As of December 31, 2020, there were 21,149,425
ordinary shares issued and outstanding.
PART
I
ITEM 1.
|
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT
AND ADVISERS
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Not
Applicable.
ITEM 2.
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OFFER STATISTICS AND EXPECTED TIMETABLE
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Not
Applicable.
3.A.
Selected Financial Data
In the table below, we provide you with historical
selected financial data for our company. The selected consolidated statements of operations data for the fiscal years ended December 31,
2020, 2019 and 2018 and the selected consolidated balance sheets data as of December 31, 2020 and 2019 have been derived from our
audited consolidated financial statements, which are included in this annual report beginning on page F-1. The selected consolidated
balance sheet data for the year ended December 31, 2018 have been derived from our audited consolidated balance sheet as of December 31,
2018, which is not included in this annual report. Our historical results do not necessarily indicate results expected for any future
periods. The selected consolidated financial data should be read in conjunction with, and are qualified in their entirety by reference
to, our audited consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects”
below. Our audited consolidated financial statements are prepared and presented in accordance with US GAAP.
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December 31, 2020
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December 31, 2019
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|
|
|
|
|
|
|
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Current assets
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|
$
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30,014,644
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|
|
$
|
11,190,351
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Total non-current assets
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$
|
3,850,210
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|
|
$
|
69,088
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Total assets
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|
$
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33,864,854
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|
|
$
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11,259,439
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Total current liabilities
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|
$
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12,152,917
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|
|
$
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6,884,793
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Total non-current liabilities
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$
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2,967,193
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|
|
$
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-
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|
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For the years ended December 31,
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|
|
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2020
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2019
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2018
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|
|
|
|
|
|
|
|
|
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Revenue
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|
$
|
96,879,173
|
|
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$
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61,775,903
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|
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$
|
24,187,596
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Operating expenses
|
|
$
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91,766,357
|
|
|
$
|
60,071,451
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|
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$
|
22,202,927
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|
Net income
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|
$
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3,586,692
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|
|
$
|
1,278,359
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|
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$
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1,477,907
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|
|
|
For the years ended December 31,
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2020
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|
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2019
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2018
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|
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|
|
|
|
|
|
|
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Net cash provided by (used in) operating activities
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$
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6,339,153
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|
|
$
|
(856,332
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)
|
|
$
|
156,921
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|
Net cash used in investing activities
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|
$
|
(116,746
|
)
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|
$
|
(46,135
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)
|
|
$
|
(40,146
|
)
|
Net cash provided by (used in) financing activities
|
|
$
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11,344,806
|
|
|
$
|
636,702
|
|
|
$
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(7,318
|
)
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Net increase (decrease) in cash
|
|
$
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18,232,544
|
|
|
$
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(216,258
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)
|
|
$
|
98,334
|
|
3.B.
Capitalization and Indebtedness
Not
Applicable.
3.C.
Reasons For The Offer And Use Of Proceeds
Not
Applicable.
3.D.
Risk Factors
An
investment in our ordinary shares involves a high degree of risk. You should carefully consider the risks and uncertainties described
below together with all other information contained in this annual report, including the matters discussed under the headings
“Forward-Looking Statements” and “Operating and Financial Review and Prospects” before you decide to invest
in our ordinary shares. We are a holding company with substantial operations in China and are subject to a legal and
regulatory environment that in many respects differs from the United States. If any of the following risks, or any other risks
and uncertainties that are not presently foreseeable to us, actually occur, our business, financial condition, results of operations,
liquidity and our future growth prospects could be materially and adversely affected.
Risks
Related to Our Business
We
historically have received a substantial part of our supplies from our related party suppliers, which might cause conflict of
interest between the Company and such suppliers.
Historically, a substantial part of our supplies
came from the Longrich Group, a related party. For the year ended December 31, 2020 and 2019, the Longrich Group accounted for approximately
87% and 90% of the total purchases, respectively. Longrich Group is controlled by Mr. Zhiwei Xu, a major shareholder, Chairman of the
Board and Chief Executive Officer of the Company.
Although
we believe our transactions with the related parties are negotiated independently on the basis of a fair market value determination,
transactions with the entities in which related parties hold ownership interests present potential for conflicts of interest,
as the interests of these entities and their shareholders may not align with the interests of the Company and our shareholders
with respect to the negotiation of, and certain other matters related to, our purchase products and services from such entities.
Conflicts of interest may also arise in connection with the exercise of contractual remedies under these transactions, such as
the treatment of events of default.
Our
Board of Directors has authorized the Audit Committee to review and approve all related party transaction. We rely on the laws
of Cayman Islands, which provide that directors owe a duty of care and a duty of loyalty to our company. Nevertheless, we may
have achieved more favorable terms if such transactions had not been entered into with related parties and these transactions,
individually or in the aggregate, may have an adverse effect on our business and results of operations or may result in government
enforcement actions or other litigation.
We
rely on a limited number of vendors, and the loss of our significant vendor could harm our business, and the loss of any one of
such vendors could have a material adverse effect on our business.
We consider our major vendors to be those vendors
that accounted for more than 10% of overall purchases in any given fiscal period. For the year ended December 31, 2019, one major supplier-
the Longrich Group, a related party, accounted for approximately 90% of the total purchases. For the year ended December 31, 2020, the
same related party supplier accounted for approximately 87% of the total purchases. We have not entered into long-term contracts with
this significant vendor and instead rely on individual orders with such vendor. Although we believe that we can locate replacement vendors
readily on the market for prevailing prices, any difficulty in replacing a vendor on terms acceptable to us could negatively affect our
performance to the extent it results in higher prices or a slower supply chain. If we lose any or all of them, or any
of them increase the prices or change the terms of the business they do with us, our sales may be adversely affected.
If
we become subject to additional scrutiny, criticism and negative publicity involving U.S.-listed China-based 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 Ordinary Shares, especially if such matter cannot be addressed and resolved
favorably.
Recently,
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. Much of the scrutiny, criticism and negative
publicity has centered around financial and accounting irregularities, a lack of effective internal controls over financial accounting,
inadequate corporate governance policies or a lack of adherence thereto and, in some cases, allegations of fraud. As a result
of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S.-listed China-based companies has decreased
in value and, in some cases, has become virtually worthless. Many of these companies have been subject to shareholder lawsuits
and SEC enforcement actions and have conducted internal and external investigations into the allegations. It is not clear what
effect this sector-wide scrutiny, criticism and negative publicity will have on us, our business. If we become the subject of
any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources
to investigate such allegations and/or defend our company. This situation may be a major distraction to our management. If such
allegations are not proven to be groundless, our business operations will be severely hindered and your investment in our Ordinary
Shares could be rendered worthless.
We
face fierce competition in the health and nutritional supplements and cosmetic markets in China. We may not be able to keep pace
with competition in our industry, which could adversely affect our market share and result in a decrease in our future sales and
earnings.
The
competition in the national health and nutritional supplements and cosmetics markets of the China is fierce. We compete primarily
on the basis of our technology, comprehensive customer service and brand recognition. Our competitors may compete with us in the
following ways:
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provide
products and services that are similar to ours, or that are more attractive to customers than ours;
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provide products
and services we do not offer;
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offer aggressive
rebates to gain market share and to promote their businesses;
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adapt at a faster
rate to market conditions, new technologies and customer demands;
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offer better, faster
and more reliable technology; and
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market, promote
and provide their services more effectively.
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Our
main competitors include health and nutritional supplements and cosmetic retail companies, including traditional offline retail
stores, social e-commerce platforms, general business to consumers, or B2C, platforms and traditional distributors, as well as
online platforms specialized in health and nutritional supplements or cosmetics. These companies may have much more financial,
technological, R&D, marketing, distribution, retail and other resources than we do. They may also have a longer operating
history, a larger customer base or a wider and deeper market coverage. In addition, when we expand to other markets, we will face
competition from new domestic or foreign competitors, which may also enter our current market.
Although
we do not compete against other platforms, products and service providers solely based on prices, if our competitors offer their
products and services at lower prices, we may be forced to provide aggressive discounts or rebates to our customers and our revenue
may decrease.
In
addition, in recent years, with the emergence of new internet business model and new retail industry, the low-price strategy of
e-commerce has led to greater pricing pressure. If this trend continues, it may lead to further competitive pressure on prices.
The new partnership and strategic alliance in the health and nutritional supplements and cosmetic industries will also change
market dynamics, which may adversely affect our business and competitive position.
Technologies
adopted by us and our competitors are developing rapidly, and new developments often lead to price competition, outdated products
and changes in market patterns. Any significant increase in competition could have a significant negative impact on our revenue
and profitability, as well as on our business and prospects. We cannot assure you that we will be able to constantly distinguish
our products and services from our competitors, maintain and improve our relationship with different participants in health and
nutritional supplements and cosmetic industries, or increase or even maintain our existing market share. We may lose market share.
If we cannot compete effectively, our financial situation and operating results may deteriorate seriously.
We
use third-party logistics and express delivery companies to complete and deliver orders placed on our platform. If these logistics
and express companies fail to provide reliable and timely delivery services, our business and reputation, as well as our financial
situation and operating results, may be adversely affected.
We
have contractual arrangements with a number of third-party logistic companies to deliver our products to our customers. We also
use them to deliver products from our fulfillment centers to delivery stations or to deliver commodity products. The interruption
or failure of these third-party delivery services may hinder timely or correct delivery of our products to our consumers. These
disruptions may be caused by events beyond our control or those beyond the control of delivery companies, such as bad weather,
natural disasters, pandemic, transportation disruptions or labor unrest. We may not be able to find replacement delivery companies
in a short period of time to provide timely and reliable delivery services, or we may not find them at all. Our business and reputation
may be affected if the product is not delivered in proper conditions or on time.
In the direct sales business model, we manage
inventory and delivery products with our own integrated processing system. In our market business model, many of third-party sellers who
sell their products on our platform use their own facilities to store products and use their own or third-party delivery systems to deliver
products to distributors and consumers that place orders on our platform, which makes it difficult to ensure that such customers and distributors
get consistent quality products and services for all products sold through our online platform. If any market seller fails to control
the quality of the products it sells on our platform, or if it fails to deliver the products or delays the delivery of the products or
delivers products that are substantially different from the product description, or if it sells counterfeit or unauthorized products through
our platform, or if it does not have the necessary licenses or permits required by relevant laws and regulations, our reputation and brand
name, may be adversely affected. We may also face claims and may be liable for damages related to such claims.
Our
sales people may not always receive accurate information for the background and regulatory checks on the sellers using our platform
or control the quality of the products they sell on our platform, as well as whether they deliver the products they sell on our
platform timely and correctly, which may cause a significant negative impact on our business, financial situation, and operating
results.
Internet
and network system limitations or failures could harm our business.
Our
businesses depend on the integrity and performance of the technology, computer and network systems supporting them. If our systems
cannot expand to cope with increased demand or otherwise fail to perform, we could experience unanticipated disruptions in service,
slower response times and delays in the introduction of new products and services. These consequences could result in financial
losses and decreased customer service and satisfaction. If transaction volumes increase unexpectedly or other unanticipated events
occur, we may need to expand and upgrade our technology, transaction processing systems and network infrastructure. We do not
know whether we will be able to accurately project the rate, timing or cost of any increases, or expand and upgrade our systems
and infrastructure to accommodate any increases in a timely manner.
If
we fail to adopt new technologies or adapt our website, mobile application and systems to changing customer requirements or emerging
industry standards, our business may be materially and adversely affected.
To
remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our internet platform.
Our competitors are constantly developing innovations and introducing new products to increase their customer base and enhance
user experience. As a result, in order to attract and retain customers and compete against our competitors, we must continue to
invest significant resources in research and development to enhance our information technology and improve our existing products
and services for our customers. The internet and the online retail industry are characterized by rapid technological evolution,
changes in customer requirements and preferences, frequent introductions of new products and services embodying new technologies
and the emergence of new industry standards and practices, any of which could render our existing technologies and systems obsolete.
Our success will depend, in part, on our ability to identify, develop, acquire or license leading technologies useful in our business,
and respond to technological advances and emerging industry standards and practices in a cost-effective and timely way. The development
of website, mobile application and other proprietary technology entails significant technical and business risks. There can be
no assurance that we will be able to use new technologies effectively or adapt our website, mobile application, proprietary technologies
and systems to meet customer requirements or emerging industry standards. If we are unable to adapt in a cost-effective and timely
manner in response to changing market conditions or customer requirements, whether for technical, legal, financial or other reasons,
our business, prospects, financial condition and results of operations may be materially and adversely affected.
We
lack product and business diversification. Accordingly, our future revenues and earnings are more susceptible to fluctuations
than a more diversified company.
Our
current primary business activities focus on the sale of health and nutritional supplements, cosmetics products and household
products. Because our focus is limited in this way, any risk affecting the health and nutritional supplements, cosmetics and household
products industries could disproportionately affect our business. Our lack of product and business diversification could inhibit
the opportunities for growth of our business, revenues and profits.
We
may incur net losses in the future.
We had incurred profits of $1,278,359 and $3,586,692
in fiscal year of 2019 and 2020, respectively. We cannot assure you that we will be able to generate net income or will have retained
earnings in the future. We anticipate that our operating expenses will increase in the foreseeable future as we seek to continue to grow
our business, attract clients and partners and further enhance and develop our services and other offerings. These efforts may prove more
expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses.
As a result of the foregoing and other factors, we may incur additional net losses in the future and may not be able to maintain profitability
on a quarterly or annual basis.
We
may need additional capital, and financing may not be available on terms acceptable to us, or at all.
Although
we believe that our current cash and cash equivalents, anticipated cash flows from operating activities will be sufficient to
meet our anticipated working capital requirements and capital expenditures in the ordinary course of business for at least 12
months following this report, we may need additional cash resources in the future if we experience changes in business conditions
or other developments. We may also need additional cash resources in the future if we find and wish to pursue opportunities for
investment, acquisition, capital expenditure or similar actions. If we determine that our cash requirements exceed the amount
of cash and cash equivalents we have on hand at the time, we may seek to issue equity or debt securities or obtain credit facilities.
The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness
would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot
assure you that financing will be available in amounts or on terms acceptable to us, if at all.
We
may incur substantial debt in the future, which may adversely affect our financial condition and negatively affect our operations.
We
may decide in the future to finance our business and operation through incurring debt. The incurrence of debt could have a variety
of negative effects, including:
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default and foreclosure
on our assets if our operating revenue is insufficient to repay debt obligations;
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acceleration of
obligations to repay the indebtedness (or other outstanding indebtedness), even if we make all principal and interest payments
when due, if we breach any covenants that require the maintenance of certain financial ratios or reserves without a waiver
or renegotiation of that covenant;
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our inability to
obtain necessary additional financing if the debt security contains covenants restricting our ability to obtain such financing
while the debt security is outstanding;
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diverting a substantial
portion of cash flow to pay principal and interest on such debt, which would reduce the funds available for expenses, capital
expenditures, acquisitions and other general corporate purposes; and
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creating potential
limitations on our flexibility in planning for and reacting to changes in our business and in the industry in which we operate.
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The
occurrence of any of these risks could adversely affect our operations or financial condition.
Our
quarterly results may fluctuate significantly and may not fully reflect the underlying performance of our business.
Our
quarterly results of operations, including the levels of our net revenues, expenses, net (loss)/income and other key metrics,
may vary significantly in the future due to a variety of factors, some of which are outside of our control, and period-to-period
comparisons of our operating results may not be meaningful, especially given our limited operating history. Accordingly, the results
for any one quarter are not necessarily an indication of future performance. Fluctuations in quarterly results may adversely affect
the market price of our Ordinary Shares. Factors that may cause fluctuations in our quarterly financial results include:
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our ability to attract
new clients and retain existing clients;
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changes in our mix
of products and services and introduction of new products and services;
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the amount and timing
of operating expenses related to the maintenance and expansion of our business, operations and infrastructure;
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our decision to
manage client volume growth during the period;
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the impact of competitors
or competitive products and services;
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increases in our
costs and expenses that we may incur to grow and expand our operations and to remain competitive;
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network outages
or security breaches;
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changes in the legal
or regulatory environment or proceedings, including with respect to security, privacy, or enforcement by government regulators,
including fines, orders or consent decrees;
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general economic,
industry and market conditions; and
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the timing of expenses
related to the development or acquisition of technologies or businesses.
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Despite
our marketing efforts, we may not be able to promote and maintain our brand in an effective and cost-efficient way and our business
and results of operations may be harmed accordingly.
We
believe that developing and maintaining awareness of our brand and business effectively is critical to attracting new and retaining
existing clients. Successful promotion of our brand and our ability to attract quality clients depends largely on the effectiveness
of our marketing efforts and the success of the channels we use to promote our services. As such, we have entered into a marketing
and promotion agreement with a network advertising and promotion company in the PRC to promote our products and platform. Despite
our marketing efforts, it is likely that our future marketing efforts will require us to incur significant additional expenses.
These efforts may not result in increased revenues in the immediate future or at all and, even if they do, any increases in revenues
may not offset the expenses incurred. If we fail to successfully promote and maintain our brand while incurring substantial expenses,
our results of operations and financial condition would be adversely affected, which may impair our ability to grow our business.
From time-to-time
we may evaluate and potentially consummate strategic investments or acquisitions, which could require significant management attention,
disrupt our business and adversely affect our financial results.
We
may evaluate and consider strategic investments, combinations, acquisitions or alliances to further increase the value of our
marketplace and better serve our customers. These transactions could be material to our financial condition and results of operations
if consummated. If we are able to identify an appropriate business opportunity, we may not be able to successfully consummate
the transaction and, even if we do consummate such a transaction, we may be unable to obtain the benefits or avoid the difficulties
and risks of such transaction.
Strategic
investments or acquisitions will involve risks commonly encountered in business relationships, including:
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difficulties in
assimilating and integrating the operations, personnel, systems, data, technologies, products and services of the acquired
business;
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inability of the
acquired technologies, products or businesses to achieve expected levels of revenue, profitability, productivity or other
benefits;
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difficulties in
retaining, training, motivating and integrating key personnel;
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diversion of management’s
time and resources from our normal daily operations;
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difficulties in
successfully incorporating licensed or acquired technology and rights into our platform and products;
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difficulties in
maintaining uniform standards, controls, procedures and policies within the combined organizations;
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difficulties in
retaining relationships with customers, employees and suppliers of the acquired business;
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risks of entering
markets in which we have limited or no prior experience;
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regulatory risks,
including remaining in good standing with existing regulatory bodies or receiving any necessary pre-closing or post-closing
approvals, as well as being subject to new regulators with oversight over an acquired business;
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assumption of contractual
obligations that contain terms that are not beneficial to us, require us to license or waive intellectual property rights
or increase our risk for liability;
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failure to successfully
further develop the acquired technology;
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liability for activities
of the acquired business before the acquisition, including intellectual property infringement claims, violations of laws,
commercial disputes, tax liabilities and other known and unknown liabilities;
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potential disruptions
to our ongoing businesses; and
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unexpected costs
and unknown risks and liabilities associated with strategic investments or acquisitions.
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We
may not make any investments or acquisitions, or any future investments or acquisitions may not be successful, may not benefit
our business strategy, may not generate sufficient revenues to offset the associated acquisition costs or may not otherwise result
in the intended benefits. In addition, we cannot assure you that any future investment in or acquisition of new businesses or
technology will lead to the successful development of new or enhanced our existing products and services or that any new or enhanced
products and services, if developed, will achieve market acceptance or prove to be profitable.
Our
business depends on the continued efforts of our senior management. If one or more of our key executives were unable or unwilling
to continue in their present positions, our business may be severely disrupted.
Our
business operations depend on the continued services of our senior management, particularly the executive officers named in this
report. While we have the ability to provide different incentives to our management, we cannot assure you that we can continue
to retain their services. If one or more of our key executives were unable or unwilling to continue in their present positions,
we may not be able to replace them easily or at all, our future growth may be constrained, our business may be severely disrupted
and our financial condition and results of operations may be materially and adversely affected, and we may incur additional expenses
to recruit, train and retain qualified personnel. In addition, although we have entered into confidentiality and non-competition
agreements with our management, there is no assurance that any member of our management team will not join our competitors or
form a competing business. If any dispute arises between our current or former officers and us, we may have to incur substantial
costs and expenses in order to enforce such agreements in China or we may be unable to enforce them at all.
If
the basic salary of certain employees fails to meet the local minimum salary standard, we may be faced with labor dispute or compensation.
The
remuneration we pay to our employee in general consists of basic salary, subsidy and performance bonus subject to different department.
For marketing staff, a great proportion of their remuneration is the performance bonus. In accordance with the Labor Contract
Law of People’s Republic of China, if the salary paid by the employer to its employee is below the local minimum salary
standard, the labor administrative authorities shall order the employer to pay the shortfall; where payment is not made within
the stipulated period, the employer shall be ordered to pay compensation to the employee based on 50% to 100% of the amount payable.
In principle, each province has its own local minimum standard and the local minimum salary standard is subject to change each
year. Our basic salary has been meeting the current local minimum salary standard. However, we cannot assure you that we can adjust
the employees’ basic salary in time to meet the changing minimum standard. In such case, we may be faced with labor dispute
or compensation.
Competition
for employees is intense, and we may not be able to attract and retain the qualified and skilled employees needed to support our
business.
We
believe our success depends on the efforts and talent of our employees, including risk management, software engineering, information
technology, financial and marketing personnel. Our future success depends on our continued ability to attract, develop, motivate
and retain qualified and skilled employees. Competition for highly skilled marketing, technical, risk management and financial
personnel is extremely intense. We may not be able to hire and retain these personnel at compensation levels consistent with our
existing compensation and salary structure. Some of the companies with which we compete for experienced employees have greater
resources than we have and may be able to offer more attractive terms of employment.
In
addition, we invest significant time and expenses in training our employees, which increases their value to competitors who may
seek to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements,
and the quality of our services and our ability to serve borrowers and lenders could diminish, resulting in a material adverse
effect to our business.
If
we cannot maintain our corporate culture as we grow, we could lose the innovation, collaboration and focus that contribute to
our business.
We
believe that a critical component of our success is our corporate culture, which we believe fosters innovation, encourages teamwork
and cultivates creativity. As we develop the infrastructure of a public company and continue to grow, we may find it difficult
to maintain these valuable aspects of our corporate culture. Any failure to preserve our culture could negatively impact our future
success, including our ability to attract and retain employees, encourage innovation and teamwork and effectively focus on and
pursue our corporate objectives.
We
do not have any business insurance coverage.
Insurance
companies in China currently do not offer as extensive an array of insurance products as insurance companies in more developed
economies. Currently, the Company does not carry any business interruption insurance, product liability insurance or any other
business insurance policies. We have determined that the costs of insuring for these risks and the difficulties associated with
acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. However, as a result
the Company may incur uninsured losses, and any uninsured business disruptions may result in our incurring substantial costs and
the diversion of resources, which could have an adverse effect on our results of operations and financial condition.
We
may have exposure to greater than anticipated tax liabilities.
We
are subject to enterprise income tax, value-added tax, and other taxes in each province and city in China where we have operations.
Our tax structure is subject to review by various local tax authorities. The determination of our provision for income tax and
other tax liabilities requires significant judgment. In the ordinary course of our business, there are many transactions and calculations
where the ultimate tax determination is uncertain. Although we believe our estimates are reasonable, the ultimate decisions by
the relevant tax authorities may differ from the amounts recorded in our financial statements and may materially affect our financial
results in the period or periods for which such determination is made.
We
may be subject to allegations, lawsuits and negative publicity claiming the sale, distribution, marketing and advertising of counterfeit
or substandard products in our retail and wholesale businesses of health and nutritional supplements and cosmetic products.
We
may face charges, litigation and administrative penalties related to the sale, distribution, marketing and advertising of counterfeit
or substandard products in our retail and wholesale businesses of health and nutritional supplements and cosmetic products, which
may damage our brand and reputation and have a significant adverse impact on us. The impact on our business, financial situation,
operating results and business prospects.
Certain
products distributed or sold in the retail and wholesale markets of health and nutritional supplements and cosmetic products in
China may be manufactured without appropriate license or approval, and/or may have fraudulent labelling errors in their content
and/or manufacturer. These products are often referred to as counterfeit or unqualified products.
The
current regulatory control and enforcement system of counterfeit and inferior products in China is not mature enough to completely
eliminate the production and sale of counterfeit products. The selling price of fake and inferior products is usually lower than
that of genuine products. In some cases, the appearance of fake and inferior products is very similar to that of genuine products.
Therefore, the existence of counterfeit products may quickly erode our sales volume and revenue from related products.
In
addition, counterfeit or substandard products may or may have the same chemical composition as genuine products, which may make
them less effective than genuine products, completely ineffective, or more likely to lead to serious side effects. We may not
be able to identify counterfeit or substandard products we purchased from suppliers. Any unintentional or unknowingly sale of
counterfeit or substandard products in our product distribution or retail business, or illegal use of our brand name by third
parties to sell counterfeit or substandard products, may cause negative publicity, fines and other administrative penalties to
us, and even lead to lawsuits related to the sale, marketing and advertising of these products. In addition, the persistence of
counterfeit and inferior products may enhance the overall negative image of distributors and retailers among consumers, and may
seriously damage the reputation and brand of other sellers including us. Similarly, consumers can buy counterfeit and substandard
products that compete directly with those distributed or sold in our retail and wholesale businesses, which may have a significant
negative impact on the sales of related products in our product portfolio and further affect our business, financial situation,
operating results and prospects.
If
counterfeit products are sold on our internet platform, our reputation and financial results could be materially and adversely
affected.
Suppliers
and third-party merchants on our internet platform are separately responsible for sourcing the products that are sold on our internet
platform. Although we have adopted measures to verify the authenticity of products sold on our internet platform and to immediately
remove any counterfeit products found on our internet platform, these measures may not always be successful. Potential sanctions
under PRC law, if we were to negligently participate or assist in infringement activities associated with counterfeit goods, include
injunctions to cease infringing activities, rectification, compensation, administrative penalties and even criminal liability,
depending on the gravity of such misconduct. Furthermore, counterfeit products may be defective or inferior in quality as compared
to authentic products and may pose safety risks to our customers. If our customers are injured by counterfeit products sold on
our internet platform, we may be subject to lawsuits, severe administrative penalties and criminal liability. See “—
We may be subject to product liability claims if our customers are harmed by the products sold on our internet platform.”
We believe our brand and reputation are extremely important to our success and our competitive position. The discovery of counterfeit
products sold on our internet platform may severally damage our reputation and cause customers to refrain from making future purchases
from us, which would materially and adversely affect our business operations and financial results.
We
may be subject to product liability claims if our customers are harmed by the products sold on our internet platform.
We
sell products manufactured by third parties, some of which may be defectively designed or manufactured, of inferior quality or
counterfeit. For example, cosmetic products in general, regardless of their authenticity or quality, may cause allergic reactions
or other illness that may be severe for certain customers. Sales and distributions of products on our internet platform could
expose us to product liability claims relating to personal injury and may require product recalls or other actions. Third parties
that have suffered such injury may bring claims or legal proceedings against us as the retailer of the products or as the marketplace
service provider. Although we would have legal recourse against the manufacturers, suppliers or third-party merchants of such
products under PRC law, attempting to enforce our rights against the manufacturers, suppliers or third-party merchants may be
expensive, time-consuming and ultimately futile. Defective, inferior or counterfeit products or negative publicity as to personal
injury caused by products sold on our platform may adversely affect consumer perceptions of our company or the products we sell,
which could harm our reputation and brand image. In addition, we do not currently maintain any product liability insurance or
third-party liability insurance coverage for the products offered through third-party merchants. As a result, any material product
liability claim or litigation could have a material and adverse effect on our business, financial condition and results of operations.
Even unsuccessful claims could result in the expenditure of funds and managerial efforts in defending them and could have a negative
impact on our reputation.
We
collect, process and use data, some of which contains personal information. Any privacy or data security breach could damage our
reputation and brand and substantially harm our business and results of operations.
As
a technology-based platform, our business generates and processes a large quantity of personal, transaction, behavioral and demographic
data. We face risks inherent in handling and protecting large volumes of data, including protecting the data hosted in our system,
detecting and prohibiting unauthorized data share and transfer, preventing attacks on our system by outside parties or fraudulent
behavior or improper use by our employees, and maintaining and updating our database. Any system failure, security breach or third
parties attacks or attempts to illegally obtain the data that results in any actual or perceived release of user data could damage
our reputation and brand, deter current and potential customers from using our services, damage our business, and expose us to
potential legal liability.
We
also have access to a large amount of confidential information in our day-to-day operations. Each order contains the names, addresses,
phone numbers and other contact information of the sender and recipient of an order placed and delivered through our platforms.
The content of the item delivered may also constitute or reveal confidential information. Although we have data security polices
and measures in place, we cannot assure you that the information will not be misappropriated, as our personnel handle the orders
and have access to the relevant confidential information.
We
are subject to local laws and regulations relating to the collection, use, storage, transfer, disclosure and security of personally
identifiable information with respect to our customers and employees including any requests from regulatory and government authorities
relating to this data. Further, PRC regulators have been increasingly focused on regulation in the areas of data security and
data protection. We expect that these areas will receive greater public scrutiny and attention from regulators, which could increase
our compliance costs and subject us to heightened risks and challenges. If we are unable to manage these risks, we could become
subject to penalties, fines, suspension of business and revocation of required licenses, and our reputation and results of operations
could be materially and adversely affected.
We
may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive
position.
We
regard our trademarks, domain names, know-how, proprietary technologies and similar intellectual property as critical to our success,
and we rely on a combination of intellectual property laws and contractual arrangements, including confidentiality agreements
with all our employees and officers as well as non-compete agreements with our executive officers to protect our proprietary rights.
Thus, we cannot assure you that any of our intellectual property rights would not be challenged, invalidated, circumvented or
misappropriated, or that such intellectual property will be sufficient to provide us with competitive advantages. In addition,
because of the rapid pace of technological change in our industry, parts of our business rely on technologies developed or licensed
by third parties, and we may not be able to obtain or continue to obtain licenses and technologies from these third parties on
reasonable terms, or at all and we might have to invest on research and development on our own technologies in such areas.
