions,
natural disasters or other causes. In the event that we are not able to source products or services at favorable prices, our net
revenues and gross profit as a percentage of net revenues may be materially and adversely affected.
In
addition, if our suppliers cease to provide us with favorable payment terms, our requirements for working capital may increase
and our operations may be materially and adversely affected. We will also need to develop relationships with new suppliers to
ensure that we have access to a steady supply of products on favorable commercial terms or to offer sufficient products and services
at acceptable prices sought by our customers. Any negative developments in our relationships with distributors, dealers and suppliers
could materially and adversely affect our business and growth prospects. If we fail to attract new distributors or dealers to
sell our products, or new suppliers to sell their products to us due to any reason, our business and growth prospects may be materially
and adversely affected.
If
we fail to manage our inventory effectively, our results of operations, financial condition and liquidity may be materially and
adversely affected.
Our
business requires us to manage a large volume of inventory effectively. We depend on our forecasts of demand for and popularity
of our products to make purchase decisions and to manage our inventory. Demand for products, however, can change significantly
between the time inventory or components are ordered and the date of sale. Demand may be affected by seasonality, new product
launches, rapid changes in product cycles and pricing, product defects, changes in consumer spending patterns, changes in consumer
tastes with respect to our products and other factors, and our customers may not order products in the quantities that we expect.
It may be difficult to accurately forecast demand, and determine appropriate product or component.
If
we fail to manage our inventory effectively or negotiate favorable credit terms with suppliers, we may be subject to a decline
in inventory values, and significant inventory write-downs or write-offs. In addition, if we are required to lower sale prices
in order to reduce inventory level or to pay higher prices to our suppliers in order to secure the right to return products to
our suppliers, our profit margins might be negatively affected. Any of the above may materially and adversely affect our results
of operations and financial condition.
Our
business depends on the continued efforts of our management. If we lose their services or they are unable to work together effectively
or efficiently, our business may be severely disrupted.
Our
business operations depend on the continued services of our senior management, particularly the executive officers named in this
annual report on Form 10-K. The management team of Huaxin has been working together since the inception of Huaxin. If they cannot
work together effectively or efficiently, our business may be severely disrupted. If one or more of our executive officers were
unable or unwilling to continue in their present positions, we might not be able to replace them easily or at all. Our business,
financial condition and results of operations may be materially and adversely affected, and we may incur additional expenses to
recruit, train and retain personnel. If any of our executive officers joins a competitor or forms a competing business, we may
lose customers, suppliers, know-how and key professionals and staff members. Our executive officers have entered into employment
agreements and confidentiality and non-competition agreements with us. However, if any dispute arises between our officers and
us, we may have to incur substantial costs and expenses in order to enforce such agreements in China or we may be unable to enforce
them at all.
If
we are unable to recruit, train and retain qualified personnel or sufficient workforce while controlling our labor costs, our
business may be materially and adversely affected.
We
intend to hire additional qualified employees to support our business operations and planned expansion in product categories.
Our future success depends, to a significant extent, on our ability to recruit, train and retain qualified personnel, particularly
technical, fulfillment, marketing and other operational personnel with experience in the online retail industry. Our experienced
mid-level managers are instrumental in implementing our business strategies, executing our business plans and supporting our business
operations and growth. The effective operation of our managerial and operating systems, customer service center and other back
office functions also depends on the hard work and quality performance of our management and employees. Since our industry is
characterized by high demand and intense competition for talent and labor, we can provide no assurance that we will be able to
attract or retain qualified staff or other highly skilled employees that we will need to achieve our strategic objectives. Labor
costs in China have increased with China’s economic development, particularly in the large cities where our facilities locate.
Rising inflation in China, which has had a disproportionate impact on everyday essentials such as food, is also putting pressure
on wages. In addition, as we are still a young company, our ability to train and integrate new employees into our operations may
also be limited and may not meet the demand for our business growth on a timely fashion, or at all. If we are unable to attract,
train and retain qualified personnel, our business may be materially and adversely affected.
Any
lack of requisite approvals, licenses or permits applicable to our business or failure to comply with PRC laws and regulations
may have a material and adverse impact on our business, financial condition and results of operations.
Our
business is subject to governmental supervision and regulation by the relevant PRC governmental authorities, including the competent
authorities of Ministry of Commerce and the China Food and Drug Administration. Together, these government authorities promulgate
and enforce regulations that cover many aspects of the operation of retailing and distribution of food and nutritional supplements,
including entry into these industries, the scope of permissible business activities, licenses and permits for various business
activities, and foreign investment. We are required to hold a number of licenses and permits in connection with our business operation,
including the Liquor Wholesale License and Food Operation License. We have in the past held and currently hold all licenses and
permits described above.
As
of the date of this annual report on Form 10-K, we have not received any notice of warning or been subject to penalties or other
disciplinary action from the relevant governmental authorities regarding our conducting our business without the above mentioned
approvals and permits. However, we cannot assure you that we will not be subject to any penalties in the future. As the alcohol
wholesale and retail industry is still evolving in China, new laws and regulations may be adopted from time to time to require
additional licenses and permits other than those we currently have, and address new issues that arise from time to time. As a
result, substantial uncertainties exist regarding the interpretation and implementation of current and any future PRC laws and
regulations applicable to our businesses. If the PRC government considers that we were operating without the proper approvals,
licenses or permits or promulgates new laws and regulations that require additional approvals or licenses or imposes additional
restrictions on the operation of any part of our business, it has the power, among other things, to levy fines, confiscate our
income, revoke our business licenses, and require us to discontinue our relevant business or impose restrictions on the affected
portion of our business. Any of these actions by the PRC government may have a material and adverse effect on our results of operations.
Failure
to make adequate contributions to various employee benefits plans as required by PRC regulations may subject us to penalties.
Companies
operating in China are required to participate in various government-sponsored employee benefit plans, including certain social
insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain
percentages of salaries, including bonuses and allowances, of employees up to a maximum amount specified by the local government
from time to time at locations where our employees are based. The requirement of employee benefit plans has not been implemented
consistently by the local governments in China given the different levels of economic development in different locations. Huaxin
has deposited social security premiums in full, and has opened a bank account and contributing housing provident funds as required.
As for the social security premiums, Huaxin may be subject to a late payment fine computed from the due date at the rate of 0.05%
per day; where payment is not made within the stipulated period, the relevant administrative authorities may impose a fine ranging
from one to three times the amount of the amount in arrears. As for the housing provident fund, if Huaxin fails to go through
the formalities to register or open the account within the prescribed time limit, a fine of not less than RMB10,000 nor more than
RMB50,000 shall be imposed. If Huaxin fails to make the payment and deposit within the prescribed time limit, an application may
be made to the people’s court for compulsory enforcement.
Failure
to renew our current leases or locate desirable alternatives for our facilities could materially and adversely affect our business.
As
of the date of this annual report on Form 10-K, we leased an aggregate of approximately 2600 square meters of properties for our
offices used for communication and development, customer service and management and our operations in general. We may not be able
to successfully extend or renew such leases upon expiration of the current term on commercially reasonable terms or at all, and
may therefore be forced to relocate our affected operations. This could disrupt our operations and result in significant relocation
expenses, which could adversely affect our business, financial condition and results of operations. In addition, we compete with
other businesses for premises at certain locations or of desirable sizes. As a result, even though we could extend or renew our
leases, rental payments may significantly increase as a result of the high demand for the leased properties. In addition, we may
not be able to locate desirable alternative sites for our facilities as our business continues to grow and such failure in relocating
our affected operations could affect our business and operations.
We
have identified material weaknesses in our internal control over financial reporting. If our remediation of these material weaknesses
is not effective, or if we experience additional material weaknesses in the future, we may not be able to accurately or timely
report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result,
the value of our shares of Common Stock.
In
connection with the audit of the consolidated financial statements as of and for the year ended June 30, 2019, PKF Littlejohn
LLP founded that the Company had made improvement in our internal control over financial reporting. A material weakness is a deficiency, or combination
of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement
of our annual or interim financial statements will not be prevented or detected on a timely basis.
Based
upon an evaluation the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were not effective as of June 30, 2019 to ensure that information required to be disclosed
by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated
to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding
required disclosure. The principal basis for this conclusion is the lack of segregation of duties within our financial function
and the lack of an operating Audit Committee, as well as the Company’s failure to engage sufficient resources in regards
to our accounting and reporting obligations.
We
have initiated remediation efforts focused on continue to make effort to strengthen our internal control over financial reporting and to specifically address
the control deficiencies that led to our material weaknesses. These efforts include the following:
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Required of the
accounting personnel in the accounting department to take a minimum of 24 CPE credits annually with a focus on US GAAP and
financial reporting standards. We also required the Chief Financial Officer to take a minimum of 40 CPE credits annually
with a focus on US GAAP and financial reporting standards.
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Implemented
an internal review process over financial reporting to continue to improve our ongoing review and supervision of our internal
control over financial reporting;
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An
ongoing initiative and training in the Company to ensure the importance of internal controls and compliance with the established
policies and procedures are fully understood throughout the organization, and we plan to provide continuous U.S. GAAP knowledge
training to relevant employees involved to ensure the performance of and the compliance with those procedures and policies.
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We
cannot assure you that the measures we have taken to date, and are continuing to implement, will be sufficient to remediate the
material weaknesses we have identified or avoid potential future material weaknesses. If the steps we take do not remediate the
material weaknesses in a timely manner, we will be unable to conclude that we maintain effective disclosure controls and procedures
or effective internal control over financial reporting. Additionally, these material weaknesses could result in a misstatement
of our accounts or disclosures that would result in a material misstatement of our annual or interim consolidated financial statements
that would not be prevented or detected.
As
a public company, we will be required to maintain adequate internal control over financial reporting and to report any material
weaknesses in our internal control over financial reporting. SEC Regulation S-K requires that we evaluate and determine the
effectiveness of our internal control over financial reporting and provide a management report on internal control over financial
reporting. Regulation S-K also requires that our management report on internal control over financial reporting be attested to
by our independent registered public accounting firm, to the extent we are no longer an emerging growth company. We do not expect
our independent registered public accounting firm to attest to our management report on internal control over financial reporting
while we are an emerging growth company.
We
are in the process of evaluating our internal control over financial reporting required to comply with this obligation, and this
process will be time consuming, costly and complicated. If we identify any additional material weaknesses in our internal control
over financial reporting, if we are unable to comply with the requirements of Regulation S-K in a timely manner, if we are unable
to assert that our internal control over financial reporting is effective, or when required in the future, if our independent
registered public accounting firm is unable to express an unqualified opinion as to the effectiveness of our internal control over
financial reporting, investors may lose confidence in our financial reports and the market price of our shares of Common Stock
could be adversely affected.
We
may not be able to adequately protect our intellectual property rights, and our competitors may be able to offer similar products
and services, which would harm our competitive position.
