Item 2.01 Completion of an Acquisition
or Disposition of Assets.
On August 6, 2020, AS
Capital, Inc. (the “Company” or “ASIN”) and HanJiao International Holding Limited, a private limited liability
company incorporated under the laws of the British Virgin Islands (“HJ” or “HanJiao”) and HJ’s
shareholders entered into a Share Acquisition Agreement (the “Share Exchange Agreement”) to acquire up to one hundred
(100) Ordinary Shares of HJ held by its five shareholders (the “HJ Shares”), representing 100% of the issued and outstanding
securities of HJ, for 86,000,000 shares of our common stock at a per share price of US$0.46, (the “Share Exchange”).
The share acquisition was consummated on August 6, 2020. As a result, we entered into the business of selling healthcare and other
related products to middle-aged and elderly market segments in the People’s Republic of China (“PRC” or China”)
through its online to offline platform, and HJ shareholders received 86,000,000 shares of the Company’s common stock (the
“Shares”). It is our understanding that HJ shareholders are not U.S. Persons within the meaning of Regulations S.
Accordingly, the Shares were issued pursuant to the exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended,
Regulation D and Regulation S promulgated thereunder. The foregoing description of the Share Exchange Agreement is qualified in
its entirety by reference to the Share Exchange Agreement which is filed as Exhibit 10.1 to this Current Report and is incorporated
herein by reference.
HJ is engaged in the
sale of healthcare and other related products to the middle-aged and elderly market segments in the PRC through its internet platform
and offline service centers.
In connection with the
acquisition, effective from August 6, 2020, the following individuals were appointed
to serve in the capacities set forth next to their names until his or her successor(s) shall be duly elected or appointed, unless
he or she resigns, is removed from office or is otherwise disqualified from serving as an executive officer or director of the
Company:
Name
|
|
Positions
|
Tian Xiangyang
|
|
Chief Executive Officer, Director and Chairperson of the Board of Director
|
Shan Yonghua
|
|
Chief Financial Officer, and Director
|
Tian Zhihai
|
|
Chief Operating Officer and Director
|
Yin Jianen
|
|
Secretary and Director
|
Wang Jirui
|
|
Director
|
Prior to the acquisition, the Company
was considered as a shell company due to its nominal assets and limited operation. Upon the acquisition, HJ and its subsidiaries
and affiliated entities will comprise the ongoing operations of the combined entity and its senior management will serve as the
senior management of the combined entity. HJ is deemed to be the accounting acquirer for accounting purposes. The transaction
will be treated as a recapitalization of the Company. Accordingly, the consolidated assets, liabilities and results of operations
of the Company will be the historical financial statements of HJ, and the Company’s assets, liabilities and results of operations
will be consolidated with HJ and subsidiaries, beginning on the acquisition date. HJ was the legal acquiree. The Company was the
legal acquirer but HJ is deemed to be the accounting acquirer in the reverse merger. The historical financial statements prior
to the acquisition are those of the accounting acquirer (HJ and subsidiaries). Historical stockholders’ equity of the accounting
acquirer prior to the merger are retroactively restated (a recapitalization) for the equivalent number of shares received in the
merger. Operations prior to the merger are those of the accounting acquirer. After completion of the share exchange transaction,
the Company’s consolidated financial statements include the assets and liabilities, the operations and cash flow of the
accounting acquirer.
CORPORATE HISTORY
Overview
On August 6, 2020, we consummated
the acquisition of One Hundred (100) Shares of HJ, representing 100% of the issued and outstanding stock of HJ. HJ is a holding
company that, through its subsidiaries and variable interest entity, is engaged in the business of selling healthcare and other
related products to the middle-aged and elderly market segments in the PRC through its internet platform and offline service centers.
HJ’s consolidated business is conducted through Beijing Luji Technology Co., Ltd., a variable interest entity formed in Beijing,
China on March 27, 2007.
Prior to our acquisition
of HJ, we were a shell company with nominal assets and limited operations. Our former business objective was to seek long term
growth through one or more business combinations with operating companies.
History
We were incorporated
on June 15, 2006 under the laws of the State of Nevada as Jupiter Resources, Inc. 75,000,000 shares of common Stock par value $0.001
and no other classes of stock were authorized. On March 27, 2007, we entered into an agreement with Ms. Helen Louise Robinson of
Vernon, British Columbia, whereby she agreed to sell to us one mineral claim located approximately 30 kilometers northwest of Vernon,
British Columbia in an area having the potential to contain silver or copper mineralization or deposits. In order to acquire a
100% interest in this claim, we paid $7,500 to Ms. Robinson. However, we were unable to keep the mineral claim in good standing
due to lack of funding and our interest in it lapsed.
On March 25, 2009,
the Company’s articles of incorporation were amended to authorize an addition of 10 million preferred shares making a total
of 85,000,000 shares authorized (75M common, 10M preferred).
On March 30, 2009,
Jupiter Resources, Inc. (the “Company”) entered into a binding letter of intent (the “Letter of Intent”)
with NatProv Holdings, Inc., a British Virgin Islands corporation (“Natprov”). Pursuant to the terms of the Letter
of Intent, Natprov and the Company were to commence the negotiation and preparation of a definitive share exchange agreement which
contained customary representations, warranties and indemnities as agreed upon by Natprov, the Company and the shareholders of
Natprov, whereby the Company, Natprov and the shareholders of Natprov were to complete a share exchange transaction (the “Transaction”)
on or before May 26, 2009, subject to certain conditions precedent to the closing of the Transaction.
On April 30, 2009,
the Company filed an amendment to change the name of the corporation to Rineon Group, Inc.
On May 01, 2009, we
filed a Certificate of Designation to designate 36,000 shares of Series A Convertible Preferred Stock, out of the 10 million preferred
stock. These shares have no votes for matters brought before the common shareholders, only with matters regarding the Series A
shares where they will be the only voters. They can convert into common but cannot at anytime convert to hold more than 4.95% of
the issued and outstanding common shares of the Company.
On May 14, 2009, we
entered into a preferred stock purchase agreement dated as of April 30, 2009 (the “Preferred Stock Purchase Agreement”)
under which the Company sold an aggregate of 36,000 shares of its Series A convertible preferred stock (the “Series A Preferred
Stock”) to Intigy Absolute Return Ltd., a British Virgin Islands corporation (“Intigy”), for a purchase price
of $36,000,000, or $1,000 per share of Series A $0.001 Par Value Preferred Stock. In addition, pursuant to the terms of the stock
purchase agreement dated as of May 14, 2009, Rineon agreed to acquire 1,985,834 shares of Amalphis from NatProv Holdings Inc (“NatProv”)
for a total consideration of $36,000,000. Of the 2,437,500 shares of Amalphis held by NatProv, 1,985,834 were converted into Class
A Preferred non-voting shares, which were then assigned by NatProv to Rineon. As a result, NatProv owned 451,666 Common Shares
of Amalphis, representing 100% of the voting shares of Amalphis, and Rineon owned 1,985,834 of Amalphis’ Class A Preferred
Shares which have the same rights and privileges as the common shares except that they have a liquidation preference and no voting
rights. Amalphis’ Class A Preferred Shares were not convertible into Common Shares.
The transactions consummated
as set forth above resulted in a change of control of the Company. In connection with such change in control, on May 14, 2009,
the board of directors of the Company authorized a change in the fiscal year end of the Company from May 31 to December 31.
Amalphis Group, Inc.,
(“Amalphis”) was formed in July 2008 as a British Virgin Islands (BVI) Business Company. Amalphis, through its wholly
owned subsidiary Allied Provident, Inc. (“API”), offers customized reinsurance products in markets where traditional
reinsurance alternatives are limited. In addition, Amalphis was formed to directly sell a variety of property and casualty insurance
products to businesses around the world. In September 2008, Amalphis acquired API, an entity that issues customized reinsurance
to a United States insurance carrier that offers automotive insurance coverage to drivers who are unable to obtain insurance from
standard carriers. API was formed in Barbados on November 9, 2007 by NatProv Holdings Inc., (“NatProv”) a British
Virgin Islands corporation.
There was no business activity between the filing of the Form 15 on November 10, 2010, and prior to August 9, 2018. The Company
had Exchange Act disclosure requirements from January 11, 2008 to November 10, 2010. The Company has no knowledge or records related
to the assets referenced above and therefor there is some level of uncertainty in the above descriptions.
Prior Company management
was unresponsive to shareholders and had refused to respond to requests to meet statutory requirements to get current with the
secretary of state and with the required filings of the Securities and Exchange Commission (“SEC”).
On August 9, 2018,
XTC, Inc. was appointed to serve as the custodian of the Company in a shareholder filed action with the Eighth Judicial District
Court in Clark County, Nevada and was instructed to revive the Company. XTC, Inc. was a shareholder of record as shown in the
court documents (500 shares) attached as Exhibit 99.1 to this Current Report. XTC acquired its 500 common shares on June 14, 2018
in the open market at a price of $0.05 per share.
Enclosed as Exhibit
99.1 hereto are the entire court records, from filing to closing documents.
On September 25, 2018, the Company filed a Certificate of Designation whereby the following preferred shares were designated
by the Company and the rights, privileges and designations of the Series A Convertible Preferred Stock were amended and restated.
The number of Series
A Convertible Preferred Stock was increased from 36,000 to 1,000,000.
|
·
|
3,000,000 Series B Convertible Preferred
Stock were created with no voting rights, and conversion rights of 1000:1, with the restriction that holders cannot convert to
hold more the 4.95% of issued and outstanding common stock.
|
|
·
|
1,000,000 Series C Convertible Preferred
Stock were created. (each Series C shall have 100,000 vote per share, with 1:1 conversion rights.
|
On September 25, 2018,
the Company issued 964,000 shares of Series A Convertible Preferred shares to XRC, LLC at $0.001 per share and 1,000,000 shares
of Series C Convertible Preferred shares at $0.001 per share to XRC, LLC, a company controlled by Chris Lotito, in exchange for
paying the costs to revive the company with the State of Nevada, giving it voting control.
On September 28, 2018,
a shareholders meeting was held wherein the shareholders gave the board authority to reorganize the Company, including making
a possible name change, and/or engaging in a reverse stock split. In addition, the Series A shareholders voted to approve a reverse
split of 1 preferred share for each 1,000 shares outstanding of the Series A Convertible Preferred and to authorize a new designation.
On October 1, 2018,
the Company made filings with the Nevada Secretary of State to change our name to “AS Capital, Inc.” and to exercise
a 10-to-1 reverse stock split for the Common stock and a 1,000 to 1 reverse of the Series A Convertible Preferred, with conversion
rights of 1 common share for every 12,000 shares of Series A Convertible Preferred Stock held. As a result, the number of issued
and outstanding Series A Convertible Preferred Stock was reduced to 1,000 shares.
On December 6, 2018,
the Court granted an Order discharging the custodian and approved all actions taken by the custodian.
Change in Control
On June 4, 2019, AS Capital,
Inc., a Nevada corporation, XRC, LLC, a Colorado limited liability company (“XRC”) and Gao Xue Ran (“Purchaser”)
entered into a Stock Purchase Agreement (the “SPA”), pursuant to which Purchaser agreed to purchase from XRC 11,000,000
shares of common stock of the Company, par value $0.0001, and 964 shares of Series A Convertible Preferred Stock Preferred Stock
of the Company, par value $0.001 (collectively, the “Shares”), for aggregate consideration of Four Hundred and Ten
Thousand Dollars ($410,000) in accordance with the terms and conditions of the SPA. XRC is the controlling shareholder of the Company.
On June 13, 2019, and in anticipation of the sales transaction with Ms. Gao, the Company assigned its line of credit and the current
balance due thereunder, including all outstanding principal and accrued interest, to XRC in consideration of 10,000,000 shares
of common stock of the Company. At the time of the transfer, $48,595 was due under the item of credit. At the same time XRC converted
its 1,000,000 shares of Series C Convertible Preferred Stock into 1,000,000 shares of common stock. Chris Lotito was the managing
member of XRC.
The acquisition of
the Shares consummated on July 18, 2019, and the Shares were ultimately purchased by the following three individuals using their
own personal funds:
Name
|
No. of Shares
|
Percentage of Issued and Outstanding
|
Consideration Paid
|
Gao Xue Ran
|
8,581,063 of Common Stock;
964 shares of Series A Preferred Stock
|
76.61%
|
$319,840
|
Zhang Yan Hua
|
1,935,633 of Common Stock
|
17.28%
|
$72,146
|
Cheung Kwok Chiu Kris
|
483,304 of Common Stock
|
4.31%
|
$18,014
|
Total
|
11,000,000 of Common Stock;
964 shares of Series A Preferred Stock
|
100%
|
|
Ms. Gao holds a controlling
interest in the Company and may unilaterally determine the election of the Board and other substantive matters requiring approval
of the Company’s stockholders.
Upon the consummation
of the sale of the Shares, Chris Lotito, our Chief Executive Officer and sole director, and John Karatzaferis, our President,
resigned from all of their positions with the Company, effective July 18, 2019. Their resignations were not due to any dispute
or disagreement with the Company on any matter relating to the Company’s operations, policies or practices.
Concurrent with such
resignations, Gao Xue Ran was appointed to serve as the Chief Executive Officer, Chief Financial Officer, President, Secretary
and sole Director of the Company, until the next annual meeting of stockholders of the Company and until such director’s
successor is elected and qualified or until such director’s earlier death, resignation or removal. None of the directors
or executive officers has a direct family relationship with any of the Company’s directors or executive officers, or any
person nominated or chosen by the Company to become a director or executive officer. Ms. Gao will serve in her positions without
compensation.
Acquisition of HJ
On August
6, 2020, we consummated the acquisition of One Hundred (100) Shares of HJ, representing 100% of the issued and outstanding
stock of HJ by issuing 86,000,000 shares of the common stock. HJ is a holding company that, through its subsidiaries and variable
interest entity, is engaged in the business of selling healthcare and other related products to the middle-aged and elderly market
segments in the PRC through its internet platform and offline service centers. HJ’s consolidated business is conducted through
Beijing Luji Technology Co., Ltd., a variable interest entity formed in Beijing, China on March 27, 2007.
In connection with the
acquisition, effective August 6, 2020, the following individuals were appointed
to serve in the capacities set forth next to their names until his or her successor(s) shall be duly elected or appointed, unless
he or she resigns, is removed from office or is otherwise disqualified from serving as an executive officer or director of the
Company:
Name
|
|
Positions
|
|
Number of Shares Held
|
|
Percentage of Total Common Equity
|
Tian Xiangyang
|
|
Chief Executive Officer, Director and Chairperson of the Board of Director
|
|
68,800,000
|
|
70.78%
|
Shan Yonghua
|
|
Chief Financial Officer, and Director
|
|
-
|
|
-
|
Tian Zhihai
|
|
Chief Operating Officer and Director
|
|
4,300,000
|
|
4.63%
|
Yin Jianen
|
|
Secretary and Director
|
|
-
|
|
-
|
Wang Jirui
|
|
Director
|
|
-
|
|
-
|
Upon the consummation of
the sale of the HJ Shares, Gao Xue Ran resigned from all of her positions with the Company, effective August
6, 2020. Her resignation was not due to any dispute or disagreement with the Company on any matter relating to the Company’s
operations, policies or practices.
Our principal executive offices are located at Room 1206, 12th Floor, 301, 3-17 F, Building 5, Block 1, Hangfeng Road,
Fengtai District, Beijing and our telephone number is +86-10-63622901. We maintain an Internet website at www.lujiguoji.com. The
information contained in, or accessible from, our website is not a part of this Current Report.
DESCRIPTION OF BUSINESS OF BEIJING LUJI
TECHNOLOGY CO., LTD.
Beijing Luji Technology
Co., Ltd. (“Beijing Luji”), previously known as Beijing Luji Culture Media Co. Ltd., a variable interest entity that
we control through contractual arrangements, was formed in Beijing, China, on March 27, 2007. Originally, Beijing Luji
was focused on the provision of services in paper media, publication of magazines and books, and investment in media businesses.
Due to the downturn of the paper media industry and the rise of the elderly healthcare services industry, in 2013 Beijing Luji
shifted its business focus to the provision of healthcare related products through its E-commerce platform to the middle-aged
and elderly populations.
In 2016, Beijing Luji expanded
its E-commerce operations and introduced its “Fozgo” branded online to offline (O2O) marketplace. The O2O platform
integrates its E-commerce platform with physical outlets to connect consumers and merchants in a dynamic marketplace. Its platform
not only offers users the convenience of making online purchases, but also provides users the possibility to purchase and receive
products at offline service centers. Currently, Beijing Luji’s core product categories include sales of home appliances (such
as water purifiers and air purifiers), healthcare products (such as nutrient supplements) and cosmetics products. As of March 31,
2020, Beijing Luji has developed several branch offices with outlets across the PRC with approximately 158,000 users. In 2018,
it was granted hi-tech enterprise status in the PRC.
On March 15, 2019, Beijing
Luji executed a Share Purchase Agreement with Rongcheng Health Group Co., Ltd. and acquired a 44% equity interest in Rongcheng
Tianrun Taxus Co., Ltd. (“Rongcheng Tianrun”) for RMB 79,830,000 (approximately $11.4 million). Rongcheng Tianrun
is organized and registered in the PRC, and it is engaged primarily in the cultivation and marketing of Taxus, a type of medicinal
plant. The ownership transfer and related registration procedures were completed on June 20, 2019. The foregoing description of
the Equity Acquisition Agreement is qualified in its entirety by reference to the Share Purchase Agreement, an English translation
of which is filed as Exhibit 10.2 to this Current Report and incorporated herein by reference.
Corporate Structure
Our current corporate
structure is as follows:
(1)
|
HanJiao International Holding Limited. (“HJ”
or “HanJiao”) was incorporated on July 5, 2018 in the British Virgin Islands.
|
(2)
|
LuJi Technology International Holding Limited (“Luji Technology”) was incorporated on July 5, 2018 in the British Virgin Islands and is wholly owned by HJ.
|
(3)
|
Inooka Holding Ltd. was established on July 18, 2018 in Hong Kong and is wholly owned by Luji Technology.
|
(4)
|
Beijing Hongtao Management Consulting Co., Ltd. (“Beijing Hongtao”), a Wholly Foreign-Owned Enterprise (“WFOE”), was established in the PRC on October 11, 2018 and is a wholly owned subsidiary of Inooka Holding Ltd. It currently provides consulting and technical services to Beijing Luji Technology Co., Ltd. (“Beijing Luji”).
|
(5)
|
Beijing Luji was established in the PRC on March 27, 2007. It is engaged in the business of selling goods in China. Beijing Hongtao controls Beijing Luji via various variable interest contractual arrangements (“VIE agreements”) to realize its economic benefits. Currently, the shareholders of Beijing Luji are Ms. Tian Xiangyang, Mr. Tian Zhihai, Mr. Liu Zexian, Ms. Gao Xuewei and Ms. Li Chunduo, together the “Beijing Luji Shareholders”.
|
(6)
|
Guoyi Investment Fund Management (Beijing) Co., Ltd. (“Beijing Guoyi”) was formed on February 19, 2016, and is wholly owned by Beijing Luji. Beijing Guoyi has no business activity as of the date of this Current Report.
|
Contractual Agreements between Beijing
Hongtao, Beijing Luji and Beijing Luji Shareholders
We do not have a direct
equity ownership interest in Beijing Luji but rely on a series of contractual arrangements, the variable interest agreements (“VIE
Agreements”), to control and receive the economic benefits of Beijing Luji’s business. We rely on contractual arrangements
with our variable interest entities to operate our E-commerce business in the PRC and other businesses in which foreign investment
is restricted or prohibited.
Beijing Hongtao, Beijing
Luji, and its shareholders entered into the VIE Agreements on May 15, 2019. The VIE agreements are designed to provide
Beijing Hongtao with the power, rights and obligations equivalent in all material respects to those it would possess as the sole
equity holder of Beijing Luji, including absolute control rights and the rights to the assets, property and revenue of Beijing
Luji. Each of the VIE Agreements is described in detail below.
Exclusive Consulting and Services Agreement
Pursuant to the Exclusive
Consulting and Service Agreement signed on May 15, 2019, between Beijing Hongtao and Beijing Luji, Beijing Hongtao agrees to provide
various services exclusively to Beijing Luji including development and research services for business-related software, pre-job
and on-the-job training services, technology development and transfer services, public relations services, market research and
consulting services, short and medium-term market development and planning services, various technical support services, consulting
services related to business compliance, organization and planning services related to marketing and membership activities. For
services rendered to Beijing Luji by Beijing Hongtao under this agreement, Beijing Hongtao is entitled to collect 100% of
the net income of Beijing Luji.
The Exclusive Consulting and Services Agreement shall remain in effect for ten years from the date of signing unless it is terminated
by Beijing Hongtao in advance or upon the mutual agreement of both parties. Beijing Luji may terminate the agreement subject to
payment of all service fees for completed services and compensation to Beijing Hongtao for losses. Prior to the termination of
this agreement, the parties may extend the term of this agreement in accordance with the requirements of Beijing Hongtao.