It
is often difficult to register, maintain and enforce intellectual property rights in China. Statutory laws and regulations are
subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory
interpretation. Confidentiality, invention assignment and non-compete agreements may be breached by counterparties, and there
may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual
property rights or to enforce our contractual rights in China. Preventing any unauthorized use of our intellectual property is
difficult and costly and the steps we take may be inadequate to prevent the misappropriation of our intellectual property. In
the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial
costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation.
In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors.
To the extent that our employees or consultants use intellectual property owned by others in their work for us, disputes may arise
as to the rights in related know-how and inventions. Any failure in protecting or enforcing our intellectual property rights could
have a material adverse effect on our business, financial condition and results of operations.
We
may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and
operations.
We
cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks,
patents, copyrights, know-how or other intellectual property rights held by third parties. We have in the past and may in the
future be subject to legal proceedings and claims relating to the intellectual property rights of others. For example, in 2018
Shanghai Juhao was sued by an individual for copyright infringement for the use Shanghai Juhao’s logo. Although the case
was dismissed by the court as Shanghai Juhao had already registered its logo/drawing as its trademark before the plaintiff registered
her drawing for copyright, there is no guarantee that there will not be any other similar lawsuits brought against us in the future.
In addition, there may be third-party trademarks, patents, copyrights, know-how or other intellectual property rights
that are infringed by our products, services or other aspects of our business without our awareness. Holders of such intellectual
property rights may seek to enforce such intellectual property rights against us in China, the United States or other jurisdictions.
If any third-party infringement claims are brought against us, we may be forced to divert management’s time and other resources
from our business and operations to defend against these claims, regardless of their merits.
Additionally,
the application and interpretation of China’s intellectual property right laws and the procedures and standards for granting
trademarks, patents, copyrights, know-how or other intellectual property rights in China are still evolving and are uncertain,
and we cannot assure you that PRC courts or regulatory authorities would agree with our analysis. If we were found to have violated
the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibited
from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. As a result,
our business and results of operations may be materially and adversely affected.
We
face risks related to health epidemics, severe weather conditions and other outbreaks.
In
recent years, there have been outbreaks of epidemics in various countries, including China. Recently, there was an outbreak of
a novel strain of coronavirus (COVID-19) in China at the end of 2019, which has spread rapidly to many parts of the world, including
the U.S. In March 2020, the World Health Organization declared COVID-19 a pandemic. The epidemic has resulted in quarantines,
travel restrictions, and the temporary closure of office buildings and facilities in China and in the U.S.
Substantially
all of our revenues and our sales are concentrated in China. Consequently, our results of operations have been and may continuously
be adversely affected to the extent that the COVID-19 outbreak or any other epidemic harm the Chinese and global economy. Any
potential impact to our results will depend on, to a large extent, future developments and new information that may emerge regarding
the duration and severity of the COVID-19 outbreak and the actions taken by government authorities and other entities to contain
the COVID-19 outbreak or treat its impact, almost all of which are beyond our control. Potential impacts include, but are not
limited to, the following:
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temporary closure
of offices, travel restrictions or suspension of shipment of our products to our customers Our suppliers have been negatively
affected during the outbreak, and could continue to be negatively affected, which could have an effect on their ability to
supply and ship products to us if there is a resurgence of COVID-19 in China;
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our customers that
are negatively impacted by the outbreak of COVID-19 may reduce their budgets to purchase our products, which may materially
adversely impact our revenue;
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our customers may
require additional time to pay us or fail to pay us at all, which could significantly increase the amount of accounts receivable
and require us to record additional allowances for doubtful accounts. We have provided significant sales incentives to our
customers and distributors during the outbreak and may continue to provide such incentives in the future, which may in turn
materially adversely affect our financial condition and operating results;
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the business operations
of our authorized physical stores and distributors have been negatively impacted by the outbreak and could continue
to be negatively impacted if there is any resurgence of COVID-19 in China, which may negatively impact their purchase of our
products and our distribution channel, or result in loss of customers and business, which may in turn materially adversely
affect our financial condition and operating results;
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any disruption of
our supply chain, logistics providers, customers or our marketing activities could adversely impact our business and results
of operations, including causing our suppliers to cease manufacturing products for a period of time or materially delay delivery
to us and customers, which may also lead to loss of customers, as well as reputational, competitive and business harm to us;
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many of our customers,
authorized store owners, distributors, suppliers and other partners are individuals and small and medium-sized enterprises
(SMEs), which may not have strong cash flows or be well capitalized, and may be vulnerable to an epidemic outbreak and slowing
macroeconomic conditions. If the SMEs that we work with cannot weather the COVID-19 outbreak and the resulting economic impact,
or cannot resume business as usual after a prolonged outbreak, our revenues and business operations may be materially and
adversely impacted;
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the global stock
markets have experienced, and may continue to experience, significant decline from the COVID-19 outbreak, which could materially
adversely affect our stock price and ability to seek financing from capital market.
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Because
of the uncertainty surrounding the COVID-19 outbreak, the financial impact related to the outbreak of and response to the coronavirus
cannot be reasonably estimated at this time, our consolidated results for the year 2021 may be adversely affected.
In
general, our business could be adversely affected by the effects of epidemics, including, but not limited to, COVID-19, avian
influenza, severe acute respiratory syndrome (SARS), the influenza A virus, Ebola virus, severe weather conditions such as a snowstorm,
flood or hazardous air pollution, or other outbreaks. In response to an epidemic, severe weather conditions, or other outbreaks,
government and other organizations may adopt regulations and policies that could lead to severe disruption to our daily operations,
including temporary closure of our offices and other facilities. These severe conditions may cause us and/or our partners to make
internal adjustments, including but not limited to, temporarily closing down business, limiting business hours, and setting restrictions
on travel and/or visits with clients and partners for a prolonged period of time. Various impact arising from a severe condition
may cause business disruption, resulting in material, adverse impact to our financial condition and results of operations.
The
relative lack of public company experience of our management team may put us at a competitive disadvantage.
Our
management team lacks public company experience, which could impair our ability to comply with legal and regulatory requirements
such as those imposed by the Sarbanes-Oxley Act of 2002, (“Sarbanes-Oxley”). Our senior management does not have much
experience managing a publicly-traded company. Such responsibilities include complying with federal securities laws and making
required disclosures on a timely basis. Our senior management may be unable to implement programs and policies in an effective
and timely manner or that adequately respond 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.
Risks
Related to Our Corporate Structure
If
the PRC government deems that the contractual arrangements in relation to our consolidated variable interest entities do not comply
with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation
of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests
in those operations.
Foreign
ownership of internet-based businesses, including value-added telecommunications services, is subject to restrictions under current
PRC laws and regulations. For example, foreign investors are generally not allowed to own more than 50% of the equity interests
in a value-added telecommunication service provider (except for the e-commerce business) and any such foreign investor must have
experience in providing value-added telecommunications services overseas and maintain a good track record in accordance with the
Foreign Investment Entry Clearance Negative List, promulgated in 2019, or the Negative List, and the Guidance Catalog of Industries
for Foreign Investment promulgated in 2007, as amended in 2015, 2017, 2019 and 2020, or the Catalog and other applicable laws
and regulations. As provided for under the Negative List and the Guidance Catalog, “e-commerce business” is
an exception to the above restriction on foreign investment. However, the above amended Catalog does not define the “e-commerce
business,” and its interpretation and enforcement involve significant uncertainties, therefore, we cannot assure you that
whether our online retail business and distribution of online information falls into the “e-commerce business” and
thus, whether we are permitted to conduct our value-added telecommunication services in the PRC through our subsidiaries in which
foreign investors own more than 50% of equity interests.
We
are a Cayman Islands exempted company with limited liability and our PRC subsidiary is considered a foreign invested enterprise.
To comply with PRC laws and regulations, we conduct our operations in China through a series of contractual arrangements entered
into among WFOE, our VIE and the shareholders of our VIE. As a result of these contractual arrangements, we exert control over
our VIE and consolidate its operating results in our financial statements under U.S. GAAP. For a detailed description of these
contractual arrangements, see “4.C. Organizational Structure - Variable Interest Entity Arrangements.”
In
the opinion of our PRC counsel, Yunnan Kangsi Law Firm, our current ownership structure, the ownership structure of our PRC subsidiary
and our consolidated VIE, and the contractual arrangements among WFOE, our VIE and the shareholders of our VIE are common practices
for the companies listed on stock exchanges in Hong Kong or the U.S. engaging in the businesses on Negative List in China and
these contractual arrangements are valid and binding in accordance with their terms and applicable PRC laws and regulations currently
in effect. However, Yunnan Kangsi Law Firm has also advised us that there are substantial uncertainties regarding the interpretation
and application of current or future PRC laws and regulations and there can be no assurance that the PRC government will ultimately
take a view that is consistent with the opinion of our PRC counsel.
If
the PRC government finds that our contractual arrangements do not comply with its restrictions on foreign investment in the value-added
telecommunication service business, the relevant PRC regulatory authorities, including the China Securities Regulatory Commission
(CSRC), would have broad discretion in dealing with such violations or failures, including, without limitation:
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discontinuing or
placing restrictions or onerous conditions on our operations;
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imposing fines,
confiscating the income from the WFOE or our VIE, or imposing other requirements with which we or our VIE may not be able
to comply;
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requiring us to
restructure our ownership structure or operations, including terminating the contractual arrangements with our VIE and deregistering
the equity pledges of our VIE, which in turn would affect our ability to consolidate, derive economic interests from, or exert
effective control over our VIE;
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restricting or prohibiting
our use of the proceeds of foreign offerings to finance our business and operations in China; or
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taking other regulatory
or enforcement actions that could be harmful to our business.
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The
imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our business. In
addition, it is unclear what impact the PRC government actions would have on us and on our ability to consolidate the financial
results of our VIE in our consolidated financial statements, if the PRC government authorities were to find our VIE structure
and contractual arrangements to be in violation of PRC laws and regulations. If the imposition of any of these government actions
causes us to lose our right to direct the activities of our VIE or our right to receive substantially all of the economic benefits
and residual returns from our VIE and we are not able to restructure our ownership structure and operations in a satisfactory
manner, we would no longer be able to consolidate the financial results of our VIE in our consolidated financial statements. Either
of these results, or any other significant penalties that might be imposed on us in this event, would have a material adverse
effect on our financial condition and results of operations.
We
rely on contractual arrangements with our VIE and the shareholders of our VIE for our business operations, which may not be as
effective as direct ownership in providing operational control.
We
have relied and expect to continue to rely on contractual arrangements with our VIE, Shanghai Juhao, to operate our platform.
These contractual arrangements may not be as effective as direct ownership in providing us with control over our consolidated
variable interest entities. For example, our consolidated variable interest entities and their shareholders could breach their
contractual arrangements with us by, among other things, failing to conduct their operations, including maintaining our website
and using the domain names and trademarks, in an acceptable manner or taking other actions that are detrimental to our interests.
If
we had direct ownership of our VIE, we would be able to exercise our rights as a shareholder to effect changes in the board of
directors of our VIE, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management
and operational level. However, under the current contractual arrangements, we rely on the performance by our consolidated variable
interest entities and their shareholders of their obligations under the contracts to exercise control over our consolidated variable
interest entities. The shareholders of our consolidated variable interest entities may not act in the best interests of our company
or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate
our business through the contractual arrangements with our consolidated variable interest entities. Although we have the right
to replace any shareholder of our consolidated variable interest entities under the contractual arrangement, if any shareholder
of our consolidated variable interest entities is uncooperative or any dispute relating to these contracts remains unresolved,
we will have to enforce our rights under these contracts through the operations of PRC laws and arbitration, litigation and other
legal proceedings and therefore will be subject to uncertainties in the PRC legal system. See “Risk Factors—Any
failure by our consolidated variable interest entities or its shareholders to perform their obligations under our contractual
arrangements with them would have a material adverse effect on our business.” Therefore, our contractual arrangements
with our consolidated variable interest entities may not be as effective in ensuring our control over the relevant portion of
our business operations as direct ownership would be.
Any
failure by our consolidated VIE or their shareholders to perform their obligations under our contractual arrangements with them
would have a material adverse effect on our business.
If
our consolidated VIE or its shareholders fail to perform their respective obligations under the contractual arrangements, we may
have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal
remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure
you will be effective under PRC laws. For example, if the shareholders of our VIE were to refuse to transfer their equity interest
in the VIE to us or our designee if we exercise the purchase option pursuant to these contractual arrangements, or if they were
otherwise to act in bad faith toward us, then we may have to take legal action to compel them to perform their contractual obligations.
All
the agreements under our contractual arrangements are governed by PRC laws and provide for the resolution of disputes through
arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be
resolved in accordance with PRC legal procedures. The legal system in the PRC is not as well established as in some other jurisdictions,
such as in the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual
arrangements. Meanwhile, there are some regulations unfavorable to VIEs. However, despite there are very few precedents and little
formal guidance as to how contractual arrangements in the context of a consolidated variable interest entity should be interpreted
or enforced under PRC laws and there remain significant uncertainties regarding the ultimate outcome of such arbitration should
legal action become necessary. Currently, almost all of the Chinese companies listed on overseas stock exchanges and are in the
internet-based business such as e-commerce or online-gaming have adopted a VIE structure. In addition, under PRC laws, rulings
by arbitrators are final and parties cannot appeal arbitration results in court unless such rulings are revoked or determined
unenforceable by a competent court. If the losing parties fail to carry out the arbitration awards within a prescribed time limit,
the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings,
which would require additional expenses and delay. In the event that we are unable to enforce these contractual arrangements,
or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be
able to exert effective control over our consolidated variable interest entities, and our ability to conduct our business may
be negatively affected. See “Risk Factors—Risks Related to Doing Business in China—Uncertainties in the interpretation
and enforcement of Chinese laws and regulations could limit the legal protections available to you and us.”
The
shareholders of our consolidated VIE may have potential conflicts of interest with us, which may materially and adversely affect
our business and financial condition.
The
shareholders of Shanghai Juhao and their interests in Shanghai Juhao may differ from their interests of our Company as a whole.
These shareholders may breach, or cause our consolidated variable interest entities to breach, the existing contractual arrangements
we have with them and our consolidated variable interest entities, which would have a material adverse effect on our ability to
effectively control our consolidated variable interest entities and receive economic benefits from them. For example, the shareholders
may be able to cause our agreements with Shanghai Juhao to be performed in a manner adverse to us by, among other things, failing
to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of
interest arise, any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved
in our favor.
Currently,
we do not have any arrangements to address potential conflicts of interest between these shareholders and our company, except
that we could exercise our purchase option under the exclusive option agreements with these shareholders to request them to transfer
all of their equity interests in Shanghai Juhao to a PRC entity or individual designated by us, to the extent permitted by PRC
laws. If we cannot resolve any conflict of interest or dispute between us and the shareholders of Shanghai Juhao, we would have
to rely on legal proceedings, which could result in the disruption of our business and subject us to substantial uncertainty as
to the outcome of any such legal proceedings.
If
the custodians or authorized users of our controlling non-tangible assets, including chops and seals of our VIE, fail to fulfill
their responsibilities, or misappropriate or misuse these assets, our business and operations may be materially and adversely
affected.
Under
PRC law, legal documents for corporate transactions, including agreements and contracts that our business relies on, are executed
using the chop or seal of the signing entity or with the signature of a legal representative whose designation is registered and
filed with the relevant local branch of the State Administration for Market Regulation (“SAMR”), formerly known as
the State Administration for Industry and Commerce. We generally execute legal documents by affixing chops or seals, rather than
having the designated legal representatives sign the documents.
We
use two major types of chops: corporate chops and finance chops. Chops are seals or stamps used by a PRC company to legally authorize
documents, often in place of a signature. We use corporate chops generally for documents to be submitted to government agencies,
such as applications for changing business scope, directors or company name, and for legal letters. We use finance chops generally
for making and collecting payments, including issuing invoices. Use of corporate chops must be approved by department manager
and office of the president, and use of finance chops must be approved by our finance department. The chops of our subsidiary
and consolidated VIE are generally held by the relevant entities so that documents can be executed locally. Although we usually
utilize chops to execute contracts, the registered legal representatives of our subsidiary and consolidated VIE have the apparent
authority to enter into contracts on behalf of such entities without chops, unless such contracts set forth otherwise.
In
order to maintain the physical security of our chops, we generally have them stored in secured locations accessible only to the
designated key employees of the office of the president or finance departments. Our designated legal representatives generally
do not have access to the chops. Although we have approval procedures in place and monitor our key employees, including the designated
legal representatives of our subsidiary and consolidated VIE, the procedures may not be sufficient to prevent all instances of
abuse or negligence. There is a risk that our key employees or designated legal representatives could abuse their authority, for
example, by binding our subsidiary and consolidated VIE with contracts against our interests, as we would be obligated to honor
these contracts if the other contracting party acts in good faith in reliance on the apparent authority of our chops or signatures
of our legal representatives. If any designated legal representative obtains control of the chop in an effort to obtain control
over the relevant entity, we would need to have a shareholder or board resolution to designate a new legal representative to take
legal action to seek the return of the chop, apply for a new chop with the relevant authorities, or otherwise seek legal remedies
for the legal representative’s misconduct. If any of the designated legal representatives obtains and misuses or misappropriates
our chops and seals or other controlling intangible assets for whatever reason, we could experience disruption to our normal business
operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve the matter,
while distracting management from our operations, and our business operations may be materially and adversely affected.
Contractual
arrangements in relation to our consolidated variable interest entities may be subject to scrutiny by the PRC tax authorities
and they may determine that we or our PRC consolidated variable interest entities owe additional taxes, which could negatively
affect our financial condition and the value of your investment.
Under
applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge
by the PRC tax authorities within ten years after the taxable year when the transactions are conducted. The PRC enterprise income
tax law requires every enterprise in China to submit its annual enterprise income tax return together with a report on transactions
with its related parties to the relevant tax authorities. The tax authorities may impose reasonable adjustments on taxation if
they have identified any related party transactions that are inconsistent with arm’s length principles. We may face material
and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements between WFOE, our wholly-owned
subsidiary in China, our consolidated VIE in China, and the shareholders of our VIE were not entered into on an arm’s length
basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and
adjust our VIE’s income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things,
result in a reduction of expense deductions recorded by our VIE for PRC tax purposes, which could in turn increase its tax liabilities
without reducing WFOE’s tax expenses. In addition, if WFOE requests the shareholders of our VIE to transfer their equity
interests in the VIE at nominal or no value pursuant to these contractual arrangements, such transfer could be viewed as a gift
and subject our WFOE and VIE to PRC income tax. Furthermore, the PRC tax authorities may impose late payment fees and other penalties
on our VIE for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially
and adversely affected if our consolidated variable interest entities’ tax liabilities increase or if it is required to
pay late payment fees and other penalties.
We
may lose the ability to use and enjoy assets held by our consolidated VIE that are material to the operation of our business if
the entities go bankrupt or become subject to a dissolution or liquidation proceeding.
Our
consolidated VIE holds certain assets that are material to the operation of our business, including domain names, software and
equipment for the online platform. Under the contractual arrangements, our consolidated VIE may not and their shareholders may
not cause it to, in any manner, sell, transfer, mortgage or dispose of its assets or its legal or beneficial interests in the
business without our prior consent. However, in the event the shareholders of our consolidated VIE breach the contractual arrangements
and voluntarily liquidate our consolidated VIE or our consolidated VIE declare bankruptcy and all or part of its assets become
subject to liens or rights of third-party creditors, or are otherwise disposed of without our consent, we may be unable to continue
some or all of our business activities, which could materially and adversely affect our business, financial condition and results
of operations. If our consolidated VIE undergoes a voluntary or involuntary liquidation proceeding, independent third-party creditors
may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially
and adversely affect our business, financial condition and results of operations.
Risks
Related to Doing Business in China
Changes
in China’s economic, political or social conditions or government policies could have a material adverse effect on our business
and results of operations.
The
operations of the Company are located in the PRC. Accordingly, the Company’s business, financial condition, and results
of operations may be influenced by the political, economic, and legal environments in the PRC, in addition to the general state
of the PRC economy. The Company’s results may be adversely affected by changes in the political and social conditions in
the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion
and remittance abroad, and rates and methods of taxation, among other things.
The
Company’s sales, purchases and expense transactions are denominated in RMB, and all of the Company’s assets and liabilities
are also denominated in RMB. The RMB is not freely convertible into foreign currencies under the current law. In China, foreign
exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by
the People’s Bank of China, the central bank of China. Remittances in currencies other than RMB may require certain supporting
documentation in order to affect the remittance.
The
Chinese economy differs from the economies of most developed countries in many respects, including the amount of government involvement,
level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has
implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive
assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets
in China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating
industry development by imposing industrial policies. The Chinese government also exercises significant control over China’s
economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary
policy, and providing preferential treatment to particular industries or companies.
While
the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and
among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and
guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect
on us. For example, our financial condition and results of operations may be adversely affected by government control over capital
investments or changes in tax regulations. In addition, in the past the Chinese government has implemented certain measures, including
interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity in China,
and since 2012, China’s economic growth has slowed down. Any prolonged slowdown in the Chinese economy may reduce the demand
for our products and services and materially and adversely affect our business and results of operations.
Increases
in labor costs in the PRC may adversely affect our business and results of operations.
The
economy in China has experienced increases in inflation and labor costs in recent years. As a result, average wages in the PRC
are expected to continue to increase. In addition, we are required by PRC laws and regulations to pay various statutory employee
benefits, including pension, housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity
insurance to designated government agencies for the benefit of our employees. The relevant government agencies may examine whether
an employer has made adequate payments to the statutory employee benefits, and those employers who fail to make adequate payments
may be subject to late payment fees, fines and/or other penalties. We expect that our labor costs, including wages and employee
benefits, will continue to increase. Unless we are able to control our labor costs or pass on these increased labor costs to our
users by increasing the fees of our services, our financial condition and results of operations may be adversely affected.
Uncertainties
with respect to the PRC legal system could adversely affect us.
The
PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the
civil law system may be cited for reference but have limited precedential value.
In
1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general.
The overall effect of legislation over the past three decades has significantly enhanced the protection afforded to various forms
of foreign investments in China. However, 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. In particular, the interpretation and enforcement
of these laws and regulations involve uncertainties. Since PRC administrative and court authorities have significant discretion
in interpreting and implementing statutory provisions and contractual terms, it may be difficult to evaluate the outcome of administrative
and court proceedings and the level of legal protection we enjoy. These uncertainties may affect our judgment on the relevance
of legal requirements and our ability to enforce our contractual rights or tort claims. In addition, the regulatory uncertainties
may be exploited through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us.
In
addition, any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of
resources and management attention.
Uncertainties
in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to us.
The
PRC legal system is based on written statutes and prior court decisions have limited value as precedents. Since these laws and
regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations
and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties.
In
particular, PRC laws and regulations concerning the valued added telecom service and online retail industry are developing and
evolving. Although we have taken measures to comply with the laws and regulations that are applicable to our business operations,
and avoid conducting any activities that may be deemed as illegal under the current applicable laws and regulations, the PRC government
authority may promulgate new laws and regulations regulating the valued added telecom service and online retail industry in the
future. Even though we are at present fully licensed to conduct our business, we cannot assure you that any new laws or regulations
which require new certifications will not be passed in the future and we might not be able to obtain such new certifications to
continuously conduct our business as we currently do. Moreover, developments in valued added telecom service and online retail
may lead to changes in PRC laws, regulations and policies or in the interpretation and application of existing laws, regulations
and policies that may limit or restrict online retail for health and nutritional supplements and cosmetic products like us, which
could materially and adversely affect our business and operations. Furthermore, we cannot rule out the possibility that the PRC
government will institute a licensing regime covering our industry at some point in the future. If such a licensing regime were
introduced, we cannot assure you that we would be able to obtain any newly required license in a timely manner, or at all, which
could materially and adversely affect our business and impede our ability to continue our operations.
From
time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative
and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be
more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than
in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules.
As a result, we may not be able to keep ourselves updated with these policies and rules in time. Such uncertainties, including
uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, could
materially and adversely affect our business and impede our ability to continue our operations.
Because
we are a Cayman Islands corporation and all of our business is conducted in the PRC, you may be unable to bring an action against
us or our officers and directors or to enforce any judgment you may obtain. It may also be difficult for you or overseas regulators
to conduct investigations or collect evidence within China.
We
are incorporated in the Cayman Islands and conduct our operations primarily in China. All of our assets are located outside of
the United States. In addition, majority of our directors and officers reside outside of the United States. As a result, it may
be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event
that you believe we have violated your rights, either under United States federal or state securities laws or otherwise, or if
you have a claim against us. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and
of China may not permit you to enforce a judgment against our assets or the assets of our directors and officers.
It
may also be difficult for you or overseas regulators to conduct investigations or collect evidence within China. For example,
in China, there are significant legal and other obstacles to obtaining information needed for shareholder investigations or litigation
outside China or otherwise with respect to foreign entities. Although the authorities in China may establish a regulatory cooperation
mechanism with its counterparts of another country or region to monitor and oversee cross-border securities activities, such regulatory
cooperation with the securities regulatory authorities in the Unities States may not be efficient in the absence of practical
cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, or “Article 177,” which became
effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection
activities within the territory of the PRC. Article 177 further provides that Chinese entities and individuals are not allowed
to provide documents or materials related to securities business activities to foreign agencies without prior consent from the
securities regulatory authority of the PRC State Council and the competent departments of the PRC State Council. While detailed
interpretation of or implementing rules under Article 177 have yet to be promulgated, the inability for an overseas securities
regulator to directly conduct investigation or evidence collection activities within China may further increase difficulties faced
by you in protecting your interests.
Recent
joint statement by the SEC and the Public Company Accounting Oversight Board (United States), or the “PCAOB,” proposed
rule changes submitted by Nasdaq, the newly enacted Holding Foreign Companies Accountable Act all call for additional and
more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially
the non-U.S. auditors who are not inspected by the PCAOB.
On
April 21, 2020, SEC Chairman Jay Clayton and PCAOB Chairman William D. Duhnke III, along with other senior SEC staff, released
a joint statement highlighting the risks associated with investing in companies based in or have substantial operations in emerging
markets including China. The joint statement emphasized the risks associated with lack of access for the PCAOB to inspect auditors
and audit work papers in China and higher risks of fraud in emerging markets.
On
May 18, 2020, Nasdaq filed three proposals with the SEC to (i) apply minimum offering size requirement for companies primarily
operating in “Restrictive Market,” (ii) adopt a new requirement relating to the qualification of management or board
of director for Restrictive Market companies, and (iii) apply additional and more stringent criteria to an applicant or listed
company based on the qualifications of the company’s auditor.
On
June 4, 2020, the U.S. President issued a memorandum ordering the President’s working group on financial markets to submit
a report to the President within 60 days of the date of the memorandum that should include recommendations for actions that can
be taken by the executive branch and by the SEC or PCAOB to enforce U.S. regulatory requirements on Chinese companies listed on
U.S. stock exchanges and their audit firms. However, it remains unclear what further actions, if any, the U.S. executive branch,
the SEC, and PCAOB will take to address the problem.
On
August 6, 2020, the President’s working group released a report recommending that the SEC take steps to implement the five
recommendations outlined in the report. In particular, to address companies from jurisdictions that do not provide the PCAOB with
sufficient access to fulfill its statutory mandate, the President’s working group recommended enhanced listing standards
on U.S. stock exchanges. This would require, as a condition to initial and continued exchange listing, PCAOB access to work papers
of the principal audit firm for the audit of the listed company. Companies unable to satisfy this standard as a result of governmental
restrictions on access to audit work papers and practices in their jurisdiction may satisfy this standard by providing a co-audit
from an audit firm with comparable resources and experience where the PCAOB determines it has sufficient access to audit work
papers and practices to conduct an appropriate inspection of the co-audit firm. The report permits the new listing standards to
provide for a transition period until January 1, 2022 for listed companies, but would apply immediately to new listings once the
necessary rulemakings and/or standard-setting are effective.
On
August 10, 2020, the SEC announced that the SEC Chairman had directed the SEC staff to prepare proposals in response to the report
of the President’s working group, and that the SEC was soliciting public comments and information with respect to the development
of these proposals.
On
May 20, 2020, the U.S. Senate passed S. 945, the Holding Foreign Companies Accountable Act, or the Act. The Act was approved
by the U.S. House of Representatives on December 2, 2020. On December 18, 2020, the Act was signed into public law by the President
of the United States. In essence, the Act requires the SEC to prohibit foreign companies from listing securities on U.S. securities
exchanges if a company retains a foreign accounting firm that cannot be inspected by the PCAOB for three consecutive years, beginning
in 2021. On March 24, 2021, SEC announced it has adopted interim final amendments to implement congressionally mandated submission
and disclosure requirements of the Act. The interim final amendments will apply to registrants that the SEC identifies as
having filed an annual report on Forms 10-K, 20-F, 40-F or N-CSR with an audit report issued by a registered public accounting
firm that is located in a foreign jurisdiction and that the PCAOB has determined it is unable to inspect or investigate completely
because of a position taken by an authority in that jurisdiction.
The
enactment of the Act and any additional actions, proceedings, or new rules resulting from these efforts to increase U.S. regulatory
access to audit information could cause investors uncertainty for affected issuers and the market price of our Ordinary Shares
could be adversely affected, and we could be delisted if we and our auditor are unable to meet the PCAOB inspection requirement.
The
lack of access to the PCAOB inspection in China prevents the PCAOB from fully evaluating audits and quality control procedures
of the auditors based in China. As a result, investors may be deprived of the benefits of such PCAOB inspections. The inability
of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of these accounting
firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB
inspections.