Our
success depends in part upon our intellectual property rights. We rely primarily on trademark, copyright, trade secret laws, confidentiality
procedures, license agreements and contractual provisions to establish and protect our proprietary rights over our products, procedures
and services. Other persons could copy or otherwise obtain and use our intellectual properties without authorization, or create
intellectual properties similar to ours independently. We may also pursue the registration of our domain names, trademarks, and
service marks in other jurisdictions, including the United States. However, the intellectual property laws in China are not considered
as strong as comparable laws in the United States or the European Union. We cannot assure you that we will be able to protect
our proprietary rights. Further, our competitors may be able to independently develop similar intellectual property, duplicate
our products and services or design around any intellectual property rights we hold. Further, our intellectual property rights
may be subject to termination or expirations. The loss of intellectual property protections or the inability to timely regain
intellectual property protections could harm our business and ability to compete.
We
may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and
operations.
We
cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks,
patents, copyrights, know-how or other intellectual property rights held by third parties. We have not been in the past, but may
be from time to time in the future, subject to legal proceedings and claims relating to the intellectual property rights of others.
There may be third-party intellectual property that is infringed by our products, services or other aspects of our business. There
could also be existing patents or other intellectual property rights of which we are not aware that our products may inadvertently
infringe. We cannot assure you that holders of the relevant intellectual property rights purportedly relating to some aspect of
our technology platform or business, if any such holders exist, would not seek to enforce such intellectual property rights against
us in China, the United States or any other jurisdictions. In addition, we strive to closely monitor the products offered on our
internet platform, and also require suppliers and third-party merchants to indemnify us for any losses we suffer or any costs
that we incur in relation to the products we source from such suppliers or the products offered by such third-party merchants
on our internet platform. However, we cannot be certain that these measures would be effective in completely preventing the infringement
of trademarks, patents, copyrights, know-how or other intellectual property rights held by third parties. Further, the application
and interpretation of China’s intellectual property right laws and the procedures and standards for granting trademarks,
patents, copyrights, know-how or other intellectual property rights in China are still evolving and are uncertain, and we cannot
assure you that PRC courts or regulatory authorities would agree with our analysis. If we are found to have violated the intellectual
property rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such
intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. In addition, we may incur
significant expenses, and may be forced to divert management’s time and other resources from our business and operations
to defend against these third-party infringement claims, regardless of their merits. Successful infringement or licensing claims
made against us may result in significant monetary liabilities and may materially disrupt our business and operations by restricting
or prohibiting our use of the intellectual property in question.
We
may need additional capital, and financing may not be available on terms acceptable to us, or at all.
We
believe our current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated
cash needs for the next 12 months. We may, however, require additional cash resources due to changed business conditions or other
future developments, including any marketing initiatives or investments we may decide to pursue. If these resources are insufficient
to satisfy our cash requirements, we may seek to obtain a credit facility or sell additional equity or debt securities. The sale
of additional equity securities could result in dilution of our existing shareholders. The incurrence of indebtedness would result
in increased debt obligations and could result in operating and financing covenants that would restrict our operations. In addition,
it is uncertain whether financing will be available in amounts or on terms acceptable to us, if at all.
We
have limited insurance coverage which could expose us to significant costs and business disruption.
We
maintain certain insurance policies to safeguard against risks and unexpected events. We have purchased cargo transportation insurance
covering our inventory in transit. However, as the insurance industry in China is still in an early stage of development, insurance
companies in China currently offer limited business-related insurance products. We do not maintain business interruption insurance
or product liability insurance, nor do we maintain key-man life insurance. We cannot assure you that our insurance coverage is
sufficient to prevent us from any loss or that we will be able to successfully claim our losses under our current insurance policy
on a timely basis, or at all. If we incur any loss that is not covered by our insurance policies, or the compensated amount is
significantly less than our actual loss, our business, financial condition and results of operations could be materially and adversely
affected.
We
face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.
Our
business could be adversely affected by natural disasters or the outbreak of avian influenza, severe acute respiratory syndrome,
or SARS, the influenza A (H1N1), H7N9 or other epidemics. Any of such occurrences could cause severe disruption to our daily operations,
and may even require a temporary closure of our facilities. Such closures may disrupt our business operations and adversely affect
our results of operations. Our operation could also be disrupted if our suppliers, customers or business partners were affected
by such natural disasters or health epidemics.
Risks
Related to Doing Business in China
A
slowdown of the Chinese economy or adverse changes in economic and political policies of the PRC government could negatively impact
China’s overall economic growth, which could materially adversely affect our business.
After
the Business Combination, we will be a holding company and all of the combined company’s operations will be entirely conducted
in the PRC. Although the PRC economy has grown in recent years, the pace of growth has slowed, and even that rate of growth may
not continue. The annual rate of growth in the PRC declined from 6.9% in 2015 to 6.7% in 2016, 6.8% in 2017 and 6.6% in 2018.
According to a recent State Information of China forecast, China’s economic growth rate in 2019 will slow to 6%-6.5%, its
lowest since 1990. A slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments
in the PRC may materially reduce the demand for the company’s products and may have a materially adverse effect on its business.
China’s
economy differs from the economies of most other countries in many respects, including the amount of government involvement in
the economy, the general level of economic development, growth rates and government control of foreign exchange and the allocation
of resources. While the PRC economy has grown significantly over the past few decades, this growth has remained uneven across
different periods, regions and economic sectors.
The
PRC government also exercises significant control over China’s economic growth by allocating resources, controlling the
payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular
industries or companies. Any actions and policies adopted by the PRC government could negatively impact the Chinese economy or
the economy of the region the combined company serves, which could materially adversely affect the combined company’s business.
Substantial
uncertainties and restrictions with respect to the political and economic policies of the PRC government and PRC laws and regulations
could have a significant impact upon the business the combined company may be able to conduct in the PRC and accordingly on the
results of its operations and financial condition.
The
combined company’s business operations may be adversely affected by the current and future political environment in the
PRC. The Chinese government exerts substantial influence and control over the manner in which the combined company must conduct
its business activities. The combined company’s ability to operate in China may be adversely affected by changes in Chinese
laws and regulations. Under the current government leadership, the government of the PRC has been pursuing economic reform policies
that encourage private economic activities and greater economic decentralization. However, the government of the PRC may not continue
to pursue these policies, or may significantly alter these policies from time to time without notice.
There
are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited
to, the laws and regulations governing the combined company’s business, or the enforcement and performance of the combined
company’s arrangements with borrowers in the event of the imposition of statutory liens, death, bankruptcy or criminal proceedings.
Only after 1979 did the Chinese government begin to promulgate a comprehensive system of laws that regulate economic affairs in
general, deal with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and
trade, as well as encourage foreign investment in China. Although the influence of the law has been increasing, China has not
developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of
economic activities in China. Also, because these laws and regulations are relatively new, and because of the limited volume of
published cases and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant
uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.
In addition, there have been constant changes and amendments of laws and regulations over the past 40 years in order to keep up
with the rapidly changing society and economy in China. Because government agencies and courts provide interpretations of laws
and regulations and decide contractual disputes and issues, their inexperience in adjudicating new business and new polices or
regulations in certain less developed areas causes uncertainty and may affect the combined company’s business. Consequently,
neither Huaxin nor Oranco can predict the future direction of Chinese legislative activities with respect to either businesses
with foreign investment or the effectiveness on enforcement of laws and regulations in China. The uncertainties, including new
laws and regulations and changes of existing laws, as well as judicial interpretation by inexperienced officials in the agencies
and courts in certain areas, may cause possible problems to foreign investors.
Both
Huaxin and Oranco’s businesses are subject to extensive regulation and supervision by state, provincial and local government
authorities, which may interfere with the way the combined company conducts its business and may negatively impact its financial
results.
Both
Huaxin and Oranco are subject to extensive and complex state, provincial and local laws, rules and regulations with regard to
their loan operations, capital structure, maximum interest rates, allowance for loan losses, among other things, as set out in
“Business — Government Regulations.” These laws, rules and regulations are issued by different central government
ministries and departments, provincial and local governments and are enforced by different local authorities. As a result of the
complexity, uncertainties and constant changes in these laws, rules and regulation, including changes in interpretation and implementation
of such, both Huaxin and Oranco’s business activities and growth may be adversely affected if they do not respond to the
changes in a timely manner or are found to be in violation of the applicable laws, regulations and policies as a result of a different
position from theirs taken by the competent authority in the interpretation of such applicable laws, regulations and policies.
If Huaxin and Oranco are found to be not in compliance with these laws and regulations, they may be subject to sanctions by regulatory
authorities, monetary penalties and/or reputation damage, which could have a material adverse effect on the combined company’s
business operations and profitability.
You
may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions against
us or our management, in China, based upon United States laws, including the U.S. federal securities laws, or other foreign laws.
We
are a company incorporated in Nevada. After the Business Combination, substantially all of our operations will be conducted in
China, and substantially all of our assets will be located in China. All of our current and proposed directors and officers reside
in China, and substantially all of the assets of those persons are located outside of the United States. As a result, Zhonglun
W&D Law Firm, our counsel as to PRC law, has advised us that it may be difficult for a shareholder to effect service of process
within the United States upon these persons, or to enforce judgments against us which are obtained in United States courts, including
judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United
States.
Zhonglun
W&D Law Firm has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC
Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil
Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity
between jurisdictions. China does not have any treaties or other form of reciprocity with the United States providing for the
reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in
the PRC will not enforce a foreign judgment against us or our directors or officers if they decide that the judgment violates
the basic principles of PRC laws, national sovereignty, security or public interest. As a result, it is uncertain whether and
on what basis a PRC court would enforce a judgment rendered by a court in the United States.
Zhonglun
W&D Law Firm has also advised us that in the event shareholders originate an action against a company without domicile in
China for disputes related to contracts or other property interests, the PRC courts may accept a cause of action if (a) the disputed
contract is concluded or performed in the PRC or the disputed subject matter is located in the PRC, (b) the company (as defendant)
has properties that can be seized within the PRC, (c) the company has a representative organization within the PRC, or (d) the
parties chose to submit to the jurisdiction of the PRC courts in the contract on the condition that such submission does not violate
the requirements of jurisdiction under the PRC Civil Procedures Law. The action may be initiated by the shareholder by filing
a complaint with the PRC courts. The PRC courts would determine whether to accept the complaint in accordance with the PRC Civil
Procedures Law. The shareholder may participate in the action by itself or entrust any other person or PRC legal counsel to participate
on behalf of such shareholder. Foreign citizens and companies will have the same rights as PRC citizens and companies in such
an action unless such foreign country restricts the rights of PRC citizens and companies.
Dividends
payable to our foreign investors and gains on the sale of our shares of Common Stock by our foreign investors may become subject
to tax by the PRC.