The foregoing description
of the Exclusive Consulting and Services Agreement is qualified in its entirety by reference to the Consulting and Services Agreement,
an English translation of which is filed as Exhibit 10.3 to this Current Report and incorporated herein by reference.
Business Operation Agreement
Pursuant to the Business
Operation Agreement signed on May 15, 2019, by and among the Beijing Luji Shareholders, Beijing Luji and Beijing Hongtao. Beijing
Luji agrees not to conduct any transactions that may materially affect its assets, business, personnel, obligations, rights or
company operations, without the prior written consent of Beijing Hongtao. Beijing Hongtao agrees to provide advice to Beijing Luji
from time to time regarding the appointment and dismissal of employees, daily management and financial management systems. Beijing
Luji and Beijing Luji Shareholders also agreed to appoint designees of Beijing Hongtao to serve as Board of directors and on the
senior management team of the Beijing Luji. In connection with this agreement, the Beijing Luji Shareholders executed a Power
of Attorney at Annex 1 of the Business Operation Agreement in which the Beijing Luji shareholders shall irrevocably authorize
the designated personnel of Beijing Hongtao to exercise their shareholders’ rights on their behalf, including voting rights
at the shareholders’ meeting in the name of the shareholders. The Beijing Luji Shareholders further agree that they will
replace the person authorized in the above Power of Attorney at any time upon Beijing Hongtao’s request. The Business Operation
Agreement shall remain in effect for ten years from the date of signing unless earlier terminated by Beijing Hongtao by delivering
30 days prior written notice or upon the mutual agreement of all parties. Beijing Luji and the Beijing Luji Shareholders do not
have the right to terminate the agreement unilaterally. Upon the termination of any agreement between Beijing Hongtao and Beijing
Luji, Beijing Hongtao shall be entitled to terminate all agreements between such parties.
The foregoing description
of the Business Operation Agreement is qualified in its entirety by reference to the Business Operation Agreement, an English translation
of which is filed as Exhibit 10.4 to this Current Report and incorporated herein by reference.
Equity Disposal Agreement
Pursuant to the Equity
Disposal Agreement signed on May 15, 2019, by and among the Beijing Luji Shareholders, Beijing Luji and Beijing Hongtao, the Beijing
Luji Shareholders granted to Beijing Hongtao an exclusive option right to purchase all of their equity interests in Beijing Luji
to secure the execution of the Equity Pledge Agreement in which the details are set out below. Under the terms of this agreement,
Beijing Hongtao has an exclusive right to purchase, to the extent permitted under the PRC law, at any time, all or any part of
the equity interests of the Beijing Luji Shareholders in Beijing Luji or an option to transfer the equity interests in Beijing
Luji to any third party designated by Beijing Hongtao. The option price shall be the minimum permitted by the laws and regulations
of the PRC. The Equity Disposal Agreement has a term of ten years from the date of signing, and it may be renewed at Beijing Hongtao’s
discretion.
The foregoing description
of the Equity Disposal Agreement is qualified in its entirety by reference to the Equity Disposal Agreement, an English translation
of which is filed as Exhibit 10.5 to this Current Report and incorporated herein by reference.
Equity Pledge Agreement
Pursuant to the Equity
Pledge Agreement signed on May 15, 2019, by and among the Beijing Luji Shareholders and Beijing Hongtao, the Beijing Luji Shareholders
pledged all of their equity interests in Beijing Luji to Beijing Hongtao to guarantee the performance of Beijing Luji’s obligations
under the Exclusive Consulting and Services Agreement, the Equity Disposal Agreement and the Business Operation Agreement.
Under the terms of the agreement, in the event that Beijing Luji or its shareholders breach their respective contractual obligations
under the Exclusive Consulting and Services Agreement, the Equity Disposal Agreement and the Business Operation Agreement, or upon
occurrence of any event of default as set forth in the Equity Pledge Agreement, Beijing Hongtao shall be entitled to exercise its
rights under this agreement, subject to certain cure periods. The Beijing Luji Shareholders further agree not to dispose of the
pledged equity interests or take any actions that would prejudice Beijing Hongtao’s interest.
The Equity Pledge
Agreement shall be effective until Beijing Luji and the Beijing Luji Shareholders have performed all of their obligations
under the Exclusive Consulting and Services Agreement, the Equity Disposal Agreement and the Business Operations Agreement
and the written approval of Beijing Hongtao has been obtained.
The foregoing description
of the Equity Pledge Agreement is qualified in its entirety by reference to the Equity Pledge Agreement, an English translation
of which is filed as Exhibit 10.6 to this Current Report and incorporated herein by reference.
Agency Agreement
Pursuant to the Agency
Agreement signed on May 15, 2019, among the Beijing Luji Shareholders and Beijing Hongtao, the Beijing Luji Shareholders granted
Beijing Hongtao an irrevocable license for the longest period permitted under law the right to exercise the voting rights of the
Beijing Luji Shareholders in accordance with the laws of the PRC and the Articles of Association of Beijing Luji. During the term
of this Agreement, none of the Beijing Luji Shareholders shall be entitled to transfer its interest in Beijing Luji to any third
party other than entities or individuals designated by Beijing Hongtao. This Agency Agreement shall be irrevocable and continuously
valid from the date of execution of this Agency Agreement, and it can be terminated at Beijing Hongtao’s discretion.
The foregoing description of the Agency Agreement is qualified in its entirety by reference to the Agency Agreement, an English
translation of which is filed as Exhibit 10.7 to this Current Report and incorporated herein by reference.
Market Overview
Home Appliances: Water Purifiers and Air
Purifiers
The standard of living
in China has been steadily rising in the past decade. As a result, domestic consumption standards have also risen, with a focus
on health and wellness lifestyle products and services. Because air and water quality and foods have a direct impact on health,
we believe that the demand for clean drinking water, air quality and health foods will become an increasingly important issue.
We believe that this demand will translate into a demand for domestic water and air purification technology. We anticipate
that water purifiers and air purifiers will eventually become widely used, essential home appliances.
According to the
statistics from AskCI Consulting (“ASKCI”), the annual compound growth rate of water purifier units sold in China
reached 8.1% from 2011 to 2017. ASKCI expects that the demand for household water purifiers will continue to grow at a rapid pace
in coming years, with the market size reaching over RMB 33 billion (approximately USD 4.7 billion) in 2018. According to research
data from IMEDIA Research, sales volume of water purifiers in China increased year by year from 2012 to 2019. From 5.8 million
units in 2012 to 8.9 million units in 2013, the sales volume of water purifiers achieved rapid growth, with an increase rate of
about 54.8%. In 2017, 16.4 million water purifiers were sold in China, while 17.9 million units were sold in 2018 and 18.3 million
units were sold in 2019.
According to the statistics
from the Prospective Industry Research Institute, the annual compound
growth rate of air purifiers in sales was about 8.4% from 2014 to 2017, with the estimated market size reaching over RMB 11 billion
(approximately USD 1.6 billion) in 2018. According to data released by Grand View Research, the compound growth rate of the
global air purifier market from 2016 to 2019 is 10.8%, and the global air purifier market in 2019 was nearly US$8.04 billion.
Health
Food Market
Total sales of health
food in China amounted to about RMB 290 billion (approximately USD 41.3 billion) in 2018, and their share in the global market
rose from 4.6% in 2010 to 11.6%. As total sales of health food continue to grow, we believe that the market outlook should remain
attractive. The market size of health products in China is about 397 billion yuan in 2019. With the continuous
growth of the total sales volume of healthy food, we believe that the market prospect will remain attractive.
The health food market
in China is dominated by dietary products which make up 55.2% of the market. This is followed in size of market share by health
foods with a nourishing function (33.5%), health foods for weight management (6.5%) and health foods for children and athletes
(4.8%). It is estimated that the sales revenue of China's health products industry will reach 480.3 billion
yuan in 2020. We believe that dietary supplements and health foods with a nourishing function will become increasingly popular
among young females and the middle-aged in the future.
Cosmetics
Market
According to the National
Bureau of Statistics, China's retail sales of cosmetics reached RMB 261.9 billion in 2018, up 9.6 percent year-on-year, 0.6 percentage
points higher than the growth rate of total retail sales of consumer goods in the same period. Retail sales of cosmetics in China
reached RMB 28 billion by December 2019, up 11.9% year on year. Retail sales of cosmetics in China reached RMB 299.2 billion from
January to December 2019, up 12.6 percent from the same period last year.
Domestic cosmetics
brands are performing very well with a market share of approximately 56%, primarily due to their expansion into second- and third-tier
markets. They have also been vigorously developing online sales and boosting advertising on new-media platforms (WeChat
and Weibo) to raise brand recognition, propagation speed and propagation scale. It is estimated that the scale of Chinese
cosmetics market will reach RMB 485.2 billion in 2021.
Smart
Home Market
According to the "China
Smart home Equipment Industry Market Outlook and Investment Strategy Planning Report" released by Foresight Industry Research
Institute, the size of China's smart home market has been growing year by year in recent years. In 2015, the size of China's smart
home market only reached US $705 million. By 2018, the size of China's smart home market had grown to approximately US 6.5 billion,
and in 2019, the size of China's smart home market is about US $8 billion. It is predicted that the size of China's smart home
market will grow to about US $10.5 billion in 2020.
Online to Offline
(“O2O”)
In recent years, local
lifestyle service O2O has expanded rapidly, with an increasing number of customers purchasing daily goods on the internet, According
to China Internet Watch, the gross merchandise volume (“GMV”) of local
lifestyle service O2O in China reached over RMB1.5 trillion (approximately US$ 232 billion) in 2018, soaring about 37.5% from
a year earlier. According to iResearch Consulting Group, the main reasons of the success of the O2O platforms can be attributed
to:
Popularity of smart
phones and mobile payment which provides convenient conditions for the development of the Internet in local life;
|
1.
|
O2O’s increasing coverage of life service demands meeting consumers’ demand for
diversified consumption; and
|
|
2.
|
Emergence of a great number of products and de-intermediation that facilitated the use of internet
purchasing, which lead to frequent usage.
|
Although local lifestyle
service O2O market has an extensive market, its penetration in the Internet service market is only 12.7%, implying that there is
still huge potential for its development.
Products
Beijing Luji is engaged
in the business of selling healthcare and other related products to the middle-aged and elderly market segments in China. Beijing
Luji sells its own branded “Fozgo” products through its website. It also sells products for other vendors. The Company
is focused on creating its national sales network and establishing its marketing channels to capitalize on its brand advantages.
A majority of the
products being sold since 2019 were “Fozgo” branded nutrition supplements. During the period of six months ended June
30, 2020, revenues were mainly attributable to the sales of smart watches, health foods, and cosmetics products, representing
50.3%, 9.4%, and 1.3% of revenues, respectively. During to the same period of 2019, revenues were mainly attributable to the sales
of health foods, home appliances and cosmetics products, representing 65.9%, 18.6% and 15.0% of revenues, respectively. During
the year ended December 31, 2019, the top products categories were health foods, home appliances and cosmetics products, representing
70.92%, 11.38% and 7.32% of the revenue, respectively. During the year ended December 31, 2018, the top product categories were
home appliances and cosmetics products, representing 78.8% and 14.0% of the revenue respectively.
Platform Users
Beijing Luji has
approximately 158,000 and 157,000 users as of June 30, 2020 and 2019. During the year ended December 31, 2019, the number
of new users increased by approximately 71,000 users, or 81%, from approximately 87,300 users for the year ended December 31,
2018. The users spread over 27 provinces and cities across the PRC.
The COVID-19 pandemic
has adversely affected the operations and projected revenues of Beijing Luji during the first half of 2020. In HJ’s unaudited
condensed consolidated financial statements for the three and six months ended June 30, 2020, it has included a note about its
ability to continue as a going concern due to consecutive quarterly losses from operations in the first half of 2020 as a result
of COVID-19. We are actively monitoring its effects on the operations of Beijing Luji and cannot accurately predict the
overall financial statements impact of COVID-19 on our full year 2020 results of operations. Based on Beijing Luji’s revised
business plan, it intends to grow its registered users to approximately 200,000 by the end of 2020; 250,000 by the end of 2021
and 300,000 by the end of year 2022 through a variety of promotional activities, offline meetings, online community marketing
and other network marketing through its Fozgo online mall.
Sales and Marketing
Beijing Luji creates awareness
of its brand and products directly through several channels: conferences and events marketing, social media platforms, and cross
collaboration with business partners.
|
·
|
Conference and
events marketing: Beijing Luji believes this can effectively enhance brand awareness of its targeted customers.
|
|
·
|
Social Media
Platforms: Beijing Luji promotes its products on various social media platforms such as WeChat, etc.
|
|
·
|
Business Partners: Beijing Luji
actively seeks businesses for brand partnerships to cross-promote its brand, products.
|
|
·
|
Referral
and Resellers: Beijing Luji actively encourages the development of a community of resellers and outlets that will be incentivized
to sell its products. Beijing Luji expects to rely on conferences and events to develop new resellers and new outlets in new provinces
across the PRC. Beijing Luji also plans to attract more new users by using WeChat QR code and the Internet.
|
Strategy for Growth
Beijing Luji is focused
on promoting its O2O cloud platform to middle-aged and elderly market segments in the PRC. Its strategies include:
|
1.
|
Increase the number of offline
service outlets and stores, enhance the user experience in the O2O business model, and
continue to increase branches across China. Beijing Luji has 10 branches as of June
30, 2020. It is expected that by December 31, 2020, the number of branches will reach
12. There will be 15 branches established in China in the next 18 months. It is estimated
that by December 31, 2022, there will be 20 branches established in China;
|
|
2.
|
Refining the variety of its product categories to better meet the needs of our users. Beijing Luji
plans to develop its products from common products to intelligent health care in the next 18 months;
|
|
3.
|
Beijing Luji intends to cooperate with healthcare institutions, provide door-to-door healthcare
services for the middle-aged and elderly people at the same time, and deliver customers in need of Beijing Luji’s healthcare
services to its base for on-site experience after preliminary screening.
|
In coming years, Beijing
Luji intends to provide more personalized services to its targeted group to include the following:
|
1.
|
Fozgo online mall: Promote its products and services to its targeted group through its O2O online
mall and outlets.
|
|
2.
|
Healthcare institutions: carry out strategic cooperation with healthcare institutions to provide
healthcare experience services nationwide. Users can enjoy professional and systematic care with a reasonable price.
|
|
3.
|
Medical examination institutions: strategically cooperate with different medical examination institutions
to promote health checkups with full medical examinations at reasonable prices to its users.
|
|
4.
|
In-home elderly care service: introduce community in-home elderly care services so a user can place
an order on its platform, and enjoy professional offline door-to-door elderly care services.
|
The impact of COVID-19
on our results of operations has been significant. In HJ’s unaudited condensed consolidated financial statements for
the three and six months ended June 30, 2020, it has included a note about its ability to continue as a going concern due
to consecutive quarterly losses from operations in the first half of 2020 as a result of COVID-19. We cannot predict the future
effects of COVID-19 on Beijing Luji’s operations and financial condition. Assuming resumption of normal operations starting
in the third quarter of 2020, we believe that Beijing Luji could generate sufficient cashflow over the next 12 months to implement
its revised business plan.
Years
|
|
Branches
|
|
Service Centers
|
|
Total Users
|
2020
|
|
12
|
|
200
|
|
200,000
|
2021
|
|
15
|
|
250
|
|
250,000
|
2022
|
|
18
|
|
300
|
|
300,000
|
Vendors
Beijing Luji partners
with various merchants and manufacturers across the PRC to identify suitable products for sale to our users in the PRC. During
the six months ended June 30, 2020 and 2019, Beijing Luji’s major vendors that contributed more than 10% to its total
purchases are as follow:
|
|
Six
months ended
|
|
|
|
June
30, 2020
|
|
|
|
US$
|
|
|
%
|
|
Baoqingmeilai Modern Agriculture
Service Co. Ltd.
|
|
|
5,650,000
|
|
|
|
92.3
|
|
|
|
Six
months ended
|
|
|
|
June
30, 2019
|
|
|
|
US$
|
|
|
%
|
|
Beijing Qingchangfeng
Trading Co., Ltd.
|
|
|
291,309
|
|
|
|
35.2
|
|
One Four One Three (Tianjin) Network Technology
Development Co., Ltd.
|
|
|
205,960
|
|
|
|
24.9
|
|
Tianjin Meichen Co., Ltd.
|
|
|
101,667
|
|
|
|
12.3
|
|
|
|
|
|
|
|
|
|
|
During the year ended
December 31, 2019 and 2018, Beijing Luji’s major vendors that accounted more than 10% of its total purchases are as follow:
|
|
Year ended
December 31, 2019
|
|
|
|
US$
|
|
|
%
|
|
Harbin Xinyue Technology Co., Ltd.
|
|
|
5,772,000
|
|
|
|
72.4
|
|
|
|
Year ended
|
|
|
|
December 31, 2018
|
|
|
|
US$
|
|
|
%
|
|
Guangzhou Olansi Water Treatment Equipment Co., Ltd.
|
|
|
1,233,000
|
|
|
|
27.8
|
|
Harbin Xinyue Technology Co., Ltd.
|
|
|
698,000
|
|
|
|
15.7
|
|
Tianjin Meichen Biotechnology Co., Ltd.
|
|
|
466,000
|
|
|
|
14.5
|
|
INTELLECTUAL PROPERTY AND PATENTS
We rely on, trade secrets,
copyrights, know-how, trademarks, license agreements and contractual provisions to establish our intellectual property rights and
protect the “Fozgo” brand of Beijing Luji. These legal means, however, afford only limited protection and may not adequately
protect our rights. Litigation may be necessary in the future to enforce our intellectual property rights, protect our trade secrets
or determine the validity and scope of the proprietary rights of others. Litigation could result in substantial costs and diversion
of resources and management attention. Any unauthorized disclosure or use of our intellectual property increase our business cost
and harm our operating results.
The laws of the PRC may
not protect our brand and intellectual property to the same extent as U.S. laws, if at all. We may be unable to fully protect our
intellectual property rights in our country. Further, companies in the internet, social media technology and other industries may
own large numbers of patents, copyrights and trademarks and may frequently request license agreements, threaten litigation or file
suit against us based on allegations of infringement or other violations of their intellectual property rights.
Beijing Luji intends
to seek the widest possible protection for significant product and process developments in our major markets through a combination
of trade secrets, trademarks, copyrights and patents, if applicable. We anticipate that the form of protection will vary depending
upon the level of protection afforded by the particular jurisdiction. Initially, we expect that our revenue will be derived principally
from our operations in the PRC where intellectual property protection may be more limited and difficult to enforce. In such instances,
we may seek protection of our intellectual property through measures taken to increase the confidentiality of our findings.
Beijing Luji intends
to register trademarks as a means of protecting the brand names of our companies and products. We intend to protect our trademarks
against infringement and also seek protection of registered design and product patent.
Beijing Luji relies on
trade secrets and unpatentable know-how that we seek to protect, in part, by confidentiality agreements. We expect that, where
applicable, we will require our employees to execute confidentiality agreements upon the commencement of employment with us. We
expect these agreements to provide that all confidential information developed or made known to the individual during the course
of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific
limited circumstances. The agreements will also provide that all inventions conceived by the individual while rendering services
to us shall be assigned to us as the exclusive property of the Company. There can be no assurance, however, that all persons who
we desire to sign such agreements will sign, or if they do, that these agreements will not be breached, that we would have adequate
remedies for any breach, or that our trade secrets or unpatentable know-how will not otherwise become known or be independently
developed by competitors.
COMPETITION
Our VIE, Beijing Luji,
operates in a highly competitive, price and service sensitive home appliances and health food industry. It competes with
Hefei Xili Electrical Appliance, Zhejiang Qinyuan Water Treatment Technology, Wanlvcheng
Group and Guangdong Youxingzhijia Intelligent Elderly Care Service Co., Ltd., which
provide the same or similar products and services in O2O and online marketing fields. We believe that main competitive factors
in the market include:
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·
|
Customer loyalty – strong customer
loyalty towards the platform with large repeated purchasers and referrals from existing customers
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·
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Product advantages – products
that have a higher added value with good customer experience
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|
·
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Services positioning – services
that meet rigid demands of precise customers
|
|
·
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Brand awareness – capability and
recognition of propagation speed of the brand
|
Although we believe we
compete favorably on the factors described above, many of our current and potential competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources, larger product and services offerings, a larger customer
base and greater brand recognition. These factors may allow our competitors to benefit from their existing customer or subscriber
base with lower acquisition costs or to respond quicker than we can to new or emerging technologies and changes in customer requirements.
These competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing campaigns
and adopt more aggressive pricing policies, which may allow them to build a larger subscriber base or to monetize that subscriber
base more effectively than us. Our competitors may develop products or services that are similar to our products and services or
that achieve greater market acceptance than our products and services. In addition, although we do not believe that merchant payment
terms are a principal competitive factor in our market, they may become such a factor and we may be unable to compete fairly on
such terms.