Our
auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this report, as
an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws
in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional
standards. Our auditor is headquartered in Manhattan, New York, and has been inspected by the PCAOB on a regular basis with the
last inspection in June 2018 and an ongoing inspection that started in October 2020. However, the recent developments would add
uncertainties to our listing and trading on Nasdaq and we cannot assure you whether Nasdaq or regulatory authorities would apply
additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality
control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach, or experience as it relates
to our audit.
Substantial
uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law and how it may impact
the viability of our current corporate structure, corporate governance and business operations.
On
March 15, 2019, the National People’s Congress, or the NPC, approved the Foreign Investment Law, which has taken effect
on January 1, 2020 and replaced the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity
Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-owned Enterprise
Law, together with their implementation rules and ancillary regulations. The Foreign Investment Law embodies an expected PRC regulatory
trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative
efforts to unify the corporate legal requirements for both foreign and domestic investments. However, since it is relatively new,
uncertainties still exist in relation to its interpretation and implementation. For instance, under the Foreign Investment Law,
“foreign investment” refers to the investment activities directly or indirectly conducted by foreign individuals,
enterprises or other entities in China. Though it does not explicitly classify contractual arrangements as a form of foreign investment,
there is no assurance that foreign investment through contractual arrangements would not be interpreted as a type of indirect
foreign investment activity under the definition in the future. In addition, the definition contains a catch-all provision which
includes investments made by foreign investors through means stipulated in laws or administrative regulations or other methods
prescribed by the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions promulgated
by the State Council to provide for contractual arrangements as a form of foreign investment. In any of these cases, it will be
uncertain whether our contractual arrangements will be deemed to be in violation of the market access requirements for foreign
investment under the PRC laws and regulations. Furthermore, if future laws, administrative regulations or provisions prescribed
by the State Council mandate further actions to be taken by companies with respect to existing contractual arrangements, we may
face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely
and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely
affect our current corporate structure, corporate governance and business operations.
We
may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies,
and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our
business and results of operations.
The
PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and permit requirements
pertaining to, companies in the internet industry. These internet-related laws and regulations are relatively new and evolving,
and their interpretation and enforcement involve significant uncertainties. As a result, in certain circumstances it may be difficult
to determine what actions or omissions may be deemed to be in violation of applicable laws and regulations.
We
only have contractual control over our website. We do not directly own the website due to the restriction of foreign investment
in businesses providing value-added telecommunication services (VATS) in China, including internet information provision services.
This may significantly disrupt our business, subject us to sanctions, compromise enforceability of related contractual arrangements,
or have other harmful effects on us.
The
evolving PRC regulatory system for the internet industry may lead to the establishment of new regulatory agencies. For example,
in May 2011, the State Council announced the establishment of a new department, the State Internet Information Office (with the
involvement of the State Council Information Office, Ministry of Industry and Information Technology (“MIIT”),
and the Ministry of Public Security). The primary role of this new agency is to facilitate policy-making and legislative development
in this field, to direct and coordinate with the relevant departments in connection with online content administration, and to
deal with cross-ministry regulatory matters in relation to the internet industry.
Our
online platform, operated by our VIE Shanghai Juhao, may be deemed to be providing commercial internet content-related services
and online data processing and transaction processing services, which would require Shanghai Juhao to obtain an Electronic Data
Interchange (EDI) License. Each of EDI License is under the category of value-added telecommunications business operating licenses,
or VATS License. The Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunications
Business, issued by the MIIT in July 2006, prohibits domestic telecommunications service providers from leasing, transferring
or selling telecommunications business operating licenses to any foreign investor in any form, or providing any resources, sites
or facilities to any foreign investor for their illegal operation of a telecommunications business in China. The circular also
requires each license holder to have the necessary facilities, including servers, for its approved business operations and to
maintain such facilities in the regions covered by its license. According to the recent practice in China, if any commercial internet
content-related service or online data processing and transaction processing service is to be carried out via mobile apps, such
mobile apps are required to be registered on the VATS License of the operator of such mobile apps. Our Juhao mobile app has been
registered on the VATS License held by Shanghai Juhao. However, Shanghai Juhao did not apply for a value-added telecommunications
business license until 2017 as its business operations were small and service fees generated by third party stores was immaterial
for the Company. Although our PRC counsel believes that it is unlikely such operation without appropriate license will be considered
as a material violation of the applicable regulation and that the possibility that the Company be penalized is remote due to the
immaterial amount generated from the valued-added telecommunication business, if there is any enforcement action by government
agencies due to such violation which affects our eligibility of existing license or future license application, it may significantly
disrupt our business, subject us to sanctions, enforcement, or have other harmful effects on our operation and financial conditions.
The
interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating
to the internet industry have created substantial uncertainties regarding the legality of existing and future foreign investments
in, and the businesses and activities of, internet businesses in China, including our business. Although we believe that we currently
have obtained necessary license to practice our business, we cannot assure you that we will be always able to meet all of requirements
in the future to renew the permits or licenses required for conducting our business in China or will be able to maintain our existing
licenses or obtain new ones.
We
rely on dividends and other distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we
may have, and any limitation on the ability of our PRC subsidiary to make payments to us could have a material adverse effect
on our ability to conduct our business.
We
are a holding company, and we rely on dividends and other distributions on equity paid by our PRC subsidiary for our cash and
financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service
any debt we may incur. If our PRC subsidiary incurs debt on its own behalf in the future, the instruments governing the debt may
restrict its ability to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require our
WFOE to adjust its taxable income under the contractual arrangements it currently has in place with our consolidated variable
interest entities in a manner that would materially and adversely affect its ability to pay dividends and other distributions
to us. See “Risk Factors—Risks Related to Our Corporate Structure—Contractual arrangements in relation to
our consolidated variable interest entities may be subject to scrutiny by the PRC tax authorities and they may determine that
we or our PRC consolidated variable interest entity owe additional taxes, which could negatively affect our financial condition
and the value of your investment.”
Under
PRC laws and regulations, our PRC subsidiary, as a wholly foreign-owned enterprise in China, may pay dividends only out of its
accumulated after-tax profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly
foreign-owned enterprise is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund
certain statutory reserve funds, until the aggregate amount of such funds reaches 50% of its registered capital. At its discretion,
a wholly foreign-owned enterprise may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare
and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.
Any
limitation on the ability of our PRC subsidiary to pay dividends or make other distributions to us could materially and adversely
limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise
fund and conduct our business. See also “Risk Factors —If we are classified as a PRC resident enterprise for PRC
income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.”
PRC
regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency
conversion may delay or prevent us from using the proceeds of our offerings and financings in the U.S. to make loans to or make
additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability
to fund and expand our business.
We
are an offshore holding company conducting our operations in China through our PRC subsidiaries and our VIE. We may make loans
to our PRC subsidiaries and VIE subject to the approval from governmental authorities and limitation of amount, or we may make
additional capital contributions to our wholly foreign-owned subsidiaries in China.
Any
loans to our wholly foreign-owned subsidiaries in China, which are treated as foreign-invested enterprises under PRC law, are
subject to PRC regulations and foreign exchange loan registrations. For example, loans by us to our wholly foreign-owned subsidiaries
in China to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of the State
Administration of Foreign Exchange, or SAFE. In addition, a foreign invested enterprise shall use its capital pursuant to the
principle of authenticity and self-use within its business scope. The capital of a foreign invested enterprise shall not be used
for the following purposes: (i) directly or indirectly used for payment beyond the business scope of the enterprises or the
payment prohibited by relevant laws and regulations; (ii) directly or indirectly used for investment in securities or investments
other than banks’ principal-secured products unless otherwise provided by relevant laws and regulations; (iii) the
granting of loans to non-affiliated enterprises, except where it is expressly permitted in the business license; and (iv) paying
the expenses related to the purchase of real estate that is not for self-use (except for the foreign-invested real estate enterprises).
SAFE
promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement
of Capital of Foreign-invested Enterprises, or SAFE Circular 19, effective June 2015, in replacement of the Circular on the Relevant
Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of
Foreign-Invested Enterprises, the Notice from the State Administration of Foreign Exchange on Relevant Issues Concerning Strengthening
the Administration of Foreign Exchange Businesses, and the Circular on Further Clarification and Regulation of the Issues Concerning
the Administration of Certain Capital Account Foreign Exchange Businesses. According to SAFE Circular 19, the flow and use of
the RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company is regulated such
that RMB capital may not be used for the issuance of RMB entrusted loans, the repayment of inter-enterprise loans or the repayment
of banks loans that have been transferred to a third party. Although SAFE Circular 19 allows RMB capital converted from foreign
currency-denominated registered capital of a foreign-invested enterprise to be used for equity investments within China, it also
reiterates the principle that RMB converted from the foreign currency-denominated capital of a foreign-invested company may not
be directly or indirectly used for purposes beyond its business scope. Thus, it is unclear whether SAFE will permit such capital
to be used for equity investments in China in actual practice. SAFE promulgated the Notice of the State Administration of Foreign
Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or SAFE Circular
16, effective on June 9, 2016, which reiterates some of the rules set forth in SAFE Circular 19, but changes the prohibition
against using RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue
RMB entrusted loans to a prohibition against using such capital to issue loans to non-associated enterprises. Violations of SAFE
Circular 19 and SAFE Circular 16 could result in administrative penalties. SAFE Circular 19 and SAFE Circular 16 may significantly
limit our ability to transfer any foreign currency we hold to our PRC subsidiaries, which may adversely affect our liquidity and
our ability to fund and expand our business in China.
In
light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding
companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary
government approvals on a timely basis, if at all, with respect to future loans to our PRC subsidiaries or VIE or future capital
contributions by us to our wholly foreign-owned subsidiaries in China. As a result, uncertainties exist as to our ability to provide
prompt financial support to our PRC subsidiaries or VIE when needed. If we fail to complete such registrations or obtain such
approvals, our ability to use the funds that we raise outside of China to capitalize or otherwise fund our PRC operations may
be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
Fluctuations
in exchange rates could have a material adverse effect on our results of operations and the value of your investment.
Substantially
all of our revenues and expenditures are denominated in RMB, whereas our reporting currency is the U.S. dollar. As a result, fluctuations
in the exchange rate between the U.S. dollar and RMB will affect the relative purchasing power in RMB terms of our U.S. dollar
assets and the proceeds from offerings in the U.S. Our reporting currency is the U.S. dollar while the functional currency for
our PRC subsidiary and consolidated variable interest entity is RMB. Gains and losses from the remeasurement of assets and liabilities
that are receivable or payable in RMB are included in our consolidated statements of operations. The remeasurement has caused
the U.S. dollar value of our results of operations to vary with exchange rate fluctuations, and the U.S. dollar value of our results
of operations will continue to vary with exchange rate fluctuations. A fluctuation in the value of RMB relative to the U.S. dollar
could reduce our profits from operations and the translated value of our net assets when reported in U.S. dollars in our financial
statements. This could have a negative impact on our business, financial condition or results of operations as reported in U.S.
dollars. If we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our Ordinary Shares
or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar
amount available to us. In addition, fluctuations in currencies relative to the periods in which the earnings are generated may
make it more difficult to perform period-to-period comparisons of our reported results of operations.
There
remains significant international pressure on the PRC government to adopt a flexible currency policy. Any significant appreciation
or depreciation of the RMB may materially and adversely affect our revenues, earnings and financial position, and the value of,
and any dividends payable on, our Ordinary Shares in U.S. dollars. For example, to the extent that we need to convert U.S. dollars
we receive from offerings in the U.S. into RMB to pay our operating expenses, appreciation of the RMB against the U.S. dollar
would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, a significant depreciation of
the RMB against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely
affect the market price of our Ordinary Shares.
Very
limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered
into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter
into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able
to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control
regulations that restrict our ability to convert RMB into foreign currency. As a result, fluctuations in exchange rates may have
a material adverse effect on your investment.
Governmental
control of currency conversion may limit our ability to utilize our net revenues effectively and affect the value of your investment.
The
PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance
of currency out of China. We receive substantially all of our net revenues in RMB. Under our current corporate structure, our
company in the Cayman Islands relies on dividend payments from our PRC subsidiary to fund any cash and financing requirements
we may have. Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions
and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE
by complying with certain procedural requirements. Therefore, our PRC subsidiary is able to pay dividends in foreign currencies
to us without prior approval from SAFE, subject to the condition that the remittance of such dividends outside of the PRC complies
with certain procedures under PRC foreign exchange regulation, such as the overseas investment registrations by the beneficial
owners of our company who are PRC residents. But 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
loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign
currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign
currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders.
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.
As of the date of this report, we believe that we have made adequate employee benefit payments. If we fail to make adequate payments
in the future, we may be required to make up the contributions for these plans. If we fail to make or supplement contributions
of social security premiums within the stipulated period, the social security premiums collection agency may enquire into the
deposit accounts of the employer with banks and other financial institutions. In an extreme situation, where we failed to contribute
social security premiums in full amount and do not provide guarantee, the social security premiums collection agency may apply
to a Chinese court for seizure, foreclosure or auction of our properties of value equivalent to the amount of social security
premiums payable, and the proceeds from auction shall be used for contribution of social security premiums. If we are subject
to deposit, seizure, foreclosure or auction in relation to the underpaid employee benefits, our financial condition and results
of operations may be adversely affected.
The
approval of the China Securities Regulatory Commission may be required under a regulation adopted in August 2006, as amended,
and, if required, we cannot predict whether we will be able to obtain such approval.
The
Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory
agencies in August 2006 and amended in 2009, requires an overseas special purpose vehicle formed for listing purposes through
acquisitions of PRC domestic companies and controlled by PRC companies or individuals to obtain the approval of the China Securities
Regulatory Commission, or the CSRC, prior to the listing and trading of such special purpose vehicle’s securities on an
overseas stock exchange. In September 2006, the CSRC published a notice on its official website specifying documents and materials
required to be submitted to it by a special purpose vehicle seeking CSRC approval of its overseas listings. The application of
the M&A Rules remains unclear.
Our
PRC counsel, Yunnan Kangsi Law Firm, has advised us based on their understanding of the current PRC laws, rules and regulations
that the M&A Rules is not applicable to our listing and trading of our Ordinary Shares on the NASDAQ, given that:
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we established our
PRC subsidiary, WFOE, by means of direct investment rather than by merger with or acquisition of PRC domestic companies; and
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no explicit provision
in the M&A Rules classifies the respective contractual arrangements among WFOE and Shanghai Juhao, and their respective
shareholders as a type of acquisition transaction falling under the M&A Rules.
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Also,
our PRC counsel has advised us that since the M&A Rules became effective, many Chinese companies have adopted VIE structure
and listed and traded their stocks on the NASDAQ, and none of them has been required to obtain such approval.
However,
there remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the context of any overseas offering
and the CSRC’s opinions summarized above are subject to any new laws, rules and regulations or detailed implementations
and interpretations in any form relating to the M&A Rules. We cannot assure you that relevant PRC government agencies, including
the CSRC, would reach the same conclusion as we do. If the CSRC or any other PRC regulatory agencies subsequently determines that
we need to obtain the CSRC’s approval or if the CSRC or any other PRC government agencies promulgates any interpretation
or implements rules that would require us to obtain CSRC or other governmental approvals, we may face adverse actions or sanctions
by the CSRC or other PRC regulatory agencies. Sanctions may include fines and penalties on our operations in the PRC, limitations
on our operating privileges in the PRC, delays in or restrictions on the repatriation of the proceeds from the offerings into
the PRC, restrictions on or prohibition of the payments or remittance of dividends by our PRC subsidiary, or other actions that
could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as
well as the trading price of our Ordinary Shares. In addition, if the CSRC or other PRC regulatory agencies later promulgate new
rules or explanations requiring that we obtain their approvals, we may be unable to obtain a waiver of such approval requirements,
if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such approval
requirement could have a material adverse effect on the trading price of Ordinary Shares.
The
M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign
investors, which could make it more difficult for us to pursue growth through acquisitions in China.
The
M&A Rules discussed in the preceding risk factor and some other regulations and rules concerning mergers and acquisitions
established additional procedures and requirements that could make merger and acquisition activities 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 domestic enterprise. Moreover, the Anti-Monopoly Law requires that
MOFCOM be notified in advance of any concentration of undertaking if certain thresholds are triggered. In addition, the security
review rules issued by MOFCOM that became effective in September 2011 specify that mergers and acquisitions by foreign investors
that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may
acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review
by MOFCOM, and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction
through a proxy or contractual control arrangement. In the future, we may grow our business by acquiring complementary businesses.
Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could
be time consuming, and any required approval processes, including obtaining approval from MOFCOM or its local counterparts may
delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain
our market share.
PRC
regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiary’s ability to increase
its registered capital or distribute profits to us or otherwise expose us or our PRC resident beneficial owners to liability and
penalties under PRC law.
SAFE
promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment
through Special Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register with SAFE
or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas
investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special
purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or
residents, name, and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers
or divisions. SAFE Circular 37 is issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for
PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75. SAFE
promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment
in February 2015, which took effect on June 1, 2015. This notice has amended SAFE Circular 37 requiring PRC residents or entities
to register with qualified banks rather than SAFE or its local branch in connection with their establishment or control of an
offshore entity established for the purpose of overseas investment or financing.
If
our shareholders who are PRC residents or entities do not complete their registration as required, our PRC subsidiary may be prohibited
from distributing its profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted
in our ability to contribute additional capital to our PRC subsidiary.
Our
major shareholders have completed the initial registrations with the local SAFE branch or qualified banks as required by SAFE
Circular 37. To our knowledge, certain of our minority shareholders of the Company who are also PRC resident individual shareholders
have not completed their SAFE Circular 37 registration yet. Also, we may not be informed of the identities of all the PRC residents
holding direct or indirect interest in our company, and we cannot provide any assurance that these PRC residents will comply with
our request to make or obtain any applicable registrations or continuously comply with all requirements under SAFE Circular 37
or other related rules. The failure or inability of the relevant shareholders to comply with the registration procedures set forth
in these regulations may subject us to fines and legal sanctions, such as restrictions on our cross-border investment activities,
on the ability of our wholly foreign-owned subsidiaries in China to distribute dividends and the proceeds from any reduction in
capital, share transfer or liquidation to us. Moreover, failure to comply with the various foreign exchange registration requirements
described above could result in liability under PRC law for circumventing applicable foreign exchange restrictions. As a result,
our business operations and our ability to distribute profits to you could be materially and adversely affected.
Any
failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject
the PRC plan participants or us to fines and other legal or administrative sanctions.
In
February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals
Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, replacing earlier rules promulgated in March 2007.
Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year
who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required
to register with SAFE through a domestic qualified agent, which could be the PRC subsidiary of such overseas listed company, and
complete certain other procedures. In addition, an overseas entrusted institution must be retained to handle matters in connection
with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and
other employees who are PRC citizens or who have resided in the PRC for a continuous period of not less than one year will be
subject to these regulations when our company becomes an overseas listed company. Failure to complete the SAFE registrations may
subject them to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiary
and limit our PRC subsidiary’s ability to distribute dividends to us. We also face regulatory uncertainties that could restrict
our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law. See “4.B.
Regulation—Regulations on Stock Incentive Plans.”
If
we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax
consequences to us and our non-PRC shareholders.
Under
the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with a “de
facto management body” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax
on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the
body that exercises full and substantial control over and overall management of the business, productions, personnel, accounts
and properties of an enterprise. In April 2009, the State Administration of Taxation issued a circular, known as 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 this circular only applies to offshore enterprises controlled
by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners like us, the criteria set forth
in the circular may reflect the State Administration of Taxation’s general position on how the “de facto management
body” test should be applied in determining the tax resident status of all offshore enterprises. According to Circular 82,
an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident
by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its
global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management
is in the PRC; (ii) 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; (iii) the enterprise’s primary assets, accounting books and records,
company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting
board members or senior executives habitually reside in the PRC.
We believe none of our entities outside of China
is a PRC resident enterprise for PRC tax purposes. See “10.E. Taxation—People’s Republic of China Taxation.”
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, which could materially reduce 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.
Regulatory
bodies of the United States may be limited in their ability to conduct investigations or inspections of our operations in China.
From
time to time, the Company may receive requests from certain U.S. agencies to investigate or inspect the Company’s operations,
or to otherwise provide information. While the Company will be compliant with these requests from these regulators, there is no
guarantee that such requests will be honored by those entities who provide services to us or with whom we associate, especially
as those entities are located in China. Furthermore, an on-site inspection of our facilities by any of these regulators may be
limited or entirely prohibited. Such inspections, though permitted by the Company and its affiliates, are subject to the unpredictability
of the Chinese enforcers, and may therefore be impossible to facilitate.
We
face uncertainty regarding the PRC tax reporting obligations and consequences for certain indirect transfers of our operating
company’s equity interests. Enhanced scrutiny over acquisition transactions by the PRC tax authorities may have a negative
impact on potential acquisitions we may pursue in the future.
The
PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of certain taxable assets, including, in
particular, equity interests in a PRC resident enterprise, by a non-resident enterprise by promulgating and implementing SAT Circular
59 and Circular 698, which became effective in January 2008, and a Circular 7 in replacement of some of the existing rules in
Circular 698, which became effective in February 2015.
Under
Circular 698, where a non-resident enterprise conducts an “indirect transfer” by transferring the equity interests
of a PRC “resident enterprise” indirectly by disposing of the equity interests of an overseas holding company, the
non-resident enterprise, being the transferor, may be subject to PRC enterprise income tax, if the indirect transfer is considered
to be an abusive use of company structure without reasonable commercial purposes. As a result, gains derived from such indirect
transfer may be subject to PRC tax at a rate of up to 10%. Circular 698 also provides that, where a non-PRC resident enterprise
transfers its equity interests in a PRC resident enterprise to its related parties at a price lower than the fair market value,
the relevant tax authority has the power to make a reasonable adjustment to the taxable income of the transaction.
In
February 2015, the SAT issued Circular 7 to replace the rules relating to indirect transfers in Circular 698. Circular 7 has introduced
a new tax regime that is significantly different from that under Circular 698. Circular 7 extends its tax jurisdiction to not
only indirect transfers set forth under Circular 698 but also transactions involving transfer of other taxable assets, through
the offshore transfer of a foreign intermediate holding company. In addition, Circular 7 provides clearer criteria than Circular
698 on how to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the
purchase and sale of equity through a public securities market. Circular 7 also brings challenges to both the foreign transferor
and transferee (or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise
conducts an “indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests
of an overseas holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity which directly
owned the taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form”
principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial
purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect
transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer
is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident
enterprise.
On
October 17, 2017, the SAT promulgated the Bulletin of SAT on Issues Concerning the Withholding of Non-resident Enterprise Income
Tax at Source (“Bulletin 37”), which became effective on December 1, 2017, and Circular 698 was then replaced effective
December 1, 2017. Bulletin 37, among other things, simplified procedures of withholding and payment of income tax levied on non-resident
enterprises.
We
face uncertainties on the reporting and consequences on future private equity financing transactions, share exchange or other
transactions involving the transfer of shares in our company by investors that are non-PRC resident enterprises. The PRC
tax authorities may pursue such non-resident enterprises with respect to a filing or the transferees with respect to withholding
obligation, and request our PRC subsidiaries to assist in the filing. As a result, we and non-resident enterprises in such transactions
may become at risk of being subject to filing obligations or being taxed, under Circular 59 or Circular 7 and Bulletin 37, and
may be required to expend valuable resources to comply with Circular 59, Circular 7 and Bulletin 37 or to establish that we and
our non-resident enterprises should not be taxed under these circulars, which may have a material adverse effect on our financial
condition and results of operations.
The
PRC tax authorities have the discretion under SAT Circular 59, Circular 7 and Bulletin 37 to make adjustments to the taxable capital
gains based on the difference between the fair value of the taxable assets transferred and the cost of investment. We may pursue
acquisitions in China or elsewhere in the world in the future that may involve complex corporate structures. If we are considered
a non-resident enterprise under the PRC Enterprise Income Tax Law and if the PRC tax authorities make adjustments to the taxable
income of the transactions under SAT Circular 59 or Circular 7 and Bulletin 37, our income tax costs associated with such potential
acquisitions will be increased, which may have an adverse effect on our financial condition and results of operations.
In
addition, in accordance with the Individual Income Tax Law promulgated by the Standing Committee of NPC, later amended on August
31, 2018 and effective on January 1, 2019, where an individual carries out other arrangements without reasonable business purpose
and obtains improper tax gains, the tax authorities shall have the right to make tax adjustments based on a reasonable method,
and levy additional tax and collect interest if there is a need to levy additional tax after making tax adjustments. As a result,
our beneficial owners, who are PRC residents, may be deemed to have carried out other arrangements without reasonable business
purpose and obtained improper tax gains for such indirect transfer, and thus be levied tax.
Risks
Related to Our Ordinary Shares
Our
dual-class share structure with different voting rights will limit your ability to influence corporate matters and could discourage
others from pursuing any change of control transactions that holders of our Ordinary Shares may view as beneficial.
We
have adopted a dual-class share structure such that our shares consist of Ordinary Shares and Preferred Shares. In respect of
matters requiring the votes of shareholders, each ordinary share is entitled to one vote and each Preferred Share is entitled
to two (2) votes. The Preferred Shares may be converted into Ordinary Shares by its holder.
We
have authorized 50,000,000 Preferred Shares and our Chairman and Chief Executive Officer Mr. Zhiwei Xu, through Jowell Holdings
Ltd. beneficially owns all of the 750,000 issued and outstanding Preferred Shares.
As
a result of this dual-class share structure, the holder of our Preferred Shares will have concentrated control over the outcome
of matters put to a vote of shareholders and have significant influence over our business, including decisions regarding mergers,
consolidations, liquidations and the sale of all or substantially all of our assets, election of directors and other significant
corporate actions. The holder of Preferred Shares may take actions that are not in the best interest of us or our other shareholders.
This concentration of ownership may discourage, delay or prevent a change in control of our company, which could have the effect
of depriving our other shareholders of the opportunity to receive a premium for their shares as part of a sale of our company
and may reduce the price of the ordinary share. This concentrated control will limit your ability to influence corporate matters
and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders
of Ordinary Shares may view as beneficial.
Our
Ordinary Shares may be thinly traded and you may be unable to sell at or near ask prices or at all if you need to sell your shares
to raise money or otherwise desire to liquidate your shares.
While
our Ordinary Shares are trading on NASDAQ, our Ordinary Shares may be “thinly-traded”, meaning that the number of
persons interested in purchasing our Ordinary Shares at or near bid prices at any given time may be relatively small or non-existent.
This situation may be attributable to a number of factors, including the fact that we are relatively unknown to stock analysts,
stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that
even if we came to the attention of such persons, they tend to be risk-averse and might be reluctant to follow an unproven company
such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned. As a consequence,
there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a
seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an
adverse effect on share price. A broad or active public trading market for our Ordinary Shares may not develop or be sustained.
If
securities or industry analysts do not publish research or reports about our business, or if the publish a negative report regarding
our Ordinary Shares, the price of our Ordinary Shares and trading volume could decline.
Any
trading market for our Ordinary Shares may depend in part on the research and reports that industry or securities analysts publish
about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade
us, the price of our Ordinary Shares would likely decline. If one or more of these analysts cease coverage of our company or fail
to regularly publish reports on us, we could lose visibility in the financial markets, which could cause the price of our Ordinary
Shares and the trading volume to decline.
The
market price for our Ordinary Shares may be volatile.
The
trading price of our Ordinary Shares may be volatile and could fluctuate widely due to factors beyond our control. This may happen
because of the broad market and industry factors, like the performance and fluctuation of the market prices of other companies
with business operations located mainly in China that have listed their securities in the United States. A number of Chinese companies
have listed or are in the process of listing their securities on U.S. stock markets. The securities of some of these companies
have experienced significant volatility, including price declines after their initial public offerings. The trading performances
of these Chinese companies’ securities after their offerings may affect the attitudes of investors toward Chinese companies
listed in the United States in general and consequently may impact the trading performance of our Ordinary Shares, regardless
of our actual operating performance.
The
market price for our Ordinary Shares may be volatile and subject to wide fluctuations due to factors such as:
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the perception of
U.S. investors and regulators of U.S. listed Chinese companies;
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actual or anticipated
fluctuations in our operating results;
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changes in financial
estimates by securities research analysts;
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negative publicity,
studies or reports;
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conditions in Chinese
online retail and e-commerce for health and nutritional supplements and cosmetic products markets;
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our capability to
catch up with the technology innovations in the industry;
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changes in the economic
performance or market valuations of other online retail and e-commerce for health and nutritional supplements and cosmetic
products companies;
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announcements by
us or our competitors of acquisitions, strategic partnerships, joint ventures or capital commitments;
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addition or departure
of key personnel;
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fluctuations of
exchange rates between RMB and the U.S. dollar; and
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general economic
or political conditions in China.
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In addition, the securities market has from time-to-time
experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These
market fluctuations may also materially and adversely affect the market price of our Ordinary Shares.
Volatility
in our ordinary share price may subject us to securities litigation.
The
market for our Ordinary Shares may have, when compared to seasoned issuers, significant price volatility and we expect that our
share price may continue to be more volatile than that of a seasoned issuer for the indefinite future. In the past, plaintiffs
have often initiated securities class action litigation against a company following periods of volatility in the market price
of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial
costs and liabilities and could divert management’s attention and resources.
In
order to raise sufficient funds to enhance operations, we may have to issue additional securities at prices which may result in
substantial dilution to our shareholders.
If
we raise additional funds through the sale of equity or convertible debt, our current shareholders’ percentage ownership
will be reduced. In addition, these transactions may dilute the value of Ordinary Shares outstanding. We may have to issue securities
that may have rights, preferences and privileges senior to our Ordinary Shares. We cannot provide assurance that we will be able
to raise additional funds on terms acceptable to us, if at all. If future financing is not available or is not available on acceptable
terms, we may not be able to fund our future needs, which would have a material adverse effect on our business plans, prospects,
results of operations and financial condition.