Under
the Enterprise Income Tax Law and its implementation regulations issued by the State Council of the PRC, a 10% PRC withholding
tax is applicable to dividends payable to investors that are non-resident enterprises, which do not have an establishment or place
of business in the PRC or which have such establishment or place of business but the dividends are not effectively connected with
such establishment or place of business, to the extent such dividends are derived from sources within the PRC. Similarly, any
gain realized on the transfer of shares by such investors is also subject to PRC tax at a current rate of 10%, subject to any
reduction or exemption set forth in relevant tax treaties, if such gain is regarded as income derived from sources within the
PRC. If we are deemed a PRC resident enterprise, dividends paid on our shares, and any gain realized from the transfer of our
shares, would be treated as income derived from sources within the PRC and would as a result be subject to PRC taxation. Furthermore,
if we are deemed a PRC resident enterprise, dividends payable to individual investors who are non-PRC residents and any gain realized
on the transfer shares by such investors may be subject to PRC tax at a current rate of 20%, subject to any reduction or exemption
set forth in applicable tax treaties. It is unclear whether we or any of our subsidiaries established outside of China are considered
a PRC resident enterprise, holders of shares would be able to claim the benefit of income tax treaties or agreements entered into
between China and other countries or areas. If dividends payable to our non-PRC investors, or gains from the transfer of our shares
by such investors are subject to PRC tax, the value of your investment in our shares may decline significantly.
Our
global income may be subject to PRC taxes under the PRC Enterprise Income Tax Law, which could have a material adverse effect
on our results of operations.
Under
the PRC Enterprise Income Tax Law, or the New EIT Law, and its amendment and implementation rules, which became effective in January
2008, an enterprise established outside of the PRC with a “de facto management body” located within the PRC is considered
a PRC resident enterprise and will be subject to the enterprise income tax at the rate of 25% on its global income. The implementation
rules define the term “de facto management bodies” as “establishments that carry out substantial and overall
management and control over the manufacturing and business operations, personnel and human resources, finance and treasury, and
Business Combination and disposition of properties and other assets of an enterprise.” On April 22, 2009, the State Administration
of Taxation (the “SAT”), issued a circular, or SAT Circular 82, which provides certain specific criteria for determining
whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in
China. Although the SAT Circular 82 only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups,
not those controlled by PRC individuals or foreigners, the determining criteria set forth in the SAT Circular 82 may reflect the
SAT’s general position on how the “de facto management body” text should be applied in determining the resident
status of all offshore enterprises for the purpose of PRC tax, regardless of whether they are controlled by PRC enterprises or
individuals. Although we do not believe that our legal entities organized outside of the PRC constitute PRC resident enterprises,
it is possible that the PRC tax authorities could reach a different conclusion. In such case, we may be considered a PRC resident
enterprise and may therefore be subject to the 25% enterprise income tax on our global income, which could significantly increase
our tax burden and materially and adversely affect our cash flow and profitability. In addition to the uncertainty regarding how
the new PRC resident enterprise classification for tax purposes may apply, it is also possible that the rules may change in the
future, possibly with retroactive effect.
We
and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises by
their non-PRC holding companies.
On
February 3, 2015, the State Administration of Taxation issued an Announcement on Several Issues Concerning Enterprise Income Tax
on Income Arising from Indirect Transfers of Property by Non-PRC Resident Enterprises, or Circular 7, with the same effective
date. Under Announcement 7, an “indirect transfer” refers to a transaction where a non-resident enterprise transfers
its equity interest and other similar interest in an offshore holding company, which directly or indirectly holds Chinese taxable
assets (the assets of an “establishment or place” situated in China; real property situated in China and equity interest
in Chinese resident enterprises) and any indirect transfer without reasonable commercial purposes are subject to the PRC taxation.
In addition, Announcement 7 specifies the conditions under which an indirect transfer is deemed to lack a reasonable commercial
purpose which include: (1) 75% or more of the value of the offshore holding company’s equity is derived from Chinese taxable
assets, (2) anytime in the year prior to the occurrence of the indirect transfer of Chinese taxable assets, 90% or more of the
total assets (excluding cash) of the offshore holding company are direct or indirect investment in China, or 90% or more of the
revenue of the offshore holding company was sourced from China; (3) the functions performed and risks assumed by the offshore
holding company(ies), although incorporated in an offshore jurisdiction to conform to the corporate law requirements there, are
insufficient to substantiate their corporate existence and (4) the foreign income tax payable in respect of the indirect transfer
is lower than the Chinese tax which would otherwise be payable in respect of the direct transfer if such transfer were treated
as a direct transfer. As a result, gains derived from such indirect transfer will be subject to PRC enterprise income tax, currently
at a rate of 10%.
Announcement
7 grants a safe harbor under certain qualifying circumstances, including transfers in the public securities market and certain
intragroup restricting transactions, however, there is uncertainty as to the implementation of Announcement 7. For example, Announcement
7 requires the buyer to withhold the applicable taxes without specifying how to obtain the information necessary to calculate
taxes and when the applicable tax shall be submitted. Announcement 7 may be determined by the tax authorities to be applicable
to our offshore restructuring transactions or sale of the shares of our offshore subsidiaries where non-resident enterprises,
being the transferors, were involved. Though Announcement 7 does not impose a mandatory obligation of filing the report of taxable
events, the transferring party shall be subject to PRC withholding tax if the certain tax filing conditions are met. Non-filing
may result in an administrative penalty varying from 50% to 300% of unpaid taxes. As a result, we and our non-resident enterprises
in such transactions may become at risk of being subject to taxation under Announcement 7, and may be required to expend valuable
resources to comply with Announcement 7 or to establish that we and our non-resident enterprises should not be taxed under Announcement
7, for any restructuring or disposal of shares of our offshore subsidiaries, which may have a material adverse effect on our financial
condition and results of operations.
Enhanced
scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may
pursue in the future.
The
PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of certain taxable assets, including, in
particular, equity interests in a PRC resident enterprise, by a non-resident enterprise by promulgating and implementing SAT Circular
59 and Circular 698, which became effective in January 2008, and a Circular 7 in replacement of some of the existing rules in
Circular 698, which became effective in February 2015.
Under
Circular 698, where a non-resident enterprise conducts an “indirect transfer” by transferring the equity interests
of a PRC “resident enterprise” indirectly by disposing of the equity interests of an overseas holding company, the
non-resident enterprise, being the transferor, may be subject to PRC enterprise income tax, if the indirect transfer is considered
to be an abusive use of company structure without reasonable commercial purposes. As a result, gains derived from such indirect
transfer may be subject to PRC tax at a rate of up to 10%. Circular 698 also provides that, where a non-PRC resident enterprise
transfers its equity interests in a PRC resident enterprise to its related parties at a price lower than the fair market value,
the relevant tax authority has the power to make a reasonable adjustment to the taxable income of the transaction.
In
February 2015, the SAT issued Circular 7 to replace the rules relating to indirect transfers in Circular 698. Circular 7 has introduced
a new tax regime that is significantly different from that under Circular 698. Circular 7 extends its tax jurisdiction to not
only indirect transfers set forth under Circular 698 but also transactions involving transfer of other taxable assets, through
the offshore transfer of a foreign intermediate holding company. In addition, Circular 7 provides clearer criteria than Circular
698 on how to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the
purchase and sale of equity through a public securities market. Circular 7 also brings challenges to both the foreign transferor
and transferee (or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise
conducts an “indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests
of an overseas holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity which directly
owned the taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form”
principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial
purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect
transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer
is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident
enterprise.
On
October 17, 2017, the SAT issued a Notice Concerning Withholding Income Tax of Non-Resident Enterprise, or SAT Notice No. 37,
which abolishes Circular 698 and certain provisions of Circular 7. SAT Notice No. 37 further reduces the burden
of the withholding obligator, such as revocation of contract filing requirements and tax liquidation procedures, strengthens the
cooperation of tax authorities in different places, and clarifies the calculation of tax payable and mechanism of foreign exchange.
We
face uncertainties on the reporting and consequences on future private equity financing transactions, share exchange or other
transactions involving the transfer of shares in our company by investors that are non-PRC resident enterprises. The PRC tax authorities
may pursue such non-resident enterprises with respect to a filing or the transferees with respect to withholding obligation, and
request our PRC subsidiaries to assist in the filing. As a result, we and non-resident enterprises in such transactions may become
at risk of being subject to filing obligations or being taxed, under Circular 59 or Circular 7 and SAT Notice No. 37, and
may be required to expend valuable resources to comply with Circular 59, Circular 7 and SAT Notice No. 37 or to establish
that we and our non-resident enterprises should not be taxed under these circulars, which may have a material adverse effect on
our financial condition and results of operations.
The
PRC tax authorities have the discretion under SAT Circular 59, Circular 7 and SAT Notice No. 37 to make adjustments to the
taxable capital gains based on the difference between the fair value of the taxable assets transferred and the cost of investment.
Although we currently have no plans to pursue any acquisitions in China or elsewhere in the world, we may pursue acquisitions
in the future that may involve complex corporate structures. If we are considered a non-resident enterprise under the PRC Enterprise
Income Tax Law and if the PRC tax authorities make adjustments to the taxable income of the transactions under SAT Circular 59
or and SAT Notice No. 37 and Circular 7, our income tax costs associated with such potential acquisitions will be increased,
which may have an adverse effect on our financial condition and results of operations.
Restrictions
on currency exchange may limit our ability to utilize our revenue effectively.
Substantially
all of our revenue is denominated in Renminbi. The Renminbi is currently convertible under the “current account,”
which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,”
which includes foreign direct investment and loans. Currently, our PRC subsidiaries, which are wholly-foreign owned enterprises,
may purchase foreign currency for settlement of “current account transactions,” including payment of dividends to
us, without the approval of SAFE by complying with certain procedural requirements. However, the relevant PRC governmental authorities
may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. Since a significant
amount of our future revenue will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit
our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign
currencies to our shareholders. Foreign exchange transactions under the capital account remain subject to limitations and require
approvals from, or registration with, SAFE or banks and other relevant PRC governmental authorities. This could affect our ability
to obtain foreign currency through debt or equity financing for all of our PRC subsidiaries.
Fluctuations
in the foreign currency exchange rate between U.S. Dollars and Renminbi could adversely affect our financial condition.
The
value of the RMB against the U.S. dollar and other currencies may fluctuate. Exchange rates are affected by, among other things,
changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005,
the PRC government changed its policy of pegging the value of the RMB to the U.S. dollar. Under this policy, the RMB is permitted
to fluctuate within a narrow and managed band against a basket of foreign currencies. Following the removal of the U.S. dollar
peg, the RMB appreciated more than 20% against the U.S. dollar over three years. From July 2008 until June 2010, however, the
RMB traded stably within a narrow range against the U.S. dollar. On June 20, 2010, the PBOC announced that the PRC government
would reform the RMB exchange rate regime and increase the flexibility of the exchange rate. Since June 2010, the RMB has appreciated
more than 10% against the U.S. dollar. In April 2012, the PRC government announced it would allow greater RMB exchange rate fluctuation.