EMPLOYEES
As of June 30, 2020,
Beijing Luji has the following number of employees:
Senior Management
|
|
9
|
|
Sales and Marketing
|
|
8
|
|
Merchant
|
|
11
|
|
Customer Services
|
|
5
|
|
Business Development
|
|
5
|
|
Information System Technology
|
|
18
|
|
Administration / Finance / HR
|
|
14
|
|
Others
|
|
4
|
|
Total
|
|
74
|
|
All of Beijing Luji’s
employees are located in the PRC. None of its employees are members of a trade union. We believe that Beijing Luji maintains good
relationships with its employees and has not experienced any strikes or shutdowns and has not been involved in any material labor
disputes.
According to the
Social Insurance Law of the People’s Republic of China, Beijing Luji is required
to make contributions to a pension fund, basic medical insurance, work injury insurance, unemployment insurance and maternity
insurance for all of our eligible employees in the PRC. Beijing Luji is required to contribute a specified percentage of the participants’
relevant income based on their wage level. The total contributions were $55,195 and $105,945 for the six months ended June
30, 2020, and 2019, respectively. The total contributions were $189,765 and $124,542 for the years ended December 31, 2019,
and 2018, respectively.
Moreover, according to
the Regulations on Management of Housing Provident Fund, Beijing Luji is required to make a contribution to the housing provident
fund for all of its eligible employees in the PRC based on a certain percentage of their relevant income.
GOVERNMENT AND INDUSTRY REGULATIONS
Business
License
Any
company that conducts business in the PRC must have a business license that covers a particular type of work. Beijing Luji’s
business license covers its present business of technology development, technical services, technology promotion; organizing cultural
and artistic exchange activities (excluding performances); sales of daily necessities, clothing, shoes and hats, electronic products,
communication equipment, computer software and auxiliary equipment, automobiles, arts and crafts, household appliances; publishing;
engaged in Internet cultural activities; sales of foods. We do not expect to conduct business outside the scope of this business
license and will update the scope of such business license in accordance with our business development in the future. In the event
that we elect to engage in a business outside the scope of such license, we will be required to apply and receive approval from
the PRC government.
Value-added Telecommunications Business Permit
Operators
of value-added telecommunications services in the PRC must obtain a Value-added Telecommunications Business Permit approved by
the telecommunications administration authorities. Provision of value-added telecommunications services in China is regulated
by various rules and regulations depending on the varieties of value-added telecommunications services. Beijing Luji holds Value-added
Telecommunications Business Permits for the operation of its online platform. In this respect, it is subject to requirements and
provisions of the Telecommunications Regulations of the PRC, The Catalogue of Telecommunications Businesses, the Administrative
Measures on Telecommunications Business Operating Licenses, the Administrative Measures on Internet Information Services and other
value-added telecommunications business related rules and regulations, which set out requirements relating to, among others, application
for the permit, information content published or circulated online, and network security.
Network
Culture Business Permit
Under
the Interim Administrative Provisions on Internet Culture, any commercial entity engaged in Internet culture activities is required
to apply to the appropriate local culture authority for an Online Culture Business Permit. Internet culture activities refer to
activities carried out for providing Internet culture products and services, which mainly include production, reproduction, import,
release or broadcast of Internet culture products, on-line distribution activities of publishing cultural products on internet,
or sending cultural products through the internet, mobile communication network and other information networks to customer equipment
as well as Internet bar and other Internet online service operating premises available for users to browse, read, appreciate,
use or download such contents, as well as the exhibitions and competitions and other similar activities concerning Internet culture
products. Internet culture products comprise cultural products produced, spread and distributed through the Internet, including
without limitation to online music, online games, online shows (programs), online performance, online arts, and online cartoons.
Beijing Luji holds an Online Culture Business Permit for the provision of online culture products on our online platform.
Employment
Laws
Beijing Luji is subject
to laws and regulations governing our relationship with its employees, including, among others, wage and hour requirements, working
and safety conditions, protection for female and juvenile workers, vocational training, social insurance and welfare. These include
local labor laws and regulations, which may require substantial resources for compliance. China’s Labor Law, which became
effective on January 1, 1995, and amended on August 27, 2009 and December 29, 2018, and China’s Labor Contract Law, which
became effective on January 1, 2008, and amended on December 28, 2012, permit workers in both state and private enterprises in
China to bargain collectively. The Labor Law and the Labor Contract Law provide for collective contracts to be developed through
collaboration between the labor union (or worker representatives in the absence of a union) and management that specify such matters
as working conditions, wage scales, and hours of work. The laws also permit workers and employers in all types of enterprises
to sign individual contracts, which are to be drawn up in accordance with the collective contract.
Intellectual Property Protection in China
Patent. The
PRC has domestic laws for the protection of copyrights, patents, trademarks and trade secrets. The PRC is also signatory to some
of the world’s major intellectual property conventions, including:
|
·
|
Convention establishing the World Intellectual Property Organization (WIPO Convention) (June 4, 1980);
|
|
|
|
|
·
|
Paris Convention for the Protection of Industrial Property (March 19, 1985);
|
|
|
|
|
·
|
Patent Cooperation Treaty (January 1, 1994); and
|
|
|
|
|
·
|
The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) (November 11, 2001).
|
Patents in the PRC are
governed by the China Patent Law and its Implementing Regulations, each of which went into effect in 1985. Amended versions of
the China Patent Law came into effect in 1993, 2001 and 2009.
The PRC is signatory to the Paris Convention for the Protection of Industrial Property, in accordance with which any person who
has duly filed an application for a patent in one signatory country shall enjoy, for the purposes of filing in the other countries,
a right of priority during the period fixed in the convention (12 months for inventions and utility models, and 6 months for industrial
designs).
The Patent Law covers
three kinds of patents — patents for inventions, utility models and designs. The Chinese patent system adopts the principle
of first to file, which means that a patent may be granted only to the person who first files an application. Consistent with
international practice, the PRC allows the patenting of inventions or utility models that possess the characteristics of novelty,
inventiveness and practical applicability only. For a design to be patentable it cannot be identical with, or similar to, any
design which, before the date of filing, has been publicly disclosed in publications in the country or abroad or has been publicly
used in the country, and should not be in conflict with any prior right of another.
Copyright.
Copyright in the PRC, including copyrighted software, is principally protected under the Copyright Law of the PRC and related
rules and regulations. Under the Copyright Law, the term of protection for copyrighted software is 50 years.
Trademark.
Registered trademarks are protected under the Trademark Law of the PRC and related rules and regulations. Trademarks are registered
with the Trademark Office of the SAIC. Where registration is sought for a trademark that is identical or similar to another trademark
which has already been registered or given preliminary examination and approval for use in the same or similar category of commodities
or services, the application for registration of such trademark may be rejected. Trademark registrations are effective for a renewable
ten-year period, unless otherwise revoked. The duration of a trademark is 10 years from the date of registration.
Domain names.
Domain name registrations are handled through domain name service agencies established under the relevant regulations, and applicants
become domain name holders upon successful registration.
Regulations on Tax
PRC Corporate Income Tax
The PRC corporate income
tax, or CIT, is calculated based on the taxable income determined under the applicable CIT Law and its implementation rules, which
became effective on January 1, 2008 and amended on February 24, 2017 and December 29, 2018 respectively. The CIT Law imposes a
uniform corporate income tax rate of 25% on all resident enterprises in China, including foreign-invested enterprises. As Beijing
Luji is a national high-tech enterprise, 15% of the enterprise income tax is imposed on national high-tech enterprises in accordance
with provisions of the Chinese tax law.
Uncertainties exist with
respect to how the CIT Law applies to the tax residence status of the Company and our offshore subsidiaries. Under the CIT Law,
an enterprise established outside of China with a “de facto management body” within China is considered a “resident
enterprise,” which means that it is treated in a manner similar to a Chinese enterprise for corporate income tax purposes.
Although the implementation rules of the CIT Law define “de facto management body” as a managing body that exercises
substantive and overall management and control over the production and business, personnel, accounting books and assets of an enterprise,
the only official guidance for this definition currently available is set forth in Circular 82 issued by the State Administration
of Taxation, which provides guidance on the determination of the tax residence status of a Chinese-controlled offshore incorporated
enterprise, defined as an enterprise that is incorporated under the laws of a foreign country or territory and that has a PRC enterprise
or enterprise group as its primary controlling shareholder. Although the Company does not have a PRC enterprise or enterprise group
as our primary controlling shareholder and is therefore not a Chinese-controlled offshore incorporated enterprise within the meaning
of Circular 82, in the absence of guidance specifically applicable to us, we have made reference to the guidance set forth in Circular
82 to evaluate the tax residence status of the Company and our subsidiaries organized outside the PRC.
According to Circular 82,
a Chinese-controlled offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having a “de facto
management body” in China and will be subject to PRC corporate income tax on its worldwide income only if all of the following
criteria are met:
|
·
|
the primary location of the day-to-day operational management is in the PRC;
|
|
|
|
|
·
|
decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC;
|
|
|
|
|
·
|
the enterprise’s primary assets, accounting books and records, company seals, and board and shareholders meeting minutes are located or maintained in the PRC; and
|
|
|
|
|
·
|
50% or more of voting board members or senior executives habitually reside in the PRC.
|
We believe that our entities
inside China are considered as PRC resident enterprise for PRC tax purposes as defined above. However, the tax resident status
of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation
of the term “de facto management body.” As all of our management members are based in China, it remains unclear how
the tax residency rule will apply to our case. If the PRC tax authorities determine that we or any of our subsidiaries outside
of China is a PRC resident enterprise for PRC enterprise income tax purposes, then we or such subsidiary could be subject to PRC
tax at a rate of 25% on its world-wide income, as our entity enterprise in China is an state high-tech enterprise, it is possible
to be impose 15% enterprise income tax on state high-tech enterprises in accordance with provisions of the Chinese tax law, thus
materially reducing our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations. Furthermore,
if the PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, gains realized
on the sale or other disposition of our ordinary shares may be subject to PRC tax, at a rate of 10% in the case of non-PRC enterprises
or 20% in the case of non-PRC individuals (in each case, subject to the provisions of any applicable tax treaty), if such gains
are deemed to be from PRC sources. It is unclear whether non-PRC shareholders of our company would be able to claim the benefits
of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise.
Any such tax may reduce the returns on your investment in our ordinary shares.
Chinese companies operating
in the high-technology and software industry that meet relevant requirements may qualify for preferential treatment within the
scope of the PRC national plan. For a qualified high and new technology enterprise, the applicable enterprise income tax rate
is 15%. The high and new technology enterprise qualification is re-assessed by the relevant authorities every three years.
Value-Added Tax and Business Tax
The Provisional Regulations
of the PRC on Value-added Tax (“VAT”) were promulgated by the State Council on December 13, 1993 and came into effect
on January 1, 1994 which were subsequently amended on November 10, 2008, February 6, 2016 and November 19, 2017. The Detailed Rules
for the Implementation of the Provisional Regulations of the PRC on Value-added Tax (Revised in 2011) were promulgated by the Ministry
of Finance and the State Administration of Taxation (“SAT”) on 28 October 2011 and came into effect on November 1,
2011 (collectively, the “VAT Law”). According to the VAT Law, all enterprises and individuals engaged in the sale of
goods, the provision of processing, repair and replacement services, and the importation of goods within the territory of the PRC
must pay value-added tax. For general VAT taxpayers selling or importing goods other than those specifically listed in the VAT
Law, the VAT rate is 17%. Starting from April 1, 2019, the VAT rate for revenue generated from providing products was changed from
16% into 13%. VAT is reported as a deduction of revenue when incurred. Entities that are VAT general taxpayers are allowed to offset
qualified input VAT paid to suppliers against their output VAT liabilities. Net VAT balance between input VAT and output VAT is
recorded in taxes payable.
On March 23, 2016, the Ministry of Finance and the SAT jointly issued the Circular on Full Implementation of Business Tax to Value-added
Tax Reform which has been partially repealed on July 1, 2017 and January 1, 2018, confirms that business tax would be completely
replaced by VAT from May 1, 2016.
Regulations Relating to Foreign Exchange
and Dividend Distribution
Foreign Exchange Regulations
The principal regulations
governing foreign currency exchange in China are the Foreign Exchange Administration Regulations. Under the PRC foreign exchange
regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions,
may be made in foreign currencies without prior approval from the State Administration of Foreign Exchange (“SAFE”)
by complying with certain procedural requirements. By contrast, approval from or registration with appropriate government authorities
is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment
of foreign currency-denominated loans or foreign currency is to be remitted into China under the capital account, such as a capital
increase or foreign currency loans to our PRC subsidiaries.
In November 2012, SAFE
promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment.
Pursuant to this circular, the opening of various special purpose foreign exchange accounts, such as pre-establishment expense
accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment of RMB proceeds by foreign investors in the
PRC, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no
longer require the approval or verification of SAFE, and multiple capital accounts for the same entity may be opened in different
provinces, which was not possible previously. In addition, SAFE promulgated the Circular on Printing and Distributing the Provisions
on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013,
which specifies that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC shall
be conducted by way of registration and banks shall process foreign exchange business relating to the direct investment in the
PRC based on the registration information provided by SAFE and its branches.
Additionally, pursuant
to the Notice of the State Administration of Foreign Exchange on Further Simplifying and Improving the Direct Investment related
Foreign Exchange Administration Policies (“SAFE Notice No. 13”), which was promulgated on February 13, 2015 and became
effective on June 1, 2015, the foreign exchange registration in relation to foreign direct investment shall be directly reviewed
and handled by qualified banks in accordance with SAFE Notice No. 13, and SAFE and its branches shall perform indirect regulation
over the foreign exchange registration via qualified banks.
We typically do not need to use our offshore foreign currency to fund our PRC operations. In the event we need to do so, we
will apply to obtain the relevant approvals of, registration or filing with SAFE and other PRC government authorities as necessary.
SAFE Circular 37
SAFE promulgated the Circular
on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip
Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly
known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register
with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose
of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises
or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle.” SAFE Circular 37
further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle,
such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other
material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required
SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to
the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle
may be restricted in its ability to contribute additional capital into its PRC subsidiary. Furthermore, failure to comply with
the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange
controls. On February 13, 2015, SAFE Notice No. 13 was promulgated, pursuant to which the aforementioned registration shall be
conducted with and handled by qualified banks.
We have notified substantial
beneficial owners of our ordinary shares who we know are PRC residents of their filing obligation, and to the best of our knowledge,
those shareholders whom we know are PRC residents have completed the registration or will carry out the registration as required
under SAFE Circular 37. However, we may not be aware of the identities of all our beneficial owners who are PRC residents. In
addition, we do not have control over our beneficial owners and cannot assure you that all of our PRC resident beneficial owners
will comply with SAFE Circular 37. The failure of our beneficial owners who are PRC residents to register or amend their SAFE
registrations in a timely manner pursuant to SAFE Circular 37 or the failure of future beneficial owners of our company who are
PRC residents to comply with the registration procedures set forth in SAFE Circular 37 may subject such beneficial owners or our
PRC subsidiaries to fines and legal sanctions. Failure to register or amend the registration may also limit our ability to contribute
additional capital to our PRC subsidiaries or receive dividends or other distributions from our PRC subsidiaries or other proceeds
from disposal of our PRC subsidiaries, or we may be penalized by SAFE.
Share Option Rules
Under the Administration
Measures on Individual Foreign Exchange Control issued by the PBOC on December 25, 2006, all foreign exchange matters involved
in employee share ownership plans and share option plans in which PRC citizens participate require approval from SAFE or its authorized
branch. Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies
may submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose
companies. In addition, under the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating
in Share Incentive Plans of Overseas Publicly-Listed Companies, or the Share Option Rules, issued by SAFE on February 15, 2012,
PRC residents who are granted shares or share options by companies listed on overseas stock exchanges under share incentive plans
are required to (i) register with SAFE or its local branches, (ii) retain a qualified PRC agent, which may be a PRC subsidiary
of the overseas listed company or another qualified institution selected by the PRC subsidiary, to conduct the SAFE registration
and other procedures with respect to the share incentive plans on behalf of the participants, and (iii) retain an overseas institution
to handle matters in connection with their exercise of share options, purchase and sale of shares or interests and funds transfers.
We will make efforts to comply with these requirements upon completion of our initial public offering.
Regulation of Dividend Distributions
The principal laws, rules
and regulations governing dividend distributions by foreign-invested enterprises in the PRC are the Company Law of the PRC, as
amended, the Wholly Foreign-owned Enterprise Law and its implementation regulations, the Chinese-foreign Cooperative Joint Venture
Law and its implementation regulations, and the Chinese-foreign Equity Joint Venture Law and its implementation regulations. Under
these laws, rules and regulations, foreign-invested enterprises may pay dividends only out of their accumulated profit, if any,
as determined in accordance with PRC accounting standards and regulations. Both PRC domestic companies and wholly-foreign owned
PRC enterprises are required to set aside a general reserve of at least 10% of their after-tax profit, until the cumulative amount
of such reserve reaches 50% of their registered capital. A PRC company is not permitted to distribute any profits until any losses
from prior fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with distributable
profits from the current fiscal year.
INSURANCE
The Company does not
have any general business or product liability insurance.
Beijing Luji maintains
certain insurance in accordance customary industry practices in the PRC. Under the PRC law it is a requirement that all employers
in the city must purchase work injury insurance for all employees to cover their liability in the event that their staff suffers
an injury or illness during the normal course of their work.
CORPORATE INFORMATION
Our principal
executive and registered offices are located Room 1206, 12th Floor, 301, 3-17 F, Building 5, Block 1, Hangfeng Road, Fengtai
District, Beijing, The PRC, telephone number +86 10 63622901.
RISK FACTORS
An investment in our
securities involves a high degree of risk. You should consider carefully the following information about these risks, together
with the other information contained in this Current Report before making an investment decision. Our business, prospects, financial
condition, and results of operations may be materially and adversely affected as a result of any of the following risks. The value
of our securities could decline as a result of any of these risks. You could lose all or part of your investment in our securities.
Some of the statements in “Risk Factors” are forward looking statements.
Risks
Relating to our Business
COVID-19 has had
an adverse effect that is material on our business and may continue to do so for the next twelve months.
During March 2020,
the World Health Organization declared the rapidly growing coronavirus outbreak to be a global pandemic. The COVID-19 pandemic
has significantly impacted health and economic conditions throughout Hong Kong and China. National, regional and local governments
took a variety of actions to contain the spread of COVID-19, including office and store closures, quarantining suspected COVID-19
patients, extended the Chinese New Year holiday, and capacity limitations. These developments have significantly impacted Beijing
Luji’s results of operations, financial condition and cash flows.
In response to the
outbreak, our Company and Beijing Luji have taken a series of measures accordingly, including telecommute working for some employees,
reducing pay and benefits for remaining employees, and cutting back capital spending and temporary closure of some service centers
(offline experience stores). The above measures have affected Beijing Luji’s operating capacity and work efficiency,
and negatively impacted its sales and marketing activities as well as its business performance. The extent to which COVID-19 affects
our business performance will depend on the future development of the epidemic, including new actions taken by the PRC government
to contain the outbreak, which is highly uncertain and unpredictable. In addition, if the Chinese economy as a whole is negatively
impacted by the outbreak, our operating performance will also be adversely affected.
In HJ’s unaudited
condensed consolidated financial statements for the three and six months ended June 30, 2020, it has included a note about its
ability to continue as a going concern due to consecutive quarterly losses from operations in the first half of 2020 as a result
of COVID-19. If COVID-19 continues to adversely affect its business and financial performance, it may not be able to generate
sufficient cash flow to meet its operating expenses.
In light of
the uncertainty as to when Beijing Luji can resume full operations and the uncertain customer demand environment, we have
scheduled a series of marketing and promotional events in the third quarter of 2020. Based on Beijing Luji’s revised
business plan and updated forecast, we believe the Company will have sufficient operating cash flows to operate as a going concern
over the next 12 months.
Continued
business closures or restrictions on operations due to COVID-19 may adversely our ability to continue as a going concern.
The consolidated
financial statements of HJ have been prepared on a going concern basis, which assumes that we will be able to continue to operate
in the future in the normal course of business. In HJ’s unaudited condensed consolidated financial statements for the three
and six months ended June 30, 2020, it has included a note about our ability to continue as a going concern due to consecutive
quarterly losses from operations in the first half of 2020 as a result of COVID-19. Business closures in the
PRC and limitations on business operations arising from COVID-19 has significantly disrupted Beijing Luji’s ability to generate
revenues and cash flow during the first half of 2020. The uncertainty regarding the length of the disruption may adversely impact
our ability to meet our operating and financial targets for the full year 2020. The ultimate impact of the COVID-19 pandemic on
our business, results of operations, financial condition and cash flows will depend on our ability to generate sales and manage
our working capital requirements and liquidity prudently during the second half of 2020.
We are susceptible
to economic conditions in the PRC where our principal business, assets, suppliers, merchants and customers are located.