We
are not likely to pay cash dividends in the foreseeable future.
We
currently intend to retain any future earnings for use in the operation and expansion of our business. Accordingly, we do not
expect to pay any cash dividends in the foreseeable future, but will review this policy as circumstances dictate. Should we determine
to pay dividends in the future, our ability to do so will depend upon the receipt of dividends or other payments from WFOE. WFOE
may, from time to time, be subject to restrictions on its ability to make distributions to us, including restrictions on the conversion
of RMB into U.S. dollars or other hard currency, and other regulatory restrictions.
You
may face difficulties in protecting your interests as a shareholder, as Cayman Islands law provides substantially less protection
when compared to the laws of the United States and it may be difficult for a shareholder of ours to effect service of process
or to enforce judgements obtained in the United States courts.
Our
corporate affairs are governed by our current memorandum and articles of association and by the Companies Act (2021 Revision)
and common law of the Cayman Islands. The rights of shareholders to take legal action against our directors and us, actions by
minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent
governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited
judicial precedent in the Cayman Islands as well as from English common law. Decisions of the Privy Council (which is the final
court of appeal for British overseas territories such as the Cayman Islands) are binding on a court in the Cayman Islands. Decisions
of the English courts, and particularly the Supreme Court of the United Kingdom and the Court of Appeal are generally of persuasive
authority but are not binding on the courts of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities
of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents
in the United States. In particular, the Cayman Islands has a less developed body of securities laws as compared to the United
States, and provide significantly less protection to investors. In addition, Cayman Islands companies may not have standing to
initiate a shareholder derivative action before the United States federal courts. The Cayman Islands courts are also unlikely
to impose liabilities against us in original actions brought in the Cayman Islands, based on certain civil liability provisions
of United States securities laws.
Currently,
all of our operations are conducted outside the United States, and substantially all of our assets are located outside the United
States. A majority of our directors and officers are nationals or residents of jurisdictions other than the United States and
a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder
to effect service of process within the United States upon these persons, or to enforce against us or them judgments obtained
in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United
States or any state in the United States.
As
a result of all of the above, our shareholders may have more difficulty in protecting their interests through actions against
us or our officers, directors or major shareholders than would shareholders of a corporation incorporated in a jurisdiction in
the United States.
We
are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions
applicable to United States domestic public companies.
We
are a foreign private issuer within the meaning of the rules under the Exchange Act. As such, we are exempt from certain provisions
applicable to United States domestic public companies. For example:
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we are not required
to provide as many Exchange Act reports, or as frequently, as a domestic public company;
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for interim reporting,
we are permitted to comply solely with our home country requirements, which are less rigorous than the rules that apply to
domestic public companies;
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we are not required
to provide the same level of disclosure on certain issues, such as executive compensation;
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we are exempt from
provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information;
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we are not required
to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect
of a security registered under the Exchange Act; and
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we are not required
to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their share ownership and trading
activities and establishing insider liability for profits realized from any “short-swing” trading transaction.
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We
are required to file an annual report on Form 20-F within four months of the end of each fiscal year. Press releases relating
to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required
to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by
U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to
you were you investing in a U.S. domestic issuer.
Because
we are a foreign private issuer and are exempt from certain NASDAQ corporate governance standards applicable to U.S. issuers,
you may have less protection than you would have if we were a domestic issuer.
The
Nasdaq Listing Rules require listed companies to have, among other things, a majority of its board members be independent. As
a foreign private issuer, however, we are permitted to follow home country practice in lieu of the above requirements. The Company
currently follows the requirements of the Nasdaq Listing Rules without relying on the exemption provided for foreign private issuers
under Marketplace Rule 5615(a)(3). However, we may choose to rely on such exemption to follow certain corporate governance practices
of our home country practice in the future. The corporate governance practice in our home country, the Cayman Islands, does not
require a majority of our board to consist of independent directors. Thus, although a director must act in the best interests
of the Company, it is possible that fewer board members will be exercising independent judgment and the level of board oversight
on the management of our company may decrease as a result. In addition, the Nasdaq Listing Rules also requires U.S. domestic issuers
to have a compensation committee, a nominating/corporate governance committee composed entirely of independent directors, and
an audit committee with a minimum of three independent directors. We, as a foreign private issuer, are not subject to these requirements.
The Nasdaq Listing Rules may require shareholder approval for certain corporate matters, such as requiring that shareholders be
given the opportunity to vote on all equity compensation plans and material revisions to those plans, certain ordinary share issuances.
We will comply with the requirements of the Nasdaq Listing Rules in determining whether shareholder approval is required on such
matters and have appointed a nominating and corporate governance committee. However, we may consider following home country practice
in lieu of the requirements under the Nasdaq Listing Rules with respect to certain corporate governance standards in the future
which may afford less protection to investors.
Although
as a foreign private issuer we are exempt from certain corporate governance standards applicable to US domestic issuers, if we
cannot satisfy, or continue to satisfy, the listing requirements and other rules of Nasdaq Capital Market, our securities may
not be listed or may be delisted, which could negatively impact the price of our securities and your ability to sell them.
Our
Ordinary Shares are approved for listing on the Nasdaq Capital Market, however, we cannot assure you that they will continue to
be listed on Nasdaq Capital Market.
In
addition, in order to maintain our listing on the Nasdaq Capital Market, we will be required to comply with certain rules the
Nasdaq Capital Market, including those regarding minimum stockholders’ equity, minimum share price, minimum market value
of publicly held shares, and various additional requirements. Even if we initially meet the listing requirements and other applicable
rules of the Nasdaq Capital Market, we may not be able to continue to satisfy these requirements and applicable rules. If we are
unable to satisfy the Nasdaq Capital Market criteria for maintaining our listing, our securities could be subject to delisting.
If
the Nasdaq Capital Market delists our securities from trading, we could face significant consequences, including:
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a limited availability
for market quotations for our securities;
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reduced liquidity
with respect to our securities;
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a determination
that our Ordinary Shares is a “penny stock,” which will require brokers trading in our Ordinary Shares to adhere
to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our
Ordinary Shares;
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limited amount of
news and analyst coverage; and
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a decreased ability
to issue additional securities or obtain additional financing in the future.
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We
are an “emerging growth company” within the meaning of the Securities Act, and if we take advantage of certain exemptions
from disclosure requirements available to emerging growth companies, this could make it more difficult to compare our performance
with other public companies.
We
are an “emerging growth company” within the meaning of the Securities Act, as modified by the JOBS Act. Section 102(b)(1)
of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards
until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not
have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting
standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements
that apply to non-emerging growth companies but any such an election to opt out is irrevocable. We have elected not to opt out
of such extended transition period, which means that when a standard is issued or revised and it has different application dates
for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private
companies adopt the new or revised standard. This may make comparison of our financial statements with another public company
which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition
period difficult or impossible because of the potential differences in accountant standards used.
As
an “emerging growth company” under applicable law, we will be subject to lessened disclosure requirements. Such reduced
disclosure may make our Ordinary Shares less attractive to investors.
For
as long as we remain an “emerging growth company”, as defined in the JOBS Act, we will elect to take advantage of
certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging
growth companies”, including, but not limited to, not being required to comply with the auditor attestation requirements
of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports
and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and
shareholder approval of any golden parachute payments not previously approved. Because of these lessened regulatory
requirements, our shareholders would be left without information or rights available to shareholders of more mature companies.
If some investors find our Ordinary Shares less attractive as a result, there may be a less active trading market for our Ordinary
Shares and our share price may be more volatile.
If
we are classified as a passive foreign investment company, United States taxpayers who own our ordinary shares may have adverse
United States federal income tax consequences.
We
will be a “passive foreign investment company,” or “PFIC,” if, in any particular taxable year, either
(a) 75% or more of our gross income for such year consists of certain types of “passive” income or (b) 50%
or more of the average quarterly value of our assets (as determined on the basis of fair market value) during such year produce
or are held for the production of passive income (the “asset test”). Although the law in this regard is unclear, we
intend to treat our VIE (including its subsidiaries) as being owned by us for U.S. federal income tax purposes, not only because
we exercise effective control over the operation of such entity but also because we are entitled to substantially all of its economic
benefits, and, as a result, we consolidate its results of operations in our consolidated financial statements. Assuming that we
are the owner of our VIE (including its subsidiaries) for U.S. federal income tax purposes, and based upon our current and expected
income and assets, including goodwill, and the value of our ordinary shares, we do not believe that we were a PFIC for the taxable
year ended December 31, 2020 and we do not expect to be a PFIC for the foreseeable future. However, there can be no
assurance that we will not be a PFIC for the current taxable year. In addition, there can be no assurance that we will not be
a PFIC for any future taxable year. PFIC status is a factual determination that must be tested each taxable year and will depend
on the composition of our assets and income in each such taxable year.
We
will be classified as a PFIC for any taxable year if either (i) at least 75% of our gross income for the taxable year is
passive income or (ii) at least 50% of the value of our assets (based on a quarterly value of the assets during the taxable
year) is attributable to assets that produce or are held for the production of passive income. In determining the average percentage
value of our gross assets, the aggregate value of our assets will generally be deemed to be equal to our market capitalization
(determined by the sum of the aggregate values of our outstanding equity) plus our liabilities. Accordingly, we could become a
PFIC if our market capitalization were to decrease significantly while we hold substantial cash, cash equivalents or other assets
that produce or are held for the production of passive income. In addition, because there are uncertainties in the application
of the relevant PFIC rules, it is possible that the Internal Revenue Service, or IRS, may challenge our classification of certain
income and assets as non-passive or our valuation of our tangible and intangible assets, which could result in a determination
that we were a PFIC for the current or subsequent taxable years.
If
we were classified as a PFIC in any taxable year in which a U.S. Holder (as defined in “Item 10. Additional Information—10.E.
Taxation—United States Federal Income Taxation”) holds the ordinary shares, the U.S. Holder would generally be
subject to additional taxes and interest charges on certain “excess” distributions we make and on the gain, if any,
recognized on the disposition or deemed disposition of such U.S. Holder’s ordinary shares, even if we are no longer a PFIC
in the year of distribution or disposition. Moreover, such U.S. Holder would also be subject to special U.S. tax reporting requirements.
For more information on the U.S. tax consequences to U.S. Holders that would result from our classification as a PFIC, see “Item
10. Additional Information—10.E. Taxation—United States federal income taxation—Passive foreign investment company.”
Our
memorandum and articles of association, as amended, contain anti-takeover provisions that could have a material adverse effect
on the rights of holders of our Ordinary Shares.
Our
amended and restated memorandum and articles of association, as amended, contain certain provisions to limit the ability of others
to acquire control of our company or cause us to engage in change-of-control transactions, including a provision that grants authority
to our board of directors to establish and issue from time to time one or more series of preferred shares without action by our
shareholders and to determine, with respect to any series of preferred shares without action by our shareholders, the terms and
rights of that series. These provisions could have the effect of depriving our shareholders to sell their shares at a premium
over the prevailing market price by discouraging third parties from seeking to obtain control of our company in a tender offer
or similar transactions.
Our
board of directors may refuse or delay the registration of the transfer of Ordinary Shares in certain circumstances.
Except
in connection with the settlement of trades or transactions entered into through the facilities of a stock exchange or automated
quotation system on which our Ordinary Shares are listed or traded from time to time, our board of directors may resolve to refuse
or delay the registration of the transfer of our Ordinary Shares. Where our directors do so, they must specify the reason(s) for
this refusal or delay in a resolution of the board of directors. Our directors may also refuse or delay the registration of any
transfer of Ordinary Shares if the transferor has failed to pay an amount due in respect to those Ordinary Shares. If our directors
refuse to register a transfer, they shall, as soon as reasonably practicable, send the transferor and the transferee a notice
of the refusal or delay in the approved form.
This,
however, will not affect market transactions of the Ordinary Shares purchased by investors. Where the Ordinary Shares are listed
on a stock exchange, the Ordinary Shares may be transferred without the need for a written instrument of transfer, if the transfer
is carried out in accordance with the rules of the stock exchange and other requirements applicable to the Ordinary Shares listed
on the stock exchange.
We
will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging
growth company.”
As
a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley
Act of 2002, as well as rules subsequently implemented by the SEC and NASDAQ Capital Market, impose various requirements on the
corporate governance practices of public companies. We are an “emerging growth company,” as defined in the JOBS Act
and will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary
of the completion of our initial public offering, (b) in which we have total annual gross revenue of at least $1.07 billion, or
(c) in which we are deemed to be a large accelerated filer, which means the market value of our Ordinary Shares that is held by
non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion
in non-convertible debt during the prior three-year period. An emerging growth company may take advantage of specified reduced
reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption
from the auditor attestation requirement under Section 404 in the assessment of the emerging growth company’s internal
control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those
standards apply to private companies.
Compliance
with these rules and regulations increases our legal and financial compliance costs and makes some corporate activities more time-consuming
and costly. After we are no longer an “emerging growth company,” or until five years following the completion of our
initial public offering, whichever is earlier, we expect to incur significant expenses and devote substantial management effort
toward ensuring compliance with the requirements of Section 404 and the other rules and regulations of the SEC. For example,
as a public company, we have been required to increase the number of independent directors and adopt policies regarding internal
controls and disclosure controls and procedures. We have incurred additional costs in obtaining director and officer liability
insurance. In addition, we incur additional costs associated with our public company reporting requirements. It may also be more
difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating
and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of
certainty the amount of additional costs we may incur or the timing of such costs.
We
are obligated to develop and maintain proper and effective internal control over financial reporting. We may not complete our
analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined
to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our Ordinary Shares.
We
will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things,
the effectiveness of our internal control over financial reporting for the year ending December 31, 2022, the first fiscal year
beginning after our initial public offering. This assessment will need to include disclosure of any material weaknesses identified
by our management in our internal control over financial reporting and, after we cease to be an “emerging growth company,”
a statement that our independent registered public accounting firm has issued an opinion on our internal control over financial
reporting.
We
are in the early stages of the costly and challenging process of compiling the system and processing documentation necessary to
perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing and any required
remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in
our internal control over financial reporting, we will be unable to assert that our internal controls are effective.
If
we are unable to assert that our internal control over financial reporting is effective, or if, when required, our independent
registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose
investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our Ordinary Shares
to decline, and we may be subject to investigation or sanctions by the SEC.
To
comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal
controls and procedures and hiring accounting or internal audit staff.
At
such time that our independent registered public accounting firm is required to formally attest to the effectiveness of our internal
control over financial reporting, it may issue a report that is adverse in the event it is not satisfied with the level at which
our controls are documented, designed or operating. Our remediation efforts may not enable us to avoid a material weakness in
the future.
Our
Chairman of the Board and Chief Executive Officer will have substantial influence over our company and his interests may not be
aligned with the interests of our other shareholders.
Mr.
Zhiwei Xu, our Chairman and member of our Board of Directors and Chief Executive Officer currently owns 5,341,380 outstanding
Ordinary Shares and 750,000 Preferred Shares (each such Preferred Shares entitles the holder thereof to the rights to votes equal
to two (2) Ordinary Shares) of the Company. As a result of his significant shareholding, Mr. Xu has, and will continue to have,
substantial influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially
all of our assets, election of directors and other significant corporate actions. He may take actions that are not in the best
interests of us or our other shareholders. This concentration of ownership may discourage, delay or prevent a change in control
of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale
of our company and might reduce the market price of our Ordinary Shares. These actions may be taken even if they are opposed by
our other shareholders. For more information regarding our principal shareholders and their affiliated entities, see “Item
6.E., “Share Ownership”.
ITEM
4.
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INFORMATION ON THE COMPANY
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A.
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History
and Development of the Company
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Jowell
Global Ltd. (“Jowell Global” or the “Company”) is an exempted company incorporated in the Cayman Islands
with limited liability on August 16, 2019 as a holding company. The Company, through its consolidated variable interest entity
(“VIE”), engages primarily in the sale of cosmetic products, nutritional supplements, and household products sourced
from third party manufacturers and distributors, and also offers an online marketplace that enables third-party sellers to sell
their products to the Company’s online consumers.
A
reorganization of the Company’s legal structure (“Reorganization”) was completed on November 1, 2019. The Reorganization
involved the incorporation of Jowell Global, a Cayman Islands holding company, Jowell Technology Limited (“Jowell Tech”),
a Hong Kong holding company on June 24, 2019, and Shanghai Jowell Technology Co., Ltd. (“Shanghai Jowell”), a new
wholly foreign-owned entity (“WFOE”) by Jowell Tech under the laws of the People’s Republic of China (“China”
or the “PRC”) on October 15, 2019.
On
October 31, 2019 and November 1, 2019, Shanghai Jowell entered into a series of contractual arrangements with Shanghai Juhao Information
Technology Co., Ltd. (“Shanghai Juhao”) and the shareholders of Shanghai Juhao, as amended on October 10, 2020. These
agreements include: 1) an Exclusive Business Cooperation and Management Agreement; 2) an Equity Interest Pledge Agreement; 3)
an Exclusive Option Agreements 4) Powers of Attorney and 5) Spousal Consent Letters. Pursuant to these agreements, Shanghai Jowell
has the exclusive rights to provide consulting services to Shanghai Juhao related to the business operation and management of
Shanghai Juhao. For such services, Shanghai Juhao agrees to pay service fees determined based on all of its net profit after tax
payments to Shanghai Jowell or Shanghai Jowell has obligation to absorb all of Shanghai Juhao’s losses. The agreements remain
in effect until and unless all parties agree to its termination, except the Exclusive Option Agreement that the effective term
of 10 years and can be renewed for an additional 10 years. Until such termination, Shanghai Juhao may not enter into another agreement
for the provision of management consulting services without the prior consent of Shanghai Jowell. Also, pursuant to the equity
interest pledge agreement between the shareholders of Shanghai Juhao and Shanghai Jowell, such shareholders pledged all of their
equity interests in Shanghai Juhao to Shanghai Jowell, to guarantee Shanghai Juhao’s performance of its obligations under
the Exclusive Business Cooperation and Management Agreement. Without Shanghai Jowell’s prior written consent, the shareholders
of Shanghai Juhao shall not transfer or assign the pledged equity interests, or incur or allow any encumbrance that would jeopardize
Shanghai Jowell’s interests. If Shanghai Juhao breaches its contractual obligations under the aforesaid agreement, Shanghai
Jowell, as the pledgee, will be entitled to certain rights and entitlements, including priority in receiving payments by the evaluation
or proceeds from the auction or sale of all or part of the pledged equity interests of Shanghai Juhao, in accordance with legal
procedures. In essence, Shanghai Jowell has gained effective control over Shanghai Juhao. Therefore, Shanghai Juhao is considered
a VIE under the Statement of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
810 “Consolidation”, because the equity investments in Shanghai Juhao no longer have the characteristics of a controlling
financial interest, and the Company, through Shanghai Jowell, is the primary beneficiary of Shanghai Juhao.
On
November 6, 2020, the Company effected a reverse stock split of its Ordinary Shares at a ratio of 1-for-3 pursuant to which all
existing shareholders of record on that date surrendered an aggregate of 42,298,849 Ordinary Shares, or 66.67% of the then outstanding
Ordinary Shares to the Company for no consideration. The shares surrendered were subsequently cancelled (“Reverse Split”).
We
have adopted a dual-class share structure such that our shares consist of Ordinary Shares and Preferred Shares. In respect of
matters requiring the votes of shareholders, each Ordinary Share is entitled to one (1) vote and each Preferred Share is entitled
to two (2) votes. The Preferred Shares may be converted into Ordinary Shares by its holder at any time at the option of the holder.
We have authorized 50,000,000 Preferred Shares and our Chairman and Chief Executive Officer Mr. Zhiwei Xu, through Jowell Holdings
Ltd., beneficially owns all 750,000 issued and outstanding Preferred Shares and 5,341,380 Ordinary Shares and therefore will have
substantial influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially
all of our assets, election of directors and other significant corporate actions.
The
Company has subsidiaries in countries and jurisdictions including PRC and Hong Kong. Details of the subsidiaries of the Company
are set out below:
Name
of Entity
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Date
of Incorporation
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Place
of Incorporation
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%
of Ownership
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Principal
Activities
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Jowell Tech
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June
24, 2019
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Hong
Kong
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100
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Holding
Company
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Shanghai Jowell
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October 15, 2019
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Shanghai, China
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100
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Holding
Company
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Shanghai Juhao
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July 31, 2012
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Shanghai, China
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0 (VIE)
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Online Retails
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Our
principal executive offices are located at 2nd Floor, No. 285 Jiangpu Road, Yangpu District, Shanghai, China 200082. Our telephone number
at this address is +86-21-5521-01874. Our registered office in the Cayman Islands is located at P.O. Box 31119 Grand Pavilion, Hibiscus
Way, 802 West Bay Road, Grand Cayman, KY1-1205, Cayman Islands. Our agent for service of process in the United States is Cogency Global
Inc. located at 122 East 42nd Street, 18th Floor, New York, NY 10168. Investors should contact us for any inquiries through the address
and telephone number of our principal executive offices.
The
SEC maintains a web site at www.sec.gov that contains reports and other information regarding issuers that file electronically
with the SEC using its EDGAR system.
See
“Item 5. Operating and Financial Review and Prospects — B. Liquidity and Capital Resources — Capital Expenditures”
for a discussion of our capital expenditures.
We
are one of the leading cosmetics, health and nutritional supplements and household products e-commerce platforms in China. We offer our
own brand products to customers and also sell and distribute health and nutritional supplements, cosmetic products and certain household
products from other companies on our platform. In addition, we allow third parties to open their own stores on our platform for a service
fee based upon their sale revenues generated from their online stores and we provide them with our unique and valuable information about
market needs, enabling them to better manage their sales effort, as well as an effective platform to promote their brands. We currently
operate under four sales channels: Online Direct Sales, Authorized Retail Store Distribution, Third-party Merchants and Live streaming
marketing.
Shanghai Juhao started its operation in 2012 and
is among the first group of membership-based online-to-offline cosmetics, health and nutritional supplements and household products e-commerce
platforms in China. Today, we offer an online platform LHH Mall through Shanghai Juhao which holds an EDI (Electronic Data Interchange)
certification approved by the Shanghai Communication Administration pursuant to the requirement of MIIT dated February 1, 2019 valid for
5 years, selling our own brand products manufactured by third parties as well as international and domestic branded products from 200+
manufacturers. As of December 31, 2020, our platform had 1,969,014 VIP members who have registered on our platform, 178 merchants who
have opened their own stores on our platform, and 73.4% of products sold on our platform were cosmetics and health and nutritional supplements.
We also sell household products, such as pots and pans, smartphones, paper towels, cups, vacuum cleaners, massagers and towels on our
platform, and those products account for 26.6 % of the products sold on our platform.
Since August 2017, we have been also selling our
products in our authorized retail stores all across China. Operating under our brand name of “Love Home Store” or “LHH
Store”, the authorized retailers may operate as independent stores or store-in-shop (an integrated store), selling products that
they purchased through our online platform LHH Mall under their special retailer accounts with us which provide them with major discounts.
As of December 31, 2020, we had authorized 24,513 Love Home Stores in 31 provinces of China, providing offline retail of our products.
On April 28, 2021, the Company announced it has
officially launched its “Juhao Best Choice” community group-buying store initiative to continue growing its offline retail
market presence. The community group-buying offline stores will sell fresh produce, foods and daily household consumer products in addition
to the cosmetics and health and nutritional supplements currently sold in the Company’s franchised LHH Stores. The community group-buying
stores aim to provide a more convenient shopping experience and high-quality produce and foods for consumers from local communities, towns
and villages across China. Juhao Best Choice stores will consolidate online and offline resources for store design and logistics services
and provide guidance and trainings for store owners with a unified system for store management, design, service criteria, SKU management
and product delivery. The Company will also provide the store owners with live-streaming marketing skill training and upgrade and expand
certain existing LHH Stores to Juhao Best Choice stores.
We
have relationships with leading cosmetics and health and nutritional supplements manufacturers and distributors in China, which not only
to provide us with high-quality products, but also supply chain services to our platform. By connecting these suppliers/distributors
with our online sales and offline authorized stores, we have created a closed-circle to brings tremendous convenience and cost savings
to our customers.
Through our website at www.1juhao.com and mobile
app, we engage primarily in the sales of cosmetic products, health and nutritional supplements and household products sourced from manufacturers
and distributors in China. Currently, we have three types of revenue streams deriving from our three major product categories: cosmetic
products, health and nutritional supplements and household products. Other than revenue from product sales, we also earn service fees
charged to third-party merchants for using our platform, which was immaterial.
For
the fiscal year ended December 31, 2020, approximately $18.7 million or 19.30% of our revenue were generated from the sales of cosmetic
products, approximately $52.4 million or 54.06% of our revenue were generated from the sales of health and nutritional supplements and
$25.7 million or 26.56% of our revenue were generated from the sales of household products.
For
the fiscal year ended December 31, 2019, approximately $18.47 million or 29.90% of our revenue were generated from the sales of cosmetic
products, approximately $22.67 million or 36.70% of our revenue were generated from the sales of health and nutritional supplements and
$20.63 million or 33.40% of our revenue were generated from the sales of household products.
For
the fiscal year ended December 31, 2018, approximately $11.70 million or 48.35% of our revenue were generated from the sales of cosmetic
products, approximately $5.44 million or 22.47% of our revenue were generated from the sales of health and nutritional supplements and
$7.06 million or 29.17% of our revenue were generated from the sales of household products.
Our
Sales Channels
We
currently utilize four sales formats: Online Direct Sales, Authorized Retail Store Distribution, Third-party Merchants and Live
Streaming Marketing.
Online Direct Sales. The
Online Direct Sales model is mainly selling the products under our own brands or third-party
products on our online shopping mall directly. We purchase these third-party
products directly from manufacturers and suppliers and deliver them to our customers. This model generates the highest profit-margin among
all our sales models.
Authorized Retail Store Distribution.
Authorized Retail Store Distribution refers to our authorized physical retail stores that distributed products all over the country and
they purchase their products from us and distribute them to consumers. Those stores may also use a small program developed by us which
can be used on WeChat to promote products to their WeChat contacts who can place orders to purchase products either from those authorized
stores or from our platform which we provide sale discounts for such orders placed on our platform but directed from our authorized stores. The
material terms of the Love Home Health Franchise Store Contract with such store owners/franchisees include: (i) Shanghai Juhao will provide
training to franchisee, which should pass the examination of Shanghai Juhao to be qualified as an authorized store; (ii) the franchisee
shall obtain the business license, tax registration certificate and other relevant certificates required for operation according to law
at its own costs; (iii) the franchisee shall abide by the rules and policies issued by Shanghai Juhao; (iv) during the term of the agreement,
the franchisee may use Shanghai Juhao’s trademark and service mark and Shanghai Juhao authorizes the franchisee to sell the products
or services of Shanghai Juhao; (v) Shanghai Juhao may inspect the operation of the franchisee from time to time; (vi) during the term
of the agreement, the franchisee’s store structure, internal and external decoration shall comply with the standards set by Shanghai
Juhao; (vii) the franchisee shall purchase the products from Shanghai Juhao for at least RMB 4,000 every two months; (viii) the franchisee
shall sell the products (or provide services) at the price specified by Shanghai Juhao; (ix) the franchisee shall not transfer the operation
right without authorization of Shanghai Juhao, and shall not conduct business beyond its authorized territory (the area within 1.5 km
radius of the address of the franchisee); (x) the franchisee will receive a 20% discount of the retail price of the products sold directly
on the LHH mall members; and (xi) the term of the agreement is usually one year subject to renewal.
Third-party Merchants. We hold an
EDI certificate approved by Shanghai Bureau of Communication Management pursuant to the requirement of the Ministry of Industry and Information
Technology of the People’s Republic of China (“MIIT”), which allows our online shopping mall to accept third-party platforms
and companies to open their stores on our platform and to enrich the product categories of our shopping mall, and give consumers more
choices. The material terms of the Juhao Mall Marketplace and Service Agreement for third party stores in Juhao Mall with such store owners
include: (i) the third party store/merchant is responsible for stores set-up, sales, inventory management, logistics and after-sales services
and Shanghai Juhao will provide assistance and charge relevant service fees; (ii) the merchant is responsible for the sales of its products
on its online store, and the sales price shall be determined by the merchant, but shall not be lower than the minimum price agreed by
the parties; (iii) if the merchant’s customers make payment through Shanghai Juhao’s online platform, Shanghai Juhao is obliged
to pay the received payment to the merchant every month according to the payment method agreed in the agreement; (iv) if the customer
finds that the product has shortage, defective or damage, or the variety, model, specification, color, quantity, shelf life and quality
of the products is inconsistent with the order, he/she may reject the product and the merchant shall timely reissue or replace the product;
(v) the merchant guarantees that the quality of the products it sells has met the national or international standards and met the general
performance and use requirements of such product; (vi) the merchant guarantees to Shanghai Juhao that there is no dispute with any third
party on intellectual property rights and other rights of the products sold on Juhao’s platform; (vii) the merchant shall provide
after-sale service and support for the products that it sold; (viii) Shanghai Juhao charges a fix service fee equals to 5% of the merchant’s
store revenue and will also charge a performance fee between 0-5% based upon the monthly performance of the merchant store, i.e. the higher
the sales reaches, the lower performance fee will apply and it will be no performance fee if the sales reaches RMB 100,000 in such month;
and (ix) the term of the agreement is usually one year subject to renewal.
Live streaming marketing.
We have started to use the most popular online sales model, Live Streaming/Broadcasting Marketing. We train our authorized retail
store owners to become live streamers participating in the live online broadcasting to market and sell products. In addition, we constantly
look for professional multi-channel network (MCN) agencies to work with their Key Opinion Leaders (KOLs) to promote our products through
live streaming on popular channels such as TikTok live, Kuaishou live and Taobao live.