On August 11, 12 and 13, 2015, the PRC government successively set the central parity rate for the RMB more than 3% lower in the
aggregate than that of August 10, 2015 and announced that it will begin taking into account previous day’s trading in setting
the central parity rate. In 2015, the yuan experienced a 4.88% drop in value, and on January 4, 2016 the PRC government set the
U.S. dollar-Chinese yuan currency pair to a reference rate of 6.5%, the lowest rate in 4.5 years, on January 6, 2017, the reference
rate was 0.9% up-regulated by the PRC government. However, it is difficult to predict how market forces or PRC or U.S. government
policy may impact the exchange rate between the RMB and the U.S. dollar in the future. As significant international pressure remains
on the PRC government to adopt a more flexible currency policy, greater fluctuation of the RMB against the U.S. dollar could result.
Our
revenues and costs are mostly denominated in the RMB, and a significant portion of our financial assets are also denominated in
the RMB. Any significant fluctuations in the exchange rate between the RMB and the U.S. dollar may materially adversely affect
our cash flows, revenues, earnings and financial position, and the amount of and any dividends we may pay on our shares in U.S.
dollars. Fluctuations in the exchange rate between the RMB and the U.S. dollar could also result in foreign currency translation
losses for financial reporting purposes.
If
any dividend is declared in the future and paid in a foreign currency, you may be taxed on a larger amount in U.S. dollars than
the U.S. dollar amount that you will actually ultimately receive.
If
you are a U.S. holder of our shares of Common Stock, you will be taxed on the U.S. dollar value of your dividends, if any, at
the time you receive them, even if you actually receive a smaller amount of U.S. dollars when the payment is in fact converted
into U.S. dollars. Specifically, if a dividend is declared and paid in a foreign currency such as the RMB, the amount of the dividend
distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the payments made in the foreign
currency, determined at the spot rate of the foreign currency to the U.S. dollar on the date the dividend distribution is includible
in your income, regardless of whether the payment is in fact converted into U.S. dollars. Thus, if the value of the foreign currency
decreases before you actually convert the currency into U.S. dollars, you will be taxed on a larger amount in U.S. dollars than
the U.S. dollar amount that you will actually ultimately receive.
Future
inflation in China may inhibit economic activity and adversely affect the combined company’s operations.
The
Chinese economy has experienced periods of rapid expansion in recent years which can lead to high rates of inflation or deflation.
This has caused the PRC government to, from time to time, enact various corrective measures designed to restrict the availability
of credit or regulate growth and contain inflation. High inflation may in the future cause the PRC government to once again impose
controls on credit and/or prices, or to take other action, which could inhibit economic activity in China. Any action on the part
of the PRC government that seeks to control credit and/or prices may adversely affect the combined company’s business operations.
PRC
laws and regulations have established more complex procedures for certain acquisitions of Chinese companies by foreign investors,
which could make it more difficult for the combined company to pursue growth through acquisitions in China.
Further
to the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rules, the Anti-monopoly
Law of the PRC, the Rules of Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors promulgated by MOFCOM or the MOFCOM Security Review Rules, was issued in August 2011, which established
additional procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors
more time-consuming and complex, including requirements in some instances that MOFCOM be notified in advance of any change of
control transaction in which a foreign investor takes control of a PRC enterprise, or that the approval from MOFCOM be obtained
in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic
companies. PRC laws and regulations also require certain merger and acquisition transactions to be subject to merger control review
and or security review.
The
MOFCOM Security Review Rules, effective from September 1, 2011, which implement the Notice of the General Office of the State
Council on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated
on February 3, 2011, further provide that, when deciding whether a specific merger or acquisition of a domestic enterprise by
foreign investors is subject to the security review by MOFCOM, the principle of substance over form should be applied and foreign
investors are prohibited from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect
investments, leases, loans, control through agreements control or offshore transactions.
Further,
if the business of any target company that the combined company seek to acquire falls into the scope of security review, the combined
company may not be able to successfully acquire such company either by equity or asset acquisition, capital contribution or through
any contractual agreements. The combined company may grow its business in part by acquiring other companies operating in its industry.
Complying with the requirements of the relevant regulations to complete such transactions could be time consuming, and any required
approval processes, including approval from MOFCOM, may delay or inhibit its ability to complete such transactions, which could
affect its ability to maintain or expand its market share.
In
addition, SAFE promulgated the Circular on the Settlement of Foreign Currency Capital of Foreign-invested Enterprises, or Circular
19, on June 1, 2015. Under Circular 19, registered capital of a foreign-invested company settled in RMB converted from foreign
currencies may only be used within the business scope approved by the applicable governmental authority and the equity investments
in the PRC made by the foreign-invested company shall be subject to the relevant laws and regulations about the foreign-invested
company’s reinvestment in the PRC. In addition, foreign-invested companies cannot use such capital to make the investments
on securities, and cannot use such capital to issue the entrusted RMB loans (except approved in its business scope), repay the
RMB loans between the enterprises and the ones which have been transferred to the third party. Circular 19 may significantly limit
our ability to effectively use the proceeds from future financing activities as the Chinese subsidiaries may not convert the funds
received from us in foreign currencies into RMB, which may adversely affect their liquidity and our ability to fund and expand
our business in the PRC.
SAFE
issued the Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts (“Circular
16”), on June 9, 2016, which became effective simultaneously. Pursuant to Circular 16, enterprises registered in the PRC
may also convert their foreign debts from foreign currency to RMB on self-discretionary basis. Circular 16 provides an integrated
standard for conversion of foreign exchange under capital account items (including but not limited to foreign currency capital
and foreign debts) on self-discretionary basis which applies to all enterprises registered in the PRC. Circular 16 reiterates
the principle that RMB converted from foreign currency-denominated capital of a company may not be directly or indirectly used
for purpose beyond its business scope or prohibited by PRC Laws or regulations, while such converted RMB shall not be provide
as loans to its non-affiliated entities. As Circular 16 is newly issued and SAFE has not provided detailed guidelines with respect
to its interpretation or implementation, it is uncertain how these rules will be interpreted and implemented.
Failure
to comply with the United States Foreign Corrupt Practices Act and Chinese anti-corruption laws could subject us to penalties
and other adverse consequences.
As
our shares are listed on OTC Pink Market, we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits
United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining
or retaining business. Non-U.S. companies, including some that may compete with us, may not be subject to these prohibitions.
In addition, in 2012, the central government of the PRC commenced a far-reaching campaign against corruption. That ongoing campaign
involves aggressive enforcement of existing Chinese anti-corruption laws. Corruption, extortion, bribery, pay-offs, theft and
other fraudulent practices may occur from time-to-time in the PRC. Our employees or other agents may engage in such conduct for
which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer
severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results
of operations.
SEC
administrative proceedings against the China affiliates of multi-national accounting firms, and/or any related adverse regulatory
development in the PRC, may result in our financial statements being determined to not be in compliance with the requirements
of the Exchange Act of 1934, as amended, or the Exchange Act.
In
December 2012, the SEC brought administrative proceedings against five major accounting firms in China alleging that they had
refused to produce audit work papers and other documents related to certain other China-based companies under investigation by
the SEC. On January 22, 2014, an initial administrative law decision was issued, censuring these accounting firms and suspending
four of these firms from practicing before the SEC for a period of six months. The decision is neither final nor legally effective
unless and until reviewed and approved by the SEC. On February 12, 2014, four of these PRC-based accounting firms appealed to
the SEC against this decision. In February 2015, each of the four PRC-based accounting firms agreed to a censure and to pay a
fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC. The settlement requires
the firms to follow detailed procedures to seek to provide the SEC with access to Chinese firms’ audit documents via the
Chinese Securities Regulatory Commission. If the firms do not follow these procedures, the SEC could restart the administrative
proceedings.
In
the event that the SEC restarts the administrative proceedings or initiates new proceedings against other firms, depending upon
the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain
auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance
with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about the proceedings against
these audit firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price of
our shares may be adversely affected.
If
our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we
were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements,
our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination
could ultimately lead to our deregistration from the SEC, which would substantially reduce or effectively terminate the trading
of our shares in the United States.
If
our management following our Business Combination is unfamiliar with United States securities laws, they may have to expend time
and resources becoming familiar with such laws, which could lead to various regulatory issues.
Following
our initial Acquisition, our management will likely resign from their positions as officers or directors of the company and the
management of the target business at the time of the Acquisition will remain in place. Management of the target business may not
be familiar with United States securities laws. If new management is unfamiliar with these laws, they may have to expend time
and resources becoming familiar with such laws. This could be expensive and time-consuming and could lead to various regulatory
issues, which may adversely affect our operations.
If
we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we
may have to expend significant resources to investigate and resolve the matter which could harm our business operations and our
reputation and could result in a loss of your investment in our shares, especially if such matter cannot be addressed and resolved
favorably.
U.S.
public companies that have substantially all of their operations in China have been the subject of intense scrutiny, criticism
and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism
and negative publicity has centered around financial and accounting irregularities, a lack of effective internal controls over
financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations
of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese
companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject
to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations.
It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our company and our business.
If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have
to expend significant resources to investigate such allegations and/or defend the Company. This situation may be a major distraction
to our management. If such allegations are not proven to be groundless, our company and business operations will be severely hampered
and your investment in our stock could be rendered worthless.
The
disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny
of any regulatory bodies in the PRC.
Our
reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the
SEC under the Securities Act and the Exchange Act. Our SEC filings and other disclosure and public pronouncements are not subject
to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are
not subject to the review by CSRC, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly,
you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator
has done any review of our company, our SEC reports, other filings or any of our other public pronouncements.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
applicable to a smaller reporting company.
ITEM
2. PROPERTIES
Our
headquarters are located at Building 22, Baihui Shoufu, Xinghuacun Town, Fenyang City, Shanxi Province, China, where we own the
property with an aggregate floor area of approximately 1561.6 square meters. This includes Huaxin’s sales and marketing
office, communication and business development office and our management and operations facilities.
Huaxin
currently leases from Fenyang Baihui Real Estate Co., Ltd. on an arm’s length basis, approximately 50 square meters of office
space at No.2, 1 st Floor, Block A4, Baihui Shoufu, Xinghuacun Town, Fenyang City, Shanxi Province, China under
a lease that expires on September 6, 2019 and can be renewed subject to mutual agreements by both parties.
Huaxin
also currently leases from Taiyuan Xiangyu Enterprise Management Consulting Co. Ltd. on an arm’s length basis, approximately
100 square meters of office space at No.5, Unit 1, Building 2, No. 343, Fenyang Road, Xiaodian District, Taiyuan City, Shanxi
Province, China under a lease that expires on November 9, 2019 and can be renewed subject to mutual agreements by both parties.