Our business and assets
are primarily located in the PRC. Our results of operations, financial state of affairs and future growth are, to a significant
degree, subject to China’s economic, political and legal development and related uncertainties. Our operations and results
could be materially affected by a number of factors, including, but not limited to:
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Changes in policies by the PRC government
resulting in changes in laws or regulations or the interpretation of laws or regulations; changes in taxation;
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Political and economic disturbance in
the PRC;
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Changes in employment restrictions;
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Import duties; and
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Currency revaluation
and restrictions.
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Our
business plans for expansion may make it difficult for us to accurately forecast our operating results and control our business
expenses which means we face a higher risk of business failure which could result in the loss of your investment.
Our
planned expense levels are, and will continue to be, based in part on our expectations, which are difficult to forecast accurately
in light of our expansion plans and factors outside of our control. We may be unable to adjust spending in a timely manner to
compensate for any unexpected developments. Further, business development expenses, like customer acquisition costs, may increase
significantly as we expand operations or make acquisitions. To the extent that any unexpected expenses are incurred, or are not
rapidly followed by, a corresponding increase in revenue, our business, operating results, and financial condition may be materially
and adversely affected which could result in the loss of your investment.
Our
future performance depends to a significant degree upon the continued service of key members of management as well as
marketing, sales and product development personnel.
We are dependent upon
the continued service of Ms. Tian Xiangyang, CEO, Chairman of the Board, Director and major shareholder, Mr. Shan Yonghua, our
CFO and Director, and Mr. Tian Zhihai, our COO and Director. The loss of Ms. Tian, Mr. Shan, Mr. Tian or one or more of our other
key personnel would have a material adverse effect on our business, operating results and financial condition. We believe our
future success will also depend in a large part upon our ability to attract, retain and further motivate highly skilled management,
marketing, sales and product development personnel. We expect to establish an incentive compensation plan for our key personnel
to retain their services. We have experienced intense competition for personnel, and we cannot assure you that we will be able
to retain our key employees or that we will be successful in attracting, assimilating and retaining talents in the future.
Because our Chief
Executive Officer, Chairperson of the Board and Director controls a large percentage of our voting securities, she has the ability
to influence matters affecting our shareholders.
Ms. Tian Xiangyang, our
CEO, Chairman of the Board, Director and shareholder beneficially controls over 70.78% of our outstanding voting securities. As
a result, she has the ability to influence matters affecting our shareholders, including the election of our directors, the acquisition
or disposition of our assets, and the future issuance of our shares. Because she controls such shares, investors may find it difficult
to replace our directors and management if they disagree with the way our business is being operated. Because the influence by
Ms. Tian could result in management making decisions that are in the best interest of her and not in the best interest of the investors,
you may lose some or all of the value of your investment in our common stock. See “Securities of Certain Beneficial Owners
and Management”.
The relative lack
of United States public company experience of our management team may put us at a competitive disadvantage.
Our management team
lacks United States public company experience, which could impair our ability to comply with applicable legal and regulatory
requirements. Such responsibilities may include complying with federal securities laws and making required filings and
disclosures on a timely basis. Our senior management may be unable to implement programs and policies in an effective and
timely manner that adequately responds to the increased legal, regulatory and reporting requirements associated with being a
publicly traded company. Our failure to comply with all applicable requirements could lead to the imposition of fines and
penalties, distract our management from attending to the management and growth of our business, result in a loss of investor
confidence in our financial reports and have an adverse effect on our business and stock price.
We may grow our
business through acquisitions in the near future, which may result in operating difficulties, dilution, and other harmful consequences.
We expect to achieve our
business plan through a combination of organic growth and acquisitions and investments. We periodically evaluate an array of potential
strategic transactions and may make one or more acquisitions in the near future. The process of integrating an acquired company,
business, or technology may create unforeseen operating difficulties and expenditures. The areas where we face risks include:
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Implementation or remediation of controls,
procedures, and policies at the acquired company;
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Diversion of management time and focus
from operating our business to acquisition integration challenges;
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Cultural challenges associated with integrating
employees from the acquired company into our organization;
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Retention of employees from the businesses
we acquire;
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Integration of the acquired company’s
accounting, management information, human resources, and other administrative systems;
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Liability for activities of the acquired
company before the acquisition, including patent and trademark infringement claims, violations of laws, commercial disputes, tax
liabilities, and other known and unknown liabilities;
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Litigation or other claims in connection
with the acquired company, including claims from terminated employees, customers, former stockholders, or other third parties;
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In the case of foreign acquisitions, the
need to integrate operations across different cultures and languages and to address the particular economic, currency, political,
and regulatory risks associated with specific countries; and
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Failure to successfully
further develop the acquired product, service or technology.
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Our failure to address
these risks or other problems encountered in connection with future acquisitions and investments could cause us to fail to realize
the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities, and harm our business generally.
Future acquisitions may
also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, or amortization expenses,
or write-offs of goodwill, any of which could harm our financial condition and results. Also, the anticipated benefit of our acquisitions
or investments may not materialize.
If we are unable
to successfully manage and achieve growth, our business and operating results could be adversely affected.
We expect the growth of
our business and operations to place significant demands on our management, operational and financial infrastructure. If we do
not effectively manage and achieve growth, the quality of our products and services could suffer, which could negatively affect
our reputation and operating results. Our expansion and growth in international markets heighten these risks as a result of the
particular challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, customs, legal
systems, alternative dispute systems, regulatory systems, and commercial infrastructures. To effectively manage this growth, we
will need to develop and improve our operational, financial and management controls, and our reporting systems and procedures.
These system enhancements and improvements may require significant capital expenditures and management resources. Failure to implement
these improvements could hurt our ability to manage our growth and our financial position and results.
If our relationships
with suppliers, especially with single source suppliers of goods, were to terminate or our purchase arrangements were to be disrupted,
our business could be interrupted and adversely affected.
We purchase our goods
from third-party suppliers and vendors. While there are several product suppliers available, we currently choose to partner with
one or a limited number of suppliers for several of our goods and products. Our reliance on a single or limited number of vendors
involves a number of risks, including:
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potential delay in shipments;
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product performance shortfalls
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potential insolvency of these vendors;
and
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reduced control over delivery schedules,
manufacturing capabilities, quality and costs.
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We cannot assure you that
there will not be any dispute with our major suppliers or vendors, or that we will be able to maintain business relationships with
our existing suppliers or vendors. We have entered into the purchase agreement or distributorship agreement with our suppliers,
there is no assurance the relationship will not be unfavorably amended, revoked or terminated, or discontinued in the future. If
we cannot locate alternative suppliers for replacement in a timely manner and/or on comparable commercial terms, our business operations
may be hindered, which would adversely affect our profitability.
A significant disruption
in our computer systems and our inability to adequately maintain and update those systems could adversely affect our operations
and our ability to maintain user confidence.
We
rely extensively on our computer systems to manage and account for inventory, process user transactions, manage and maintain the
privacy of user data, communicate with our vendors and other third parties, service accounts, and summarize and analyze results.
We also rely on continued and unimpeded access to the Internet to use our computer systems. Our systems are subject to damage or
interruption from power outages, telecommunications failures, computer viruses, malicious attacks, security breaches, and catastrophic
events. If our systems are damaged or fail to function properly or reliably, we may incur substantial repair or replacement costs,
experience data loss or theft and impediments to our ability to manage inventories or process user transactions, engage in additional
promotional activities to retain our users, and encounter lost user confidence, which could adversely affect our results of operations.
We
continually invest to maintain and update our computer systems. Implementing significant system changes increases the risk of
computer system disruption. The potential problems and interruptions associated with implementing technology initiatives, as well
as providing training and support for those initiatives, could disrupt or reduce our operational efficiency, and could negatively
impact user experience and user confidence.
If
our efforts to protect the security of information about our customers, and other third parties are unsuccessful, we may face
additional costly government enforcement actions and private litigation, and our sales and reputation could suffer.
We
regularly receive and store information about our customers, merchants, vendors and other third parties. However, because the
techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult
to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures.
In addition, hardware, software, or applications we develop or procure from third parties or through open source solutions may
contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Unauthorized
parties may also attempt to gain access to our systems or facilities, or those of third parties with whom we do business, through
fraud, trickery, or other forms of deceiving our team members, contractors, and vendors.
To
date, we have not encountered any data breach that was material to our consolidated financial statements. If we, our vendors,
or other third parties with whom we do business experience significant data security breaches or fail to detect and appropriately
respond to significant data security breaches, we could be exposed to government enforcement actions and private litigation. In
addition, our users could lose confidence in our ability to protect their information, which could cause them to discontinue using
our services or stop shopping with us altogether.
If
we become subject to governmental investigations or compulsory measures, our business operation and reputation could be harmed
and our financial condition could be adversely affected.
Governmental
authorities may carry out investigations on us by reason of routine administration or complaints or reports made. Besides, they
may impose compulsory measures on the object of investigation for the purpose of facilitating the investigation, such as seizure
of premises, facilities or other properties, Freezing deposits or remittances, detainment of properties and restrictions on personal
freedom of citizens. Any governmental investigation and/or compulsory measure could divert our management’s attention as
well as other resources away from our business, and negatively affect our reputation and brand image. In the event that any unfavorable
conclusion was drawn after the investigation, we may be subject to administrative orders, penalties, or even criminal charges,
which could materially adversely affect our business, financial condition and results of operations.
If
we are unable to continue using the properties we lease, our business could be interrupted and adversely affected
We
lease properties in the PRC for office and other use. Some of the lessors have refused to provide us with the ownership certificate
and/or other authorization supporting documents. Moreover, certain properties have been leased by us for uses that are not in
conformity with those registered with or approved by relevant governmental authorities. Therefore, in the event that any of the
leases are deemed by a court or administrative authority to be invalid or unenforceable, or we are required to vacate from the
leased property, our business could be interrupted and adversely affected, and we may incur additional costs in identifying new
premises and relocation.
Moreover,
if we fail to register our lease agreements with the relevant PRC governmental authorities, we may be subject to a fine not exceeding
RMB10,000 (approximately USD 1,400) for each unregistered lease agreement if the relevant PRC government authorities require us
to rectify such non-compliance and we fail to do so within the specific time. If we are subject to such fines, our financial condition
and results of operations may be adversely affected.
Other
factors can have a material adverse effect on our future profitability and financial condition.
Many
other factors can affect our profitability and financial condition, including:
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changes in, or interpretations of laws
and regulations including changes in accounting standards and taxation requirements;
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changes in the rate of inflation, interest
rates and the performance of investments held by us;
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changes in the creditworthiness of counterparties
that transact business with;
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changes in business, economic, and political
conditions, including: war, political instability, terrorist attacks, the threat of future terrorist activity and related military
action; natural disasters; the cost and availability of insurance due to any of the foregoing events; labor disputes, strikes,
slow-downs, or other forms of labor or union activity; and, pressure from third-party interest groups;
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changes in our business and investments
and changes in the relative and absolute contribution of each to earnings and cash flow resulting from evolving business strategies,
changing product mix, changes in tax rates and opportunities existing now or in the future;
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difficulties related to our information
technology systems, any of which could adversely affect business operations, including any significant breakdown, invasion, hacking,
destruction, or interruption of these systems;
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changes in credit markets impacting our
ability to obtain financing for our business operations; or
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legal difficulties, any of which could
preclude or delay commercialization of products or technology or adversely affect profitability, including claims asserting statutory
or regulatory violations, adverse litigation decisions, and issues regarding compliance with any governmental consent decree.
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Risks Related to Doing Business in the
PRC
We face the risk
that changes in the policies of the PRC government could have a significant impact upon the business we may be able to conduct
in the PRC and the profitability of such business.
We conduct substantially
all of our operations and generate most of our revenue through our VIE in the PRC. Accordingly, economic, political
and legal developments in the PRC will significantly affect our business, financial condition, results of operations and prospects. The
PRC economy is in transition from a planned economy to a market-oriented economy subject to plans adopted by the government that
set national economic development goals. Policies of the PRC government can have significant effects on economic conditions
in the PRC. While we believe that the PRC will continue to strengthen its economic and trading relationships with foreign
countries and that business development in the PRC will continue to follow market forces, we cannot assure you that this will be
the case. Our interests may be adversely affected by changes in policies by the PRC government, including:
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changes in laws, regulations or their
interpretation;
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confiscatory taxation;
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restrictions on currency conversion, imports
or sources of supplies;
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expropriation or nationalization of private
enterprises; and
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the allocation of resources.
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Although the PRC government
has been pursuing economic reform policies for more than two decades, the PRC government continues to exercise significant control
over economic growth in the PRC through the allocation of resources, controlling payments of foreign currency, setting monetary
policy and imposing policies that impact particular industries in different ways. We cannot assure you that the PRC
government will continue to pursue policies favoring a market oriented economy or that existing policies will not be significantly
altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting political,
economic and social life in the PRC.
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.
We are a holding company
and all of the combined company’s operations are 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 2017 to 6.3% in 2019 according to the National Bureau of Statistics of China. According to a recent national information
forecast, China’s economic growth rate in 2020 will slow to 2% to 4% because of the effect of epidemic, 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 combined company’s products and may have a materially adverse effect on our 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 that we may be able to conduct in the PRC and accordingly on the results of our operations
and financial condition.
Our 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 we must conduct our business activities. Our 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 our business, or the enforcement and performance of our contractual 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 30 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 our business. Consequently, we cannot 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.
We may be exposed
to liabilities under the Foreign Corrupt Practices Act, and any determination that we violated the Foreign Corrupt Practices Act
could have a material adverse effect on our business.
We are subject to the Foreign
Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and
their officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining
business. We will have operations, agreements with third parties and make sales in the PRC, which may experience corruption. Our
proposed activities may create the risk of unauthorized payments or offers of payments by one of the employees, consultants, or
sales agents of our Company, because these parties are not always subject to our control. It will be our policy to implement safeguards
to discourage these practices by our employees. Also, our existing practices and any future improvements may prove to be less than
effective, and the employees, consultants, or sales agents of our Company may engage in conduct for which we might be held responsible.
Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could
negatively affect our business, operating results and financial condition. In addition, the government may seek to hold our Company
liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
Failure to make adequate
contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.
We are required under PRC
laws and regulations 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 our employees up to a maximum amount specified by the local government from time
to time at locations where we operate our businesses. 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. We have made adequate
employee benefit payments. We may be required to make up the contributions for these plans as well as to pay late fees where applicable.
In the event that we fail to make a supplementary payment for the social insurance within a specified period designated by the
competent government authority, we may be subject to fines, the amount payable of which shall be determined usually 1 to 3 times
of the underpaid amount according to the Social Insurance Law of the PRC. If we are
subject to supplementary payments, late fees or fines in relation to the underpaid employee benefits, our financial condition and
results of operations may be adversely affected.
Restrictions on currency exchange may
limit our ability to utilize our revenue effectively.
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.
Because our holding
company structure creates restrictions on the payment of dividends, our ability to pay dividends is limited.
We are a holding company
whose primary assets are our ownership of the equity interests in our subsidiaries and our agreements with our variable interest
entities. We conduct no other business and, as a result, we depend entirely upon our subsidiaries and variable interest entities’
earnings and cash flow. If we decide in the future to pay dividends, as a holding company, our ability to pay dividends and meet
other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries and variable interest
entities. Our subsidiaries, variable interest entities and projects may be restricted in their ability to pay dividends, make distributions
or otherwise transfer funds to us prior to the satisfaction of other obligations, including the payment of operating expenses or
debt service, appropriation to reserves prescribed by laws and regulations, covering losses in previous years, restrictions on
the conversion of local currency into U.S. dollars or other hard currency, completion of relevant procedures with governmental
authorities or banks and other regulatory restrictions. Under the applicable PRC laws and regulations, foreign-invested enterprises
in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards
and regulations. In addition, a foreign-invested enterprise in China is required to set aside a portion of its after-tax profit
to fund specific reserve funds prior to payment of dividends. In particular, at least 10% of its after-tax profits based on PRC
accounting standards each year is required to be set aside towards its general reserves until the accumulative amount of such reserves
reach 50% of its registered capital. These reserves are not distributable as cash dividends. If future dividends are paid in RMB,
fluctuations in the exchange rate for the conversion of any of these currencies into U.S. dollars may adversely affect the amount
received by U.S. stockholders upon conversion of the dividend payment into U.S. dollars. We do not presently have any intention
to declare or pay dividends in the future. You should not purchase shares of our common stock in anticipation of receiving dividends
in future periods.
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.
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, unless otherwise provided under relevant tax
treaties, 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 or whether 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.
Furthermore, our WFOE’s
ability to pay dividends may be restricted due to foreign exchange control policies and the availability of its cash balance. Substantially
all of the Operating Companies’ operations are conducted in China and all of the revenue we recognize, through our WFOE will
be denominated in RMB. RMB is subject to exchange control regulation in China, and, as a result, our WFOE may be unable to distribute
any dividends outside of China due to PRC exchange control regulations that restrict our ability to convert RMB into U.S. dollars.
The lack of dividends or
other payments from our WFOE may limit our ability to make investments or business combinations that could be beneficial to our
business, pay dividends or otherwise fund, and conduct our business. Our funds may not be readily available to us to satisfy obligations
which have been incurred outside the PRC, which could adversely affect our business and prospects or our ability to meet our cash
obligations. Accordingly, if we do not receive dividends from our WFOE, our liquidity and financial condition will be materially
and adversely affected.
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 Announcement 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 investments 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 tax 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.
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 us 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 seeks 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 our ability to maintain or expand our 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 in 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 a 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 a 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 utilized 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.
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 and
reporting, 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 may 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.
In addition, major
issues with other U.S. listed Chinese companies in the future, could have a negative effect on the value of your investment, even
though the Company is not involved.
There are
uncertainties under the PRC Securities Law relating to the procedures and requisite timing for the U.S. securities regulatory
agencies to conduct investigations and collect evidence within the territory of the PRC.
On December 28,
2019, the newly amended Securities Law of the PRC (the “PRC Securities Law”) was promulgated, which became effective
on March 1, 2020. According to Article 177 of the PRC Securities Law (“Article 177”), the securities regulatory authority
of the State Council may establish a regulatory cooperation mechanism with securities regulatory authorities of another country
or region for the implementation of cross-border supervision and administration. Article 177 further provides that overseas securities
regulatory authorities shall not engage in activities pertaining to investigations or evidence collection directly conducted within
the territories of the PRC, and that no Chinese entities or individuals shall provide documents and information in connection
with securities business activities to any organizations and/or persons aboard without the prior consent of the securities regulatory
authority of the State Council and the competent departments of the State Council. As of the date of this prospectus, we are not
aware of any implementing rules or regulations which have been published regarding application of Article 177.
We believe Article
177 is only applicable where the activities of overseas authorities constitute a direct investigation or evidence collection by
such authorities within the territory of the PRC. Our principal business operation is conducted in the PRC. In the event that
the U.S. securities regulatory agencies carry out an investigation on us such as an enforcement action by the Department of Justice,
the SEC or other authorities, such agencies’ activities will constitute conducting an investigation or collecting evidence
directly within the territory of the PRC and accordingly fall within the scope of Article 177. In that case, the U.S. securities
regulatory agencies may have to consider establishing cross-border cooperation with the securities regulatory authority of the
PRC by way of judicial assistance, diplomatic channels or establishing a regulatory cooperation mechanism with the securities
regulatory authority of the PRC. However, there is no assurance that the U.S. securities regulatory agencies will succeed in establishing
such cross-border cooperation in this particular case and/or establish such cooperation in a timely manner.
Furthermore, as
Article 177 is a recently promulgated provision, it remains unclear as to how it will be interpreted, implemented or applied by
the Chinese Securities Regulatory Commission or other relevant government authorities. As such, there are uncertainties as to
the procedures and requisite timing for the U.S. securities regulatory agencies to conduct investigations and collect evidence
within the territory of the PRC. If the U.S. securities regulatory agencies are unable to conduct such investigations, there exists
a risk that they may determine to suspend or de-register our registration with the SEC and may also delist our securities from
applicable trading market within the US.
It may be difficult
for stockholders to enforce any judgment obtained in the United States against us, which may limit the remedies otherwise available
to our stockholders.
Substantially all of our
assets are located in the PRC. Moreover, our current directors and officers are Chinese nationals. All or a substantial portion
of their assets are located outside the United States. As a result, it may be difficult for our stockholders to effect service
of process within the United States upon our subsidiaries and variable interest entities or any individuals. In addition, there
is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts obtained against
us or our officers and/or directors predicated upon the civil liability provisions of the securities laws of the United States
or any state thereof or be competent to hear original actions brought in the PRC against us or such persons predicated upon
the securities laws of the United States or any state thereof. It is unclear if extradition treaties now in effect between
the United States and the PRC would permit effective enforcement against us or our officers and directors of criminal penalties
under the United States Federal securities laws or otherwise.
Risks Relating to Our
Corporate Structure
We conduct our principal
business through Beijing Luji, by means of contractual arrangements. If the PRC courts or administrative authorities determine
that these contractual arrangements do not comply with applicable regulations, we could be subject to severe penalties and our
business could be adversely affected. In addition, changes in such Chinese laws and regulations may materially and adversely affect
our business.