Sales
of Products
We
have adopted three complementary sales formats on our internet platform for health and nutritional supplements, household products
and cosmetics, which are the main products sold in our mall: curated sales, series sales and flash sales, pursuant to which we
either sell products directly to customers as a principal or act as a service provider for third-party merchants who sell products
on our internet platform. We provide our customers with the same shopping experience regardless of whether the products are sold
by us or by third-party merchants.
Curated
sales. We believe the curated sales format embraces value, quality and convenience for our customers and enhances our
trendsetting image. We curate and recommend a carefully selected collection of branded products for a limited period of time at
attractive prices. We carefully select popular cosmetic products that primarily appeal to females. We select and update the products
for curated sales every day.
Series
sales. In addition to the curated sales, we also use our internet platform to produce series sales models that conform
to the trend, festivals and hot topics. We have selected multi category products in line with the theme in the series of topics,
where consumers can compare and purchase through brand, price, scope of application and other parameters. We create topics and
shopping scenes, so as to guide consumers to buy the products here. We collaborate with an extensive range of international and
domestic suppliers and third-party merchants, who offer diversified and branded beauty and health and nutritional supplements.
Flash Sales. Our flash sales format
features virtual stores of selected third-party merchants. Our flash sales products are selected from products sold under our own brand
or third-party merchant products. At least four products are sold with large discount and limited quantity every day. Through the flash
sales, we can increase the attention and stickiness of potential and existing consumers to our platform, and can also promote the products
and reduce the backlog risk for those high inventory products. The third-party merchants need to register and reserve the spots for the
flash sales with us in advance and we will arrange the products to be sold by flash sales according to the recent sales data for various
products and their categories on the platform, so that the selected products can achieve best sales and recognition by the customers.
Products
Offerings
Product
Categories
We
offer high quality and affordable products. The following table illustrates the categories of products we sell on our platform:
Product Category
|
|
Product
Description
|
Health and nutritional supplements and foods
|
|
Products that regulate
immune system, bone health products, beauty and beauty supplements
|
Cosmetics
|
|
Lipstick, foundation,
cream, eyebrow pencil, makeup remover, lip enamel, eye shadow, mascara, eye liner
|
Skin care
|
|
Eye cream, eye mask,
sunscreen cream, skin cream, moisturizing water, lotion, hand cream, cleansing cream, face cream, essence, facial mask
|
Body Care
|
|
Body wash, shampoo,
hair conditioner, hand sanitizer, essential oil, toothpaste, mouthwash, essential oil soap, styling gel
|
For baby and children
|
|
Lip balm, baby massage
oil, moisture cream, shower gel, shampoo, hand sanitizer, baby toothpaste, diaper, baby soap
|
Washing items
|
|
Detergent, washing
powder, washing tablet, washing liquid, kitchen cleaner, soap, pipe dredger
|
Fragrances
|
|
Traditional herbal
lotion, perfume for men and women, fragrant ball, air purifying box
|
Food
|
|
Fruits, vegetables,
snacks, roasted sunflower seeds and nuts, biscuits and pastries, health foods, beverages, wines, prepared products, kitchen
seasoning, dry grain and oil
|
Electronics
|
|
Large electronic
appliances, home appliances, kitchen appliances, cosmetic electronic appliances
|
Apparel
|
|
Men’s and
women’s clothes, men’s and women’s shoes, men’s and women’s bags, suitcases and accessories
|
Household Products
|
|
Home textile, home
decoration, maternal and infant products, kitchenware, daily life necessities, cosmetic products
|
We
also sell the following products under our own brands
Product Category
|
|
Product
Description
|
Skin care
|
|
Facial mask
|
Body Care
|
|
Body wash, shampoo,
hair conditioner
|
For baby and children
|
|
Lip balm, baby massage
oil, moisture cream, shower gel, shampoo, hand sanitizer, baby toothpaste, diaper, baby soap
|
Food
|
|
Roasted seeds and
nuts, beverages, prepared products
|
Electronics
|
|
Home appliances
|
Apparel
|
|
Suitcases and accessories
|
Household Products
|
|
Daily life necessities
|
Exclusive
Products
To
enhance consumers’ attraction to our product offerings and online shopping mall, we enter into exclusive arrangements from
time to time with certain manufacturers and suppliers to offer exclusive products, including products under our owns brand names
on our platform. In addition, through exclusive arrangements with suppliers, we are able to offer selected SKUs and sets of cosmetic
products under popular brands exclusively on our platform, such as selected SKUs and sets of cosmetic products under the FRUITY
brand of Longrich Group Co., Ltd, a related party. We do not substantially depend on any of our exclusive products suppliers.
Customers
Our
large, engaged and loyal customer base is the key to our success. The loyalty of our customer base is demonstrated by the repeat
purchase rates. In the past three years, the number of our repeat customers has grown greatly every year. In 2017, there were
10,728 customers placed orders on our platform, of which 6,570 or 61.24% are repeat customers. In 2018, there were 16,724 customer-placed
orders on our platform, of which 10,976 or 65.63% are repeat customers. In 2019, there were 56,516 customer-placed orders on our
platform, of which 29,393 or 52.01% are repeat customers. In 2020, there were 90,773 customer-placed orders on our platform, of
which 41,439 or 45.65% are repeat customers. In 2018, the number of repeat customers increased by 67.06% compared with 2017, and
in 2019, the number of repeat customers increased by 167.8% compared with 2018. In 2020, the number of repeat customers increased
by 40.98% compared with 2019. If a customer returns to our platform and purchase from us within 30 days from his/her previous
purchase, it is considered as a repeat customer.
Marketing
We
believe that the most efficient form of marketing for our business is to continuously roll out creative and cost-efficient marketing
campaigns to establish our brand image as a trendsetter for healthy products. These marketing campaigns promote word-of-mouth
referrals and enhance repeat customer visits to our internet platform. We also use live streaming marketing and self-media platform
marketing such as our WeChat public information release account to communicate with our customers and issue promotions and products
information. We have entered into a marketing and promotion agreement with a network advertising and promotion company in the
PRC to promote our products and platform. As a result, we have been able to build a large, engaged and loyal customer base with
relatively low customer acquisition cost. Our cost-effective marketing campaigns have allowed us to have relatively low marketing
expenses.
As
part of our viral marketing strategy, we offer various incentives to our existing customers in order to increase their spending
and loyalty. Our customers can earn cash coupons for eligible purchases and become VIP members by registered their information
with us on our platform, which status offers them additional benefits such as cash coupon rewards, exclusive products and free
samples. We offer gifts and lucky draw promotions on our internet platform. Our customers can also earn cash coupons for successful
referrals of new members and customers. In addition, we conduct online advertising via search engines, portals, advertising networks,
video sharing websites, and social networking and microblogging sites, we encourage our customers to share their shopping experiences
with us through social media and networking websites in China.
Our
Internet Platforms
Our
1juhao.com website
Integrating
convenience, aesthetics and functionality, our website aims to actively drive consumer spending by strategically featuring a carefully
selected catalog of popular items. We focus on creating a superior online shopping experience for our customers providing detailed
product descriptions, thoughtful peer reviews and multi-angle picture illustrations designed to assist our customers in making
purchase decisions. Our website interface is fully integrated with our warehouse management system, enabling us to track order
and delivery status on a real-time basis.
Our
Mobile Platform
We believe consumers will increasingly shop online
through mobile internet. Therefore, we have invested substantial resources to build a mobile application platform dedicated to providing
a superior mobile shopping experience. We use different sales channels to market and sell the products on our online shopping mall, except
for the products purchased and taken by walk-in customers at our authorized stores. For the products sold through our online shopping
mall which represent the majority of our sales, these are either purchased on our online portal/platform or through our mobile app. Approximately
35.84% of our Gross Merchandise Volume (“GMV”) from our online shopping mall was generated from our mobile app in 2018 and
the remaining 64.16% was generated on our online portal/platform. In 2019, we generated approximately 41.49% of GMV from our mobile app
and the remaining 58.51% was generated on our online portal/platform. In 2020, we generated approximately 24.09% of GMV from our mobile
app and the remaining 75.91% was generated on our online portal/platform.
Our
Android- and iOS-based mobile applications allow customers to quickly and efficiently view, search, select and purchase products
offered on our platform. The layout of products offered on our mobile applications is intuitive and easy to use. Customers can
browse our recommended product selections, in particular our curated sales which are immediately accessible as soon as our mobile
applications are activated on their mobile devices, and make quick purchases at any time and regardless of their locations. In
addition, customers can conveniently browse and search for products based on brand, category, product functionality, and can sort
product listings by popularity, price and discount level. Users may also subscribe to future curated sales notifications from
our mobile applications.
The
unique product offerings and functions on our mobile platform further enhance mobile user experience and engagement. Certain selected
products and sales events are offered exclusively on our mobile applications to increase their popularity. We also seek to provide
customers with a customized shopping experience through analyzing and understanding their transaction histories and browsing patterns
on our mobile application and develop targeted sales events to increase customer stickiness and enhance cross-selling opportunities.
A direct dial feature on our mobile platform allows users to call our customer service with a single click. We periodically send
product promotional information to our mobile application users through text messages and mobile push notifications. We also continuously
work on developing additional features to better utilize mobile device functionalities to enhance user experience.
Authorized
Physical Stores
Since
August 2017, many retail stores became authorized retail stores, named LHH (Love Home) Stores. All products sold in these stores must
be purchased on our online LHH shopping platform though such retailers’ accounts with us so they can receive discounts on their
orders, which are not available for regular online customers. When an authorized store places orders on our platform, we can deliver
products to the specific store or directly to its end customers; all orders go through the retailer account number for each store for
a major discount and we can track sales for each store. We will review, evaluate and qualify potential physical stores before they can
become authorized stores, including business qualification and decoration requirements. As an important part of our strategy to better
serve consumers, we had 24,513 offline authorized stores spread out in 31 provinces in China as of December 31, 2020, providing both
online and offline retail and wholesale services to our customers. By connecting upstream suppliers, distributors and offline authorized
store services, we have created a closed-loop platform, which we believe brings convenience and cost savings to our consumers. We plan
to develop additional authorized physical stores to establish our presence in major cities in China and worldwide, to expand our market,
build greater trust with our customers and to further broaden our brand awareness.
Our
Suppliers and Third-Party Merchants
Since
our inception, we have attracted a broad group of suppliers for health and nutritional supplements, household products and cosmetic products
and third-party merchants for beauty, apparel and other lifestyle products. Our suppliers and third-party merchants include brand owners,
brand distributors, resellers and exclusive product suppliers. In 2017, 2018 and 2019, we worked with approximately 35, 64 and 64 suppliers
and 96,145 and 169 third-party merchants, respectively. As of December 31, 2020, we had approximately 122 suppliers and 178 third-party
merchants. We charge a service fee to third party merchants that open stores on our platform based upon their sales volume generated
from their online stores ranging from 5% - 10% of their revenues. The higher the sale volume is, the lower service fee percentage will
apply. We do not provide delivery service for third party merchants and they purchase their own products and use their own delivery services.
We believe our reputation as a brand incubator and our ability to assist suppliers and third-party merchants in effectively selling their
inventory and fulfilling their demand for marketing will help us attract new suppliers and third-party merchants and build stronger ties
with our existing ones.
Supplier
and Third-party Merchant Selection.
We
have implemented a strict and systematic selection process for suppliers and third-party merchants. Our merchandizing team is responsible
for identifying potential suppliers and third-party merchants globally based on our selection guidelines. Our key supplier and third-party
merchant selection criteria include company size, reputation, sales records in offline and online channels and product offerings. We
generally choose to work with reputable suppliers and third-party merchants with reliable track records and high-quality product offerings.
Once a potential supplier or third-party merchant is identified, we conduct due diligence reviews based on our selection criteria including
qualifications, background, product quality, pricing, payment terms and services. For our exclusive products, we typically identify suppliers
from trade shows and on-site visits based on our selection criteria, including the relevant qualifications and governmental permits.
We also conduct detailed factory auditing on the supplier’s manufacturing capability and production process to control product
quality.
Supply
Arrangements.
We
generally enter into framework supply agreements with suppliers and third-party merchants annually based on our standard form. We constantly
communicate with our suppliers and third-party merchants to keep them informed of any changes to the inventory levels of their products
in order for them to timely respond to our sales demands. Before hosting a major sales event, we provide advance notice to our suppliers
and third-party merchants so that they can prepare ample stock to meet potential surge in demand and increased purchases.
Product
Selection.
Our
merchandizing team members possess insightful knowledge and understanding of existing and potential customers’ needs and preferences.
Before selecting each product, we consider and analyze historical sales data, fashion trends, seasonality and customer feedbacks to project
how many items of a particular product we should offer for curated sales, in our online shopping mall or for flash sales. To maximize
the outcome of our curated sales, we carefully plan our product mix to achieve a balanced and complementary product offering across different
product categories.
Quality
Control.
In
addition to our product selection process, we believe we have one of the most stringent quality assurance and control procedures in the
e-commerce industry for products delivered through our logistics network in China. We are currently collaborating with a leading institution
in China to conduct periodic laboratory tests on randomly selected samples of products provided by our suppliers and third-party merchants.
The tests are designed to analyze the chemical composition of sample products to ensure their authenticity and quality. Any non-compliant
products identified will subject the supplier or third-party merchant to fines as well as permanent termination of business relationship
with such supplier or third-party merchant. We commit to the high-quality standards of products offerings sold through our internet platform.
Furthermore,
we diligently examine the product sourcing channel and qualification of our suppliers, carefully inspect all products delivered to our
logistics centers, and reject or return products that do not meet our quality standards or the purchase order specifications. We also
reject any products with broken or otherwise compromised packaging. In addition, we check all products before shipment from our warehouse
shipping center to our customers to ensure there is no apparent damage, and conduct random periodic quality checks on our inventory.
For non-compliant products, we immediately take them off from our internet platform. Furthermore, we typically require suppliers and
third-party merchants to pay deposits or provide advance payment guarantees. For products that are not processed by our logistics centers,
we carefully scrutinize the product sourcing channels of third-party merchants and impose penalties, typically in amounts equal to several
times the value of the relevant products.
Inventory
Management.
We
generally do not pay in advance for the products that we purchase from our suppliers, except for Longrich Group which usually delivers
the products on the same day or the next day of the payment. Most of our suppliers of products deliver products within 30 days of our
order and grant us a credit term of 30 to 50 days.
Our
largest supplier is Longrich Group including its subsidiaries, a related party of the Company. Since its establishment in 1986, Longrich
Group grew to five manufacturing factories and ten R & D bases in the world. Longrich Group has built a large-scale, flexible and
intelligent production line and manufacturing process around its core business of cosmetics products.
Payment
and Fulfillment
Payment
We
provide our customers with a number of payment options including cash on delivery (for selected cities), bank transfers, online payments
with credit cards and debit cards issued by major banks in China, and payment through major third-party online payment platforms, such
as Alipay and WeChat Pay.
As
part of our marketing efforts, we distribute cash coupons that can be used by our members to offset the purchase price of our products.
Furthermore, our customers can use the account balances on our platform accumulated from prior product refunds to make future purchases.
Fulfillment
We
have established a logistics and delivery network with nationwide coverage. We have adopted a flexible logistics model supported by our
robust and advanced warehouse management system. We use third-party nationwide and regional delivery companies to ensure reliable and
timely delivery.
Our
logistics center is strategically located in Changshu city in Eastern China.
Our
warehouse management system enables us to closely monitor each step of the fulfillment process from the time a purchase order is confirmed
and the product stocked in our logistics centers, up to when the product is packaged and picked up by delivery service providers for
delivery to a customer. We closely monitor the speed and service quality of the third-party merchants that open stores on our platform
through customer surveys and feedbacks from our customers to ensure customer satisfaction.
Delivery
Services
We
deliver orders placed on our internet platform to all areas in China through reputable third-party delivery companies with nationwide
coverage, and regional delivery companies. For delivery to remote regions of China, we use China Post. We generally include the delivery
cost in the cost of products, except in rare instance of bulk orders where we require the purchaser to pay for shipping expenses.
We
leverage our large-scale operations and reputation to obtain favorable contractual terms from third-party delivery companies. In order
to reduce the cost of third-party logistics as much as possible, we usually only sign a year-round agreement with one express company
to receive better rate. We regularly monitor and review the delivery companies’ performance and their compliance with our contractual
terms. We typically negotiate and enter into logistics agreements on an annual basis.
Customer
Service
We
believe our emphasis on customer service enhances our brand image and customer loyalty. Customers can access our sales and after-sales
service hotlines and online representatives 24 hours a day, 7 days a week.
Our
customer service center is located in our branch company in Changshu city. We train our customer service representatives to answer customer
inquiries and proactively educate potential customers about our products and promptly resolve customer complaints. Each representative
is required to complete mandatory training, conducted by experienced managers on product knowledge, complaint handling and communication
skills.
We
believe we have one of the most customer-friendly return policies in the online retail markets in China. For most of the products in
our online mall, we and our third-party merchants generally offer a 7-day product return policy, as long as the product is not used,
damaged, is returned in its original state and can be resold.
Once
a customer submits a return application request online, our customer service representatives will review and process the request or contact
the customer by e-mail or by phone if there are any questions relating to the request. Upon receipt of the returned product, we credit
the customer’s Juhao member or payment account with the purchase price. We fully cover the return shipment costs for our products.
We believe our hassle-free return policies help build customer trust and increase customer loyalty and our sales.
Technology
Our
technology systems are designed to enhance efficiency and scalability, and play an important role in the success of our business. We
rely on our copyright protected APP software and other internally developed proprietary technologies to improve our website and management
systems in order to optimize every aspect of our operations for the benefit of our customers, suppliers and third-party merchants.
We
have adopted a service-oriented architecture supported by data processing technologies which consists of front-end, mid-end and back-end
modules. Our network infrastructure is built upon self-owned servers located in data centers operated by third-party internet data center
providers. We are implementing enhanced cloud architecture and infrastructure for our core data processing system to augment our existing
virtual private network as we continue to expand our operations, enabling us to achieve significant internal efficiency through a virtual
and centralized network platform.
Our
front-end modules facilitate the online shopping processes of our customers. Our front-end modules are supported by our content distribution
network, dynamic and distributed cluster and a core database, providing our customers with quicker access to the product display they
are interested in, and facilitating faster processing of their purchases. We have designed our systems to cope with our maximum peak
concurrent visitors at all times. As a result of such foresight, we are able to provide our customers constantly smooth online shopping
experience. Our mid-end modules support our daily administrative and business operations and our back-end modules support our supply
chain and greatly enhance the efficiency of our operations.
Our
business intelligence systems enable us to effectively gather, analyze and make use of internally-generated customer behavior and transaction
data. We regularly use this information in planning our marketing initiatives for upcoming curated sales and merchandizing for our online
shopping mall. We have developed most of the key business modules in-house. We also acquired software use right from a reputable third-party
provider, and work closely with these third-party providers to customize the software for our operations. We have implemented a number
of measures to prevent data failure and loss. We have developed a disaster tolerant system for our key business modules which includes
real-time data mirroring, real-time data back-up and redundancy and load balancing. We believe our module-based systems are highly scalable,
which enable us to quickly expand system capacity and add new features and functionality to our systems in response to our business needs
and evolving customers’ demands without affecting the operation of existing modules. In addition, we have also adopted rigorous
security policies and measures to protect our proprietary data and customer information.
Intellectual
Property
We regard our trademarks, software copyrights,
service marks, domain names, trade secrets, proprietary technologies and similar intellectual property as critical to our success, and
we rely on trademark, copyright and trade secret protection laws in the PRC, as well as confidentiality procedures and contractual provisions
with our employees, service providers, suppliers, third-party merchants and others to protect our proprietary rights. We believe that
more and more consumers will shop online through mobile internet. Therefore, we have invested a lot of resources to build a mobile application
platform dedicated to provide excellent mobile shopping experience. We use different sales channels to market and sell the products on
our online shopping mall, except for the products purchased and taken by walk-in customers at our authorized stores. For the products
sold through our online shopping mall which represent the majority of our sales, these are either purchased on our online portal/platform
or through our mobile app. In 2020, we generated approximately 24.09% of GMV from our mobile app and the remaining 75.91% was generated
from our online portal/platform.
Competition
The
retail markets of health and nutritional supplements, cosmetics and household products in China are fragmented and highly competitive.
We face competition from traditional health and nutritional supplements and cosmetic products retailers, such as traditional Chinese
medicine stores, health and nutritional supplements stores and department stores, and online cosmetic products retailers, such as Jumei,
Lefeng, as well as general e-commerce platforms, such as Suning.com Co., Ltd., which operates Suning.com, Alibaba Group, which
operates Taobao.com and Tmall.com, Amazon China which operates Amazon.cn, JD.com, Inc., which operates JD.com,
Vipshop Holdings Ltd., which operates VIP.com, and E-Commerce China Dangdang Inc., which operates Dangdang.com.
1.
Competitive advantages of Juhao’s online and offline new retail model
We
have been using big data and artificial intelligence technologies to collect and analyze consumers’ activities on our platform
and their shopping patterns, such as the time each customer spends on our platform, the web pages such customer visits, how long the
customer spends on each web page, how often such customer visits our site, average spending amount that such customer spends each order
and products she/he purchase, the location of such customer, whether she/he is a repeat customer, from which search engine or portal
such customer is directed to our site and whether she/he use computer or mobile-app, etc. We also use big data and artificial intelligence
to analyze our suppliers’ products, qualifications, production capacity, technology, management and credibility. Relying on the
Internet, through the use of big data, artificial intelligence and other advanced technologies, we continuously upgrade our product offering
and service processes to improve our business model so that it deeply integrates online service, offline experience and modern logistics.
Ecosystem
Our
business platform includes an online shopping platform, physical stores, warehouse and shipping center and marketing channels which are
embedded to improve our capability to better meet our consumers’ requirements for convenient and comfortable shopping experience,
which ultimately increase user stickiness.
Boundless
Through
the efficient integration of online platform and offline stores, consumers can enjoy shopping at any time and any place, through a series
of diversified channels such as physical stores, online shopping malls, live streaming shopping, self-media platform such as our WeChat
public information release account. Our customers can interact with companies or other consumers, including discussion of product experience,
product consultation and purchase of products and services.
Intelligent
Business Model
The
important foundation for the existence and development of our business model is the improvement of personalization, instantaneity, convenience,
interaction, accuracy and fragmentation in the shopping experience of our customers. In order to meet the above needs of our customers,
we plan to develop what we call “intelligent” shopping method which consists of the comprehensive application of 5G telecommunication,
intelligent virtual clothes fitting room, 3D remote touch sensing, photo search, voice shopping, VR shopping, unmanned logistics, self-service
payment and virtual assistant.
Shopping
Experience
With the continuous growth of per capita disposable
personal income of Chinese urban residents and the great enrichment of consumption goods, we believe that consumption will gradually change
from price based to value- based shopping, and the quality of shopping experience will increasingly become the key factor for consumers.
In real life, people’s recognition and understanding of a brand often come from brick and mortar store, and our experiential business
mode is to embed products into all kinds of real life scenarios created by using off-line stores, giving consumers a direct opportunity
to comprehensively and deeply understand goods and services, thus triggering consumers’ perception of the comprehensive feedback
including the sense of hearing, taste and other aspects, this can not only enhance people’s sense of participation and acceptance,
but also further discover the value of offline stores.
2.
Advantages of our Juhao e-commerce platform
We
have obtained an EDI license certificate issued by the Shanghai Communications Administration. In China, only a few major e-commerce
platforms have obtained this certificate, such as Taobao.com (an Alibaba Group company). This certificate not only allows us to sell
products sourced from third parties on our online shopping mall, but also allows us to have third-party merchants, enterprises or individuals
open stores on our e-commerce platform to sell their own products. We believe such distinctive advantage brings more consumers to our
Juhao platform and contributes to the growth of our business.
We
believe we can compete effectively against our competitors. However, some of our current and potential competitors may have longer operating
histories, larger customer bases, better brand recognition, stronger platform management and fulfillment capabilities and greater financial,
technical and marketing resources than we do. See “Risk Factors—Risks Related to Our Business—We face fierce
competition in the health and nutritional supplements and cosmetic markets in China. We may not be able to keep pace with competition
in our industry, which could adversely affect our market share and result in a decrease in our future sales and earnings.”
Regulations
This
section sets forth a summary of the most significant rules and regulations that affect our business activities in China.
The
relevant regulations promulgated by such government authorities are described below.
Regulations
of operation and service of e-commerce and authorized retail store
We operate under a license for value–added
telecom businesses of the People’s Republic of China (EDI), authorized by the Ministry of Industry and Information Technology of
the People’s Republic of China, or MIIT, which has approved the Shanghai Juhao platform for operating online data processing and
transaction processing services. Our license was approved on February 1, 2019 and is valid for 5 years. Shanghai Juhao was at its early
development stage between 2012 and 2017 and it did not apply for a value-added telecommunications business license until 2017. At its
early business development stage, the Company’s business operation was small and revenue from service fees generated by third party
stores was immaterial in the overall business and total revenue of the Company. Our PRC counsel believes, due to the immaterial amount
from valued-added telecommunication business from 2012 until we received the approval in 2019, that it is unlikely that such operation
without appropriate license will be considered as a material violation of the regulation by the regulator and that the possibility that
the Company be penalized is remote. In addition, Mr. Zhiwei Xu, a major shareholder of Shanghai Juhao and our Chairman and CEO, has provided
an indemnification letter to the Company and agreed that he will indemnify Shanghai Juhao and Company for any losses and penalties imposed
by government agencies due to the lack of a value-added telecommunication business license prior to February 1, 2019.
Under
the Telecommunications Regulations of the People’s Republic of China and Administrative Measures on Internet Information Services,
a telecommunications service provider is required to procure operating licenses from the MIIT or its provincial counterparts, prior to
the commencement of its operations, otherwise such operator might be subject to sanctions including corrective orders and warnings from
the competent administration authority, fines and confiscation of illegal gains. In case of serious violations, the operator’s
websites may be ordered to be closed. If there is illegal income, the illegal income shall be confiscated. A fine ranging from three
to five times the amount of the illegal income; if there is no illegal income or the illegal income is less than RMB 50,000, a fine ranging
from RMB 100,000 to RMB1,000,000 shall be imposed; if the circumstances are serious, and the website shall be closed. If such operations
disrupt the order of the telecommunications market and constitute a criminal offence, criminal liability shall be pursued in accordance
with the law. In addition to the requirement to be approved as an EDI, in 2017 the MIIT published Order No. 321, which requires an EDI
to submit annual report starting in 2020. The Company has submitted and passed current annual report for 2020.
E-Commerce
Law of the PRC
On
January 26, 2014, the State Administration for Industry and Commerce, or the SAIC (which is the predecessor of the State Administration
for Market Regulation) promulgated the Administrative Measures for Online Trading, or the Online Trading Measures, which became
effective on March 15, 2014, to regulate all operating activities for product sales and services provision via the internet (including
mobile internet). It stipulates the obligations of online products operators and services providers and certain special requirements
applicable to third-party platform operators. Furthermore, MOFCOM promulgated the Provisions on the Procedures for Formulating Transaction
Rules of Third-Party Online Retail Platforms (Trial) on December 24, 2014, which became effective on April 1, 2015, to
guide and regulate the formulation, revision and enforcement of transaction rules by online retail third-party platforms operators. These
measures impose more stringent requirements and obligations on third-party platform operators. For example, third-party platform operators
are obligated to make their transaction rules publicly available and file them with MOFCOM or their respective provincial counterparts,
examine and register the legal status of each third-party merchant selling products or services on their platforms and display on a prominent
location of the merchant’s webpage the information stated in the merchant’s business license or a link to its business license.
Where third-party platform operators also conduct self-operation of products or services on the platform, these third-party platform
operators must make a clear distinction between their online direct sales and sales of products by third-party merchants on their third-party
platforms to avoid misleading the consumers.
On
August 31, 2018, the Standing Committee of the National People’s Congress of China (“SCNPC”) promulgated the E-Commerce
Law of the PRC, or the E-Commerce Law, which became effective on January 1, 2019. The promulgation of the E-Commerce Law established
the basic legal framework for the development of China’s e-commerce business and clarified the obligations of the operators of
e-commerce platforms and the possible legal consequences if operators of e-commerce platforms are found to be in violation of legal obligations.
For example, pursuant to the E-Commerce Law, an operator of an e-commerce platform shall give appropriate reminders to and facilitate
the business operators on its platform who have not completed the formalities for the registration of market entities to complete such
formalities. Also, an operator of an e-commerce platform is legally obligated to verify and register the information of the business
operators on its platform, prepare emergency plans in response to possible cyber security incidents, keep the transaction information
for no less than three years from the date on which the transaction has been completed, establish rules on the protection of intellectual
property rights and conform to the principle of openness, fairness and justice. Violation of the provisions of the E-Commerce Law may
result in being ordered to make corrections within a prescribed period of time, confiscation of illegally obtained gains, fines, suspension
of business, inclusion of such violations in the credit records and possible civil liabilities.
The
Company’s business operation is on-line retail business which includes online data processing and transaction processing services,
therefore, the-above E-Commerce laws and regulations apply to the Company. We have set up all necessary formalities and requirements
in accordance with applicable E-Commerce laws and regulations for our customers and vendors who are using our E-Commerce platform and
taken necessary measures and steps to keep us, our business partners and customers in compliance with these laws and regulations.
Regulations
Relating to Foreign Investment
The
PRC Foreign Investment Law
On
March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which has taken effect on January 1,
2020 and replaced three existing laws on foreign investments in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law,
the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation
rules and ancillary regulations. The Foreign Investment Law embodies a regulatory trend to rationalize its foreign investment
regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements
for both foreign and domestic invested enterprises in China. The Foreign Investment Law establishes the basic framework for
the access to, and the promotion, protection and administration of foreign investments in view of investment protection and fair competition.