Huaxin
also currently leasse from Shanxi Zhanpeng Metal Products Co., Ltd. on an arm’s length basis, approximately 1,000 square
meters of office space at No. 2, South Hero Road, Fenyang City, Shanxi Province, China under a lease that expires on March 9,
2021 and can be renewed subject to mutual agreements by both parties.
Huaxin
also currently leases from Ms. Jiangmei Guo on an arm’s length basis, approximately 140 square meters of office space at
No. 1011, Unit 2, Unit 1, Wenxingyuan, Xiaodian District, Fenyang City, Shanxi Province, China under a lease that expires on December
8, 2019 and can be renewed subject to mutual agreements by both parties.
Huaxin
also currently leases from Mr. Genshan Zhao on an arm’s length basis, approximately 60 square meters of office space at
Room 915, Wufeng International, No. 11 Zhenxing Street, High-Tech Zone, Taiyuan City, Shanxi Province, China under a lease that
expires on September 30, 2019 and can be renewed subject to mutual agreements by both parties.
Huaxin
also currently leases from Mr. Jianhong Zhang on an arm’s length basis, approximately 50 square meters of office space at
Room 903, 9th Floor, Wufeng International Building, High-tech Development Zone, Taiyuan City, Shanxi Province, China under a lease
that expires on September 20, 2019 and can be renewed subject to mutual agreements by both parties.
In
addition, Huaxin currently leases from Fenyang City Jiudu Xinhua Liquor Trading Center Co., Ltd. on an arm’s length basis,
approximately 1,200 square meters of warehouse space at South District if Shudao Avenue, High-Speed Exit, Xinghua Village, Fenyang
City, Shanxi Province, China under a lease that expires on January 11, 2020 and can be renewed subject to mutual agreements by
both parties.
We
believe that our current facilities are adequate and suitable for our operations.
ITEM
3. LEGAL PROCEEDINGS
Currently
there are no legal proceedings pending or threatened against the Company. However, from time to time, we may become involved in
various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties,
and an adverse result in these or other matters may arise.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
The accompanying notes are an integral
part of the consolidated financial statements.
The accompanying notes are an integral
part of the consolidated financial statements.
The 321,296,000 shares of Oranco, Inc.
were issued to the sellers of Reliant Galaxy International Limited on May 29, 2019. The increase of the Company’s authorized
common stock to 500,000,000 was completed on February 15, 2019. More details are discussed in note 22.
The accompanying notes are an integral
part of the consolidated financial statements.
The accompanying notes are an integral
part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in RMB and US$, except for number of shares and per
share data)
|
1.
|
SUMMARY
OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
|
|
(a)
|
Description
of Business
|
Oranco,
Inc. (the “Company”) was incorporated under the laws of the State of Nevada on June 16, 1977. The Company has been
in the business of the development of mineral deposits. During 1983 all activities were abandoned, and the Company had remained
inactive until June 29, 2018 when it acquired the business of Reliant Galaxy International Limited (“Reliant”). The
Company and its subsidiaries (the “Group”) are principally engaged in marketing of self-owned brand and wholesale of
spirits and wine in the People’s Republic of China (the “PRC”).
As disclosed in the Form 8-K
filed with the Securities and Exchange Commission on October 19, 2018, the Company entered into a business agreement with Guangzhou
Silicon Technology Co., Ltd on August 20, 2018 to have Guangzhou Silicon Technology Co., Ltd to develop an anti-counterfeiting
laser recognition proprietary system using blockchain technology.
Details of the subsidiaries
are set out in note 20 to the consolidated financial statements.
|
(b)
|
Basis of consolidation and presentation
|
The Consolidated Financial Statements
include the Financial Statements of Oranco, Inc. and its wholly-owned subsidiaries.
Subsidiaries are all entities over
which the Group has control. The Group controls an entity when the Group is exposed to or has rights to variable returns from its
involvement with the investee and has the ability to affect those returns through its power over the investee. Subsidiaries are
fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control
ceases.
The accompanying financial statements
have been prepared in accordance with the U.S. generally accepted accounting principles or GAAP. The Company operates in one reportable
segment and solely within the PRC. Accordingly, no segment or geographic information has been presented.
Non-controlling interests are shown
as a component of shareholders’ equity on the consolidated statement of balance sheet and the share of the net income attributable
to non-controlling interests is shown as a component of net income in the consolidated statements of operations.
ORANCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in RMB and US$, except for number of shares and per
share data)
|
1.
|
SUMMARY
OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
|
|
(b)
|
Basis of consolidation and presentation – continued
|
Business Combinations
The acquisition of subsidiaries
that meet the criteria for business combinations is accounted for using the acquisition method of accounting. The consideration
transferred for the acquisition is the fair values of the assets transferred, the liabilities incurred to the former owners of
the acquiree and the equity interests issued by the Group.
The consideration transferred includes
the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and
liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition
date. The Group recognizes any non-controlling interest in the acquiree at the non-controlling interest’s proportionate share
of the recognized amounts of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred.
Any contingent consideration to
be transferred by the Group are recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent
consideration that is deemed to be an asset or liability is recognized, either in the Statement of Operations or as a change to
other comprehensive income. Contingent consideration that is classified as equity is not remeasured, and its subsequent settlement
is accounted for within equity. Goodwill is initially measured as the excess of the aggregate of the consideration transferred
and the fair value of the identifiable net assets acquired and liabilities assumed.
|
(c)
|
Financial instruments
|
Financial instruments of the Group
primarily consist of cash and cash equivalents, trade receivables, deposits, prepayments and other receivables, prepaid land lease,
trade payables, receipts in advance, accruals and other payables, and bank borrowings. The carrying values of the Group’s
financial instruments approximate their fair values, principally because of the short-term maturity of these instruments or their
terms.
The Group has no derivative financial
instruments.
|
(d)
|
Cash and cash equivalents
|
Cash and cash equivalents consist
of cash on hand and highly liquid investments which are unrestricted as to withdrawal or use, and which have maturities of three
months or less when purchased.
In May 2014, the FASB issued ASU
No. 2014-09, Revenue from Contracts with Customers (Topic 606), to update the financial reporting requirements for revenue recognition.
Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers.
It supersedes most current revenue recognition guidance, including industry-specific guidance. The guidance is based on the principle
that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional
disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including
significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. This guidance became
effective for the Group beginning on July 1, 2018, and the Group has the option of using either a full retrospective or a modified
retrospective approach for the adoption of the new standard. We adopted this standard using the modified retrospective approach
on July 1, 2018.
ORANCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Amounts in RMB and US$, except for number of shares and per
share data)
|
1.
|
SUMMARY
OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
|
|
(e)
|
Revenue
recognition - continued
|
In preparation for adoption
of the standard, we have completed our impact assessment of implementing this guidance. We have evaluated each of the five steps
in Topic 606, which are as follows: 1) identify the contract with the customer; 2) identify the performance obligations in the
contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations; and 5) recognize
revenue when (or as) performance obligations are satisfied.
Revenue was not affected materially
in any period due to the adoption of ASC Topic 606 because: (1) we identified similar performance obligations under ASC Topic 606
as compared with deliverables and separate units of account previously identified; our performance obligation is to deliver the
spirits and wine; (2) we determined the transaction price to be consistent; and (3) we recorded revenue at the same point in time,
upon delivery under both ASC Topic 605 and ASC Topic 606, as applicable under the terms of the contract with the customer. Additionally,
the accounting for fulfillment costs or costs incurred to obtain a contract were not affected materially in any period due to the
adoption of Topic 606.
There are also certain considerations
related to accounting policies, business processes and internal control over financial reporting that are associated with implementing
Topic 606. We have evaluated our policies, processes, and control framework for revenue recognition, and identified and implemented
the changes needed in response to the new guidance.
Lastly, disclosure requirements
under the new guidance in Topic 606 have been significantly expanded in comparison to the disclosure requirements under the current
guidance, including disclosures related to disaggregation of revenue into appropriate categories, performance obligations, the
judgments made in revenue recognition determinations, adjustments to revenue which relate to activities from previous quarters
or years, any significant reversals of revenue, and costs to obtain or fulfill contracts.
We conclude that the adoption of the
standard has no material impact on our revenue recognition policy.
|
(f)
|
Trade
receivables and allowance for doubtful accounts
|
Trade receivables are stated at
the amount the Group expects to collect. The Group maintains allowances for doubtful accounts for estimated losses. Management
considers the following factors when determining the collectability of specific accounts: historical experience, creditworthiness
of the clients, aging of the receivables and other specific circumstances related to the accounts. Allowance for doubtful accounts
is made and recorded into general and administrative expenses based on the aging of trade receivables and on any specifically identified
receivables that may become uncollectible. Trade receivables which are deemed to be uncollectible are charged off against the allowance
after all means of collection have been exhausted and the potential for recovery is considered remote. The Company takes a write
off of the account balances when the Company can demonstrate all means of collection on the outstanding balances have been exhausted.
There is no allowance for doubtful accounts in these consolidated financial statements.
Inventories are stated at the lower
of cost or net realizable value. Cost is determined using the weighted average method. The components of inventories include raw
materials, processing cost of finished goods and purchase cost of products. The Group routinely evaluate the net realizable value
of the inventories in light of current market conditions and market trends and record a write-down against the cost of inventories
should the net realizable value falls below the cost.
ORANCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(Amounts in RMB and US$, except for number
of shares and per share data)
|
1.
|
SUMMARY
OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
|
|
(h)
|
Property,
plant and equipment and depreciation
|
Property, plant and equipment are
carried at cost less accumulated depreciation and any recorded impairment. Depreciation is calculated on a straight-line basis
over the following estimated useful lives:
Category
|
|
Estimated useful life
|
|
Estimated residual values
|
Building
|
|
20 years
|
|
0-10%
|
Computer and office equipment
|
|
3 years
|
|
0-10%
|
Leasehold improvement
|
|
Over the shorter of lease term or the estimated useful lives of the assets
|
Repairs and maintenance are expensed
as incurred and asset improvements are capitalized. Consideration is given at each balance sheet date to determine whether there
is any indication of impairment of the carrying amounts of the property, plant and equipment. The indication could be an unfavorable
development of a business or severe economic slowdown as well as reorganization of the operation. In assessing value in use, the
estimated future cash flows are discounted to their present value, based on the time value of money and the risks specific to the
country where the assets are located.
VAT
on sales is charged at 13% on revenue from product sale’s and is subsequently paid to the PRC tax authorities after netting input
VAT on purchases. The excess of output VAT over input VAT is recognized in other payables, and the excess of input VAT over output
VAT is recognized in other receivables in the Consolidated statement of Balance Sheets.