There are uncertainties
regarding the interpretation and application of PRC laws, rules and regulations, including but not limited to the laws, rules
and regulations governing the validity and enforcement of the VIE contractual arrangements. The contractual arrangements were
entered into among Beijing Hongtao, Beijing Luji and/or its shareholders. We have been advised by our PRC counsel, Jingtian &
Gongcheng, based on their understanding of the current PRC laws, rules and regulations, that (i) the structure for operating our
business in China will not result in any violation of PRC laws or regulations currently in effect, and (ii) the contractual arrangements
among Beijing Hongtao, Beijing Luji and its shareholders are valid, binding and enforceable, and will not result in any violation
of PRC laws or regulations currently in effect. If the PRC courts or regulatory authorities determine that our contractual
arrangements are in violation of applicable PRC laws, rules or regulations, our contractual arrangements will become invalid or
unenforceable.
If we or our ownership
structure or the contractual arrangements, are determined to be in violation of any existing or future PRC laws, rules or regulations,
or we fail to obtain or maintain any of the required governmental permits or approvals, the relevant PRC regulatory authorities
would have broad discretion in dealing with such violations, including:
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revoking our business and operating licenses;
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discontinuing or restricting our operations;
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imposing conditions or requirements with which we may not be able to comply;
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requiring us to restructure the relevant ownership structure or operations;
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restricting or prohibiting our use of the proceeds to finance our business and operations in China; or
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imposing fines.
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The imposition of any of
these penalties would severely disrupt our ability to conduct our business and have a material adverse effect on our financial
condition, results of operations and prospects.
It is uncertain whether
any new PRC laws, rules or regulations relating to the variable interest entity structure will be adopted or if adopted, what they
would provide.
The PRC government
may determine that our contractual arrangements do not comply with the applicable laws and regulations
There can be no assurance
that the VIE contractual arrangements will be deemed by the relevant governmental or judicial authorities to be in compliance with
the existing or future applicable PRC laws and regulations, or the relevant governmental or judicial authorities may in the future
interpret the existing laws or regulations with the result that the contractual arrangements will be deemed to be in compliance
of the PRC laws and regulations.
On 15 March 2019, the National
People’s Congress promulgated the Foreign Investment Law of the PRC, the (‘‘Foreign Investment Law’’),
which will come into effect on 1 January 2020. The Foreign Investment Law will replace the Law on Sino-Foreign Equity Joint Ventures,
the Law on Sino-Foreign Contractual Joint Ventures and the Law on Wholly Foreign-Owned Enterprises to become the legal foundation
for foreign investment in the PRC. The Foreign Investment Law stipulates certain forms of foreign investment, which do not include
the contractual arrangements as a form of foreign investment. However, the Foreign Investment Law stipulates that foreign investment
includes “foreign investors invest through any other methods under laws, administrative regulations or provisions prescribed
by the State Council”. Therefore, there are possibilities that future laws, administrative regulations or provisions prescribed
by the State Council may regard contractual arrangements as a form of foreign investment, and then whether our contractual arrangements
will be recognized as a foreign investment, whether our contractual arrangements will be deemed to be in violation of the foreign
investment access requirements and how our contractual arrangements will be handled are uncertain. Therefore, there is no guarantee
that our contractual arrangements and the business of our PRC operating subsidiaries will not be materially and adversely affected
in the future.
The Foreign Investment
Law provides that a negative list for foreign investments is adopted by government authorities. Whether or not a foreign investment
is prohibited or restricted is determined according to the negative list. Under the current negative list, value-added telecommunication
services and online culture operation businesses engaged by our PRC operating entities are foreign investment restricted and prohibited
businesses.
Considering that a number
of existing entities engaged in the value-added telecommunication business and/or online culture operation business, some of which
have obtained listing status abroad, are operating under contractual arrangements, our Directors are of the view that it is unlikely,
if any interpretation or implementation regulations, rules or measures of the Foreign Investment Law are subsequently promulgated,
that the relevant authorities will apply it retrospectively to require relevant enterprises to remove or otherwise unwind their
contractual arrangements.
The Board is monitoring
and will continue to monitor the development of the Foreign Investment Laws in order to assess its possible impact on the contractual
arrangements and the business of Beijing Luji. In case there would be material impact on the Company’s business, the Company
will timely publish announcements in relation to material developments of and arising from the Foreign Investment Law.
Our contractual arrangements
may not be as effective as direct ownership in providing control over Beijing Luji.
We rely on the VIE contractual
arrangements with Beijing Luji to operate the O2O business and such other related business activities in the PRC. These contractual
arrangements may not be as effective in providing control over Beijing Luji as direct ownership.
In the event that any of
the Beijing Luji Shareholders or Beijing Luji fails to perform each of their respective obligations under the VIE contractual arrangements,
our management may have to take time to ask for rectification and even bring legal proceedings against the relevant defaulting
party, which may result in diversion of resources and management’s attention, and therefore materially and adversely affect
our business and results of operations.
The Beijing Luji
Shareholders may potentially have a conflict of interests with us.
Our control over Beijing
Luji is based on the VIE contractual arrangements. Conflict of interests of the Beijing Luji Shareholders therefore could adversely
affect the interests of our Company. Pursuant to the Power of Attorney, the Beijing Luji Shareholders will irrevocably authorize
designated persons appointed by us as their representatives to exercise their rights as shareholders of Beijing Luji. However,
cooperation from the Beijing Luji Shareholders is needed in exercising and performing relevant shareholder’s rights and obligations
sometimes, for example in case of registration for changes with governmental authorities or remitting the dividend payable to us.
In the event that conflict of interests between the Company and the Beijing Luji Shareholders arises, there can be no assurance
that all or any of the Beijing Luji Shareholders will act in our interest. If the Beijing Luji Shareholders act in a way compromising
our interest or fail to act, our business, financial conditions and results of operations may be adversely affected.
In addition, the Beijing
Luji Shareholders own a significant portion of the Company’s outstanding common stock and are able to vote and direct our
operations. The decisions made by these shareholders may not be in your best interest and could negatively affect the value of
your investment.
The contractual arrangements
may be subject to scrutiny of the PRC tax authorities and transfer pricing adjustments and additional tax may be imposed.
We could face material
adverse tax consequences if the PRC tax authorities determine that the contractual arrangements were not entered into based on
arm’s length negotiations. If the PRC tax authorities determine that these agreements were not entered into on an arm’s
length basis, they may adjust our income and expenses for PRC tax purposes in the form of a transfer pricing adjustment. A transfer
pricing adjustment could adversely affect our financial position by increasing the relevant tax liability, and this could further
result in late payment fees and other penalties to the Company for unpaid taxes. As a result, any transfer pricing adjustment could
have a material adverse effect on our financial position and results of operations.
A substantial amount
of costs and time may be involved in transferring the ownership of Beijing Luji to us under the Equity Disposal Agreement.
The Equity Disposal Agreement
grants the WFOE a right to acquire part or all of the equity interest in the registered capital or part or all of the assets of
Beijing Luji at the lowest price permitted by PRC law, under which the WFOE or its designated party is entitled to acquire all
or part of the equity interest of Beijing Luji from the Beijing Luji Shareholders.
Nevertheless, such rights
can only be exercised by the WFOE as and when permitted by the relevant PRC laws and regulations, in particular, when there are
no limitations on foreign ownership in PRC companies that are engaged in the value-added telecommunication services and related
online business.
In addition, a substantial
amount of costs and time may be involved in transferring the ownership or assets of Beijing Luji to the WFOE if it chooses to exercise
the exclusive right to acquire all or part of the equity interest in Beijing Luji under the Equity Disposal Agreement, which may
have a material adverse impact on our business, prospects and results of operation.
The Company does
not have any insurance which covers the risks relating to the contractual arrangements and the transactions contemplated thereunder.
We do not have insurance
that covers the risks relating to the contractual arrangements and the transactions contemplated thereunder and the Company has
no intention to purchase any insurance in this regard. If any risk arises from the contractual arrangements in the future, such
as those affecting the enforceability of the contractual arrangements and the relevant agreements for the transactions contemplated
thereunder and the operation of the Company, our results may be adversely affected. However, we will monitor the relevant legal
and operational environment from time to time to comply with the applicable laws and regulations. In addition, we will implement
relevant internal control measures to reduce the operational risk.
Risks Related to our
Common Stock
We can provide no
assurances as to our future financial performance or the investment results of a purchase of our Common Stock.
Any projected results of
operations involve significant risks and uncertainties and should be considered speculative, and depend on various assumptions
which may not be correct. The future performance of our Company and the return on our common stock depends on a complex series
of events that are beyond our control and that may or may not occur. Actual results for any period may or may not approximate any
assumptions that are made and may differ significantly from such assumptions. We can provide no assurance or prediction as to our
future profitability or to the ultimate success of an investment in our Common Stock.
Because there is
no established public trading market for our common stock, you may experience difficulties in reselling your stock.
We cannot assure you that
there will be an established market in the future for our common stock. The trading of securities on the OTC Pink is often
sporadic and investors may have difficulty buying and selling our shares or obtaining market quotations for them, which may have
a negative effect on the market price of our common stock. You may not be able to sell your shares at your purchase price or at
any price. Accordingly, you may have difficulty reselling any shares you purchase.
The market price
of our common stock may be volatile, and our stock price may fall below your purchase price at the time you desire to sell your
shares of our common stock, resulting in a loss on your investment.
The market price of our
common stock may fluctuate substantially due to a variety of factors, many of which are beyond our control, including, without
limitation:
|
·
|
actual or anticipated variations in our quarterly and annual operating results, financial condition or asset quality;
|
|
·
|
changes in general economic or business conditions, both domestically and internationally;
|
|
·
|
the effects of, and changes in, trade, monetary and fiscal policies, including the interest rate policies of the Federal Reserve or the PRC Government, or in laws and regulations affecting us;
|
|
·
|
the number of securities analysts covering us;
|
|
·
|
the volatility of the Renminbi and the United States dollar;
|
|
·
|
publication of research reports about us, our competitors, or changes in, or failure to meet, securities analysts’ estimates of our financial and operating performance, or lack of research reports by industry analysts or ceasing of coverage;
|
|
·
|
changes in market valuations or earnings of companies that investors deemed comparable to us;
|
|
·
|
the average daily trading volume of our common stock;
|
|
·
|
future issuances of our common stock or other securities;
|
|
·
|
additions or departures of key personnel;
|
|
·
|
perceptions in the marketplace regarding our competitors and/or us;
|
|
·
|
significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving our competitors or us; and
|
|
·
|
other news, announcements or disclosures (whether by us or others) related to us, our competitors or our core market.
|
The
stock market has experienced significant fluctuations in recent years. In many cases, these changes have been unrelated to the
operating performance and prospects of particular companies. In addition, significant fluctuations in the trading volume in our
common stock may cause significant price variations to occur. Increased market volatility may materially and adversely affect the
market price of our common stock, which may make it difficult for you to resell your shares at the volume, prices and times desired.
Future
issuances of our common stock will dilute current stockholders or adversely affect the market.
Our
business plan contemplates expanding our operations through acquisitions which may involve significant issuances of our common
stock. Future issuances of our common stock may be at values substantially below the price paid by the current holders of our common
stock. In addition, common stock could be issued to fend off unwanted tender offers or hostile takeovers without further stockholder
approval. Sales of substantial amounts of our common stock, or even just the prospect of such sales, could depress the prevailing
price of our common stock and our ability to raise equity capital in the future. Additionally, large share issuances would generally
have a negative impact on our share price. It is possible that, due to additional share issuances, you could lose a substantial
amount, or all, of your investment. In addition, if a trading market develops for our common stock, we may attempt to raise capital
by selling shares of our common stock, possibly at a discount to market. These actions will result in dilution of the ownership
interests of existing shareholders, further dilute common stock book value, and that dilution may be material.
We
may be subject to the “penny stock” rules which will adversely affect the liquidity of our common stock.
In
the event that our shares are traded, and our stock trades below $5.00 per share, our stock would be classified as a “penny
stock”, which is subject to various regulations involving disclosures to be given to any buyer prior to the purchase of any
penny stock. The U.S. SEC has adopted regulations which generally define a “penny stock” to be any equity security
that has a market price of less than $5.00 per share, subject to certain exceptions. Depending on market fluctuations, our common
stock could be considered to be a “penny stock”. A penny stock is subject to rules that impose additional sales practice
requirements on broker/dealers who sell these securities to persons other than established members and accredited investors. For
transactions covered by these rules, the broker/dealer must make a special suitability determination for the purchase of these
securities. In addition, the broker/dealers must receive the purchaser’s written consent to the transaction prior to the
purchase. The broker/dealers must also provide certain written disclosures to the purchaser. Consequently, the “penny stock”
rules may restrict the ability of broker/dealers to sell our securities, and may negatively affect the ability of holders of shares
of our common stock to resell them. These disclosures require you to acknowledge that you understand the risks associated with
buying penny stocks and that you can absorb the loss of your entire investment. Penny stocks are low priced securities that usually
do not have a very high trading volume. Consequently, the price of the stock is often volatile and you may not be able to buy or
sell the stock when you want to. These rules also limit the ability of broker-dealers to solicit purchases of our Common Stock
and therefore reduce the liquidity of the public market for our shares should one develop.
The
market for penny stocks has experienced numerous frauds and abuses that could adversely impact investors in our stock.
Company
management believes that the market for penny stocks has suffered from patterns of fraud and abuse. Such patterns include:
|
·
|
Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
|
|
·
|
Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
|
|
·
|
"Boiler room" practices involving high pressure sales tactics and unrealistic price projections by sales persons;
|
|
·
|
Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
|
|
·
|
Wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
|
It
is not likely that we will pay dividends on the Common Stock or any other class of stock.
We
intend to retain any future earnings for the operation and expansion of our business. We do not anticipate paying cash dividends
on our Common Stock, or any other class of stock, in the foreseeable future. Stockholders should look solely to appreciation in
the market price, if any, of our common shares to obtain a return on their investment.
Investing
in our Company is highly speculative and could result in the entire loss of your investment.
An
investment in our shares is highly speculative and involves significant risk. Our shares should not be purchased by any person
who cannot afford to lose their entire investment. Our business objectives are also speculative, and it is possible that we would
be unable to accomplish them. Our shareholders may be unable to realize any return on their purchase of our common shares and may
lose their entire investment. For this reason, each prospective purchaser of our common shares should read this Form 8-K and all
of its exhibits carefully and consult with their attorney, business and/or investment advisor.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
This discussion summarizes
significant factors affecting the operating results, financial conditions, liquidity and cash flows of HJ for the years ended
December 31, 2019, and December 31, 2018 and its unaudited condensed consolidated financial statements for the three and six
months ended June 30, 2020 and June 30, 2019. The discussion and analysis below should be read together with the section entitled
“Forward Looking Statements” and our financial statements and notes to the financial statements included elsewhere
in this Current Report on Form 8-K.
Except for historical
information, the matters discussed in this section are forward looking statements that involve risks and uncertainties and are
based upon judgments concerning various factors that are beyond the Company’s control. Consequently, and because forward-looking
statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results
and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures
made by us in this report.
Overview
On August 6, 2020, we consummated
the acquisition of one hundred (100) Shares of HJ, representing 100% of the issued and outstanding stock of HJ. HJ conducts its
business through its variable interest entity, Beijing Luji. As a result, we entered into the business of selling healthcare and
other related products to the middle-aged and elderly market segments in the PRC through its online to offline platform.
In 2016, Beijing Luji expanded
its E-commerce operations and introduced its “Fozgo” branded online to offline (O2O) marketplace. The O2O platform
integrates our E-commerce platform with physical outlets to connect consumers and merchants in a dynamic marketplace. Our platform
not only offers users the convenience of making online purchases, but also provides the possibility to purchase and receive products
and services offline. Currently, our core product categories include sales of home appliances (such as water purifiers and air
purifiers), health foods and cosmetics products. As of March 31, 2020, Beijing Luji has developed several branch offices with outlets
across the PRC with approximately 158,300 users. In 2018, we were granted with hi-tech enterprise status in the PRC.
On March 15, 2019, Beijing
Luji signed a Share Purchase Agreement with Rongcheng Health Group Co., Ltd. to purchase 44% of total shares of Rongcheng Tianrun
Taxus Co., Ltd. for RMB79,830,000, or approximately US$11.6 million. Rongcheng Tianrun Taxus Co., Ltd. is primarily engaged in
the cultivation and marketing of Taxus, a type of small evergreen tree or shrub which is believed to purify the air. As of the
report date, the transaction has not been completed and is pending registration procedures with the government. The foregoing description
of the Share Purchase Agreement is qualified in its entirety by reference to the Equity Acquisition Agreement, an English translation
of which is filed as Exhibit 10.2 to this Current Report and incorporated herein by reference.
History
We were incorporated on
June 15, 2006 under the laws of the State of Nevada as Jupiter Resources, Inc. 75,000,000 shares of stock was authorized all as
common stock with a par value $0.001 and no other classes of stock were authorized. On March 25, 2009, the articles were amended
to authorize an addition of 10 million preferred shares making a total of 85,000,000 shares authorized (75M common, 10M preferred).
On April 30, 2009 the Company filed an amendment to change the name of the corporation to Rineon Group, Inc. On May 14, 2009, the
board of directors of the Company authorized a change in the fiscal year end of the Company from May 31 to December 31.
From inception to November
1, 2018, the date of the filing of the Company’s Form 15, the Company attempted unsuccessfully to enter into business combinations
with various target companies. There was no business activity between the filing of the Form 15 and prior to August 9, 2018. The
Company had Exchange Act disclosure requirements from January 11, 2008 to November 10, 2010. The Company has no knowledge or records
related to the assets referenced above and therefor there is some level of uncertainty in the above descriptions.
Prior Company management
was unresponsive to shareholders and had refused to respond to requests to meet statutory requirements to get current with the
secretary of state and the Securities and Exchange Commission’s filing requirements. Accordingly, on August 9, 2018, XTC,
Inc. was appointed to serve as the custodian of the Company in a shareholder filed action with the Eighth Judicial District Court
in Clark County, Nevada and was instructed to revive the company. XTC, Inc. was a shareholder of record as shown in the court documents
of 500 common shares attached as Exhibit 99.1 to this Current Report. XTC acquired its 500 common shares on 6/14/18 in the open
market at a price of $0.05 per share.
On September 25, 2018,
the Company filed a Certificate of Designation whereby the following preferred shares were designated and the rights, privileges
and designations of the Series A and C Convertible Preferred Stock were amended and restated.
|
·
|
The number of Series A Convertible Preferred was increased from 36,000 to 1,000,000.
|
|
·
|
3,000,000 shares of Series B Convertible Preferred Stock were created with no voting rights, and conversion rights of 1000:1, with the restriction that holders cannot convert to hold more the 4.95% of issued and outstanding common stock.
|
|
·
|
1,000,000 shares of Series C Convertible Preferred Stock were created with each Series C having 100,000 votes per share, with 1:1 conversion rights.
|
On September 25, 2018,
the Company issued 964,000 shares of Series A Convertible Preferred shares to XRC, LLC at $0.001 per share and 1,000,000 shares
of Series C Convertible Preferred shares at $0.001 per share to XRC, LLC, a company controlled by Chris Lotito, in exchange for
paying the costs to revive the Company with the State of Nevada, giving it voting control.
On September 28, 2018,
a shareholders meeting was held wherein the shareholders gave the board authority to reorganize the Company, including making possible
a name change, and/or engaging in a reverse stock split. In addition, the Series A shareholders voted to approve a reverse split
of the Series A Convertible Preferred and to authorize a new designation.
On October 1, 2018, the
Company made filings with the Nevada Secretary of State to change our name to "AS Capital, Inc.” and approve a 1 for
10 reverse stock split for the Common stock and a 1 for 1,000 reverse of the Series A Convertible Preferred, with conversion rights
of 1 common share for every 12,000 shares of Series A Convertible Preferred Stock held. As a result, the number of issued and outstanding
Series A Convertible Preferred Stock was reduced to 1,000 shares.
On December 6, 2018, the
Court granted an Order discharging the custodian and approved all actions taken by the custodian.
Change in Control
On June 4, 2019, AS Capital,
Inc., a Nevada corporation (“we,” “ASIN” or the “Company”), XRC, LLC, a Colorado limited liability
company (“XRC”) and Gao Xue Ran (“Purchaser”) entered into a Stock Purchase Agreement (the “SPA”),
pursuant to which the Purchaser agreed to purchase from XRC 11,000,000 shares of common stock of the Company, par value $0.001,
and 964 shares of Series A Convertible Preferred Stock of the Company, par value $0.001 (collectively, the “Shares”),
for aggregate consideration of Four Hundred and Ten Thousand Dollars ($410,000) in accordance with the terms and conditions of
the SPA. XRC was the controlling shareholder of the Company. The acquisition of the Shares was consummated on July 18, 2019, and
the Shares were ultimately purchased by the following three individuals using their own personal funds:
Name
|
|
No. of Shares
|
|
Percentage of Issued and Outstanding
|
|
Consideration Paid
|
Gao Xue Ran
|
|
8,581,063 of Common Stock;
964 shares of Series A Preferred Stock
|
|
76.61%
|
|
$319,840
|
Zhang Yan Hua
|
|
1,935,633 of Common Stock
|
|
17.28%
|
|
$72,146
|
Cheung Kwok Chiu Kris
|
|
483,304 of Common Stock
|
|
4.31%
|
|
$18,014
|
Upon the consummation of
the sale of the Shares, Chris Lotito, our Chief Executive Officer and sole director, and John Karatzaferis, our President, resigned
from all of their positions with the Company, effective July 18, 2019. Their resignations were not due to any dispute or disagreement
with the Company on any matter relating to the Company's operations, policies or practices.