According
to the Foreign Investment Law, “foreign investment” refers to investment activities directly or indirectly conducted
by one or more natural persons, business entities, or otherwise organizations of a foreign country (collectively referred to as “foreign
investor”) within China, and the investment activities include the following situations: (i) a foreign investor, individually
or collectively with other investors, establishes a foreign-invested enterprise within China; (ii) a foreign investor acquires stock
shares, equity shares, shares in assets, or other like rights and interests of an enterprise within China; (iii) a foreign investor,
individually or collectively with other investors, invests in a new project within China; and (iv) investments in other means as
provided by laws, administrative regulations, or the State Council.
According
to the Foreign Investment Law, the State Council will publish or approve to publish a catalogue for special administrative measures,
or the “negative list.” The Foreign Investment Law grants national treatment to foreign invested entities, except
for those foreign invested entities that operate in industries deemed to be either “restricted” or “prohibited”
in the “negative list”. Because the “negative list” has yet to be published by the State Council, it is unclear
whether it will differ from the current Special Administrative Measures for Market Access of Foreign Investment (Negative List)
promulgated by the NDRC and the MOFCOM. The Foreign Investment Law provides that foreign invested entities operating in foreign
restricted or prohibited industries will require market entry clearance and other approvals from relevant PRC governmental authorities.
Furthermore,
the Foreign Investment Law provides that foreign invested enterprises established according to the existing laws regulating
foreign investment may maintain their structure and corporate governance within five years after the implementing of the Foreign
Investment Law.
In
addition, the Foreign Investment Law also provides several protective rules and principles for foreign investors and their
investments in the PRC, including, among others, that local governments shall abide by their commitments to the foreign investors; foreign-invested
enterprises are allowed to issue stocks and corporate bonds; except for special circumstances, in which case statutory procedures shall
be followed and fair and reasonable compensation shall be made in a timely manner, expropriation or requisition of the investment of
foreign investors is prohibited; mandatory technology transfer is prohibited; and the capital contributions, profits, capital gains,
proceeds out of asset disposal, licensing fees of intellectual property rights, indemnity or compensation legally obtained, or proceeds
received upon settlement by foreign investors within China, may be freely remitted inward and outward in RMB or a foreign currency. Also,
foreign investors or the foreign investment enterprise should be imposed legal liabilities for failing to report investment information
in accordance with the requirements.
This
new Foreign Investment Law has provided a more transparent foreign investment environment in China. Particularly, this new law has changed
the regulatory procedure from a pre-approval requirement to the negative list system, which means the foreign invested company may engage
in any business activities that are not in the negative list and pre-approval is not required anymore.
Negative
List Relating to Foreign Investment
Investment
activities in the PRC by foreign investors are principally governed by the Guidance Catalog of Industries for Foreign Investment promulgated
and as amended from time to time by MOFCOM and National Development and Reform Commission (the “NDRC”) and MOFCOM. In June
2019, Special Administrative Measures (Negative List) for Admission of Foreign Investment (2019 Version) or the Negative List, replaced
2018 Version of the Negative List. In June, 2020, the MOFCOM and the NDRC promulgated the Special Administrative Measures (Negative List)
for Foreign Investment Access (2020 Version), or the Negative List, which became effective on July 23, 2020. Industries listed in the
Negative List are divided into two categories: restricted and prohibited. Industries not listed in the Negative List are generally deemed
as constituting a third “permitted” category. Establishment of wholly foreign-owned enterprises is generally allowed in permitted
industries. Some restricted industries are limited to equity or contractual joint ventures, while in some cases Chinese partners are
required to hold the majority interests in such joint ventures. In addition, restricted category projects are subject to higher-level
government approvals. Foreign investors are not allowed to invest in industries in the prohibited category. Industries not listed in
the Negative List are generally open to foreign investment unless specifically restricted by other PRC regulations.
To
comply with PRC laws and regulations, we rely on contractual arrangements with our VIE to operate our e-commerce business in China. See
“Risk Factors—Risks Related to Our Corporate Structure— We rely on contractual arrangements with our VIE and the
shareholders of our VIE for our business operations, which may not be as effective as direct ownership in providing operational control.”
Shanghai
Juhao, our VIE, engages in e-commerce retail and related services, including online data processing and transaction processing service,
which are within the category in which foreign investment is classified into License Category pursuant to the most recently published
Negative List 2020 version. In addition, we intend to centralize our management and operation in the PRC to avoid being restricted from
conducting certain business activities which are important for our current or future business but are currently restricted or might be
restricted in the future. As such, we believe the contractual arrangements between the WFOE and our VIE are necessary and essential for
our business operations. These contractual arrangements with our VIE and its shareholders enable us to exercise effective control over
the variable interest entity and hence consolidate its financial results.
Regulations
Relating to Internet Information Security and Privacy Protection
The
PRC Constitution states that the PRC laws protect the freedom and privacy of communications of citizens and prohibit infringement on
such rights. PRC government authorities have enacted laws and regulations with respect to internet information security and protection
of personal information from any abuse or unauthorized disclosure, which include the Decision of the Standing Committee of the National
People’s Congress on Internet Security Protection enacted and amended by the SCNPC on December 28, 2000 and August 27,
2009, respectively, the Provisions on the Technical Measures for Internet Security Protection issued by the Ministry of Public
Security on January 13, 2006 and took effect on March 1, 2006, the Decision of the Standing Committee of the National People’s
Congress on Strengthening Network Information Protection promulgated by the SCNPC on December 28, 2012, the Several Provisions
on Regulating the Market Order of Internet Information Services promulgated by the MIIT on December 29, 2011, and the Provisions
on Protection of Personal Information of Telecommunication and Internet Users released by the MIIT on July 16, 2013. Internet
information in China is regulated from a national security standpoint.
The
Provisions on Protection of Personal Information of Telecommunication and Internet Users regulate the collection and use of users’
personal information in the provision of telecommunications services and internet information services in the PRC. Telecommunication
business operators and internet service providers are required to formulate and disclose their own rules for the collection and use of
users’ information. Telecommunication business operators and internet service providers must specify the purposes, manners and
scopes of information collection and uses, obtain consent from the relevant citizens, and keep the collected personal information confidential.
Telecommunication business operators and internet service providers are prohibited from disclosing, tampering with, damaging, selling
or illegally providing others with, collected personal information. Telecommunication business operators and internet service providers
are required to take technical and other measures to prevent the collected personal information from any unauthorized disclosure, damage
or loss. Once users terminate the use of telecommunications services or internet information services, telecommunications business operators
and internet information service providers shall stop the collection and use of the personal information of users and provide the users
with services for deregistering their account numbers.
The
Provisions on Protecting Personal Information of Telecommunication and Internet Users further define the personal information of
user to include user name, birth date, identification number, address, phone number, account number, passcode, and other information
that may be used to identify the user independently or in combination with other information and the timing, places, etc. of the use
of services by the users. Furthermore, according to the Interpretations on Several Issues Concerning the Application of Law in the
Handling of Criminal Cases Involving Infringement on Citizens’ Personal Information, or the Interpretations issued by the Supreme
People’s Court and the Supreme People’s Procuratorate on May 8, 2017 and took effect on June 1, 2017, personal
information means various information recorded electronically or through other manners, which may be used to identify individuals or
activities of individuals, including, but not limited to, the name, identification number, contact information, address, user account
number and passcode, property ownership and whereabouts.
The
Company is legally obligated to protect the information of its customers and vendors, especially for the personal data of its consumers,
such as identity, consuming pattern, and other personal information.
On
November 1, 2015, the Ninth Amendment to the Criminal Law of the PRC issued by the SCNPC became effective, pursuant to which,
any internet service provider that fails to comply with obligations related to internet information security administration as required
by applicable laws and refuses to rectify upon order is subject to criminal penalty for (i) any large-scale dissemination of illegal
information; (ii) any severe consequences due to the leakage of the user information; (iii) any serious loss of criminal evidence;
or (iv) other severe circumstances. Furthermore, any individual or entity that (i) sells or distributes personal information
in a manner which violates relevant regulations, or (ii) steals or illegally obtain any personal information is subject to criminal
penalty under severe circumstances.
On
June 1, 2017, the Cyber Security Law of the PRC, or the Cyber Security Law, promulgated by SCNPC took effect, which is formulated
to maintain the network security, safeguard the cyberspace sovereignty, national security and public interests, protect the lawful rights
and interests of citizens, legal persons and other organizations, and requires that a network operator, which includes, among others,
internet information services providers, take technical measures and other necessary measures to safeguard the safe and stable operation
of the networks, effectively respond to the network security incidents, prevent illegal and criminal activities, and maintain the integrity,
confidentiality and availability of network data. The Cyber Security Law reaffirms the basic principles and requirements set forth in
other existing laws and regulations on personal information protections and strengthens the obligations and requirements of internet
service providers, which include but are not limited to: (i) keeping all user information collected strictly confidential and setting
up a comprehensive user information protection system; (ii) abiding by the principles of legality, rationality and necessity in
the collection and use of user information and disclosure of the rules, purposes, methods and scopes of collection and use of user information;
and (iii) protecting users’ personal information from being leaked, tampered with, destroyed or provided to third parties.
Any violation of the provisions and requirements under the Cyber Security Law and other related regulations and rules may result in administrative
liabilities such as warnings, fines, confiscation of illegal gains, revocation of licenses, suspension of business, and shutting down
of websites, or, in severe cases, criminal liabilities. After the release of the Cyber Security Law, on May 2, 2017, Cyberspace
Administration of China issued the Measures for Security Reviews of Network Products and Services (Trial), or the Review Measures,
which become effective on June 1, 2017. The Review Measures establish the basic framework and principle for national security reviews
of network products and services.
The
recommended national standard, Information Security Technology Personal Information Security Specification, puts forward specific
refinement requirements on the collection, preservation, use and commission processing, sharing, transfer, public disclosure, etc. Although
it is not mandatory, in the absence of clear implementation rules and standards for the law on cyber security and other personal information
protection, it will be used as the basis for judging and making determinations. On November 28, 2019, The Notice of Identification Method
of Application Illegal Collection and Use of Personal Information was issued, which provides a reference for the identification of App
illegal collection and use of personal information, and provides guidance for App operators’ self-inspection and self-correction
and netizens’ social supervision.
As
an online retail platform operator and service provider, we are subject to these laws and regulations relating to the collection, use,
storage, transfer, disclosure and security of personally identifiable information with respect to our customers, vendors and employees
including any requests from regulatory and government authorities relating to this data. Further, PRC regulators have been increasingly
focused on regulation in the areas of data security and data protection. We expect that these areas will receive greater public scrutiny
and attention from regulators, which could increase our compliance costs and subject us to heightened risks and challenges. If we are
unable to manage these risks, we could become subject to penalties, fines, suspension of business and revocation of required licenses,
and our reputation and results of operations could be materially and adversely affected.
Regulations
Relating to Food Trade
General
Administration of Food Marketing
The
Food Safety Law of the People’s Republic of China has been implemented since June 2009, revised by the Chinese People’s Congress
in April 2015 and December 29, 2018 and implemented in December 2018. The Regulations for the Implementation of the Food Safety Law of
the People’s Republic of China have been in effect since July 2009.The State Council standardized food safety in 2016, established
a food safety supervision monitoring and evaluation system, and adopted food safety standards. The State Council implements a food production
and operation licensing system. Engaged in food production, sales, catering services, and obtained business licenses in accordance with
the law. The State Council implements strict supervision and management of special foods such as health foods, medical formulas, and
infant formulas.
The
“Food Management License Management Measures” promulgated by the State Food Product Supervision and Administration Bureau
in August 2015 and revised in 2017 regulates food business licensing activities, strengthens the supervision and management of food business,
and guarantees food safety. Food business operators engaged in food business activities shall receive a Food Business License at a business
location. The food business license is valid for five years.
Shanghai
Juhao holds a food business license issued on May 12, 2016, which was renewed on April 22, 2021 with an expiration date of April 21,
2026. This license is renewable every 5 years and the Company shall submit a renewal application with the authority 30 days before its
expiration date. In addition, under the requirements of other relevant provisions of the “Food Safety Law of the People’s
Republic of China” and “Regulations on the Administration of Production and Marketing of Alcoholic Products in Shanghai”,
we have also obtained the renewable “Retail License for Alcoholic Products” for alcohol related products on our platform
on September 4, 2020 which is valid for three years and we will apply for renewal before its expiration date on September 4, 2024.
Regulations
on product quality and customer protection
According
to the “Product Quality Law of the People’s Republic of China” which came into effect in September 1993 and the “Product
Quality Law of the People’s Republic of China” revised by the Chinese People’s Congress in 2000, 2009, and 2018 respectively,
the products sold must comply with relevant safety standards, and the seller should take measures to maintain quality of products. The
seller shall not make adulterated product. The qualified products shall not be impersonated as unqualified products. For the seller,
any violation of national or industry health and safety standards or other requirements may result in civil liability and administrative
penalties, such as compensation for damages, fines, confiscation of illegally sold products and sales proceeds, and even cancellation
of business licenses; Except for criminal responsibility according to law.
The
Law of the People’s Republic of China on the Protection of Consumer Rights and the Law on the Protection of Consumer Rights and
Interests came into effect in January 1994 and were revised by the Chinese People’s Congress in 2009 and 2013 respectively. The
operators should ensure that the services provided by the products are in line with the personal, property security requirements, and
provide consumers with real information about the quality, function, use and expiration date of the product or service. Consumers who
claim damages to products or services purchased or accepted on the Internet trading platform may claim damages from the seller or service
provider. The operator of the online trading platform cannot provide the real name, address and effective contact information of the
seller or service provider, and the consumer can also claim damages from the provider of the online trading platform. The operator of
the online trading platform knows or should know that the seller or service provider uses its platform to infringe the legitimate rights
and interests of the consumer. If the supplier fails to take necessary measures, it shall bear joint and several liability with the seller
or the service provider. In addition, if the operator deceives the consumer or sells a product that is known to be unqualified or defective,
it shall not only compensate the consumer for the loss, but also pay the additional damages in accordance with the price of the goods
or services three times.
In
January 2017, the State Administration for Industry and Commerce issued the “Interim Measures for the Reimbursement of Online Purchase
Products within 7 Days”, which was implemented since March 2017, further clarifying the scope of rights for consumers to return
without reason, including exceptions and return procedures. And online trading; platform operators are responsible for formulating seven-day
unreasonable return rules and related consumer protection systems, and supervising merchants to comply with these rules.
Because
we sell food products on our online shopping mall platform, these food safety laws and regulations are applicable to us.
Regulations
Relating to Online Advertising
Internet
advertising management
In
April 2015, the National People’s Congress enacted the “Advertising Law of the People’s Republic of China” or
the “Advertising Law”, which was implemented in September 2015 and revised in October 2018 The Advertising Law regulates
the commercial advertising activities of the People’s Republic of China and stipulates the obligations of advertisers, advertising
operators, advertising publishers and advertising spokespersons. It prohibits any advertisements from obscenity, pornography, gambling,
superstition, obscenity, obscenity, etc. Content or violence related content.
If
the advertiser violates the provisions of the advertising content, he shall order it to stop publishing and impose a fine of not less
than RMB 200,000; if the circumstances are serious, the business license may be revoked and may be banned by the relevant departments.
The advertisement review approval document can be revoked and the advertiser’s application will not be accepted within one year.
In addition, the advertising operators and advertising publishers who violate the regulations shall be fined between RMB 200,000 and
RMB 2 million to collect advertising fees; if the circumstances are serious, the “Advertising Operator Business License”
or “Advertising Business Permit” shall be revoked. Authorized publishers may be revoked.
In
July 2016, the State Administration for Industry and Commerce passed the Interim Measures for the Administration of Internet Advertising
or the Measures for the Administration of Internet Advertising, which came into effect in September 2016. According to the “Internet
Advertising Management Measures”, Internet advertisers are responsible for the authenticity of advertising content, and all online
advertisements must be marked with “advertising” so that viewers can easily identify them.
As
an online retail platform operator and service provider, the Company places advertisements of its products and also provides spaces for
vendors to publish their advertisements on our platform. Therefore, the Company is treated as an advertising publisher or advertiser,
and the on-line advertising laws and regulations apply to us.
Regulations
Relating to Intellectual Property Rights
The
PRC has adopted comprehensive legislation governing intellectual property rights, including copyrights, patents, trademarks and domain
names.
Copyright. Copyright
in the PRC, including copyrighted software, is principally protected under the Copyright Law of the PRC promulgated in February 2010
which took effect in April 2010 (the “Copyright Law”), and related rules and regulations. Under the Copyright Law, the term
of protection for copyrighted software is 50 years.
Patent. The
Patent Law of the PRC promulgated in December 2008, which became effective in October 2009 and was recently revised by the SCNPC on October
17, 2020 (which revision will become effective on June 1, 2021), provides for patentable inventions, utility models and designs. An invention
or utility model for which patents may be granted shall have novelty, creativity and practical applicability. The State Intellectual
Property Office under the State Council is responsible for examining and approving patent applications. The protection period is
20 years for inventions and 10 years for utility models and designs, all of which commence from the date of application of patent rights
under the current Patent Law of the PRC. The protection period has been slightly amended in recent amendment which will become effective
on June 1, 2021. The terms of protection for invention and utility patents will still be 20 years and 10 years, respectively, in general.
The term of protection for a design patent will be extended from 10 years to 15 years. In addition, for invention patents, in situations
where a patent is only granted after 4 years or more from its filing date or 3 years or more after a request for substantive examination
date, the applicant can request for an extension of protection term for any unreasonable delay.
Trademark.
The Trademark Law of the PRC promulgated in August 2013 which took effect in May 2014 (the “Trademark Law”), and revised
in 2019, and its implementation rules protect registered trademarks. The Trademark Office of National Intellectual Property Administration,
PRC, formerly the PRC Trademark Office of the State Administration of Market Regulation is responsible for the registration and administration
of trademarks throughout the PRC. The Trademark Law has adopted a “first-to-file” principle with respect to trademark registration.
Domain
Name. Domain names are protected under the Administrative Measures for the Internet Domain Names of the PRC promulgated by the
Ministry of Information and Industry of the PRC effective on December 20, 2004 and the Administrative Measures for Internet Domain Names
promulgated by MIIT, effective on November 1, 2017 (the “Domain Name Measures”). MIIT is the major regulatory body responsible
for the administration of the PRC internet domain names. The Domain Names Measures has adopted a “first-to-file” principle
with respect to the registration of domain names.
The
Company has registered its trademarks, copyrights and domain names with competent regulatory agencies in China. We may be from time to
time in the future subject to legal proceedings and claims relating to the intellectual property rights of others. See “Risk
Factors: Risks Related to Our Business: We may be subject to intellectual property infringement claims, which may be expensive to defend
and may disrupt our business and operations.”
Regulations
Relating to Dividend Withholding Tax
Pursuant
to the Enterprise Income Tax Law and its implementation rules, if a non-resident enterprise has not set up an organization or establishment
in the PRC, or has set up an organization or establishment but the income derived has no actual connection with such organization or
establishment, it will be subject to a withholding tax on its PRC-sourced income at a rate of 10%. Pursuant to the Arrangement between
Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, the
withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise is reduced to 5% from
a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to the Notice of
the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or Circular
81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to enjoy the reduced withholding
tax: (i) it must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and
(ii) it must have directly owned such percentage in the PRC resident enterprise throughout the 12 months prior to receiving
the dividends. There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax rules and
regulations. We believe our corporate structure has made us eligible for such reduced rate once we become a resident enterprise in Hong
Kong. The qualification of HK resident enterprise focuses on de facto management. As of the date of this report, we do not have a management
team in Hong Kong and would most likely not be considered a HK resident enterprise and therefore would not be eligible for the reduced
5% withholding tax rate.
Regulations
on Enterprise Income Tax
PRC
enterprise income tax is calculated based on taxable income, which is determined under (i) the PRC Enterprise Income Tax Law, or the
EIT Law, promulgated by the NPC and implemented in January 2008 and amended in March 2017 and December 2018, respectively, and (ii) the
implementation rules to the EIT Law promulgated by the State Council and implemented in January 2008. The EIT Law imposes a uniform enterprise
income tax rate of 25% on all resident enterprises in the PRC, including foreign-invested enterprises and domestic enterprises, unless
they qualify for certain exceptions.
In
addition, according to the EIT Law and its implementation rules, enterprises registered in countries or regions outside the PRC with
“de facto management bodies” located within China may be considered to be PRC resident enterprises and will be subject to
PRC enterprise income tax at the rate of 25% on their worldwide income. The implementation rules of the EIT Law define “de facto
management bodies” as establishments that exercise full and substantial control over and overall management of the business, productions,
personnel, accounts and properties of an enterprise. The only detailed guidance currently available for the definition of “de
facto management body” as well as the determination and administration of tax residency status of offshore-incorporated enterprises
are set forth in the Notice Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC Tax Resident Enterprises
on the Basis of De Facto Management Bodies issued by the SAT in April 2009, or Circular 82, and the Administrative Measures for Enterprise
Income Tax of Chinese-Controlled Overseas Incorporated Resident Enterprises (Trial Version) issued by the SAT in July 2011, or Bulletin
No. 45, which provides guidance on the administration as well as the determination of the tax residency status of a Chinese-controlled
offshore-incorporated enterprise, defined as an enterprise that is incorporated under the law of a foreign country or territory and that
has a PRC company or PRC corporate group as its primary controlling shareholder.
According
to Circular 82, a Chinese-controlled offshore-incorporated enterprise will be regarded as a PRC resident enterprise by virtue of having
its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all
of the following conditions are met:
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the
primary location of the day-to-day operational management and the places where they perform their duties are in the PRC;
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decisions
relating to the enterprise’s financial and human resource matters are made or are subject to approval of organizations or personnel
in the PRC;
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the
enterprise’s primary assets, accounting books and records, company seals and board and shareholder resolutions are located
or maintained in the PRC; and
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50%
or more of voting board members or senior executives habitually reside in the PRC.
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Bulletin
No. 45 further clarifies certain issues related to the determination of tax resident status and competent tax authorities. It also specifies
that when provided with a copy of Recognition of Residential Status from a resident Chinese-controlled offshore-incorporated enterprise,
a payer does not need to withhold income tax when paying certain PRC-sourced income such as dividends, interest and royalties to such
Chinese-controlled offshore-incorporated enterprise.
We
believe that we are not a PRC resident enterprise for PRC tax purposes. 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.” 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,
which could materially reduce 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.
Regulations
on Income Tax for Share Transfers
According
to the Announcement of the SAT on Several Issues Concerning the Enterprise Income Tax on Indirect Property Transfer by Non-Resident Enterprises,
or Circular 7, promulgated by the SAT in February 2015, if a non-resident enterprise, such as the Company, transfers the equity interests
of a PRC resident enterprise indirectly through transfer of the equity interests of an offshore holding company (other than a purchase
and sale of shares issued by a PRC resident enterprise through or in a public securities market) without a reasonable commercial purpose,
the PRC tax authorities have the power to reassess the nature of the transaction and treat the indirect equity transfer as a direct transfer.
As a result, the gain derived from such transfer, which means the equity transfer price less the cost of equity, will be subject to PRC
withholding tax at a rate of up to 10%. Under the terms of Circular 7, the transfer which meets all of the following circumstances shall
be directly deemed as having no reasonable commercial purposes: (i) over 75% of the value of the equity interests of the offshore holding
company are directly or indirectly derived from PRC taxable properties; (ii) at any time during the year before the indirect transfer,
over 90% of the total properties of the offshore holding company are investments within PRC territory, or in the year before the indirect
transfer, over 90% of the offshore holding company’s revenue is directly or indirectly derived from PRC territory; (iii) the function
performed and risks assumed by the offshore holding company are insufficient to substantiate its corporate existence; and (iv) the foreign
income tax imposed on the indirect transfer is lower than the PRC tax imposed on the direct transfer of the PRC taxable properties. In
October, 2017, the SAT issued the Bulletin of SAT on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source,
or Bulletin 37, which, among others, repeals certain rules stipulated in Circular 7. Bulletin 37 further details and clarifies the tax
withholding methods in respect of income of non-resident enterprises.
Regulations
on PRC Value-Added Tax and Business Tax
Pursuant
to applicable PRC tax regulations, any entity or individual conducting business in the service industry is generally required to pay
a business tax at the rate of 5% on the revenues generated from providing such services. However, if the services provided are related
to technology development and transfer, such business tax may be exempted subject to approval by the relevant tax authorities. Pursuant
to the Provisional Regulations on Value-Added Tax of the PRC and its implementation regulations, unless otherwise specified by relevant
laws and regulations, any entity or individual engaged in the sales of goods, provision of processing, repairs and replacement services
and importation of goods into China is generally required to pay a value-added tax, or VAT, for revenues generated from sales of products,
while qualified input VAT paid on taxable purchase can be offset against such output VAT.
In
November 2011, the Ministry of Finance and the State Administration of Taxation promulgated the Pilot Plan for Imposition of Value-Added
Tax to Replace Business Tax. In March 2016, the Ministry of Finance and the State Administration of Taxation further promulgated the
Notice on Fully Promoting the Pilot Plan for Replacing Business Tax by Value-Added Tax, which became effective on May 1, 2016. Pursuant
to the pilot plan and relevant notices, VAT is generally imposed in lieu of business tax in the modern service industries, including
the VATS, on a nationwide basis. VAT of a rate of 6% applies to revenue derived from the provision of some modern services. Certain small
taxpayers under PRC law are subject to reduced value-added tax at a rate of 3%. Unlike business tax, a taxpayer is allowed to offset
the qualified input VAT paid on taxable purchases against the output VAT chargeable on the modern services provided.
On
April 4, 2018, the Ministry of Finance and the State Administration of Taxation issued the Notice on Adjustment of VAT Rates, which
came into effect on May 1, 2018. According to the abovementioned notice, the taxable goods previously subject to VAT rates of 17%
and 11% respectively become subject to lower VAT rates of 16% and 10% respectively starting from May 1, 2018. Furthermore, according
to the Announcement on Relevant Policies for Deepening Value-added Tax Reform jointly promulgated by the Ministry of Finance, the State
Administration of Taxation and the General Administration of Customs, which became effective on April 1, 2019, the taxable goods
previously subject to VAT rates of 16% and 10% respectively become subject to lower VAT rates of 13% and 9% respectively starting from
April 1, 2019. Shanghai Juhao currently pays VAT at a rate of 13%.
Regulations
on Foreign Currency Exchange
The
principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, which were most
recently amended in August 2008. Under the Foreign Exchange Administration Regulations, payments of current account items, such as profit
distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without
prior approval from 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 account
items, such as direct investments, repayment of foreign currency-denominated loans, repatriation of investments and investments in securities
outside of China.
In
August 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment
and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises (“SAFE Circular 142”), regulating the conversion
by a foreign-invested enterprise of foreign currency-registered capital into RMB by restricting how the converted RMB may be used. SAFE
Circular 142, provides that the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only
be used for purposes within the business scope approved by the applicable government authority and may not be used for equity investments
within the PRC.
In
addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of
foreign-invested enterprises. The use of such RMB capital may not be changed without SAFE’s approval, and such RMB capital may
not, in any case, be used to repay RMB loans if the proceeds of such loans have not been used. Any violation of Circular 142 may result
in severe penalties, including substantial fines.
In
November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct
Investment, which substantially amends and simplifies the current foreign exchange procedure. 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 derived 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 approval or verification from SAFE, and
multiple capital accounts for the same entity may be opened in different provinces, which was not possible previously.
In
addition, SAFE promulgated another circular in May 2013, which specifies that the administration by SAFE or its local branches over direct
investment by foreign investors in the PRC must be conducted by way of registration, and banks must process foreign exchange business
relating to direct investment in the PRC based on the registration information provided by SAFE and its branches.
In
July 2014, SAFE further reformed the foreign exchange administration system in order to satisfy and facilitate the business and capital
operations of Foreign-Invested Enterprises and issued the Circular of the State Administration of Foreign Exchange on the Pilot Reform
of the Administrative Approach Regarding the Settlement of the Foreign Exchange Capitals of Foreign-Invested Enterprises in Certain Areas
(“Circular 36”), in July 2014. This circular suspends the application of Circular 142 in certain areas and allows a Foreign-Invested
Enterprise registered in such areas to use the RMB capital converted from foreign currency registered capital for equity investments
within the PRC.
On
February 13, 2015, SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning
Direct Investment, or SAFE Notice 13, which became effective on June 1, 2015. Pursuant to SAFE Notice 13, instead of applying for approvals
regarding foreign exchange registrations of foreign direct investment and overseas direct investment from SAFE, entities and individuals
will be required to apply for such foreign exchange registrations from qualified banks. The qualified banks, under the supervision of
SAFE, will directly examine applications and manage registrations.
In
March 30, 2015, SAFE promulgated SAFE Circular 19, to expand the reform nationwide. SAFE Circular 19 came into force and replaced both
Circular 142 and Circular 36 on June 1, 2015. SAFE Circular 19 allows foreign-invested enterprises to make equity investments by using
RMB funds converted from foreign exchange capital. However, Circular 19 continues to prohibit foreign-invested enterprises from, among
other things, using RMB funds converted from foreign exchange capital for expenditure beyond the enterprise’s business scope, providing
entrusted loans, or repaying loans between non-financial enterprises.
On
June 9, 2016, SAFE issued SAFE Circular 16, which took effect on the same day. Compared to SAFE Circular 19, SAFE Circular 16 provides
that, in addition to foreign exchange capital, foreign debt funds and proceeds remitted from foreign listings should also be subject
to the discretional foreign exchange settlement. In addition, it also lifted the restriction that foreign exchange capital under the
capital accounts and the corresponding RMB capital obtained from foreign exchange settlement should not be used for repaying the inter-enterprise
borrowings (including advances by a third party) or repaying bank loans in RMB that had been sub-lent to the third party.
In
January 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Genuineness
and Compliance Verification, or Circular 3, which stipulates several capital control measures with respect to the outbound remittance
of profit from domestic entities to offshore entities, including (i) under the principle of genuine transaction, banks shall check board
resolutions regarding profit distribution, the original version of tax filing records and audited financial statements; and (ii) domestic
entities shall hold income to account for previous years’ losses before remitting profits. Moreover, pursuant to Circular 3, domestic
entities shall make detailed explanations of the sources of capital and utilization arrangements, and provide board resolutions, contracts
and other proof when completing the registration procedures in connection with an outbound investment.