Leases where substantially all
the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Payments made under
operating leases are charged to the consolidated statements of operations on a straight-line basis over the lease periods.
Further detail are disclosed in
note 1(r)
|
(k)
|
Foreign
currency translation
|
Substantially all of the Group’s
operations are conducted in China and as a result, the functional and reporting currency of the Group is the Chinese Renminbi.
Monetary assets and liabilities
denominated in currencies other than the applicable functional currencies are translated into the functional currencies at the
prevailing rates of exchange at the balance sheet date. Transactions in currencies other than the functional currency are converted
into the functional currency at the applicable rates of exchange prevailing at the transaction dates. Transaction gains and losses
are recognized in the consolidated statements of operations.
ORANCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(Amounts in RMB and US$, except for number
of shares and per share data)
|
1.
|
SUMMARY
OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
|
|
(k)
|
Foreign
currency translation - continued
|
In translating the financial statements
of the Company’s subsidiaries outside the PRC into the reporting currency, assets and liabilities are translated from the
subsidiaries’ functional currencies to the reporting currency at the exchange rate at the balance sheet date. Equity amounts
are translated at historical exchange rates; revenues, expenses, and other gains and losses are translated using the average rate
for the period. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component
of other comprehensive income/(loss) in the consolidated statements of operations. During 2019 and 2018, such translation adjustments
were not material.
The Group uses the average exchange
rate for the year and the exchange rate at the balance sheet date to translate the operating results and financial position, respectively.
Translation differences are recorded in accumulated other comprehensive loss, a component of shareholders’ deficits.
Convenience translation
Amounts
in US$ are presented for the convenience of the reader and are translated at the noon buying rate of US$1.00 to RMB 6.6171 on June
29, 2018 and RMB 6.8650 on June 29, 2019, representing
the noon buying rate set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that
the RMB amounts could have been, or could be converted, realized or settled into US$ at such rate or at any other rate.
Income taxes are provided for in
accordance with the laws and regulations applicable to the Group as enacted by the relevant tax authorities. The impact of an uncertain
income tax position on the income tax return is recognized at the largest amount that is more-likely-than-not to be sustained upon
audit of the related tax authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood
of being sustained. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The
Group records interest and penalties related to unrecognized tax benefits (if any) in interest expenses and general and administrative
expenses, respectively.
On December 22, 2017, the United
States enacted TCJA which instituted fundamental changes to the taxation of multinational corporations, including a reduction of
the U.S. corporate income tax rate to 21% beginning in 2018. The TCJA also requires a one-time transition tax on the mandatory
deemed repatriation of the cumulative earnings of the Company’s foreign subsidiary as of December 31, 2017. To determine
the amount of this transition tax, the Company must determine the amount of earnings generated since inception by the relevant
foreign subsidiary, as well as the amount of non-U.S. income taxes paid on such earnings, in addition to potentially other factors.
The Company acquired the foreign operations on 29 June 2018, hence the Company does not have any qualifying earnings or profits
from its foreign subsidiary under the transition tax calculation thus no transition tax is payable.
|
(m)
|
Fair
value measurement
|
The Group defines fair value as
the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
When determining the fair value
measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or
most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing
the asset or liability.
ORANCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(Amounts in RMB and US$, except for number
of shares and per share data)
|
1.
|
SUMMARY
OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
|
|
(m)
|
Fair
value measurement-continued
|
The Group’s financial instruments
include cash and cash equivalents, term deposits, trade and other receivables, trade and other payables and bank borrowings. The
Group considers the carrying amounts approximate fair value because of the short maturity of these financial instruments.
|
(n)
|
Business
combinations
|
In a business combination achieved
in stages, the Group remeasures its previously held equity interest in the acquire immediately before obtaining control at its
acquisition-date fair value and the re-measurement gain or loss, if any, is recognized in earnings.
|
(o)
|
Transactions
between entities under common control
|
When accounting for a transfer
of assets or exchange of shares between entities under common control of the Group, the carrying amounts of the assets and liabilities
transferred shall remain unchanged subsequent to the transaction, and no gain or loss shall be recorded in the Group’s consolidated
statements of operations.
|
(p)
|
Commitments
and contingencies
|
In the normal course of business,
the Group is subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a wide
range of matters, including, among others, government investigations, shareholder lawsuits, and non-income tax matters. An accrual
for a loss contingency is recognized when it is probable that a liability has been incurred and the amount of loss can be reasonably
estimated. If a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material,
is disclosed.
ORANCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(Amounts in RMB and US$, except for number
of shares and per share data)
|
1.
|
SUMMARY
OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
|
|
(q)
|
Adoption
of new accounting standards
|
On July 1, 2018, we adopted ASU
No. 2014-09, “Revenue from Contracts with Customers” and the related amendments using the modified retrospective method.
The adoption of ASC 606 had no impact on total reported revenues, costs and net income.
In January 2017, the FASB issued
ASU No. 2017-01, “Business Combinations: Clarifying the Definition of a Business” (“ASU 2017-01”). ASU
2017-01 clarifies the definition of a business for determining whether transactions should be accounted for as acquisitions (or
disposals) of assets or businesses. ASU 2017-01 is effective for annual periods and interim periods within those annual periods
beginning after December 15, 2017, and early adoption is permitted. The Company adopted this standard on July 1, 2018 and will
apply the standard to any future business combinations.
In August 2016, FASB issued ASU
No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. The standard provides new authoritative guidance addressing
eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain transactions are
presented and classified in the statement of cash flows. The standard is effective for the Group in the first quarter of the fiscal
year 2019. The Company adopted this standard on July 1, 2018.
The adoption of the standard
in the consolidated financial statements for the financial year ended June 30, 2019 will have no significant impact to the provision
for income taxes and will have no impact to the net cash used in, or generated by, operating, investing, or financing activities
in the Group’s consolidated statements of cash flows.
|
(r)
|
Recently
issued accounting pronouncements not yet adopted
|
In February 2016, the FASB issued
an accounting standard update, Leases (Topic 842), (“ASC 842”) which supersedes the lease recognition requirements
in Leases (Topic 840), (“ASC 840”). ASC 842 establishes a right- of-use (“ROU”) model that requires a lessee
to record a ROU asset and a lease liability on the balance sheet for all leases. Consistent with ASC 840, leases will be classified
as either finance or operating, with classification affecting the pattern of expense recognition in the statements of operations.
The new guidance will be effective for us starting in the first quarter of our fiscal year ending June 30, 2020. ASC 842 requires
a modified retrospective transition approach for capital and operating leases existing at, or entered into after, the beginning
of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued an accounting standard
update which amends ASC 842 and offers an additional (and optional) transition method by which entities may elect not to recast
the comparative periods presented in financial statements in the period of adoption. This ASU has the same transition requirements
and effective date as ASC 842. We will adopt ASC 842 using the optional adoption method and thereby not adjust comparative financial
statements. Consequently, our reporting for the comparative periods presented in the year of adoption would continue to be in accordance
with ASC 840, including the disclosure requirements of ASC 840. We currently plan to apply the package of practical expedients
to leases that commenced before the effective date whereby we will elect to not reassess the following: (i) whether any expired
or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct
costs for any existing leases. We have enhanced system functionality to enable the preparation and reporting of financial information
and are evaluating related processes and internal controls. We expect the most significant impact upon the adoption of this standard
to be the recognition of ROU assets and lease liabilities on our Consolidated statement of Balance Sheets. We do not expect the
adoption of this standard to have a significant impact on our Consolidated Statements of Operations or Cash Flows.
The
Group is finalizing the impact of the standard on its consolidated financial statements and disclosures, as well as changes to
its systems, processes, and internal controls. The Company’s preliminary assessments are subject to change.
Further details are disclosed in
note 24
ORANCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(Amounts in RMB and US$, except for number
of shares and per share data)
|
2.
|
REVENUE
AND OTHER INCOME
|
Revenue represents the invoiced
spirits and wine products sold to customers less discounts, returns, and surcharges.
|
|
June 30,
2018
|
|
|
June 30,
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
101,759,660
|
|
|
|
104,270,083
|
|
|
|
15,188,650
|
|
Other income
|
|
|
155,700
|
|
|
|
133,321
|
|
|
|
19,420
|
|
|
|
|
101,915,360
|
|
|
|
104,403,404
|
|
|
|
15,208,070
|
|
All revenue is derived in China.
A concentration analysis of the
revenue is as follows:
|
|
June 30,
2018
|
|
|
June 30,
2019
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
16
|
%
|
|
|
13
|
%
|
Customer B
|
|
|
16
|
%
|
|
|
12
|
%
|
Customer C
|
|
|
12
|
%
|
|
|
12
|
%
|
Customer D
|
|
|
11
|
%
|
|
|
11
|
%
|
Customer E
|
|
|
11
|
%
|
|
|
10
|
%
|
Customer F
|
|
|
9
|
%
|
|
|
10
|
%
|
Others
|
|
|
25
|
%
|
|
|
32
|
%
|
|
|
|
100
|
%
|
|
|
100
|
%
|
ORANCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(Amounts in RMB and US$, except for number
of shares and per share data)
|
3.
|
SELLING
AND DISTRIBUTION EXPENSES
|
The following expenses are included
in the selling and distribution expenses:
|
|
June 30,
2018
|
|
|
June 30,
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Freight
|
|
|
40,623
|
|
|
|
72,285
|
|
|
|
10,529
|
|
Packaging cost
|
|
|
1,090,553
|
|
|
|
122,441
|
|
|
|
17,836
|
|
|
|
|
1,131,176
|
|
|
|
194,726
|
|
|
|
28,365
|
|
|
4.
|
PROPERTY,
PLANT AND EQUIPMENT, NET
|
Property, plant and equipment,
net, consist of the following:
|
|
June 30, 2018
|
|
|
June 30,
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Computer and office equipment
|
|
|
268,550
|
|
|
|
268,550
|
|
|
|
39,119
|
|
Building
|
|
|
3,754,625
|
|
|
|
3,754,625
|
|
|
|
546,923
|
|
Add: Computer and leasehold improvement
|
|
|
-
|
|
|
|
66,081
|
|
|
|
9,626
|
|
|
|
|
4,023,175
|
|
|
|
4,089,256
|
|
|
|
595,668
|
|
Less: accumulated depreciation
|
|
|
(727,029
|
)
|
|
|
(965,032
|
)
|
|
|
(140,573
|
)
|
Property, plant and equipment, net,
|
|
|
3,296,146
|
|
|
|
3,124,224
|
|
|
|
455,095
|
|
|
5.
|
PREPAID
LAND LEASE AND OTHER LEASE, NET
|
Prepaid land lease and other
lease, net, consists of the following:
|
|
June 30, 2018
|
|
|
June 30,
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid land lease
|
|
|
5,412,120
|
|
|
|
5,412,120
|
|
|
|
788,364
|
|
Less: accumulated amortization
|
|
|
(393,020
|
)
|
|
|
(502,700
|
)
|
|
|
(73,227
|
)
|
Add: Prepaid other lease
|
|
|
-
|
|
|
|
5,000,000
|
|
|
|
728,333
|
|
Prepaid land lease and other lease, net
|
|
|
5,019,000
|
|
|
|
9,909,420
|
|
|
|
1,443,470
|
|
The carrying amounts of the prepaid
land lease and other lease are analyzed as:
|
|
June 30, 2018
|
|
|
June 30,
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
109,680
|
|
|
|
547,180
|
|
|
|
79,706
|
|
Non-current assets
|
|
|
4,909,420
|
|
|
|
9,362,240
|
|
|
|
1,363,764
|
|
|
|
|
5,019,000
|
|
|
|
9,909,420
|
|
|
|
1,443,470
|
|
ORANCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(Amounts in RMB and US$, except for number
of shares and per share data)
|
5.
|
PREPAID
LAND LEASE AND OTHER LEASE, NET - CONTINUED
|
Prepaid land lease represents
the cost of the rights of the use of the land in respect of leasehold land in the People’s Republic of China, on which the
Group’s buildings are situated. Prepaid other lease represents the lease of a warehouse in the PRC.