Concurrently with such
resignations, Gao Xue Ran was appointed to serve as the Chief Executive Officer, Chief Financial Officer, President, Secretary
and sole Director of the Company, until the next annual meeting of stockholders of the Company and until such director’s
successor is elected and qualified or until such director’s earlier death, resignation or removal. None of the directors
or executive officers has a direct family relationship with any of the Company’s directors or executive officers, or any
person nominated or chosen by the Company to become a director or executive officer. Ms. Gao will serve in her positions without
compensation.
Acquisition of HJ
On August 6, 2020,
we consummated the acquisition of one hundred (100) Shares of HJ, representing 100% of the issued and outstanding stock of HJ
for the issuance of 86,000,000 shares of our common stock. HJ is a holding company that, through its subsidiaries and variable
interest entity, is engaged in the business of selling healthcare and other related products to the middle-aged and elderly market
segments in the PRC through its internet platform and offline service centers. HJ’s consolidated business is conducted through
Beijing Luji Technology Co., Ltd., a variable interest entity formed in Beijing, China on March 27, 2007.
In connection with the
acquisition, effective August 6, 2020, the following individuals were appointed to serve in the capacities set forth next to their
names until his or her successor(s) shall be duly elected or appointed, unless he or she resigns, is removed from office or is
otherwise disqualified from serving as an executive officer or director of the Company:
Name
|
|
Positions
|
Tian Xiangyang
|
|
Chief Executive Officer, Director and Chairperson of the Board of Director
|
Shan Yonghua
|
|
Chief Financial Officer, and
Director
|
Tian Zhihai
|
|
Chief Operating Officer and Director
|
Yin Jianen
|
|
Secretary and Director
|
Wang Jirui
|
|
Director
|
Upon the consummation of
the sale of the HJ Shares, Gao Xue Ran resigned from all of her positions with the Company, effective August 6, 2020. Her resignation
was not due to any dispute or disagreement with the Company on any matter relating to the Company's operations, policies or practices.
Results of Operations for HJ (Acquired Company)
Results of Operations for the Three
Months Ended June 30, 2020 and 2019
Our consolidated
financial statements have been prepared on a going concern basis, which assumes that we will be able to continue to operate in
the future in the normal course of business. In HJ’s unaudited condensed consolidated financial statements for the three
and six months ended June 30, 2020, it has included a note about its ability to continue as a going concern due to consecutive
quarterly losses from operations in the first half of 2020 as a result of COVID-19. Business closures in the
PRC and limitations on business operations arising from COVID-19 has significantly disrupted Beijing Luji’s ability to generate
revenues and cash flow during the first half of 2020.
The following table
sets forth certain financial data for the three months ended June 30, 2020 and 2019 (in thousands):
|
|
For
the Three Months Ended June 30,
|
|
|
Percentage
|
|
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
|
|
Dollars
|
|
|
%
|
|
|
Dollars
|
|
|
%
|
|
|
%
|
|
Revenues
|
|
$
|
94
|
|
|
|
100.0
|
|
|
$
|
44,902
|
|
|
|
100.0
|
|
|
|
(99.8
|
)
|
Cost of revenues
|
|
|
(167
|
)
|
|
|
(177.7
|
)
|
|
|
(32,998
|
)
|
|
|
(73.5
|
)
|
|
|
(99.5
|
)
|
Gross (loss) profit
|
|
|
(73
|
)
|
|
|
(77.7
|
)
|
|
|
11,904
|
|
|
|
26.5
|
|
|
|
(100.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
740
|
|
|
|
787.2
|
|
|
|
2,698
|
|
|
|
6.0
|
|
|
|
(72.6
|
)
|
Selling expenses
|
|
|
2,385
|
|
|
|
2,537.2
|
|
|
|
981
|
|
|
|
2.2
|
|
|
|
143.1
|
|
Finance expenses, net
|
|
|
12
|
|
|
|
12.8
|
|
|
|
293
|
|
|
|
0.7
|
|
|
|
(95.9
|
)
|
Total operating expenses
|
|
|
3,137
|
|
|
|
3,337.2
|
|
|
|
3,972
|
|
|
|
8.9
|
|
|
|
(21.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(3,210
|
)
|
|
|
(3,414.9
|
)
|
|
|
7,932
|
|
|
|
17.7
|
|
|
|
(140.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses, net
|
|
|
(577
|
)
|
|
|
(613.8
|
)
|
|
|
(705
|
)
|
|
|
(1.6
|
)
|
|
|
(18.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses, net
|
|
|
(577
|
)
|
|
|
(613.8
|
)
|
|
|
(705
|
)
|
|
|
(1.6
|
)
|
|
|
(18.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before provision for income taxes
|
|
|
(3,787
|
)
|
|
|
(4,028.7
|
)
|
|
|
7,227
|
|
|
|
16.1
|
|
|
|
(152.4
|
)
|
Provision for income taxes
|
|
|
–
|
|
|
|
–
|
|
|
|
1,406
|
|
|
|
3.1
|
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(3,787
|
)
|
|
|
(4,028.7
|
)
|
|
$
|
5,821
|
|
|
|
13.0
|
|
|
|
(165.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(9
|
)
|
|
|
(9.6
|
)
|
|
|
(376
|
)
|
|
|
(0.8
|
)
|
|
|
(97.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
$
|
(3,796
|
)
|
|
|
(4,038.3
|
)
|
|
$
|
5,445
|
|
|
|
12.1
|
|
|
|
(169.7
|
)
|
Revenues:
Revenues were approximately $94,000 and approximately $44.9 million for the three months ended June 30, 2020 and 2019
respectively. The decrease in revenues of approximately $44.8 million or 99.8% is due primarily to business interruptions arising
from COVID-19. During the three months ended June 30, 2020 and 2019, all revenue was generated in the PRC. During the period of
three months ended June 30, 2020, revenues were mainly attributable to the sales of smart watches, health foods, and cosmetics
products, representing 68.5%, 12.8%, and 1.7% of revenues, respectively. During to the same period of 2019, the revenues were
mainly attributable to the sales of health foods, home appliances and cosmetics products, representing 63.2%, 20.1% and 16.1% of
revenues, respectively. During the three months ended June 30, 2020 and 2019, no customers accounted for 10% or more of total
revenues.
Cost of revenues:
Cost of revenues consists primarily of the cost of merchandise sold, delivery cost, service fees, sales incentives and
commissions that are directly attributable to the sale of certain designated products. Cost of revenues of approximately $167,000
for the three months ended June 30, 2020 consisted of provision for slow-moving inventory of approximately $133,000.
The decrease in cost of revenues of approximately $32.8 million or 99.5% from the comparable period of 2019 was due mainly
to decrease in product sales as a result of COVID-19.
Gross (Loss)
Profit. Gross loss for the three months ended June 30, 2020 of approximately $73,000 was attributed mainly
to the provision for slowing-moving inventory of $133,000. Gross profit for the three months ended June 30, 2019 of approximately
$11.9 million was attributed mainly to revenues of approximately $44.9 million.
General and
Administrative Expenses. General and administrative expenses (“G&A expenses”) consist primarily of costs
in salary and benefits for our general administrative and management staff, facilities costs, depreciation expenses, professional
fees, audit fees, and other miscellaneous expenses incurred in connection with general operations. G&A expenses decreased
72.6% or approximately $2.0 million from approximately $2.7 million for the three months ended June 30, 2019 was due
primarily to the decrease in advisory fees, salary and benefits.
Selling Expenses. Selling
expenses consist mainly of payroll and benefits for employees involved in the sales and distribution functions, meeting/event
fees, advertisement, and marketing and selling expenses that are related to events and activities at the Company’s service
centers designed to promote product sales. Selling expenses increased by 143.1% or approximately $1.4 million to approximately
$2.4 million in the three months ended June 30, 2020 from approximately $981,000 in the same period of 2019. The increase
was due mainly to costs incurred in marketing and other promotional activities (such as product exhibition in various regions)
in the second quarter of 2020.
Finance Expenses,
net. Finance expenses consist mainly of service fees related to the use of third-party online payment platforms, bank fees
and interest expenses related to borrowings; net of interest income from bank and related bank products. Total net financial expenses
were approximately $12,000 and 293,000 for the three months ended June 30, 2020, and 2019, respectively. The decrease in net financial
expense was due mainly to interest income earned in the three months period ended June 30, 2020.
Operating
(loss) income. Operating loss was approximately $3.2 million for the three months ended June 30, 2020, compared to approximately
$7.9 million of operating income for the same period of 2019. The decrease in operating income in 2020 was due primary to the
significant decline in revenues in 2020 due to the impact of COVID-19.
Total other
expenses, net. Other income consists primarily of income from the administration of Beijing Luji’s online marketplace.
Other expenses consist mainly of estimated tax penalties and charitable contributions. Total net other expense was approximately
$577,000 for the three months ended June 30, 2020, compared to approximately $705,000 for the same period of 2019. The decrease
in net other expense in 2020 was due primary to approximately $153,000 income tax refund in the second quarter of 2020.
Provision
for income taxes. Provision for income taxes was $0 for the three months ended June 30, 2020, compared to approximately
$1.4 million for the same period of 2019.
Net (loss)
income. As a result of the factors described above, net loss was approximately 3.8 million for the three months ended
June 30, 2020, a decrease of approximately $9.6 million from approximately $5.8 million of net income for the same period of 2019.
Comprehensive Loss (Income). Comprehensive loss was approximately
$3.8 million for the three months ended June 30, 2020, as compared to other comprehensive income of approximately $5.4 million
for the three months ended June 30, 2019.
Results of Operations for the Six
Months Ended June 30, 2020 and 2019
The following table sets forth certain
financial data for the six months ended June 30, 2020 and 2019
(in thousands)
|
|
For
the Six Months Ended June 30,
|
|
|
Percentage
|
|
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
|
|
Dollars
|
|
|
%
|
|
|
Dollars
|
|
|
%
|
|
|
%
|
|
Revenues
|
|
$
|
128
|
|
|
|
100.0
|
|
|
$
|
51,058
|
|
|
|
100.0
|
|
|
|
(99.7
|
)
|
Cost of revenues
|
|
|
(205
|
)
|
|
|
(160.2
|
)
|
|
|
(37,289
|
)
|
|
|
(73.0
|
)
|
|
|
(99.5
|
)
|
Gross (loss) profit
|
|
|
(77
|
)
|
|
|
(60.2
|
)
|
|
|
13,769
|
|
|
|
27.0
|
|
|
|
(100.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
1,872
|
|
|
|
1,462.5
|
|
|
|
4,165
|
|
|
|
8.2
|
|
|
|
(55.1
|
)
|
Selling expenses
|
|
|
3,658
|
|
|
|
2,857.8
|
|
|
|
1,631
|
|
|
|
3.2
|
|
|
|
124.3
|
|
Finance (income) expenses,
net
|
|
|
(170
|
)
|
|
|
(132.8
|
)
|
|
|
95
|
|
|
|
0.2
|
|
|
|
(278.9
|
)
|
Total operating expenses
|
|
|
5,360
|
|
|
|
4,187.5
|
|
|
|
5,891
|
|
|
|
11.5
|
|
|
|
(9.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(5,437
|
)
|
|
|
(4,247.7
|
)
|
|
|
7,878
|
|
|
|
15.4
|
|
|
|
(169.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses, net
|
|
|
(2,769
|
)
|
|
|
(2,163.3
|
)
|
|
|
(1,161
|
)
|
|
|
2.3
|
|
|
|
138.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses, net
|
|
|
(2,769
|
)
|
|
|
(2,163.3
|
)
|
|
|
(1,161
|
)
|
|
|
2.3
|
|
|
|
138.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before provision for income taxes
|
|
|
(8,206
|
)
|
|
|
(6,410.9
|
)
|
|
|
6,717
|
|
|
|
13.2
|
|
|
|
(222.2
|
)
|
Provision for income taxes
|
|
|
–
|
|
|
|
–
|
|
|
|
1,436
|
|
|
|
2.8
|
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(8,206
|
)
|
|
|
(6,410.9
|
)
|
|
$
|
5,281
|
|
|
|
10.3
|
|
|
|
(255.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(93
|
)
|
|
|
(72.7
|
)
|
|
|
(29
|
)
|
|
|
(0.1
|
)
|
|
|
220.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
$
|
(8,299
|
)
|
|
|
(6,483.6
|
)
|
|
$
|
5,252
|
|
|
|
10.3
|
|
|
|
(258.0
|
)
|
Revenues:
Revenues were approximately $128,000 and approximately $51.1 million for the six months ended June 30, 2020, and 2019,
respectively. The decrease in revenues of approximately $50.9 million or 99.7% is due primarily to business interruptions arising
from COVID-19. During the six months ended June 30, 2020 and 2019, all revenue was generated in the PRC. During the period of
six months ended June 30, 2020, revenues were mainly attributable to the sales of smart watches, health foods, and cosmetics products,
representing 50.3%, 9.4%, and 1.3% of revenues, respectively. During to the same period of 2019, revenues were mainly attributable
to the sales of health food, home appliances and cosmetics products, representing 65.9%, 18.6% and 15.0% of revenues, respectively.
During the six months ended June 30, 2020 and 2019, no customers accounted for 10% or more of total revenues.
Cost of revenues:
Cost of revenues consists primarily of the cost of merchandise sold, delivery cost, service fees, sales incentives and
commissions that are directly attributable to the sale of certain designated products. Cost of revenues of approximately $205,000
for the six months ended June 30, 2020 consisted of provision for slow-moving inventory of approximately $167,000. The decrease
in cost of revenues of approximately $37.1 million or 99.5% from the comparable period of 2019 was due mainly to decrease in product
sales as a result of COVID-19.
Gross
(Loss) Profit. Gross loss for the six months ended June 30, 2020 of approximately $77,000 was attributed mainly to
the provision for slowing-moving inventory of $167,000. Gross profit for the six months ended June 30, 2019 of approximately
$13.8 million was attributed mainly to revenues of approximately $51.1 million.
General and
Administrative Expenses. General and administrative expenses (“G&A expenses”) consist primarily of costs
in salary and benefits for our general administrative and management staff, facilities costs, depreciation expenses, professional
fees, audit fees, and other miscellaneous expenses incurred in connection with general operations. G&A expenses decreased
55.1% or approximately $2.3 million from approximately $4.2 million for the six months ended June 30, 2019 was due primarily
to the decrease in advisory fees, salary and benefits.
Selling Expenses. Selling
expenses consist mainly of payroll and benefits for employees involved in the sales and distribution functions, meeting/event
fees, advertisement, and marketing and selling expenses that are related to events and activities at the Company’s service
centers designed to promote product sales. Selling expenses increased by 124.3% or approximately $2.0 million to approximately
$3.7 million in the six months ended June 30, 2020 from approximately $1.6 million in the same period of 2019. The increase
was due mainly to costs incurred in marketing and other promotional activities (such as product exhibition in various regions)
in the first half year of 2020.
Finance (Income)
Expenses, net. Finance income represents interest income from bank and related bank products, net of service fees related
to the use of third-party online payment platforms. Finance expenses consist mainly of service fees related to the use of third-party
online payment platforms, bank fees and interest expenses related to borrowings; net of interest income from bank and related
bank products. Total net financial income and expense were approximately $170,000 and 95,000 for the six months ended June 30,
2020, and 2019, respectively. The increase in net financial income was due mainly to interest income earned in the six months
period ended June 30, 2020.
Operating
(loss) income. Operating loss was approximately $5.4 million for the six months ended June 30, 2020, compared to approximately
$7.9 million of operating income for the same period of 2019. The decrease in operating income in 2020 was due primary to the
significant decline in revenues in 2020 due to the impact of COVID-19.
Total other
expenses, net. Other income consists primarily of income from the administration of Beijing Luji’s online marketplace.
Other expenses consist mainly of estimated tax penalties and charitable contributions. Other expense of approximately $2.8 million
for the six months ended June 30, 2020 consisted mainly of donation to Binzhou Red Cross Society for approximately $1.4 million
and estimated tax penalties related to unpaid VAT and income taxes of approximately $1.5 million.
Provision
for income taxes. Provision for income taxes was $0 for the six months ended June 30, 2020, compared to approximately
$1.4 million for the same period of 2019.
Net (loss)
income. As a result of the factors described above, net loss was approximately 8.2 million for the six months ended June
30, 2020, a decrease of approximately $13.5 million from approximately $5.3 million of net income for the same period of 2019.
Comprehensive
Loss (Income). Comprehensive loss was approximately $8.3 million for the six months ended June 30, 2020, as compared to
other comprehensive income of approximately $5.3 million for the six months ended June 30, 2019.
Results of Operations for the Years Ended December 31, 2019 and
2018
The following table sets forth certain operational
data for the years ended December 31, 2019, and 2018:
(in thousands)
|
|
Years ended December 31,
|
|
|
Percentage
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
|
Dollars
|
|
|
%
|
|
|
Dollars
|
|
|
%
|
|
|
%
|
|
Revenues
|
|
$
|
58,233
|
|
|
|
100.0
|
|
|
$
|
53,445
|
|
|
|
100.0
|
|
|
|
9.0
|
|
Cost of revenues
|
|
|
41,764
|
|
|
|
71.7
|
|
|
|
38,762
|
|
|
|
72.5
|
|
|
|
7.7
|
|
Gross profit
|
|
|
16,469
|
|
|
|
28.3
|
|
|
|
14,683
|
|
|
|
27.5
|
|
|
|
12.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
8,111
|
|
|
|
13.9
|
|
|
|
3,929
|
|
|
|
7.4
|
|
|
|
106.5
|
|
Selling expenses
|
|
|
3,596
|
|
|
|
6.2
|
|
|
|
1,689
|
|
|
|
3.2
|
|
|
|
112.9
|
|
Finance expenses (income), net
|
|
|
83
|
|
|
|
0.1
|
|
|
|
(29
|
)
|
|
|
(0.1
|
)
|
|
|
391.8
|
|
Total operating expenses
|
|
|
11,790
|
|
|
|
20.2
|
|
|
|
5,589
|
|
|
|
10.5
|
|
|
|
111.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
4,679
|
|
|
|
8.0
|
|
|
|
9,094
|
|
|
|
17.0
|
|
|
|
(48.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses, net
|
|
|
(2,378
|
)
|
|
|
(4.1
|
)
|
|
|
(1,882
|
)
|
|
|
(3.5
|
)
|
|
|
26.4
|
|
Loss from equity investment
|
|
|
(31
|
)
|
|
|
(0.1
|
)
|
|
|
0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses, net
|
|
|
(2,409
|
)
|
|
|
(4.1
|
)
|
|
|
(1,882
|
)
|
|
|
(3.5
|
)
|
|
|
28.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
2,270
|
|
|
|
3.9
|
|
|
|
7,212
|
|
|
|
13.5
|
|
|
|
(68.5
|
)
|
Provision for income taxes
|
|
|
931
|
|
|
|
1.6
|
|
|
|
1,349
|
|
|
|
2.5
|
|
|
|
(31.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,339
|
|
|
|
2.3
|
|
|
$
|
5,863
|
|
|
|
11.0
|
|
|
|
(77.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(164
|
)
|
|
|
(0.3
|
)
|
|
|
(721
|
)
|
|
|
(1.3
|
)
|
|
|
(77.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
1,175
|
|
|
|
2.0
|
|
|
$
|
5,142
|
|
|
|
9.6
|
|
|
|
(77.1
|
)
|
Revenues.
Revenues were approximately $58.2 million and $53.4 million for the year ended December 31, 2019, and 2018, respectively, representing
an increase of approximately $4.8 million, or 9.0%. The increase revenues is due mainly to the increase in product sales and increase
in the number of platform users. For the years ended December 31, 2019 and 2018, revenues were derived mainly from the sale of
home appliances, health foods and cosmetics products in the PRC. During the twelve months ended December 31, 2019, and 2018, no
customers accounted for 10% or more of our total net revenues.
Cost of revenues. Cost of
revenues consists primarily of the cost of merchandise sold, delivery cost, service fees, sales incentives and commissions that
are directly attributable to the sale of certain designated products. Cost of revenues increased to approximately $41.8 million
for the year ended December 31, 2019 from $38.8 million for the same period in 2018. An increase of approximately $3 million or
7.7% due mainly higher product cost and commission.
Gross Profit.
Gross profit increased from approximately $14.7 million for the year ended December 31, 2018 to approximately $16.5 million for
the same period in 2019. Gross profit margin increased from 27.5% for the year ended December 31, 2018 to 28.3% for the same period
in 2019 due mainly to favorable product mix.