Based
on the forgoing, if we intend to provide funding to our wholly foreign owned subsidiaries through capital injection at or after their
establishment, we should file with the State Administration for Market Regulation or its local counterparts, via the foreign investment
comprehensive administrative system and register such funding with local banks for foreign exchange related matters.
In
October 2019, SAFE promulgated the Circular 28 to further promote facilitation of cross-border trade and investment and relaxed certain
restriction on foreign exchange settlement.
Regulations
on Foreign Exchange Registration of Overseas Investment by PRC Residents
SAFE
issued SAFE Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through
Special Purpose Vehicles, or SAFE Circular 37, that became effective in July 2014, replacing the previous SAFE Circular 75. SAFE
Circular 37 regulates foreign exchange matters in relation to the use of special purpose vehicles, or SPVs, by PRC residents or entities
to seek offshore investment and financing or conduct round trip investment in China. Under SAFE Circular 37, a SPV refers to an offshore
entity established or controlled, directly or indirectly, by PRC residents or entities for the purpose of seeking offshore financing
or making offshore investments, using legitimate onshore or offshore assets or interests, while “round trip investment” refers
to direct investment in China by PRC residents or entities through SPVs, namely, establishing foreign-invested enterprises to hold the
ownership, control rights and management rights. SAFE Circular 37 provides that, before making contribution into an SPV, PRC residents
or entities are required to complete foreign exchange registration with SAFE or its local branch. SAFE promulgated the Notice on Further
Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February 2015, which took effect
on June 1, 2015. This notice has amended SAFE Circular 37 requiring PRC residents or entities to register with qualified banks rather
than SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of
overseas investment or financing.
PRC
residents or entities who had contributed legitimate onshore or offshore interests or assets to SPVs but had not obtained registration
as required before the implementation of SAFE Circular 37 must register their ownership interests or control in the SPVs with qualified
banks. An amendment to the registration is required if there is a material change with respect to the SPV registered, such as any change
of basic information (including change of the PRC residents, name and operation term), increases or decreases in investment amount, transfers
or exchanges of shares, and mergers or divisions. Failure to comply with the registration procedures set forth in SAFE Circular 37 and
the subsequent notice, or making misrepresentations about or failure to disclose controllers of the foreign-invested enterprise that
is established through round-trip investment, may result in restrictions being imposed on the foreign exchange activities of the relevant
foreign-invested enterprise, including payment of dividends and other distributions, such as proceeds from any reduction in capital,
share transfer or liquidation, to its offshore parent or affiliate, and the capital inflow from the offshore parent, and may also subject
relevant PRC residents or entities to penalties under PRC foreign exchange administration regulations.
The
major shareholders of the Company have completed the initial registrations with the local SAFE branch or qualified banks as required
by SAFE Circular 37. To our knowledge, certain of our minority shareholders of the Company who are also PRC resident individual shareholders
have not completed their SAFE Circular 37 registration yet. Failure to comply with the registration procedures set forth in the Circular
37 may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including the payment
of dividends and other distributions to its offshore parent or affiliate, the capital inflow from the offshore entities and settlement
of foreign exchange capital, and may also subject relevant onshore company or PRC residents to penalties under PRC foreign exchange administration
regulations.
Regulations
on Stock Incentive Plans
SAFE
promulgated the Stock Option Rules in February 2012, replacing the previous rules issued by SAFE in March 2007. Under the Stock
Option Rules and other relevant rules and regulations, PRC residents who participate in stock incentive plans in an overseas publicly-listed
company are required to register with SAFE or its local branches and complete certain other procedures. Participants of a stock incentive
plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of the overseas publicly listed company
or another qualified institution selected by the PRC subsidiary, to conduct the SAFE registration and other procedures with respect to
the stock incentive plan on behalf of the participants. In addition, the PRC agent is required to amend the SAFE registration with respect
to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agent or other material changes. The
PRC agent must, on behalf of the PRC residents who have the right to exercise the employee share options, apply to SAFE or its local
branches for an annual quota for the payment of foreign currencies in connection with the PRC residents’ exercise of the employee
share options. The foreign exchange proceeds received by the PRC residents from the sale of shares under the stock incentive plans granted
and dividends distributed by the overseas listed companies must be remitted into the bank accounts in the PRC opened by the PRC agents
before distribution to such PRC residents.
We
have not adopted any stock incentive plans as of the date of this report.
Regulations
on Dividend Distribution
Under
our current corporate structure, we may rely on dividend payments from WFOE, which is a wholly foreign-owned enterprise incorporated
in China, to fund any cash and financing requirements we may have. The principal regulations governing distribution of dividends of foreign-invested
enterprises include the newly enacted Foreign-Investment Law, which came into effect on January 1, 2020, and its implementation rules.
Under these laws and regulations, wholly foreign-owned enterprises in China may pay dividends only out of their accumulated after-tax
profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, wholly foreign-owned enterprises
in China are required to allocate at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds
until these reserves have reached 50% of the registered capital of the enterprises. Wholly foreign-owned companies may, at their discretion,
allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserves are
not distributable as cash dividends.
Regulations
on M&A and Overseas Listings
Six
PRC regulatory agencies, including MOFCOM, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign
Investors, or the M&A Rules, which became effective in September 2006 and was amended in June 2009. The M&A Rules, among
other things, require offshore SPVs formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled
by PRC companies or individuals, to obtain the approval of MOFCOM prior to publicly listing their securities on an overseas stock exchange.
In
the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations
and other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining
approval from MOFCOM or its local counterparts may delay or inhibit our ability to complete such transactions. The M&A Rules requires
a foreign investor to obtain the approval from MOFCOM or its local counterpart only upon (i) its acquisition of a domestic enterprise’s
equity interest; (ii) its subscription of the increased capital of a domestic enterprise; or (iii) establishes and operates
a foreign-invested enterprise with assets acquired from a domestic enterprise and such transactions raise “national defense and
security” concerns or through such transactions foreign investors may acquire de facto control over domestic enterprises that raise
“national security” concerns. It is unclear whether our business would be deemed to be in an industry that raises “national
defense and security” or “national security” concerns. However, MOFCOM or other government agencies may publish explanations
in the future determining that our business is in an industry subject to the security review, in which case our future acquisitions in
China, including those by way of entering into contractual control arrangements with target entities, may be closely scrutinized or prohibited.
In
addition, Domestic Investment by Foreign-Invested Enterprises issued by MOFCOM in September 2000 is also currently in force governing
M&A.
See
“Risk Factors—Risks Related to Doing Business in China—The approval of the China Securities Regulatory Commission
may be required under a regulation adopted in August 2006, as amended, and, if required, we cannot predict whether we will be able to
obtain such approval.”
Regulations
Relating to Employment
Pursuant
to the Labor Law of PRC, promulgated by the NPC in July 1994 and revised in August 2009 and December 2018 (the “Labor Law”),
and the Labor Contract Law of PRC, promulgated by the Standing Committee of the NPC in June 2007 and amended in December 2012 (the “Labor
Contract Law”), employers must execute written employment contracts with full-time employees. If an employer fails to enter into
a written employment contract with an employee within one year from the date on which the employment relationship is established, the
employer must rectify the situation by entering into a written employment contract with the employee and pay the employee twice the employee’s
salary for the period from the day following the lapse of one month from the date of establishment of the employment relationship to
the day prior to the execution of the written employment contract. All employers must compensate their employees with wages equal to
at least the local minimum wage standards. Violations of the PRC Labor Law and the Labor Contract Law may result in the imposition of
fines and other administrative sanctions, and serious violations may result in criminal liabilities.
Enterprises
in China are required by PRC laws and regulations to participate in certain employee benefit plans, including social insurance funds,
namely a pension plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity
insurance plan, and a housing provident fund, and contribute to the plans or funds based on local annual minimum salary standard or certain
percentage of the local annual average compensations to works (“Social Insurance Payment Base”). We participate in employee
benefit plans and have made contributions to such plans required by current PRC laws and regulations. If enterprises are required to
contribute to the plans or funds based on a higher Social Insurance Payment Base under the new regulations or policies in the future,
we may have to make more contributions to such plans for our employees.
We
intend to comply with the new regulations and policies applicable to employee benefit plans set forth through time. As of the date of
this report, we have signed written employment contracts with all of our employees and paid all the benefits package as required by law.
In addition, the PRC Individual Income Tax Law requires companies operating in China to withhold individual income tax on employees’
salaries based on the actual salary of each employee upon payment.
|
C.
|
Organizational
structure
|
Below
is the Company’s corporate structure chart as of the date of this report.
Variable
Interest Entity Arrangements
In
establishing our business, we have used a VIE structure. In the PRC, investment activities by foreign investors are principally governed
by the Guidance Catalog of Industries for Foreign Investment, which was promulgated and is amended from time to time by the PRC Ministry
of Commerce, or MOFCOM, and the PRC National Development and Reform Commission, or NDRC. In June 2018, the Guidance Catalog of Industries
for Foreign Investment was replaced by the Special Administrative Measures (Negative List) for Foreign Investment Access (2019 Version),
or the Negative List. In June 2020, the MOFCOM and the NDRC promulgated the Special Administrative Measures (Negative List) for Foreign
Investment Access (2020 Version), or the Negative List, which became effective on July 23, 2020. Industries not listed in the Negative
List are generally open to foreign investment unless specifically restricted by other PRC regulations. Our Company and WFOE are considered
as foreign investors or foreign invested enterprises under PRC law.
The
business we conduct through our VIE is within the category for which foreign investment is currently restricted under the Negative List
or other PRC Laws. In addition, we intend to centralize our management and operation in the PRC without being restricted to conducting
certain business activities which are important for our current or future business but are restricted or might be restricted in the future.
As such, we believe the agreements between the WFOE and our VIE are necessary and essential to our business operations. These contractual
arrangements with our VIE and its shareholders enable us to exercise effective control over our VIE and hence consolidate their financial
results.
WFOE
effectively assumed management of the business activities of our VIE through a series of agreements which are referred to as the VIE
Agreements. The VIE Agreements are comprised of a series of agreements, including an Exclusive Business Cooperation and Management Agreement,
an Equity Interest Pledge Agreement, an Exclusive Option Agreement, Powers of Attorney and Spousal Consent Letters. Through the VIE Agreements,
WFOE has the right to advise, consult, manage and operate the VIE for an annual consulting service fee in an amount equal to a certain
percentage of the VIE’s net income. The shareholders of the VIE have pledged all of their right, title and equity interests in
the VIE as security for WFOE to collect consulting services fees provided to the VIE through the Equity Interest Pledge Agreement. In
order to further reinforce WFOE’s rights to control and operate the variable interest entity, the VIE’s shareholders have
granted WFOE an exclusive right and option to acquire all of their equity interests in the VIE through the Exclusive Option Agreement.
On
October 31, 2019 and November 1, 2019, Shanghai Jowell entered into a series of contractual arrangements with Shanghai Juhao Information
Technology Co., Ltd. (“Shanghai Juhao”) and the shareholders of Shanghai Juhao, as amended on October 10, 2020. These agreements
include: 1) an Exclusive Business Cooperation and Management Agreement; 2) an Equity Interest Pledge Agreement; 3) an Exclusive Option
Agreements 4) Powers of Attorney and 5) Spousal Consent Letters. Pursuant to these agreements, Shanghai Jowell has the exclusive rights
to provide consulting services to Shanghai Juhao related to the business operation and management of Shanghai Juhao. For such services,
Shanghai Juhao agrees to pay service fees determined based on all of its net profit after tax payments to Shanghai Jowell or Shanghai
Jowell has obligation to absorb all of Shanghai Juhao’s losses. The agreements remain in effect until and unless all parties agree
to its termination, except the Exclusive Option Agreement that the effective term of 10 years and can be renewed for an additional 10
years. Until such termination, Shanghai Juhao may not enter into another agreement for the provision of management consulting services
without the prior consent of Shanghai Jowell. Also, pursuant to the equity interest pledge agreement between the shareholders of Shanghai
Juhao and Shanghai Jowell, such shareholders pledged all of their equity interests in Shanghai Juhao to Shanghai Jowell, to guarantee
Shanghai Juhao’s performance of its obligations under the Exclusive Business Cooperation and Management Agreement. Without Shanghai
Jowell’s prior written consent, the shareholders of Shanghai Juhao shall not transfer or assign the pledged equity interests, or
incur or allow any encumbrance that would jeopardize Shanghai Jowell’s interests. If Shanghai Juhao breaches its contractual obligations
under the aforesaid agreement, Shanghai Jowell, as the pledgee, will be entitled to certain rights and entitlements, including priority
in receiving payments by the evaluation or proceeds from the auction or sale of all or part of the pledged equity interests of Shanghai
Juhao, in accordance with legal procedures. In essence, Shanghai Jowell has gained effective control over Shanghai Juhao. Therefore,
Shanghai Juhao is considered a VIE under the Statement of Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 810 “Consolidation”, because the equity investments in Shanghai Juhao no longer have the
characteristics of a controlling financial interest, and the Company, through Shanghai Jowell, is the primary beneficiary of Shanghai
Juhao.
|
D.
|
Facilities
and Property
|
Our
principal executive office is located in Shanghai, China, where we lease approximately 700 square meters of office space. We also leased
two office spaces for approximately 7,073 square meters and one warehouse space for approximately 6,440 square meters in Chuangshu City,
Jiangsu Province. Our leases will expire in December 2021, which can be renewed upon mutual agreement with our lessors. Our leased premises
are leased from related parties who either have valid titles to the relevant properties or proper authorization from the title holder
to sublease the property, save as disclosed in the following table:
Currently,
we lease the following properties to conduct our business:
Property Address
|
|
Lessor
|
|
Annual Rent
|
|
Lease
Expiration
Date
|
|
Purposes/Use
|
|
2nd Floor, No. 285 Jiangpu Road, Yangpu District, Shanghai, China
|
|
Shanghai Longrich Industrial Co. Ltd.
|
|
RMB 661,500
|
|
December 31, 2021
|
|
Office
|
|
No. 46-5 Xinzhuang Avenue, Xinzhuang County, Changshu City, Jiangsu Province, China
|
|
Suzhou Colori Cosmetics Manufacturing Co., Ltd.
|
|
RMB 1,803,200
|
|
December 31, 2021
|
|
Warehouse
|
|
No. 26 Longrich Blvd, Chang Nan Village, Xinzhuang County, Changshu City, Jiangsu Province, China
|
|
Jiangsu Longrich Bioscience Co. Ltd.
|
|
RMB 2,740,915
|
|
December 31, 2021
|
|
Office
|
|
38 Xinzhuang Avenue, Changnan Village, Xinzhuang County, Changshu City, Jiangsu Province, China
|
|
Jiangsu Longrich Bioscience Co. Ltd.
|
|
RMB503,128
|
|
December 31, 2021
|
|
Office
|
|
We
believe that we will be able to obtain adequate facilities, principally through leasing, to accommodate our future expansion plans.
ITEM 4A.
|
UNRESOLVED STAFF COMMENTS
|
Not
Applicable
ITEM 5.
|
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|
You
should read the following discussion and analysis of our financial condition and results of operations in conjunction with our
consolidated financial statements and the related notes included elsewhere in this annual report on Form 20-F. This
discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including
those set forth under “Item 3. Key Information—D. Risk Factors” or in other parts of this annual report on Form 20-F.
5A.
Operating Results
Overview
Jowell Global Ltd. (“Jowell Global”
or “we”) is an exempted company incorporated in the Cayman Islands with limited liability on August 16, 2019, as a holding
company. We, through our consolidated variable interest entity (“VIE”), focuses on providing consumers with convenient and
high-quality online retail experience through our retail platforms, www.1juhao.com, and mobile app, as well as authorized retail stores.
We also offer programs that enable third-party sellers to distribute their products through our platforms. In an effort to differentiate
our services, we focus on and specialize in the online retail of cosmetic products, health and nutritional supplements and household products.
We completed a reorganization of our legal structure
on November 1, 2019. The reorganization involved the incorporation of Jowell Global, Jowell Technology Limited (“Jowell Tech”),
a Hong Kong holding company; the incorporation of Shanghai Jowell Technology Co., Ltd. (“Shanghai Jowell”), a wholly foreign-owned
entity (“WFOE”) formed by Jowell Tech under the laws of the People’s Republic of China (“China” or the “PRC”).
As part of the reorganization, on October 31,
2019 and November 1, 2019, Shanghai Jowell entered into a series of agreements with Shanghai Juhao Information Technology Co., Ltd. (“Shanghai
Juhao”) and its shareholders, as amended on October 10, 2020. These agreements include: 1) an Exclusive Business Cooperation and
Management Agreement (“EBCMA”); 2) an Equity Interest Pledge Agreement (“EIPA”); 3) an Exclusive Option Agreement
(“EOA”); 4) Powers of Attorney (“POA”) and 5) Spousal Consent Letters. Through these agreements, Shanghai Jowell
has established the exclusive rights to receive the profits and obligation to absorb losses from Shanghai Juhao. The agreements remain
in effect unless all parties agree to its termination, except the EOA which has an effective term of 10 years and can be renewed for an
additional 10 years upon the end of the initial term. Until such termination, Shanghai Juhao may not enter into another agreement for
the similar provision without obtaining consent from Shanghai Jowell. Shanghai Jowell has gained effective control over Shanghai Juhao
and Shanghai Juhao is considered a Variable Interest Entity (“VIE”) under the Statement of Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) 810 “Consolidation”.
Jowell Global, Jowell Tech, and Shanghai Jowell
are holding companies with no material operations of their own and do not hold any material assets. We conduct our operations primarily
through our VIE in China. We established our VIE structure through aforementioned VIE agreements. These VIE agreements are subject to
restrictions under current PRC laws and regulations. In the opinion of our PRC counsel, Yunnan Kangsi Law Firm, our current ownership
structure, the ownership structure of our PRC subsidiary and our consolidated VIE, and the contractual arrangements among WFOE, our VIE
and the shareholders of our VIE are common practices for the companies listed on stock exchange in Hong Kong or the U.S. engaging in the
businesses on Negative List in China and these contractual arrangements are valid and binding in accordance with their terms and applicable
PRC laws and regulations currently in effect. However, Yunnan Kangsi Law Firm has also advised us that there are substantial uncertainties
regarding the interpretation and application of current or future PRC laws and regulations and there can be no assurance that the PRC
government will ultimately take a view that is consistent with the opinion of our PRC counsel. If the PRC government finds that our contractual
arrangements do not comply with its restrictions on foreign investment in the online data processing and transaction processing services
business, the relevant PRC regulatory authorities, including the China Securities Regulatory Commission (CSRC), would have broad discretion
in dealing with such violations or failures, including, without limitation: requiring us to restructure our ownership structure or operations,
including terminating the contractual arrangements with our VIE and deregistering the equity pledges of our VIE, which in turn would affect
our ability to consolidate, derive economic interests from, or exert effective control over our VIE. For more detail, see “Item
3.D. Risk Factors – Risks Related to Our Corporate Structure - If the PRC government deems that the contractual arrangements in
relation to our consolidated variable interest entities do not comply with PRC regulatory restrictions on foreign investment in the relevant
industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe
penalties or be forced to relinquish our interests in those operations.”
In 2012, Shanghai Juhao started its operation,
which was among the first membership -based e-commerce platforms for online-to-offline sales of cosmetics, health and nutritional
supplements and household products in China. Today, we offer an online platform Juhao Mall which holds an EDI (Electronic Data Interchange)
certification approved by the Shanghai Communication Administration pursuant to the requirement of Ministry of Industry and Information
Technology of China, selling our own brand products manufactured by third parties as well as international and domestic branded products
from 200+ other manufacturers. As of December 31, 2020 and 2019, our platform had 1,969,014 and 1,563,574 VIP members who have registered
on our platform, respectively, 178 and 169 merchants who have opened their own stores on our platform, respectively. In the years ended
December 31, 2020 and 2019, 73.4% and 71.6% of the products sold on our platform were cosmetics and health and nutritional supplements,
respectively. We also sell household products, such as pots and pans, paper towels, cups, vacuum cleaners, massagers, towels on our platform,
and those products account for 26.6% and 28.4 % of the products sold on our platform in 2020 and 2019, respectively.
We believe that we are industry forerunners in
turning data insight into valuable business intelligence in China. We continue to innovate and develop new solutions for our e-commerce
platform, which is supported by a strong IT infrastructure. We currently offer innovative service modules on our platforms such as data
analysis, CRM (customer relationship management), classification management, supply chain management, online shopping consultation, price
intelligence system, and precision marketing. Aimed at operational excellence, our service modules are designed and built to satisfy the
needs of participants for integrated and easy-to-use software systems. Our technology and data solutions for our authorized Love Home
Store enable users to monitor sales volume and pricing of products through our smart supply chain. With service location-specific data,
users are able to understand the needs of specific products in real time and gain valuable market insight. We can use this information
to recommend purchasing and inventory strategies to Love Home Store users in order to fundamentally improve their procurement processes.
Since August 2017, we have been also selling our
products in authorized retail stores all across China. Operating under the brand name “Love Home Store” or “LHH Store”,
the authorized retailers may operate as independent stores or store-in-shop (an integrated store), selling our products that they purchased
through our online platform under their special retailer accounts with us which provide them with major discounts. As of December 31,
2020, we authorized more than 24,513 Love Home stores in 31 provinces of China, providing offline retail and wholesale of our products.
Our
authorized LHH Stores as of December 31, 2020:
On April 28, 2021, the Company announced it has officially launched
its “Juhao Best Choice” community group-buying store initiative to continue growing its offline retail market presence. The
community group-buying offline stores will sell fresh produce, foods and daily household consumer products in addition to the cosmetics
and health and nutritional supplements currently sold in the Company’s franchised LHH Stores. The community group-buying stores
aim to provide a more convenient shopping experience and high-quality produce and foods for consumers from local communities, towns and
villages across China. Juhao Best Choice stores will consolidate online and offline resources for store design and logistics services
and provide guidance and trainings for store owners with a unified system for store management, design, service criteria, SKU management
and product delivery. The Company will also provide the store owners with live-streaming marketing skill training and upgrade and expand
certain existing LHH Stores to Juhao Best Choice stores.
In recent years, global e-commerce market continues
to expand. According to the CEVSN Information Consulting Co., Ltd. (“CEVSN”) in 2020, the number of global online consumers
reached 2.21 billion people, with a year-on-year growth of 8.9%. For online retail sales, in 2020, the global e-commerce retail sale reached
$4.4 trillion , with a year-on-year growth rate of 25.7%, and its percentage in total retail sales steadily increased to about 16.5%.
In 2020, the national online retail sales in China reached RMB 11.76 trillion (approximately $1.81 trillion), an increase of 10.9% over
the previous year, among which, the online retail sales of physical goods reached RMB 9.76 trillion (approximately $1.50 trillion), an
increase of 14.8%.
China is the second largest market for cosmetics
and health and nutritional supplements in the world. According to the data of CEVSN, the sales for cosmetics and health and nutritional
supplements in 2020 are RMB 546.4 billion (approximately $84.06 billion) and RMB 308.2 billion (approximately $47.42 billion) respectively.
The e-commerce channel has gradually become an important sales channel in cosmetics and health and nutritional supplements market, of
which the percentage of e-commerce sales in cosmetics industry is about 31.1%, and that in health and nutritional supplements industry
is about 34.5%.
The
increasing demand for quality of life in China has driven an increase in expenditure on cosmetics, health and nutritional supplements
and household products. These markets show considerable long-term growth potential, under both per-capita and percentage-of-GDP
calculations. For example, compared with the per-capita consumption levels of the US, Japan, and South Korea, China is still at
a lower expenditure for these products, resulting in a growth potential that is 3-6 times greater.
Key
Factors Affecting Our Results
Our
business and results of operations are affected by general factors affecting the online retail markets for health and nutritional
supplements and cosmetics in China, including China’s overall economic growth, the increase in per capita disposable income,
the growth in consumer spending and the retail industry and the expansion of internet penetration. Unfavorable changes in any
of these general factors could affect the demand for the products we sell and could materially and adversely affect our results
of operations.
While
our business is influenced by general factors affecting China’s online retail industry, our operating results are more directly
affected by certain company specific factors, including:
|
●
|
our
ability to attract and retain customers at reasonable cost;
|
|
●
|
our
ability to establish and maintain relationships with suppliers, third-party merchants and other service providers;
|
|
●
|
our
ability to invest in growth and new technologies while improving operating efficiency;
|
|
●
|
our
ability to control marketing expenses, while promoting our brand and internet platform cost-effectively;
|
|
●
|
our
ability to source new products to meet customer demands; and
|
|
●
|
Our ability to establish Juhao Best Choice Stores and continue to expand offline LHH Stores and increase the interactions between our online platform and offline stores.
|
|
|
|
|
●
|
our ability to compete effectively and to execute our strategies successfully
|
Results
of Operations
Certain
tables within this section may not reflect the exact amount or percentage due to rounding.
For
the Year Ended December 31, 2020 and 2019
The
following table summarizes the results of our operations for the years ended December 31, 2020 and 2019, respectively, and provides
information regarding the dollar and percentage increase during such periods.
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
Variance
|
|
|
|
$ Amount
|
|
|
% of Revenue
|
|
|
$ Amount
|
|
|
% of Revenue
|
|
|
$ Amount
|
|
|
%
|
|
|
|
(in thousands, except for percentages)
|
|
Revenue
|
|
$
|
96,879
|
|
|
|
100.0
|
%
|
|
$
|
61,776
|
|
|
|
100.0
|
%
|
|
$
|
35,103
|
|
|
|
56.8
|
%
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
86,405
|
|
|
|
89.2
|
%
|
|
|
56,081
|
|
|
|
90.8
|
%
|
|
|
30,324
|
|
|
|
54.1
|
%
|
Fulfilment
|
|
|
2,270
|
|
|
|
2.3
|
%
|
|
|
2,122
|
|
|
|
3.4
|
%
|
|
|
148
|
|
|
|
7.0
|
%
|
Marketing
|
|
|
1,028
|
|
|
|
1.1
|
%
|
|
|
723
|
|
|
|
1.2
|
%
|
|
|
305
|
|
|
|
42.2
|
%
|
General and Administrative Expenses
|
|
|
2,064
|
|
|
|
2.1
|
%
|
|
|
1,146
|
|
|
|
1.9
|
%
|
|
|
918
|
|
|
|
80.1
|
%
|
Total Operating Expenses
|
|
|
91,766
|
|
|
|
94.7
|
%
|
|
|
60,072
|
|
|
|
97.2
|
%
|
|
|
31,694
|
|
|
|
52.8
|
%
|
Income from Operations
|
|
|
5,113
|
|
|
|
5.3
|
%
|
|
|
1,704
|
|
|
|
2.8
|
%
|
|
|
3,409
|
|
|
|
200.1
|
%
|
Other Income (Expenses)
|
|
|
6
|
|
|
|
0.0
|
%
|
|
|
1
|
|
|
|
0.0
|
%
|
|
|
5
|
|
|
|
500.0
|
%
|
Income before Income Taxes
|
|
|
5,119
|
|
|
|
5.3
|
%
|
|
|
1,705
|
|
|
|
2.8
|
%
|
|
|
3,414
|
|
|
|
200.2
|
%
|
Provision (Benefit) for Income Taxes
|
|
|
1,532
|
|
|
|
1.6
|
%
|
|
|
427
|
|
|
|
0.7
|
%
|
|
|
1,105
|
|
|
|
258.8
|
%
|
Net Income
|
|
$
|
3,587
|
|
|
|
3.7
|
%
|
|
$
|
1,278
|
|
|
|
2.1
|
%
|
|
|
2,309
|
|
|
|
180.7
|
%
|
Revenue
Through our website at www.1juhao.com and mobile
app, we engage primarily in the sales of cosmetic products, health and nutritional supplements and household products sourced from manufacturers
and distributors in China. Currently, we have three types of revenue streams deriving from our three major product categories: cosmetic
products, health and nutritional supplements and household products. Other than revenue from product sales, we also earn service fees
charged to third party merchants for using our platform, which was immaterial and is grouped in “Others” presented below.
The following sets forth the breakdown of our revenue by revenue stream for the years ended December 31, 2020 and 2019, respectively.
|
|
For the Years Ended December 31,
|
|
|
Variance
|
|
|
|
2020
|
|
|
%
|
|
|
2019
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
(in thousands, except for percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cosmetic products
|
|
$
|
18,701
|
|
|
|
19.30
|
%
|
|
$
|
18,471
|
|
|
|
29.90
|
%
|
|
$
|
230
|
|
|
|
1.25
|
%
|
Health and Nutritional Supplements
|
|
|
52,372
|
|
|
|
54.06
|
%
|
|
|
22,672
|
|
|
|
36.70
|
%
|
|
|
29,700
|
|
|
|
131.00
|
%
|
Household Products
|
|
|
25,733
|
|
|
|
26.56
|
%
|
|
|
20,633
|
|
|
|
33.40
|
%
|
|
|
5,100
|
|
|
|
24.72
|
%
|
Other
|
|
|
73
|
|
|
|
0.08
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
73
|
|
|
|
n/a
|
|
Total
|
|
$
|
96,879
|
|
|
|
100.00
|
%
|
|
$
|
61,776
|
|
|
|
100.00
|
%
|
|
$
|
35,103
|
|
|
|
56.82
|
%
|
Compared to the year ended December 31, 2019,
sales of cosmetic products increased slightly by about $230,000 or 1.25% in 2020. The slight increase in cosmetic products revenue is
primarily due to 2.45% increase in weighted average unit price of the products sold and partially offset by the slight decrease of 1.18%
in the quantity of products sold. In 2019, we launched a new premium brand, Yasi. Along with our initial introduction of the new brand
to the market, we provided a relatively high marketing discount to promote the sale of the new brand products. In 2020, as our sales of
the new brand products were relatively stable, we lowered the discounts provided resulting in slight increase in weighted average unit
selling price and slight decrease in quantity sold.