The prepaid land lease’
terms are 70 years, ending in 2082 and prepaid other lease ’s terms are10 years, ending in 2029.
Inventories consist of the following:
|
|
June 30,
2018
|
|
|
June 30,
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
|
4,451,541
|
|
|
|
4,500,125
|
|
|
|
655,517
|
|
Finished goods
|
|
|
2,622,873
|
|
|
|
2,216,931
|
|
|
|
322,932
|
|
Packaging material
|
|
|
272,135
|
|
|
|
183,932
|
|
|
|
26,793
|
|
|
|
|
7,346,549
|
|
|
|
6,900,988
|
|
|
|
1,005,242
|
|
|
|
June 30,
2018
|
|
|
June 30,
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
33,933,857
|
|
|
|
32,053,899
|
|
|
|
4,669,177
|
|
|
|
|
33,933,857
|
|
|
|
32,053,899
|
|
|
|
4,669,177
|
|
The Group normally allows credit
terms to well-established customers ranging from 30 to 150 days. The Group seeks to maintain strict control over its trade receivables.
Overdue trade receivables are reviewed regularly by the Board of Directors.
|
8.
|
DEPOSITS,
PREPAYMENTS AND OTHER RECEIVABLES
|
|
|
June 30,
2018
|
|
|
June 30,
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
23,571,363
|
|
|
|
45,054,919
|
|
|
|
6,562,989
|
|
Deposits
|
|
|
9,000,000
|
|
|
|
-
|
|
|
|
-
|
|
Other receivables
|
|
|
678,227
|
|
|
|
555,604
|
|
|
|
80,933
|
|
|
|
|
33,249,590
|
|
|
|
45,610,523
|
|
|
|
6,643,922
|
|
ORANCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(Amounts in RMB and US$, except for number
of shares and per share data)
|
9.
|
CASH
AND CASH EQUIVALENTS
|
|
|
June 30,
2018
|
|
|
June 30,
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Cash on hand
|
|
|
394,082
|
|
|
|
419,446
|
|
|
|
61,099
|
|
Cash held in banks
|
|
|
26,110,880
|
|
|
|
52,744,520
|
|
|
|
7,683,106
|
|
|
|
|
26,504,962
|
|
|
|
53,163,966
|
|
|
|
7,744,205
|
|
Cash held in banks earns interest
at floating rates based on daily bank deposit rates.
|
|
June 30,
2018
|
|
|
June 30,
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Trade payables
|
|
|
44,636
|
|
|
|
247,685
|
|
|
|
36,079
|
|
|
|
|
44,636
|
|
|
|
247,685
|
|
|
|
36,079
|
|
For the larger suppliers, the
Group makes payment in advance for the inventories. For the smaller suppliers, the Group obtains credit terms ranging from 30 to
90 days.
A concentration analysis of the
suppliers based on the purchases made during the year is as follows:
|
|
June 30,
2018
|
|
|
June 30,
2019
|
|
|
|
|
|
|
|
|
Supplier A
|
|
|
41
|
%
|
|
|
52
|
%
|
Supplier B
|
|
|
17
|
%
|
|
|
21
|
%
|
Supplier C
|
|
|
10
|
%
|
|
|
13
|
%
|
Supplier D
|
|
|
8
|
%
|
|
|
3
|
%
|
Supplier E
|
|
|
8
|
%
|
|
|
3
|
%
|
Supplier F
|
|
|
7
|
%
|
|
|
3
|
%
|
Others
|
|
|
11
|
%
|
|
|
5
|
%
|
|
|
|
100
|
%
|
|
|
100
|
%
|
ORANCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(Amounts in RMB and US$, except for number
of shares and per share data)
|
11.
|
RECEIPTS
IN ADVANCE, ACCRUALS AND OTHER PAYABLES
|
Receipts in advance, accruals
and other payables consist of the following:
|
|
June 30,
2018
|
|
|
June 30,
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Accrued payroll and bonus
|
|
|
272,408
|
|
|
|
301,894
|
|
|
|
43,976
|
|
Accrued and other payables
|
|
|
3,022,597
|
|
|
|
3,430,703
|
|
|
|
499,738
|
|
Other tax payables
|
|
|
623,868
|
|
|
|
466,538
|
|
|
|
67,959
|
|
Receipts in advance
|
|
|
1,221,152
|
|
|
|
1,499,033
|
|
|
|
218,359
|
|
|
|
|
5,140,025
|
|
|
|
5,698,168
|
|
|
|
830,032
|
|
|
12.
|
AMOUNT
DUE TO DIRECTOR
|
|
|
June 30,
2018
|
|
|
June 30,
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Current-liabilities
|
|
|
96,231,368
|
|
|
|
13,392,777
|
|
|
|
1,950,878
|
|
Non-Current-liabilities
|
|
|
-
|
|
|
|
81,781,805
|
|
|
|
11,912,863
|
|
|
|
|
96,231,368
|
|
|
|
95,174,582
|
|
|
|
13,863,741
|
|
The amount due to director is
interest-free, unsecured and repayable on demand.
|
|
June 30,
2018
|
|
|
June 30,
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Loans from financial institution – Note (i)
|
|
|
-
|
|
|
|
2,250,000
|
|
|
|
327,749
|
|
|
|
|
-
|
|
|
|
2,250,000
|
|
|
|
327,749
|
|
Classified as:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
-
|
|
|
|
2,250,000
|
|
|
|
327,749
|
|
|
|
|
-
|
|
|
|
2,250,000
|
|
|
|
327,749
|
|
Note:
|
(i)
|
Loans
from the financial institution bear a fixed interest rate ranging from 5% to 5.59% per annum.
|
ORANCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(Amounts in RMB and US$, except for number
of shares and per share data)
|
14.
|
SHARE
CAPITAL AND CAPITAL MANAGEMENT
|
|
|
Issued and fully paid
|
|
|
Shares to be issued
|
|
|
Additional paid
in capital
|
|
|
Total share capital
|
|
Company
|
|
Number of
shares
|
|
|
value
US$
|
|
|
value
RMB
|
|
|
Number of
shares
|
|
|
value
US$
|
|
|
value
RMB
|
|
|
value
US$
|
|
|
value
RMB
|
|
|
value
RMB
|
|
At June 30, 2017 and June 30, 2016
|
|
|
4,269,950
|
|
|
|
4,270
|
|
|
|
27,775
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,269
|
)
|
|
|
(27,774
|
)
|
|
|
1
|
|
Common stock conversion
|
|
|
37,921,530
|
|
|
|
37,922
|
|
|
|
246,671
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
246,671
|
|
Conversion of amount due to a director
|
|
|
15,000,000
|
|
|
|
15,000
|
|
|
|
97,570
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,209
|
|
|
|
176,986
|
|
|
|
274,556
|
|
Shares issued for cash
|
|
|
13,000,000
|
|
|
|
13,000
|
|
|
|
84,561
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
91,000
|
|
|
|
591,925
|
|
|
|
676,486
|
|
Shares issued as consideration for business acquisition
|
|
|
28,000,000
|
|
|
|
28,000
|
|
|
|
182,131
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
182,131
|
|
Shares to be issued as consideration for business acquisition note 1
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
321,296,000
|
|
|
|
321,296
|
|
|
|
2,126,520
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,126,520
|
|
Reverse merger
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(113,940
|
)
|
|
|
(741,137
|
)
|
|
|
(741,137
|
)
|
At June 30, 2018
|
|
|
98,191,40
|
|
|
|
98,191
|
|
|
|
638,708
|
|
|
|
321,296,000
|
|
|
|
321,296
|
|
|
|
2,126,520
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,765,228
|
|
Shares reverse split on August 7, 2019
|
|
|
(88,372,332
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(289,166,400
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Restated at June 30, 2018
|
|
|
9,819,148
|
|
|
|
98,191
|
|
|
|
638,708
|
|
|
|
32,129,600
|
|
|
|
321,296
|
|
|
|
2,126,520
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,765,228
|
|
Shares were issued as consideration for business acquisition note 1
|
|
|
32,129,600
|
|
|
|
321,296
|
|
|
|
2,126,520
|
|
|
|
(32,129,600
|
)
|
|
|
(321,296
|
)
|
|
|
(2,126,520
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at June 30, 2019
|
|
|
41,948,748
|
|
|
|
419,487
|
|
|
|
2,765,228
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,765,228
|
|
Each share has a nominal value
of US$0.001 per share.
Note:
|
1.
|
The 321,296,000 new shares at $0.001 per share are
part of the consideration of the acquisition of Reliant Galaxy International Limited by the company. The aggregated nominal value
of the shares is US$321,296.
|
|
2.
|
On
July 22, 2019, the Company filed a Certificate of Amendment with the Secretary of State of Nevada to effect a reverse stock split
of the issued and outstanding shares of its common stock at a ratio of one share for every 10 shares outstanding prior to the
effective date of the reverse stock split. All current and historical information contained herein related to the share and per
share information for the Company’s common stock or stock equivalents reflects the 1-for-10 reverse stock split of the Company’s
outstanding shares of common stock that became market effective on August 7, 2019. There was no change in the number of the Company’s
authorized shares of common stock.
|
|
3.
|
On
August 7, 2019, the Company effected a decrease in the number of its authorized Common Stock from 500,000,000 to 50,000,000, with
its Common Stock’s par value unchanged at $0.001 per share.
|
ORANCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(Amounts in RMB and US$, except for number
of shares and per share data)
The Company is subject to taxes
in the USA. The Company has had no taxable income under Federal or State tax laws. The Company has loss carryforwards totalling
$24,581 that may be offset against future federal income taxes. If not used, the carryforwards will expire 20 years after they
are incurred.