Selling Expenses.
Selling expenses consist mainly of payroll and benefits for employees involved in the sales and distribution functions, meeting/event
fees, advertisement, and marketing and selling expenses that are related to events and activities at the Company’s service
centers designed to promote product sales. Selling expenses increased by approximately $1.9 million to $3.6 million in the year
ended December 31, 2019 from $1.7 million in the same period of 2018. The increase was due mainly to the increase of promotion
and marketing events in 2019.
General and administrative
Expenses. G&A expenses consist primarily of costs in salary and benefits for our general administrative and management
staff, facilities costs, depreciation expenses, professional fees, audit fees, and other miscellaneous expenses incurred in connection
with general operations. G&A increased by approximately $4.2 million from $3.9 million for the year ended December 31,
2018 to approximately $8.1 million in the same period of 2019. The increase was due mainly to the increase of advisory fees
of approximately $1 million and higher bad debt expense of approximately $1.4 million in 2019.
Finance Expenses,
net. Finance expenses consist mainly of service fees related to the use of third-party online payment platforms, bank fees
and interest expenses related to borrowings; net of interest income from bank and related bank products. The increase in finance
expenses was due mainly to increase in the use of third-party online payment platforms in 2019.
Operating Income.
Operating income was approximately $4.7 million for the year ended December 31, 2019, compared to approximately $9.1 million for
the same period of 2018. The decrease in operating income in 2019 was primary due to the increase in operating expenses.
Total other expenses,
net. Other expenses consist mainly of estimated tax penalties for unpaid VAT and income taxes and charitable contributions.
For the year ended December 31, 2019, other expenses consisted mainly of estimated tax penalties. For the year ended December 31,
2018, other expenses consisted mainly of charitable contributions.
Provision for
Income Taxes. Provision for income taxes was approximately $0.9 million for the year ended December 31, 2019, compared
to $1.3 million for the same period of 2018. The decrease was attributable mainly to lower pre-tax income.
Net Income. As a result of
the factors described above, net income was approximately $1.3 million for the year ended December 31, 2019, a decrease of $4.5
million from net income $5.9 million for the same period of 2018.
Comprehensive
Income. Comprehensive income was $1.2 million for the year ended December 31, 2019, as compared to comprehensive income
of $5.1 million for the year ended December 31, 2018. The decrease was due mainly to higher operating expenses in 2019.
Liquidity and Capital Resources for HJ
(Acquired Company)
Six Months Ended June 30, 2020 Compared to Six Months
Ended June 30, 2019
As of June 30, 2020 and December 31,
2019, we had cash and cash equivalents of approximately $5.9 million and $28.9 million, respectively.
The following table sets forth a summary
of our cash flows for the periods as indicated:
|
|
For the Six Months ended
|
|
|
|
June
30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Net cash (used in) provided by operating
activities
|
|
$
|
(19,233,677
|
)
|
|
$
|
32,250,730
|
|
Net cash (used in) investing activities
|
|
$
|
(1,773,998
|
)
|
|
$
|
(11,758,601
|
)
|
Net cash (used in) financing activities
|
|
$
|
(1,742,847
|
)
|
|
$
|
(110,832
|
)
|
Effect of exchange rate changes on cash and cash
equivalents
|
|
$
|
(269,063
|
)
|
|
$
|
(183,787
|
)
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(23,019,585
|
)
|
|
$
|
20,197,510
|
|
Cash and cash equivalents at beginning of period
|
|
$
|
28,919,817
|
|
|
$
|
18,019,617
|
|
Cash and cash equivalents at end of period
|
|
$
|
5,900,232
|
|
|
$
|
38,217,127
|
|
The following table sets forth a summary
of our working capital:
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Variation
|
|
|
%
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
$
|
14,864,376
|
|
|
$
|
31,095,695
|
|
|
$
|
(16,231,319
|
)
|
|
|
(52.2
|
)
|
Total
Current Liabilities
|
|
$
|
26,697,505
|
|
|
$
|
32,354,228
|
|
|
$
|
(5,656,723
|
)
|
|
|
(17.5
|
)
|
Working
Capital
|
|
$
|
(11,833,129
|
)
|
|
$
|
(1,258,533
|
)
|
|
$
|
(10,574,596
|
)
|
|
|
840.2
|
|
Working Capital.
Total working capital as of June 30, 2020 amounted to approximately negative $11.8 million, as compared to approximately
negative $1.3 million as of December 31, 2019. The deterioration in working capital was due mainly to a decline in net assets.
For the six months
ended June 30, 2020, cash used in operating activities was approximately $19.2 million. For six months ended June 30, 2019, cash
provided by operating activities was approximately $32.3 million. The change of approximately $51.5 million was due primary to
net changes in (1) advances to suppliers of approximately $5.7 million, (2) inventory of approximately $132,000, (3) due from
related parties, net of approximately $10.3 million, (4) prepayment and other current assets of approximately $921,000, (5) advances
from customers of approximately $5.6 million, (6) taxes payable of approximately $9.3 million, (7) accrued expenses of approximately
$2.8 million, and (8) other payables and other current liabilities of approximately $3.4 million.
Net cash used in
investing activities was approximately $1.8 million for the six months ended June 30, 2020, as compared to net cash used in investing
activities of $11.8 million for the six months ended June 30, 2019. The change of approximately $10 million was due primary to
net changes in (1) purchases of property and equipment of approximately $1.8 million, and (2) investment in equity investee of
$11.7 million.
Net cash used in
financing activities was approximately $1.7 million for the six months ended June 30, 2020, as compared to net cash used in financing
activities of approximately $110,000 for the six months ended June 30, 2019. The increase was due mainly to increase of repayment
of loans of approximately $1 million and increase in dividends paid of approximately $616,000.
Year Ended December 31, 2019 Compared to Year Ended December
31, 2018
The following table sets forth a summary
of our cash flows for the periods as indicated:
|
|
For the Year ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Audited)
|
|
|
(Audited)
|
|
Net cash provided by operating activities
|
|
$
|
24,730,684
|
|
|
$
|
12,765,264
|
|
Net cash (used in) investing activities
|
|
$
|
(11,581,326
|
)
|
|
$
|
(188,250
|
)
|
Net cash (used in) financing activities
|
|
$
|
(1,865,742
|
)
|
|
$
|
(754,761
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
$
|
(383,416
|
)
|
|
$
|
(824,990
|
)
|
Net increase in cash and cash equivalents
|
|
$
|
10,900,200
|
|
|
$
|
10,997,263
|
|
Cash and cash equivalents at beginning of year
|
|
$
|
18,019,617
|
|
|
$
|
7,022,354
|
|
Cash and cash equivalents at end of year
|
|
$
|
28,919,817
|
|
|
$
|
18,019,617
|
|
The following table sets forth a summary of our working capital:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Variation
|
|
|
%
|
|
|
|
(Audited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
$
|
31,095,695
|
|
|
$
|
33,101,338
|
|
|
$
|
(2,005,643
|
)
|
|
|
(6.1
|
)
|
Total Current Liabilities
|
|
$
|
32,354,228
|
|
|
$
|
19,344,592
|
|
|
$
|
13,009,636
|
|
|
|
67.3
|
|
Working Capital
|
|
$
|
(1,258,533
|
)
|
|
$
|
13,756,746
|
|
|
$
|
(15,015,279
|
)
|
|
|
(109.1
|
)
|
Working
Capital. Total working capital as of December 31, 2019 amounted to approximately negative $1.3 million, as compared to
approximately negative $13.8 million as of December 31, 2018. The deterioration in working capital was due mainly to higher
operating expenses in year 2019.
Net cash generated
from operating activities was $24.7 million for the year ended December 31, 2019, and consisted primarily of a net income of
$3.1 million, adjusted for depreciation and amortization of $0.2 million, a decrease in advances from customers of $3.5
million, an increase in accrued expenses and other liabilities of $4.3 million, an increase in taxes payable of $9.0 million,
a decrease in prepaid expenses and other assets of $1.5 million, an increase in due from related parties of $10.2 million, a
decrease in advances to suppliers of $0.3 million.
Net cash generated from
operating activities was $12.8 million for the year ended December 31, 2018, and consisted primarily of a net income of $5.1 million,
adjusted for depreciation and amortization of $0.1 million, an increase in advances from customers of $3.1 million, an increase
in accrued expenses and other liabilities of $5.3 million, an increase in taxes payable of $9.9 million, an increase in prepaid
expenses and other assets of $1.5 million, an increase in inventory of $1.1 million, a decrease in due from related parties of
$7.7 million, an increase in advances to suppliers of $0.5 million.
Net cash used in
investing activities for the fiscal year ended December 31, 2019, was $11.6 million which was used for purchase of equity
investment. Net cash used in investing activities was $0.2 million for the year ended December 31, 2018.
Net cash used in financing
activities for the fiscal year ended December 31, 2019, was approximately $1.9 million which was used primarily for the distribution
of dividends. Net cash used in financing activities for the fiscal year ended December 31, 2018, was approximately $0.8 million
which was used for the distribution of dividends.
Off-Balance Sheet Arrangements
We have not entered into
any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not
entered into any derivative contracts that are indexed to our own shares and classified as shareholders’ equity, or that
are not reflected in our financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred
to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any
variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages
in leasing, hedging or research and development services with us.
Critical Accounting Policies and Estimates
Basis
of Presentation
The accompanying consolidated
financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United
States of America (“US GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission
(“SEC”).
Principles
of Consolidation
The accompanying consolidated
financial statements include the financial statements of HanJiao International Holding Limited (“HJ” or “HanJiao”),
its wholly-owned subsidiaries, WOFE, the VIE and its subsidiaries. All inter-company transactions and balances have been eliminated
upon consolidation.
VIE
Agreements with Beijing Hongtao
HanJiao does not
have a direct equity ownership interest in Beijing Luji but relies on the VIE Agreements to control and receive the economic benefits
of Beijing Luji’s business. The Company relies on contractual arrangements with its variable interest entity to operate
its online to office (O2O) business in the PRC in which foreign investment is restricted or prohibited. The O2O platform integrates
the Company’s e-commerce platform with physical outlets (service centers) to connect consumers and merchants in a dynamic
marketplace. Pursuant to the VIE Agreements, HanJiao, through Beijing Hongtao, is able to exercise effective control over, bears
the risks of, enjoys substantially all of the economic benefits its VIE and its subsidiary and has an exclusive option to purchase
all or part of the equity interests in the VIE when and to the extent permitted by PRC law. The Company’s management
concluded that Beijing Luji and its subsidiary are variable interest entities of the Company and Beijing Hongtao is the primary
beneficiary of Beijing Luji and its subsidiary. As such, the financial statements of the VIE and its subsidiary are included in
the consolidated financial statements of the Company. Each of the VIE Agreements is described in detail below:
Exclusive Consulting and Services Agreement
Pursuant to the Exclusive
Consulting and Services Agreement signed on May 15, 2019, between Beijing Hongtao and Beijing Luji, Beijing Hongtao agrees to provide
various services exclusively to Beijing Luji including development and research services for business-related software, pre-job
and on-the-job training services, technology development and transfer services, public relations services, market research and
consulting services, short and medium-term market development and planning services, various technical support services, consulting
services related to business compliance, organization and planning services related to marketing and membership activities. For
services rendered to Beijing Luji by Beijing Hongtao under this agreement, Beijing Hongtao is entitled to collect 100% of
the net income of Beijing Luji.
The Exclusive Consulting
and Services Agreement shall remain in effect for ten years from the date of signing unless it is terminated by Beijing Hongtao
in advance or upon the mutual agreement of both parties. Beijing Luji may terminate the agreement subject to payment of all service
fees for completed services and compensation to Beijing Hongtao for losses. Prior to the termination of this agreement, the parties
may extend the term of this agreement in accordance with the requirements of Beijing Hongtao.
Business Operations Agreement
Pursuant to the Business
Operations Agreement signed on May 15, 2019, by and among the Beijing Luji shareholders, Beijing Luji and Beijing Hongtao. Beijing
Luji agreed not to conduct any transactions that may materially affect its assets, business, personnel, obligations, rights or
company operations, without the prior written consent of Beijing Hongtao. Beijing Hongtao agrees to provide advice to Beijing Luji
from time to time regarding the appointment and dismissal of employees, daily management and financial management systems. Beijing
Luji and Beijing Luji shareholders also agree to appoint designees of Beijing Hongtao to serve as board of directors and on the
senior management team of Beijing Luji. In connection with this agreement, the Beijing Luji shareholders executed a power of attorney
of the Business Operations Agreement in which the Beijing Luji shareholders shall irrevocably authorize the designated personnel
of Beijing Hongtao to exercise their shareholders’ rights on their behalf, including voting rights at the shareholders' meeting
in the name of the shareholders. The Beijing Luji shareholders further agree that they will replace the person authorized in the
above power of attorney at any time upon Beijing Hongtao's request. The Business Operations Agreement shall remain in effect for
ten years from the date of signing unless earlier terminated by Beijing Hongtao by delivering 30 days prior written notice or upon
the mutual agreement of all parties. Beijing Luji and the Beijing Luji shareholders do not have the right to terminate the agreement
unilaterally. Upon the termination of any agreement between Beijing Hongtao and Beijing Luji, Beijing Hongtao shall be entitled
to terminate all agreements between such parties.
Equity Disposal Agreement
Pursuant to the Equity
Disposal Agreement signed on May 15, 2019, by and among the Beijing Luji shareholders, Beijing Luji and Beijing Hongtao, the Beijing
Luji shareholders granted to Beijing Hongtao an exclusive option right to purchase all of their equity interests in Beijing Luji
to secure the execution of the Equity Pledge Agreement in which the details are set out below. Under the terms of this agreement,
Beijing Hongtao has an exclusive right to purchase, to the extent permitted under the PRC law, at any time, all or any part of
the equity interests of the Beijing Luji shareholders in Beijing Luji or an option to transfer the equity interests in Beijing
Luji to any third party designated by Beijing Hongtao. The option price shall be the minimum permitted by the laws and regulations
of the PRC. The Equity Disposal Agreement has a term of ten years from the date of signing, and it may be renewed at Beijing Hongtao’s
discretion.
Equity Pledge Agreement
Pursuant to the Equity
Pledge Agreement signed on May 15, 2019, by and among the Beijing Luji shareholders and Beijing Hongtao, the Beijing Luji shareholders
pledged all of their equity interests in Beijing Luji to Beijing Hongtao to guarantee the performance of Beijing Luji’s
obligations under the Exclusive Consulting and Services Agreement, the Equity Disposal Agreement and the Business Operations Agreement.
Under the terms of the agreement, in the event that Beijing Luji or its shareholders breach their respective contractual obligations
under the Exclusive Consulting and Services Agreement, the Equity Disposal Agreement and the Business Operations Agreement, or
upon occurrence of any event of default as set forth in the Equity Pledge Agreement, Beijing Hongtao shall be entitled to exercise
its rights under this agreement, subject to certain cure periods. The Beijing Luji shareholders further agree not to dispose of
the pledged equity interests or take any actions that would prejudice Beijing Hongtao’s interest.
The Equity Pledge Agreement
shall be effective until Beijing Luji and the Beijing Luji shareholders have performed all of their obligations under the Exclusive
Consulting and Services Agreement, the Equity Disposal Agreement and the Business Operations Agreement and the written approval
of Beijing Hongtao has been obtained.
Agency Agreement
Pursuant to the Agency
Agreement signed on May 15, 2019, among the Beijing Luji shareholders and Beijing Hongtao, the Beijing Luji shareholders granted
Beijing Hongtao an irrevocable license for the longest period permitted under law the right to exercise the voting rights of the
Beijing Luji shareholders in accordance with the laws of the PRC and the Articles of Association of Beijing Luji. During the term
of this Agreement, none of the Beijing Luji shareholders shall be entitled to transfer their interest in Beijing Luji to any third
party other than entities or individuals designated by Beijing Hongtao. This Agency Agreement shall be irrevocable and continuously
valid from the date of execution of this Agency Agreement, and it can be terminated at Beijing Hongtao’s discretion.
Use of Estimates
The
preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Significant accounting
estimates reflected in HanJiao’s consolidated financial statements include the allowance for doubtful accounts and
slow-moving inventory, and the useful lives of property and equipment. Since the use of estimates is an integral component of
the financial reporting process, actual results could differ from those estimates.
Fair Value of Financial Instruments
HanJiao follows
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) FASB ASC Section
820, “Fair Value Measurements and Disclosures.” ASC 820 clarifies the definition of fair value, prescribes methods
for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
Level 1 applies to assets or liabilities
for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 applies to assets or liabilities
for which there are inputs, other than quoted prices in level 1, that are observable for the asset or liability such as quoted
prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient
volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable
or can be derived principally from, or corroborated by, observable market data.
Level 3 applies to assets or liabilities
for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value
of the asset or liability.
The carrying value of
financial instruments included in current assets and liabilities approximate their fair values because of the short-term nature
of these instruments.
Cash and Cash Equivalents
Cash
and cash equivalents consist of cash on hand, cash on deposit and other highly liquid investments which are unrestricted as to
withdrawal or use, and which have original maturities of three months or less when purchased. Beijing Luji maintains cash
with various financial institutions mainly in the PRC.
Risks and Uncertainties
The operations of
Beijing Luji are located in the PRC. Accordingly, its business, financial condition, and results of operations may
be influenced by the political, economic, and legal environment in the PRC, as well as by the general state of the PRC economy.
The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated
with companies in North America and Western Europe. These include risks associated with, among other factors, the political, economic
and legal environment and foreign currency restrictions. Beijing Luji’s results may be adversely affected by changes
in the political, regulatory and social conditions in the PRC, and by changes in governmental policies or interpretations with
respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of
taxation, among other things. Although the Company has not experienced losses from these situations and believes that it is in
compliance with existing laws and regulations, changes in the future could affect the Company’s interest in these entities.
Inventories
Inventories consist
of finished goods and they are stated at the lower of cost or net realizable value. Cost is determined using the weighted average
method. Beijing Luji periodically evaluates its inventories and will record an allowance for inventories that are either
slow-moving, may not be saleable or whose cost exceeds its net realizable value.
Advance to Suppliers
Advances to suppliers
consist of payments to suppliers for finished goods that have not been received by Beijing Luji. Beijing Luji periodically
evaluates and reviews its advance to suppliers to determine whether its carrying value has been impaired.
Long-term Investment
Long-term investment
consists mainly of Beijing Luji’s equity investment for strategic or business development purposes. The Company applies
the equity method of accounting to account for an equity investment, according to FASB ASC 323 “Investment—Equity
Method and Joint Ventures,” over which it has significant influence but does not own a majority equity interest or otherwise
control. Under the equity method, Beijing Luji’s share of the profits or losses of the equity investees are recorded
in its consolidated statements of income and comprehensive income.
Beijing Luji reviews
its investment at least annually to determine whether a decline in fair value to below the carrying value is other-than-temporary.
The primary factors Beijing Luji considers in its determination are the duration and severity of the decline in fair value;
the financial condition, operating performance and the prospects of the equity investee; and other company specific information
such as recent financing rounds. If the decline in fair value is deemed to be other-than-temporary, the carrying value of the
investment will be written down to its fair value.
Property and Equipment, Net
Property and equipment
are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the underlying assets. The
cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are
retired or disposed of, the cost and accumulated depreciation and amortization are removed from the accounts, and any resulting
gains or losses are included in income in the year of disposition. Beijing Luji examines the possibility of decreases in
the value of its property and equipment, when events or changes in circumstances reflect the fact that their recorded value may
not be recoverable.
Estimated useful lives
are as follows, taking into account the assets’ estimated residual value:
Classification
|
|
Estimated useful lives
|
Vehicles
|
|
10 years
|
Office equipment
|
|
3 years
|
Furniture and fixtures
|
|
3 years
|
Software
|
|
3 years
|
Long-lived Assets
Finite-lived assets
and intangibles are reviewed for impairment testing when circumstances require. For purposes of evaluating the recoverability
of long-lived assets, when undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount,
the asset is written down to its fair value. The long-lived assets of Beijing Luji that are subject to evaluation consist
primarily of property, plant and equipment, land use rights, and long-term prepaid leases.
Revenue Recognition
On January 1, 2019,
Beijing Luji adopted FASB ASC 606, Revenue from Contracts with Customers using the modified retrospective method for all
contracts not completed as of the date of adoption. Accordingly, revenue for the year ended December 31, 2019 was presented under
ASC 606, while comparative information has not been restated and continues to be reported under the accounting standards in effect
for the prior period.
The core principle
underlying the revenue recognition standard is that Beijing Luji will recognize revenue to represent the transfer of products
or services to customers in an amount that reflects the consideration to which Beijing Luji expects to be entitled in such
exchange. This will require Beijing Luji to identify contractual performance obligations and determine whether revenue
should be recognized at a point in time or over time, based on when control of the product or the benefit of the services transfers
to the customer. Under the guidance of ASC 606, Beijing Luji is required to (a) identify the contract with a customer,
(b) identify the performance obligations in the contract, (c) determine the transaction price, (d) allocate the
transaction price to the performance obligations in the contract and (e) recognize revenue when (or as) Beijing Luji
satisfies its performance obligations.
The adoption of
ASC 606 did not significantly change (i) the timing and pattern of revenue recognition for Beijing Luji’s revenues,
and (ii) the presentation of revenues as gross versus net. Therefore, the adoption of ASC 606 did not have a significant
impact on Beijing Luji’s financial position, results of operations, equity or cash flows as of the adoption date
and for the year ended December 31, 2019. Persuasive evidence of an arrangement is demonstrated via sales orders; and the consideration
is fixed upon the initiation of the purchase order by the customer.
Product Sales:
Beijing Luji is primarily engaged in the sale of healthcare and other related products (such as nutrition or dietary supplements;
water or air purifiers) to the middle aged and elderly market segments in the PRC. Beijing Luji sells these products under its
own “Fozgo” brand and related healthcare products for other vendors through its internet platform and offline
service centers. Revenue from product sales is recognized when control passes to the customer, which generally occurs at a point
in time when products are delivered. Allowance for sales returns, that reduces revenues, are estimated based on historical experience.
Revenues are recorded net of value-added taxes, business taxes, discounts and surcharges and allowance for returns.
Beijing Luji
collects cash from customers before or upon delivery of products mainly through banks and third-party online payment platforms
(such as Alipay). Cash collected from customers before product delivery is recognized as advance from customers.
Cost of Revenues
Cost of revenues consists
primarily of the cost of merchandise sold, delivery cost, service fees, sales incentives and commissions that are directly attributable
to the sale of certain designated products.
General and Administrative Expenses
General and administrative
expenses consist mainly of payroll and related costs for employees involved in general corporate functions, including accounting,
finance, tax, legal and human resources, professional fees and other general corporate expenses as well as costs associated with
the use by these functions of facilities and equipment, such as depreciation and rental expenses.
Selling Expenses
Selling expenses consist
mainly of payroll and benefits related costs for employees involved in the sales and distribution functions, meeting/event fees,
advertisement and marketing and selling expenses that are related to events and activities at the Company’s service centers
designed to promote product sales.
Finance Expenses (Income)
Finance expenses consist
mainly of service fees related to the use of third-party online payment platforms, bank fees and interest expenses related to borrowings;
net of interest income from bank and related bank products.
Other Income (Expenses)
Other income consists
primarily of income from the administration of the online marketplace. Other expenses consist mainly of estimated tax penalties
and charitable contributions.
Income Taxes
Beijing Luji
follows FASB ASC Topic 740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this
method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of
assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets are also recognized
for operating losses that are available to offset the future taxable income. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized.
Beijing Luji
follows FASB ASC 740-10-25, “Accounting for Uncertainty in Income Taxes”, which requires income tax positions
to meet a more-likely-than-not recognition threshold to be recognized in the financial statements. Under ASC 740-10-25, tax positions
that previously failed to meet the more-likely-than-not threshold should be recognized in the first subsequent financial reporting
period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold
should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. The Company
believes that it does not have any uncertain tax positions. It is not expected that there will be any uncertain tax position within
12 months of December 31, 2019.
The application
of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations
themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations
and court rulings. Therefore, the actual liability may be materially different from our estimates, which could result in the need
to record additional tax liabilities or potentially reverse previously recorded tax liabilities or the deferred tax asset valuation
allowance. Due to the lack of temporary differences between the tax bases and their financial reporting amounts, Beijing Luji
has not recognized any deferred tax assets or liabilities as of December 31, 2019 and 2018, respectively.
Enterprise Income Tax
Under the Provisional
Regulations of the PRC concerning income tax on enterprises promulgated by the PRC (the “EIT Law”), Beijing Luji
was qualified as a high and new technology enterprise starting in 2018, and enjoys a preferential tax rate of 15% for 3 years
expiring in 2020.An entity can re-apply to be a high and new technology enterprise when the prior certificate expires. Income
tax is payable at a rate of 15% of our taxable income for the six months ended June 30, 2020 and 2019 and for the years ended
December 31, 2019 and 2018.
Value-Added Tax
Prior to May 1, 2018,
the Company was subject to value-added tax (“VAT”) at rates of 6% and 17% on revenue generated from providing services
and products, respectively. Starting from May 1, 2018, the VAT rate for revenue generated from providing products was changed from
17% to 16%. Starting from April 1, 2019, the VAT rate for revenue generated from providing products changed from 16% to 13%. VAT
is reported as a reduction of revenue when incurred. Entities that are VAT general taxpayers are allowed to offset qualified input
VAT paid to suppliers against their output VAT liabilities. The net VAT balance between input VAT and output VAT is recorded in
taxes payable.
Foreign Currency Translation
The functional currency
of the Beijing Luji’s operations in the PRC is the Chinese Yuan or Renminbi (“RMB”). The consolidated
financial statements are translated into U.S. dollars (“USD”) using the period end rates of exchange for assets and
liabilities, equity is translated at historical exchange rates, and average rates of exchange (for the period) are used for revenues
and expenses and cash flows. As a result, amounts relating to assets and liabilities reported on the statements of cash flows
may not necessarily agree with the changes in the corresponding balances on the balance sheets. Translation adjustments resulting
from the process of translating the local currency financial statements into USD are included in determining comprehensive income
(loss). Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing
on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency
at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations
as incurred.
All of Beijing Luji’s
revenue transactions are transacted in its functional currency. Beijing Luji does not enter into any material transaction
in foreign currencies. Transaction gains or losses have not had, and are not expected to have, a material effect on the results
of operations of the Company.
Comprehensive Income
(Loss)
Comprehensive income
(loss) consists of two components, net income (loss) and other comprehensive income (loss). Other comprehensive income (loss)
refers to revenue, expenses, gains and losses that under GAAP are recorded as an element of shareholders’ equity but are
excluded from net income (loss). Other comprehensive income (loss) consists entirely of foreign currency translation adjustments
resulting from Beijing Luji’s translation of its financial statements from its functional currency into USD.
Earnings (loss) Per Share
Basic earnings (loss)
per share is computed by dividing net income (loss) by the weighted-average number of ordinary shares outstanding during the period.
Diluted earnings per share is computed by dividing net income by the weighted-average number of ordinary shares plus dilutive
potential ordinary shares outstanding during the period. When Beijing Luji has a loss, the potential ordinary shares are
not included since their inclusion would be anti-dilutive. For the years ended December 31, 2019 and 2018, there were no potential
ordinary shares, such as options, warrants or conversion rights, that would have a dilutive effect on the Company’s earnings
per share.
Recent Accounting Pronouncements
In February 2016, the
FASB issued ASU 2016-02, Amendments to the ASC 842 Leases. This update requires a lessee to recognize an asset and liability (the
lease liability) arising from operating leases on the balance sheet for the lease term. When measuring assets and liabilities arising
from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain
to exercise an option to extend the lease or not to exercise an option to terminate the lease. Leases with a twelve months or less
lease term, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. If a lessee
makes this election, it should recognize lease expense on a straight-line basis over the lease term. In transition, this update
will be effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those
fiscal years. The Company expects to adopt of ASU 2016-02 when it completes its proposed transaction with a public entity, and
does not expect the adoption of ASU 2016-02 to have a material impact on its financial statements.
In July 2017, the FASB
Issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging
(Topic 815). The amendments in Part I of the Update change the reclassification analysis of certain equity-lined financial instruments
(or embedded features) with down round features. The amendments in Part II of this Update recharacterize the indefinite deferral
of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. For public
business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal
years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption
is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim
period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments
in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect. The
Company does not believe the adoption of this ASU would have a material effect on the Company’s consolidated financial statements.
In August 2018, the FASB
Accounting Standards Board issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework Changes to the
Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements
on fair value measurements. ASU 2018-13 is effective for public entities for fiscal years beginning after December 15, 2019, with
early adoption permitted for any removed or modified disclosures. The removed and modified disclosures will be adopted on a retrospective
basis and the new disclosures will be adopted on a prospective basis. The Company does not expect this guidance will have a material
impact on its consolidated financial statements.
The Company believes
that other recent accounting pronouncement will not have a material effect on the Company’s consolidated financial position,
results of operations and cash flows.
PROPERTIES
We maintain our approximately
303 square meter corporate office at Room 1206, 12th Floor, 301, 3-17 F, Building 5, Block 1, Hangfeng Road, Fengtai District,
Beijing, The PRC through a sublease with Beijing Hongtao. According to the sublease, we are obligated to pay a monthly rent of
approximately RMB 51,713 (approximately US $7,700) during the term of 2 years. The lease expires July 19, 2022. The foregoing description
of the lease is qualified in its entirety by reference to the Lease Agreement, an English translation of which is filed as Exhibit
10.8 to this Current Report and incorporated herein by reference.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial
Owners and Management
The following table sets
forth certain information concerning the number of shares of our common stock owned beneficially as of August 6, 2020 by: (i)
each person (including any group) known to us to own more than five percent (5%) of any class of our voting securities, (ii) each
of our directors and each of our named executive officers (as defined under Item 402(m)(2) of Regulation S-K), and (iii) officers
and directors as a group. Unless otherwise indicated, the shareholders listed possess sole voting and investment power with respect
to the shares shown except to the extent voting power may be shared with a spouse. Unless otherwise indicated, the address for
each director and executive officer listed is: c/o AS Capital, Inc., Room 1206, 12th Floor, 301, 3-17 F, Building 5,
Block 1, Hangfeng Road, Fengtai District, Beijing, China.
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Common Stock Beneficially Owned
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Name and Address of Beneficial Owner
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Number of Shares
and Nature of
Beneficial
Ownership
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Percentage of
Total Common
Equity (1)
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TIAN Xiangyang (2)
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68,800,000
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70.78%
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TIAN Zhihai (3)
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4,300,000
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4.63%
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|
|
|
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All executive officers and directors as a Group
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72,300,000
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75.41%
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5% or Greater Stockholders:
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GAO Xue Ran
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8,581,063
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8.83%
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(1)
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Beneficial
ownership is determined in accordance with SEC rules and generally includes voting or investment power with respect to securities.
For purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares
of common stock that such person has the right to acquire within 60 days of August 6, 2020. Applicable percentage ownership
is based on 97,201,030 shares of common stock outstanding as of August 6, 2020, and any shares that such person or persons
has the right to acquire within 60 days of August 6, 2020, is deemed to be outstanding for such person, but is not deemed
to be outstanding for the purpose of computing the percentage ownership of any other person. The inclusion herein of any shares
listed as beneficially owned does not constitute an admission of beneficial ownership.
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(2)
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Rhone Holding Limited, a limited liability company organized under the laws of the British Virgin Islands,
is the record holder of such securities. Ms. Tian is the sole shareholder and director of Rhone Holding Limited. Ms. Tian has served
as the Chairman, Chief Executive Officer and Director of the Board of Directors of Beijing Luji since July 2018 and was appointed
to serve as the Chief Executive Officer and Director of the Company on August 6, 2020.
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(3)
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Donau Holding Limited, a limited liability company organized under the laws of the British Virgin Islands,
is the record holder of such securities. Mr. Tian is the sole shareholder and director of Donau Holding Limited. Mr. Tian has served
as the Chief Operating Officer of Beijing Luji since January 2017 and was appointed to serve as the Chief Operating Officer and
Director of the Company on August 6, 2020.
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Changes In Control
On June 4, 2019, AS Capital,
Inc., a Nevada corporation (“we,” “ASIN” or the “Company”), XRC, LLC, a Colorado limited liability
company (“XRC”) and Gao Xue Ran (“Purchaser”) entered into a Stock Purchase Agreement (the “SPA”),
pursuant to which Purchaser agreed to purchase from XRC 11,000,000 shares of common stock of the Company, par value $0.001, and
964 shares of Series A Convertible Preferred Stock of the Company, par value $0.001 (collectively, the “Shares”), for
aggregate consideration of Four Hundred and Ten Thousand Dollars ($410,000) in accordance with the terms and conditions of the
SPA. XRC is the controlling shareholder of the Company. The acquisition of the Shares consummated on July 18, 2019, and the Shares
were ultimately purchased by the following three individuals using their own personal funds:
Name
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No. of Shares
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Percentage of Issued and Outstanding
|
|
Consideration Paid
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Gao Xue Ran
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8,581,063 of Common Stock;
964 shares of Series A Preferred Stock
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76.61%
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$319,840
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Zhang Yan Hua
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1,935,633 of Common Stock
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17.28%
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$72,146
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Cheung Kwok Chiu Kris
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|
483,304 of Common Stock
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4.30%
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$18,014
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Ms. Gao held a controlling
interest in the Company and may unilaterally determine the election of the Board and other substantive matters requiring approval
of the Company’s stockholders.
Upon the consummation of
the sale of the Shares, Chris Lotito, our Chief Executive Officer and sole director, and John Karatzaferis, our President, resigned
from all of their positions with the Company, effective July 18, 2019. Their resignations were not due to any dispute or disagreement
with the Company on any matter relating to the Company's operations, policies or practices.
Concurrently with such
resignations, Gao Xue Ran was appointed to serve as the Chief Executive Officer, Chief Financial Officer, President, Secretary
and sole Director of the Company, until the next annual meeting of stockholders of the Company and until such director’s
successor is elected and qualified or until such director’s earlier death, resignation or removal. None of the directors
or executive officers has a direct family relationship with any of the Company’s directors or executive officers, or any
person nominated or chosen by the Company to become a director or executive officer. Ms. Gao will serve in her positions without
compensation.
Acquisition of HJ
On August 6, 2020,
we consummated the acquisition of One Hundred (100) Shares of HJ, representing 100% of the issued and outstanding stock of HJ.
HJ is a holding company that, through its subsidiaries and variable interest entity, is engaged in the business of selling healthcare
and other related products to the middle-aged and elderly market segments in the PRC through its internet platform and offline
service centers. HJ’s consolidated business is conducted through Beijing Luji Technology Co., Ltd., a variable interest
entity formed in Beijing, China on March 27, 2007.
In connection with the acquisition, effective August 6, 2020, the following individuals were appointed to serve in the
capacities set forth next to their names until his or her successor(s) shall be duly elected or appointed, unless he or she resigns,
is removed from office or is otherwise disqualified from serving as an executive officer or director of the Company:
Tian Xiangyang
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Chief Executive Officer, Director and Chairperson of the Board of Director
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Shan Yonghua
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Chief Financial Officer
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Tian Zhihai
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Chief Operating Officer and Director
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Yin Jianen
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Secretary and Director
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Wang Jirui
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Director
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Upon the consummation of
the sale of the HJ Shares, Gao Xue Ran resigned from all of her positions with the Company, effective August 6, 2020. Her resignation
was not due to any dispute or disagreement with the Company on any matter relating to the Company's operations, policies or practices.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS
Set forth below are the
present directors, director nominees and executive officers of the Company. There are no other persons who have been nominated
or chosen to become directors nor are there any other persons who have been chosen to become executive officers. There are no arrangements
or understandings between any of the directors, officers and other persons pursuant to which such person was selected as a director
or an officer. Directors are elected to serve until the next annual meeting of stockholders and until their successors have been
elected and have qualified. Officers are appointed to serve until the meeting of the board of directors following the next annual
meeting of stockholders and until their successors have been elected and qualified.
Name
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Age
|
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Position
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Tian Xiangyang
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48
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Chief Executive Officer, Director and Chairperson of the Board of Director
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Shan Yonghua
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52
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Chief Financial Officer and Director
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Tian Zhihai
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44
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Chief Operating Officer and Director
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Yin Jianen
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46
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Secretary and Director
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Wang Jirui
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55
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Director
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Set forth below is a
brief description of the background and business experience of our sole executive officer and director:
Ms. Xiangyang Tian,
48 years old, joined Hanjiao international on July 5, 2018 as HJ Chief Executive Officer, Director and Chairperson of the Board.
She is one of the founders of Beijing Luji, and has served as an Executive Director of Beijing Luji since March 2007. She has served
as a director of HJ since July 2018, and has served as Chief Executive Officer and Chairman of Hanjiao international the board
since April 2019, and is responsible for the overall strategic planning and day-to-day operations of Beijing Luji Technology Co.,
Ltd at the same time. Ms Tian has introduced a business model by creating a cloud platform called "Fozgo" for the elderly.
Prior to establishing Beijing
Luji, Ms. Tian served as the Chief Secretary at Supply and Marketing Agency of Huailai County, Hebei Province from January 2000
to February 2007. From January 1996 to December 1999, she served as the Political Cadre for the Government Office of Tumu Town
in Huailai County, Hebei Province. Ms. Tian was the staff for the Zhangbei County Grain Bureau of Hebei Province from July 1991
to December 1995. Ms. Tian graduated from Hebei Provincial Party Collecge, majoring in Economic Management, and EMBA Business Administration
at Peking University. She brings to the Board her experience in financial planning, overview and strategic planning.
Mr. Yonghua Shan,
52 years old, has served as Chief Financial Officer of Hanjiao International since March 2020. Mr. Shan has over 31 years working
experience in financial management, tax planning, investment and financing management. Prior to joining HJ, Mr. Shan served as
the Financial Director of Beijing Luji Technology Co., Ltd. since September 2016. During July 2013 to August 2016, Mr. Shan was
the Financial Director of Beijing Beichuang Non-Woven Co. Mr. Shan was the Financial Manager of Beijing Ligao Technology Co., Ltd.
from February 2006 to June 2013 and the General Manager Assistant and Investment Manager of Kelon Electric Co., Ltd from August
2000 to January 2006. Mr. Shan obtained his Master degree in Management Engineering from Wuhan University of Technology. Mr. Shan
brings to the Board his experience in financial management.
Mr. Zhihai Tian,
44 years old, joined Hanjiao International in July 2018 and has served as Chief Operating Officer and Director of Hanjiao International
since April 2020. Mr. Tian joined Beijing Luji in 2008 and has served as Chief Operating Officer of Beijing Luji since July 2018.
Mr. Tian is mainly responsible for the daily operation and customer relationship management. He had more than 10 years of experience
in company operations, customer development and relationship management. Before joining Beijing Luji, Mr. Tian worked at Hongshu
Group from July 2000 to December 2007. Mr. Tian obtained EMBA at the School of Economics and Management, Peking University. Mr.
Tian brings to the Board his deep industry operational expertise.
Mr. Jianen Yin,
46 years old, joined Hanjiao international on June, 2020. He has served as HJ Secretary and Director since April 2020. He serves
HJ with his management experience, business and social network with investment and financing knowledge. Before joining us, Mr.
Yin was the Vice General Manager of Fixed Income Department of Jiuzhou Securities from May 2016 to June 2019 and of Western Securities
during August 2009 to April 2016. From April 2002 to June 2007, he served as the Marketing Director for Sumitomo Forestry Machinery.
Mr. Yin has obtained the MBA degree from Guanghua School of Management, Peking University and graduated with Hotel Management degree
from Beijing Union University. Mr. Yin brings to the Board his management, finance and investment experience.
Mr. Jirui Wang,
55 years old, joined Hanjiao international on June, 2020 and has served as the Director of HJ since April 2020. Mr. Wang has over
23 years working experience in financial industry with extensive knowledge in investment banking and fixed income sectors. Before
joining HJ, Mr. Wang worked for Jiuzhou Securities from September 2017 to December 2019 and of Western Securities during April
2016 to September 2017. From June 1995 to December 2016, Mr. Wang served as the Chief Representative of the Southern Representative
District of the Beijing Office of South Korea Sincere Chemical Co., Ltd. During October 1987 to May 1995, Mr. Wang was the Purchaser
for Hunan Tobacco Company. Mr. Wang graduated from Xiangtan University in Hunan Province in 1987. Mr. Want brings to the Board
his expertise in investment banking and finance.
Family Relationships
Ms. Tian Xiangyang
is the aunt of Mr. Tian Zhihai. Except as set forth above, there are no family relationships between any of our directors or executive
officers.
Involvement in Certain Legal Proceedings
No executive officer
or director is a party in a legal proceeding adverse to us or any of our subsidiaries or has a material interest adverse to us
or any of our subsidiaries.
No executive officer
or director has been involved in the last ten years in any of the following:
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Any bankruptcy petition filed by or against any business or property of such person, or of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
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·
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Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
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·
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Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities;
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·
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Being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
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·
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Being the subject of or a party to any judicial or administrative order, judgment, decree or finding, not subsequently reversed, suspended or vacated relating to an alleged violation of any federal or state securities or commodities law or regulation, or any law or regulation respecting financial institutions or insurance companies, including but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail, fraud, wire fraud or fraud in connection with any business entity; or
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·
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Being the subject of or
a party to any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined
in Section 3(a)(26) of the Exchange Act, any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act),
or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated
with a member.
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Board Committees
We have not formed separate
Audit, Corporate Governance, Compensation and Nominating committees. Our entire Board performs the functions of the Audit, Corporate
Governance, Compensation and Nominating committees.
Delinquent Section 16(a) Reports