The Company’s BVI subsidiary
is not subject to taxation.
The Company’s Hong Kong
subsidiary is subject to taxes in Hong Kong. The Hong Kong subsidiary has had no taxable income.
The Company’s PRC subsidiaries
are subject to taxes in China. The applicable PRC statutory income tax rate is 25% according to the Enterprise Income Tax Law.
A reconciliation of the income
tax expenses in China is set out below:
|
|
June 30,
2018
|
|
|
June 30,
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Profit before income tax
|
|
|
59,767,974
|
|
|
|
59,308,503
|
|
|
|
8,639,258
|
|
Taxation at the applicable tax rate of 25%
|
|
|
14,941,994
|
|
|
|
14,827,126
|
|
|
|
2,159,814
|
|
Tax effect on non-taxable income
|
|
|
(42,182
|
)
|
|
|
(33,323
|
)
|
|
|
(4,854
|
)
|
Tax effects of expense that are not deductible
|
|
|
808,014
|
|
|
|
4,696,259
|
|
|
|
684,086
|
|
(Over)/under-provision in respect of previous year
|
|
|
(612,145
|
)
|
|
|
(161,989
|
)
|
|
|
(23,596
|
)
|
Income taxes
|
|
|
15,095,681
|
|
|
|
19,328,073
|
|
|
|
2,815,450
|
|
|
16.
|
CONTRIBUTION
PLAN IN THE PRC
|
As stipulated by the PRC state
regulations, the subsidiaries in the PRC participate in the state-run defined contribution retirement scheme. All employees are
entitled to an annual pension payment equal to a fixed proportion of the average basic salary of the geographical area of their
last employment at their retirement date. The PRC subsidiaries are required to make contributions to the local social security
bureau at 29.4% to 37.4% of the previous year’s average basic salary amount of the geographical area where the employees
are under employment with the PRC subsidiaries. The Group has no obligation for the payment of pension benefits beyond the annual
contributions as set out above.
According to the relevant rules
and regulations of the PRC, the PRC subsidiaries and their employees are each required to make contributions to an accommodation
fund at 9% of the salaries and wages of the employees which are administered by the Public Accumulation Funds Administration Centre.
There is no further obligation for the Group except for such contributions to the accommodation fund. The Group had no significant
obligation apart from the contributions as stated above.
ORANCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(Amounts in RMB and US$, except for number
of shares and per share data)
|
17.
|
OPERATING
LEASE ARRANGEMENT
|
The Group has total future minimum
lease payments under non-cancellable operating lease payable as follows:
|
|
June 30,
2018
|
|
|
June 30,
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
|
134,294
|
|
|
|
600,856
|
|
|
|
87,525
|
|
After 1 year but within 2 years
|
|
|
18,000
|
|
|
|
62,305
|
|
|
|
9,076
|
|
After 2 years but within 3 years
|
|
|
9,000
|
|
|
|
-
|
|
|
|
-
|
|
After 3 years
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
161,294
|
|
|
|
663,161
|
|
|
|
96,601
|
|
The Group is the lessee of a
few office premises, warehouse and staff residence held under operating leases. The leases typically run for an initial period
of one to three years.
|
18.
|
RELATED
PARTY BALANCES AND TRANSACTIONS
|
The Group had the following
transactions with related parties during the financial periods:
|
|
July 1,
2017
|
|
|
Settlement
|
|
|
Repayment
|
|
|
New Loans
|
|
|
June 30,
2018
|
|
Amount due to director
|
|
|
(13,395,233
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(95,976,484
|
)
|
|
|
(109,371,717
|
)
|
Amount due from director
|
|
|
11,814,199
|
|
|
|
|
|
|
|
|
|
|
|
1,326,150
|
|
|
|
13,140,349
|
|
Net amount due to director
|
|
|
(1,581,034
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(94,650,334
|
)
|
|
|
(96,231,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1,
2018
|
|
|
Settlement
|
|
|
Repayment
|
|
|
New Loans
|
|
|
June 30,
2019
|
|
Amount due to director
|
|
|
(109,371,717
|
)
|
|
|
398,911
|
|
|
|
6,000,000
|
|
|
|
(4,953,831
|
)
|
|
|
(108,115,423
|
)
|
Amount due from director
|
|
|
13,140,349
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(199,508
|
)
|
|
|
12,940,841
|
|
Net amount due from/(to) director
|
|
|
(96,231,368
|
)
|
|
|
398,911
|
|
|
|
6,000,000
|
|
|
|
(5,153,339
|
)
|
|
|
(95,174,582
|
)
|
ORANCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(Amounts in RMB and US$, except for number
of shares and per share data)
|
18.
|
RELATED
PARTY BALANCES AND TRANSACTIONS - CONTINUED
|
The Group made sales to Fuqing
Jing Hong Trading Co., Ltd, the director of which was a family member of the CEO Mr. Yang Peng. The family member resigned from
Fuqing Jing Hong Trading Co., Ltd on June 28, 2018, hence Fuqing Jing Hong ceased to be a related party on June 28, 2018.
|
|
June 30,
2018
|
|
|
June 30,
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
14,359,832
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
14,359,832
|
|
|
|
-
|
|
|
|
-
|
|
|
19.
|
CONTINGENT
LIABILITIES
|
At the end of each reporting
period, neither the Group nor the Company had any significant contingent liabilities.
ORANCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(Amounts in RMB and US$, except for number
of shares and per share data)
|
20.
|
DETAILS
OF SUBSIDIARIES
|
Company
name
|
|
Place
and date of incorporation
|
|
Capital
|
|
Attributable
Equity
interest
|
|
|
Principal
activities
|
|
|
|
|
|
|
|
|
|
|
Reliant
Galaxy International Limited
|
|
Established
in British Virgin Islands on January 3, 2017
|
|
Registered
and paid-in capital of RMB 69,100
|
|
|
100
|
%
|
|
Investment
holding
|
|
|
|
|
|
|
|
|
|
|
|
Sure
Rich Investment
|
|
Established
in
|
|
Share
capital
|
|
|
100
|
%
|
|
Investment
holding
|
(Group)
Limited
|
|
Hong
Kong
On February 1, 2007
|
|
RMB
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fujian
Jinou Trading Co., Ltd.
|
|
Established
in the PRC on July 5, 2004
|
|
Registered
and paid-in capital of US$ 1,650,000
|
|
|
100
|
%
|
|
Investment
holding and marketing self-owned brand and wholesaling of spirits
|
|
|
|
|
|
|
|
|
|
|
|
Fenyang
Huaxin Spirit Development Co., Ltd.
|
|
Established
in the PRC on November 7, 2013
|
|
Registered
and Paid-in capital of RMB 1,000,000
|
|
|
100
|
%
|
|
Marketing
self-owned brand and wholesaling of spirits and wines
|
|
|
|
|
|
|
|
|
|
|
|
Fenyang
Jinqiang Spirit Co., Ltd.
|
|
Established
in the PRC on November 7, 2013
|
|
Registered
capital 10,000,000 (note ii)and Paid-in capital of RMB 5,000,000
|
|
|
100
|
%
|
|
Marketing
self-owned brand and wholesaling of spirits
|
|
|
|
|
|
|
|
|
|
|
|
Beijing
Huaxin Tianchuang Enterprise Management Consulting Co., Ltd.
|
|
Established
in the PRC on April 14, 2018
|
|
Registered
and issued capital of RMB1,000,000
|
|
|
51
Note
|
%
(i)
|
|
Dormant
|
Notes:
|
(i)
|
The subsidiary was registered with payable share capital
and the Company committed to pay up its share of the issued capital in the amount of RMB 510,000 on March 31, 2037, which is 20
years from the date of incorporation permitted by the Regulation of the People’s Republic of China on Company Registration.
The amount due to the subsidiary is interest-free and unsecured.
|
|
(ii)
|
On August 13, 2018, the Company increased the number
of the authorized Common Stock from 5,000,000 to 10,000,000.
|
Company name
|
|
Place and date of incorporation
|
|
Capital
|
|
Attributable Equity
interest
|
|
|
Principal activities
|
|
|
|
|
|
|
|
|
|
|
Guangzhou Silicon Technology Co., Ltd
|
|
Established in the
PRC on September 8, 2015
|
|
Registered and
issued capital of RMB5,000,000
|
|
|
20
|
%
|
|
Development, sale and provision of software solutions
|
Notes:
|
(i)
|
On
September 1, 2018, Fenyang Huaxin Spirit Development Co., Ltd acquired 20% of Guangzhou Silicon Technology Co., Ltd which then
became an associate of the Company.
|
ORANCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- CONTINUED
(Amounts in RMB and US$, except for number
of shares and per share data)
On June 29, 2018, Oranco, Inc.
acquired 100% of the issued capital of Reliant in a share for share exchange with the shareholders of Reliant at that time. Due
to the relative size of the companies, the shareholders of Reliant became the majority shareholders in the consolidated group.
Pursuant to the share for share
exchange, Oranco issued an aggregated 349,296,000 new shares of common stock, with par value of $0.001 per share, of which 28,000,000
were issued on the closing date of June 29, 2018. The remaining 321,296,000 shares were issued on May 29, 2019 following
the completion of the increase of the Company’s authorized shares on February 15, 2019.
At the date of acquisition, Oranco,
Inc. was a shell company with minimal assets and operations. The transaction has been treated as a group reconstruction and has
been accounted for using the reverse merger accounting method. Accordingly, the consolidated financial statements have been treated
as being a continuation of the consolidated financial statements of Reliant, with Oranco, Inc. being treated as the acquired entity
for accounting purposed. Accordingly, the financial information for the previous period and comparatives reflects the consolidated
operations of Reliant.
|
23.
|
NOTE
TO THE CONSOLIDATED STAETMENT OF CASH FLOWS
|
Disclosure of non-cash transactions for
the ended June 30, 2018:
|
a.
|
Renminbi
94,051,934 of the amount due to a director relates to Reliant’s acquisition of Sure Rich Investment (Group) Limited being
the consideration of Sure Rich Investment (Group) Limited payable by Reliant. The amount is due to the seller of Sure Rich Investment
(Group) Limited, who is also a director of Reliant and the Company.
|
|
b.
|
The
Group acquired liabilities of Renminbi 757,296 as part of the reverse merger.
|
There are no non-cash transactions
for the year ended June 30, 2019
|
24.
|
SUBSEQUENT
EVENT DISCLOSURE
|
In February 2016, the FASB issued
an accounting standard update, Leases (Topic 842), The adoption of the standard in the financial quarter ended September 30, 2019
would imply the recognition of lease asset of Renminbi 703,414 and lease liabilities of Renminbi 703,414 based on a discount rate
of 2.90% over the lease terms in our Consolidated statement of Balance Sheets. We do not expect the adoption of this standard to
have a significant impact on our Consolidated Statements of Operations or Cash Flows.
F-24