Revenue generated from health and nutritional
supplements revenue stream increased by about $29.7 million or 131.00%. The significant increase is mainly attributable to the increase
in quantity sold of 119%, including snake & turtle powder capsule, Chrysalis Cordyceps, etc. Additionally, the weighted average selling
price of products sold in this revenue stream also increased by about 5.47% in 2020 comparing to 2019. In 2020, due to the spread of COVID-19,
health related concerns increased significantly in China. Customers showing much more interest in purchasing and consuming our health
and nutritional supplement products that regulate and enhance their immune system during the pandemic. The increase in customer demand
led to increase in quantity sold in 2020 comparing to 2019. Furthermore, due to government-imposed stay home orders in early 2020 and
the fear of infection during the outbreak of COVID-19, a significant portion of the consumers’ demand fulfilled through traditional
offline retail stores before the pandemic was replaced by online purchases. This dramatic change in consumer’s behavior also benefits
us as an online retailer and led to increase in sales in the health and nutritional supplements revenue stream.
Comparing to the year ended December 31, 2019,
in the year ended December 31, 2020, our household products revenue increased by about $5.1 million or 24.7%. The increase is primarily
attributable to the 50.9% increase in weighted average unit price for products sold and is partially offset by the 17.4% decrease in quantity
sold. The increase in weighted average unit price for products sold and the decrease in quantity of products sold comparing the two periods
is mainly due to the higher unit price products that we sold such as Longrich energy pot and Longrich water purifier in 2020 than in 2019.
Furthermore, in 2020, we released new products to the market, including massager and slow cooker. The successful of these new products
to the market also contributed to the increase in revenue generated from household products.
Operating
Expenses
Operating
expenses primarily consist of cost of sales, fulfilment expenses, marketing expenses and general and administrative expenses.
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
Variance
|
|
|
|
$ Amount
|
|
|
% of Revenue
|
|
|
$ Amount
|
|
|
% of Revenue
|
|
|
$ Amount
|
|
|
%
|
|
|
|
(in thousands, except for percentages)
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
$
|
86,405
|
|
|
|
89.2
|
%
|
|
$
|
56,081
|
|
|
|
90.8
|
%
|
|
$
|
30,324
|
|
|
|
54.1
|
%
|
Fulfilment expenses
|
|
|
2,270
|
|
|
|
2.3
|
%
|
|
|
2,122
|
|
|
|
3.4
|
%
|
|
|
148
|
|
|
|
7.0
|
%
|
Marketing expenses
|
|
|
1,028
|
|
|
|
1.1
|
%
|
|
|
723
|
|
|
|
1.2
|
%
|
|
|
305
|
|
|
|
42.2
|
%
|
General and Administrative Expenses
|
|
|
2,064
|
|
|
|
2.1
|
%
|
|
|
1,146
|
|
|
|
1.9
|
%
|
|
|
918
|
|
|
|
80.1
|
%
|
Total Operating Expenses
|
|
$
|
91,766
|
|
|
|
94.7
|
%
|
|
$
|
60,072
|
|
|
|
97.2
|
%
|
|
$
|
31,694
|
|
|
|
52.8
|
%
|
Our total operating expenses increased by about
$31.7 million or 52.7% from $60.1 million in the 2019 to $91.8 million in 2020. All categories of our operating expenses increased in
2020 comparing to 2019. The increase is attributable to the increase in sales and expansion of our operations.
Cost
of Sales
Cost
of sales primarily consists of the purchase price of merchandise that we sell directly on our platform and inbound shipping costs.
The cost of sales for all of our three revenue streams increased comparing 2020 to 2019.
Compared to 2019, the cost of sales of cosmetic
products increased by about $883,000 or 5.2% from $17.1 million in 2019 to about $17.9 million in 2020. The increase is due to an increase
in the average unit cost of $0.10 or 6.4%. The increase is partially offset by the decrease of 132,715 units or 1.18% in quantity sold
comparing 2020 to 2019. The increase in average unit cost is mainly due to the change in the mix of cosmetic products sold comparing the
two periods. In 2020, we sold more high-end products with higher unit costs, including products under our premium brand, Yasi, than in
2019.
The
cost of sales of health and nutritional supplements increased by about $25.8 million or 122.3% from $21.1 million in 2019 to $46.8
million in 2020. The increase is primarily attributable to increase in quantity sold. Comparing to 2019, we have sold about 119%
more units of products in 2020. There is also a slight increase of about 1.49% in weighted average unit cost which also contribute
to the increase in cost of sales of health and nutritional supplements. The significant increase in quantity sold is due to arising
health related concerns in 2020 caused by the global spread of COVID-19.
The cost of sales of household products increased
by about $3.7 million or 20.5% from $18.0 million 2019 to $21.7 million in 2020. The increase is due to increase of weighted average unit
cost of $0.65 per unit or 45.84% comparing the two years. The increase is partially offset by the decrease in quantity sold. Compared
to 2019, the quantity sold decreased by about 17.4% in 2020. The increase in weighted average unit cost and decrease in quantity sold
are mainly due to change in the product mix. In 2020, we sold more high unit cost products than in 2019.
Fulfillment
Expenses
Fulfillment
expenses increased by $148,000 or 7.0% in 2020 compared to 2019. Our fulfilment expenses primarily consist of costs related to
order fulfillment, including charges we paid for order preparing, packaging, outbound freight, and physical storage. The increase
in our fulfillment expenses is primarily attributable to the increase in outbound freight costs resulting from increased sales.
Fulfillment expense as a percentage of revenue decreased from 3.4% in 2019 to 2.3% in 2020. The decrease in fulfilment expense
to revenue percentage is mainly due to increase in sales to large local distributors who arrange their own freight.
Marketing
Expenses
Marketing expenses increased by $305,000 or 42.2%
in 2020 compared to 2019. The increase in marketing expenses is consistent with the increase in sales and was primarily attributable to
increase in payroll related expenses as we expanded our business in 2020.
General
and Administrative Expenses
Compared to the 2019, in 2020 general and administrative
expenses increased by $0.92 million or 80.1%. The increase was primarily attributable to an increase in expenses related to preparation
for the Nasdaq listing and initial public offering of approximately $0.9 million in fiscal year 2020.
Income
from Operations
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
Variance
|
|
|
|
$ Amount
|
|
|
% of Revenue
|
|
|
$ Amount
|
|
|
% of Revenue
|
|
|
$ Amount
|
|
|
%
|
|
(in thousands, except for percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
$
|
5,113
|
|
|
|
5.3
|
%
|
|
$
|
1,704
|
|
|
|
2.8
|
%
|
|
|
3,409
|
|
|
|
200.1
|
%
|
Income
from operations in the year ended December 31, 2020 and 2019 was $5.1 million and $1.7 million, respectively. The increase in
income from operations is mainly due to the increase in our revenue comparing the two periods. Income from operations accounted
for 5.3% and 2.8% of revenue in 2020 and 2019, respectively. The slight increase in income from operations to revenue ratio is
mainly attributable to slight decrease in cost of sales and fulfilment expenses as a percentage to revenue.
Income
Before Income Taxes
Our income before income taxes was $5.1 million
for 2020, an increase of $3.4 million or 200.2% from $1.7 million in 2019. The increase was primarily attributable to the increase in
our revenue comparing the two years and slight decrease in cost of sales and fulfillment expenses as a percentage to revenue.
Provision
for income taxes
Our
provision for income taxes was $1.5 million in 2020, an increase of $1.1 million or 258.8% from $0.4 million in 2019. The increase
is mainly attributable to increase in income before income taxes comparing the two years. We are subject to income taxes on entity
basis on income derived from the location in which each entity is domiciled. In 2020 and 2019, our main operating entity, Shanghai
Juhao was subject to a unified 25% enterprise income tax rate under the Enterprise Income Tax (“EIT”) Law of the PRC.
Jowell Global is incorporated in the Cayman Islands as an offshore holding company and is not subject to tax on income or capital
gain under the laws of the Cayman Islands. Jowell Tech is incorporated in Hong Kong as a holding company and is subject to Hong
Kong’s two-tier tax rates regime. In 2020, we have incurred certain costs at Jowell Global and Jowell Tech associated with
our IPO and we were not able to recognize any tax benefits according to local income tax laws. As a result, the effective tax
rate increased from 25.1% in 2019 to 29.9% in 2020.
Other
comprehensive income
Foreign
currency translation income was $783,000 and $2,000 in 2020 and 2019, respectively. The balance sheet amounts with the exception
of equity as of December 31, 2020 were translated at 1.00 RMB to 0.1531 US$ as compared to 1.00 RMB to 0.1435 US$ as of December
31, 2019. The equity accounts were stated at their historical rate. The average translation rates applied to the income statements
accounts for the year ended December 31, 2020 and 2019 were 1.00 RMB to 0.1450 US$ and 1.00 RMB to 0.1447 US$, respectively. The
change in the value of the RMB relative to the U.S. dollar may affect our financial results reported in U.S dollar terms without
giving effect to any underlying change in our business or results of operation.
For
the Years Ended December 31, 2019 and 2018
The
following table summarizes the results of our operations for the years ended December 31, 2019 and 2018, respectively, and provides
information regarding the dollar and percentage increase or (decrease) during such periods.
|
|
For the Year ended
|
|
|
For the Year ended
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
Variance
|
|
|
|
$ Amount
|
|
|
% of revenue
|
|
|
$ Amount
|
|
|
% of revenue
|
|
|
$ Amount
|
|
|
%
|
|
|
|
(in thousands, except for percentages)
|
|
Net Revenues
|
|
$
|
61,776
|
|
|
|
100.0
|
%
|
|
$
|
24,188
|
|
|
|
100.0
|
%
|
|
$
|
37,588
|
|
|
|
155.4
|
%
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
56,081
|
|
|
|
90.8
|
%
|
|
|
20,186
|
|
|
|
83.5
|
%
|
|
|
35,895
|
|
|
|
177.8
|
%
|
Fulfilment
|
|
|
2,122
|
|
|
|
3.4
|
%
|
|
|
983
|
|
|
|
4.1
|
%
|
|
|
1,139
|
|
|
|
115.8
|
%
|
Marketing
|
|
|
723
|
|
|
|
1.2
|
%
|
|
|
537
|
|
|
|
2.2
|
%
|
|
|
186
|
|
|
|
34.6
|
%
|
General and administrative expenses
|
|
|
1,146
|
|
|
|
1.8
|
%
|
|
|
497
|
|
|
|
2.0
|
%
|
|
|
649
|
|
|
|
130.6
|
%
|
Total operating expenses
|
|
|
60,072
|
|
|
|
97.2
|
%
|
|
|
22,203
|
|
|
|
91.8
|
%
|
|
|
37,869
|
|
|
|
170.6
|
%
|
Income from Operations
|
|
|
1,704
|
|
|
|
2.8
|
%
|
|
|
1,985
|
|
|
|
8.2
|
%
|
|
|
(281
|
)
|
|
|
(14.2
|
%)
|
Other Income (Expense)
|
|
|
1
|
|
|
|
0.0
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
1
|
|
|
|
100
|
%
|
Income Before Income Taxes
|
|
|
1,705
|
|
|
|
2.8
|
%
|
|
|
1,985
|
|
|
|
8.2
|
%
|
|
|
(280
|
)
|
|
|
(14.1
|
%)
|
Provision (Benefit) for Income Taxes
|
|
|
427
|
|
|
|
0.7
|
%
|
|
|
507
|
|
|
|
2.1
|
%
|
|
|
(80
|
)
|
|
|
(15.8
|
%)
|
Net Income
|
|
$
|
1,278
|
|
|
$
|
2.1
|
%
|
|
|
1,478
|
|
|
|
6.1
|
%
|
|
|
(200
|
)
|
|
|
(13.5
|
%)
|
Revenue
Through
our website at www.1juhao.com and mobile app, we engage primarily in the sales of cosmetic products, health and nutritional supplements
and household products sourced from manufacturers and distributors in China. Currently, we have three types of revenue streams
deriving from our three major product categories: cosmetic products, health and nutritional supplements and household products.
Other than revenue from product sales, we also earn service fees charged to third party merchants for using our platform, which
was immaterial for years ended December 31, 2019 and 2018, and is grouped in “Others” presented below. Total revenue
for the year ended December 31, 2019 increased by about $37.6 million or 155.4% from about $24.2 million in 2018 to about $61.8
million in 2019. The increase was primarily due to an increase in weighted average selling prices of cosmetic products sold and
an increase in the quantity of health and nutritional supplements and household products sold.
The
following table further sets forth the breakdown of our revenue by revenue stream for the years ended December 31, 2019 and 2018,
respectively:
|
|
For the Years Ended December 31,
|
|
|
Variance
|
|
|
|
2019
|
|
|
%
|
|
|
2018
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(in thousands, except for percentages)
|
|
Cosmetic products
|
|
$
|
18,471
|
|
|
|
29.9
|
%
|
|
$
|
11,696
|
|
|
|
48.35
|
%
|
|
$
|
6,775
|
|
|
|
57.9
|
%
|
Health and Nutritional supplements
|
|
|
22,672
|
|
|
|
36.7
|
%
|
|
|
5,435
|
|
|
|
22.47
|
%
|
|
|
17,237
|
|
|
|
317.1
|
%
|
Household products
|
|
|
20,633
|
|
|
|
33.4
|
%
|
|
|
7,056
|
|
|
|
29.17
|
%
|
|
|
13,577
|
|
|
|
192.4
|
%
|
Others
|
|
|
-
|
|
|
|
-
|
%
|
|
|
1
|
|
|
|
0.01
|
|
|
|
(1
|
)
|
|
|
(100.0
|
)%
|
Total
|
|
$
|
61,776
|
|
|
|
100.0
|
%
|
|
$
|
24,188
|
|
|
|
100.00
|
%
|
|
$
|
37,588
|
|
|
|
155.4
|
%
|
The
increase of revenue generated from sales of cosmetic products in 2019 compared to 2018 is mainly attributable to an increase in
the weighted average selling price of cosmetic products. Compared to 2018, the weighted average selling prices of cosmetic products
sold in 2019 increased by about 96.6%. The increase is partially offset by an approximate 19.7% decrease in the quantity of products
sold in 2019 comparing to 2018. In cooperation with our distributor, we successfully launched a new premium brand, Yasi, during
the second half of 2019, with a higher selling price than other cosmetic products. The new brand was well received by consumers,
which contributed to increase in our weighted average selling price in the cosmetic products revenue stream.
The
increase of health and nutritional supplements revenue in 2019 compared to 2018 is mainly attributable to a 465.3% increase in
the quantity of products sold. The increase is partially offset by a 26.2% decrease in the weighted average selling price. In
2019, we continued our marketing and promotion programs and provided attractive discounts on nutritional supplement products.
We benefited from our business expansion with a low margin strategy and were able to generate significantly more revenue through
increase in quantity of products sold.
The
increase of household products revenue in 2019 compared to 2018 is mainly attributable to a 139.58% increase in the quantity of
products sold and a 22.1% increase in the weighted average selling price. In addition to the implementation of our business expansion
with a low margin strategy, we also saw a high demand for certain premium Longrich branded products, such as Longrich energy pot
and Longrich water purifier. These combined factors contributed to the increase in both quantity sold and weighted average selling
price.
Income
from Operations
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
|
|
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
Variance
|
|
|
|
Amount
|
|
|
% of revenue
|
|
|
Amount
|
|
|
% of revenue
|
|
|
Amount
|
|
|
%
|
|
|
|
(in thousands, except for percentages)
|
|
Income from Operations
|
|
$
|
1,704
|
|
|
|
2.8
|
%
|
|
$
|
1,985
|
|
|
|
8.2
|
%
|
|
$
|
(281
|
)
|
|
|
(14.2
|
%)
|
Income
from operations in 2019 and 2018 was $1.7 million and $2.0 million, respectively. The decrease in income from operations is mainly
due to the implementation of our business expansion with a low margin strategy which resulted in an increase in cost of revenue
relative to revenue.
Operating
Expenses
Operating
expenses primarily consist of cost of sales, fulfilment expenses, marketing expenses and general and administrative expenses.
|
|
For the Year ended
|
|
|
For the Year ended
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
Variance
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(in thousands, except for percentages)
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
$
|
56,081
|
|
|
|
93.4
|
%
|
|
|
20,186
|
|
|
|
90.9
|
%
|
|
|
35,895
|
|
|
|
177.8
|
%
|
Fulfilment
|
|
|
2,122
|
|
|
|
3.5
|
%
|
|
|
983
|
|
|
|
4.4
|
%
|
|
|
1,139
|
|
|
|
115.8
|
%
|
Marketing
|
|
|
723
|
|
|
|
1.2
|
%
|
|
|
537
|
|
|
|
2.4
|
%
|
|
|
186
|
|
|
|
34.6
|
%
|
General and administrative expenses
|
|
|
1,146
|
|
|
|
1.9
|
%
|
|
|
497
|
|
|
|
2.3
|
%
|
|
|
649
|
|
|
|
130.6
|
%
|
Total operating expenses
|
|
|
60,072
|
|
|
|
100.0
|
%
|
|
|
22,203
|
|
|
|
100.0
|
%
|
|
|
37,869
|
|
|
|
170.6
|
%
|
Our
total operating expenses increased by about $37.9 million or 170.6% from $22.2 million in 2018 to $60.1 million in 2019. All categories
of our operating expenses increased in 2019 compared to the prior year. The increase is attributable to the increase in sales
and related to the expansion of our operations.
Cost
of Sales
Cost
of sales primarily consists of the purchase price of merchandise that we sell directly on our platform and inbound shipping costs.
The cost of sales in all of our three revenue streams increased in 2019 compared to 2018.
Compared
to 2018, cost of sales of cosmetic products increased by about $7.5 million or 77.8% from $9.6 million in 2018 to about $17.1
million in 2019. The increase is due to an increase in the average unit cost of $0.83 or 121.3%. The increase is partially offset
by 2.8 million units or 19.7% decrease in quantity sold. Our successful launch of new premium products result in the increase
in average unit cost.
The
cost of sales of health and nutritional supplements increased by about $16.1 million or 327.3% from $4.9 million in 2018 to $21.1
million in 2019. The increase is primarily due to we sold approximately 1.2 million units more products in 2019 than in 2018.
The increase is partially offset by decrease in the average cost per unit of 24.41%. There is an increasing demand for the recently
released of new health and nutritional supplements on our platform, such as cordyceps capsules and herbal wine products, which
had a relatively lower average unit cost.
The
cost of sales of household products increased by about $12.3 million or 217.1% from $5.7 million in 2018 to $18.0 million in 2019.
The increase results from a 139.6% increase in the quantity of products sold and a 32.4% increase in the average unit cost. The
increase in the average unit cost and quantity of products sold is mainly due to increased demands of premium Longrich branded
water purifier and energy pot in 2019.
Fulfillment
Expenses
Fulfillment
expenses increased by $1.1 million or 115.8% in 2019 compared to 2018. Our fulfilment expenses primarily consist of costs related
to order fulfillment, including charges we paid for order preparing, packaging, outbound freight, and physical storage. The increase
in our fulfillment expenses is primarily attributable to the increase in outbound freight costs resulting from increased sales.
Marketing
Expenses
Marketing
expenses increased by $0.2 million or 34.6% in 2019 compared to 2018. The increase in selling expenses is consistent with the
increase in sales and was primarily attributable to increases in costs associated with our promotional events.
General
and Administrative Expenses
Compared
to 2018, in 2019 general and administrative expenses increased by $0.6 million or 130.6%. The increase was primarily attributable
to an increase in our payroll expenses of approximately $0.4 million due to our continual expansion and recruitment of employees.
Income
Before Income Taxes
Our
income before income taxes was $1.7 million for the year ended December 31, 2019, a decrease of $0.3 million or 14.1% from $2.0
million in the year ended December 31, 2018. The decrease was primarily attributable to our continual implementation of business
expansion with low margin strategy.
Provision
for income taxes
Our
provision for income taxes was $0.4 million in 2019, a decrease of $80,000 or 15.8% from $0.5 million in 2018. We are subject
to income taxes on an entity basis on income derived from the location in which each entity is domiciled. In 2019 and 2018, only
Shanghai Juhao was subject to a unified 25% enterprise income tax rate under the Enterprise Income Tax (“EIT”) Law
of the PRC.
Other
comprehensive income
Foreign
currency translation adjustments amounted to a gain of $2,000 in 2019 and a loss of $110,000 in 2018. The balance sheet amounts
with the exception of equity as of December 31, 2019 were translated at 1.00 RMB to 0.1435 US$ as compared to 1.00 RMB to 0.1454
US$ as of December 31, 2018. The equity accounts were stated at their historical rate. The average translation rates applied to
the income statements accounts for 2019 and 2018 were 1.00 RMB to 0.1447 US$ and 1.00 RMB to 0.1511 US$, respectively. The change
in the value of the RMB relative to the U.S. dollar may affect our financial results reported in U.S dollar terms without giving
effect to any underlying change in our business or results of operation.
The
impact attributable to changes in revenue and expenses due to foreign currency translation is summarized as follows.
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
|
(in thousands)
|
|
Impact on revenue
|
|
$
|
(512
|
)
|
|
$
|
(919
|
)
|
Impact on operating expenses
|
|
$
|
(510
|
)
|
|
$
|
(844
|
)
|
Impact on net income
|
|
$
|
(11
|
)
|
|
$
|
(56
|
)
|
For
2019, if using the RMB 1.00 to $0.1435 (foreign exchange rate as of December 31, 2019) to translate our revenue, operating expense
and net income, our reported revenue, operation expense and net income would decrease by $512,000, $510,000 and $11,000, respectively.
For
2018, if using the RMB 1.00 to $0.1454 (foreign exchange rate as of December 31, 2018) to translate our revenue, operating expense
and net income, our reported revenue, operation expense and net income would decrease by $919,000, $844,000 and $56,000, respectively.
Operating
Activities
Net
cash provided by operating activities was approximately $6.3 million in 2020, compared to cash used in operating activities of
approximately $0.9 million in 2019. The increase in net cash provided by operating activities was primarily attributable to the
following factors:
|
●
|
Increase
in cash provided by utilization of advances to suppliers – related parties of about $11.7 million comparing 2020 with
2019. In 2020, we reserved cash of $7.6 million from utilization of advances to suppliers – related parties. In 2019,
we paid about $4.1 million cash to a supplier who is also a related party of the Company. We made a significant advance to
one of our related parties, who is the sole vendor of Longrich branded products at the end of 2019 as we planned to use such
advance for purchase of Longrich branded products in 2020. The utilization of such advance payment in 2020 reduced our cash
payments in 2020 in acquiring Longrich branded products.
|
The
increase in cash provided by operating activities is partially offset by the following factor:
|
●
|
Decrease
in cash saved from purchase of inventory of approximately $4.5 million comparing 2020 to 2019. Our average inventory turnover days are
21 days in 2020 and 16 days in 2019. We have consistently managed our inventory based on sales expectation to reduce any unnecessary
inventory associated costs. In 2020, our revenue increased significantly and we expected to see revenue to continue grow. As such, we
intentionally increased the inventory balance as of December 31, 2020 leading to increased cash used in purchasing of inventory comparing
to 2019.
|
Net
cash used in operating activities was approximately $0.9 million in 2019, compared to cash provided by operating activities of
approximately $0.2 million in 2018. The decrease in net cash provided by operating activities was primarily attributable to the
following factors:
|
●
|
Increase
in cash used for advances to suppliers – related parties of about $1.6 million. One of our related parties is the sole
vendor of Longrich branded products. Additionally, we cooperated with this related party to develop new brands and products,
expecting to have expanded products lines to meet differentiated consumer demands. The increase in advances to suppliers –
related parties is mainly associated with the new products development and also to secure future supplies of Longrich branded
products.
|
|
|
|
|
●
|
Decrease in cash
provided by accrued expenses and other liabilities of approximately $981,000. Our accrued expense and other liabilities as
of December 31, 2019 and 2018 mainly consists of deposits made by resellers and distributors who purchased products from our
website. We generally require new resellers and distributors to make deposit with us to ensure they do not conduct any illegal
or unethical business activities and also to reduce the counter party credit risk. However, in 2019, we waived deposits for
some of our distributors to encourage them to make more purchases, which contributed to the decrease in cash provided by accrued
expense and other liabilities.
|
The
decrease in cash provided by operating activities is partially offset by the following factor:
|
●
|
Decrease
in cash used for inventory of approximately $1.3 million. Our average inventory turnover days are 16 days in 2019 to 35 days in 2018.
To efficiently manage our inventory without significantly increasing the inventory associated costs, we managed our inventory closely
based on sales expectation. Our sales increased significantly in the past three years due to our expansion. To meet the increased demand
of our products, we increased the level of inventory in 2019 compared to the prior year. In 2019, we hosted multiple nation-wide promotion
events, including the “double 11” day and “double 12” day in November and December, 2019, on which we provided
more extensive price markdowns, compared to the events in 2018. Accordingly, the promotion events significantly reduced our inventory
turnover rate in 2019, compared to 2018.
|
Investing
Activities
Net cash used in investing activities was approximately
$117,000 and $46,000 in 2020 and 2019, respectively. In 2020, we made approximately $115,000 advance payment to purchase vehicles for
business use. In 2019, we paid about $40,000 to acquire software supporting our app development.
Net
cash used in investing activities was approximately $46,000 and $40,000 in 2019 and 2018, respectively. Cash used in investing
activities in both years were for software acquired from third-party that support our app development.
Financing
Activities
Net cash provided by financing activities was
$11.3 million and $0.6 million in 2020 and 2019, respectively. In October 2021, we completed a private placement and issued 1,149,425
(after reverse split) Ordinary Shares to three third-party investors for
an aggregate proceeds of $10 million. In addition, our related parties provided approximately $1.2 million related party loans. These
related party loans are short-term in nature, interest-free and due upon demand. Furthermore, we conserved cash of about $0.55 million
by using trade notes payable in 2020 and used about $0.4 million cash to pay for deferred offering costs that are directly related to
our initial public offering. In 2019, we received about $2.3 million cash from capital contributed by our existing stockholders. In 2019,
Shanghai Juhao used about $1.6 million cash to pay dividends to Shanghai Juhao stockholders and used about $86,000 cash to pay off our
related party loans.
Net
cash provided by financing activities was $637,000 in 2019 and net cash used in financing activities was $7,000 in 2018. On October
8, 2019, the shareholders of Shanghai Juhao approved an increase in the registered capital of Shanghai Juhao and contributed approximately
$2.3 million in October, 2019. In July, 2019, our VIE Shanghai Juhao’s Board of Directors approved to make cash dividend
of $1.6 million. The dividend was paid in July, 2019.
Cash
Transfer within the Company and Restrictions on Dividends Distribution
The
Company’s sales, purchases and expense transactions are denominated in RMB, and all of the Company’s assets and liabilities
are also denominated in RMB. The RMB is not freely convertible into foreign currencies under the current law. In China, foreign
exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by
the People’s Bank of China, the central bank of China. Remittances in currencies other than RMB may require certain supporting
documentation in order to affect the remittance. Currently, our subsidiary in the PRC may purchase currencies to transfer cash
within the Company among subsidiaries in and out of the PRC for, among other things, payment of cash dividends to us, if any,
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 and therefore limit our ability to transfer cash within the Company among
subsidiaries in and out of the PRC. The limitation over cash transfer within the Company does not raise additional liquidity risk
as all of our liabilities are also denominated in RMB and we conduct our business primarily through our consolidated VIE in China.
We
rely on dividends and other distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we
may have. Under PRC laws and regulations, our PRC subsidiary may pay dividends only out of its accumulated after-tax profits as
determined in accordance with PRC accounting standards and regulations. In addition, our subsidiary in the PRC is required to
set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50%
of its registered capital. Each of such entity in the PRC is also required to further set aside a portion of its after-tax profits
to fund the employee welfare fund, although the amount to be set aside, if any, is determined at the discretion of its board of
directors. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future
losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except
in the event of liquidation. Therefore, these statutory reserves, along with the registered capital of the PRC entities are considered
as restricted. Amounts restricted that include paid in capital and statutory reserve funds, as determined pursuant to PRC GAAP,
are $14,567,851, $4,268,147 and $1,964,982 as of December 31, 2020, 2019 and 2018, respectively.
Off-balance
Sheet Commitments and Arrangements
We
have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or
that are not reflected in our consolidated 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. We do
not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support
to us or that engages in leasing, hedging or research and development services with us.
Assets
Held By and the Operations of Entities Apart From the Consolidated VIE
The
Company and its subsidiaries are all holding companies, except for its consolidated VIE. The only assets held by the Company and
its subsidiaries are the cash in their bank accounts. The uncertainties in the PRC legal system could cause the relevant regulatory
authorities to find our current VIE Agreements with VIE to be in violation of any existing or future PRC laws or regulations and
could limit the Company’s ability to enforce its rights under these contractual arrangements. Furthermore, the nominee shareholders
of the VIE may have interests that are different from those of the Company, which could potentially increase the risk that they
would seek to act contrary to the terms of the VIE Agreements with the VIE. In addition, if the nominee shareholders will not
remain the shareholders of the VIE, breach, or cause the VIE to breach, or refuse to renew the existing contractual arrangements
the Company has with them and the VIE, the Company may not be able to effectively control the VIE and receive economic benefits
from them, which may result in deconsolidation of the VIE.
Impact
of COVID-19 Pandemic
Beginning
in late 2019, there were reports of the COVID-19 (coronavirus) outbreak in Wuhan, China, the epidemic quickly spread to many provinces,
autonomous regions, and cities in China as well as many parts of the world, including the U.S. In March 2020, the World Health
Organization declared the COVID-19 a pandemic. With an aim to contain the COVID-19 outbreak, the Chinese government has imposed
various strict measures across the country including, but not limited to, travel restrictions, mandatory quarantine requirements,
and postponed resumption of business operations until after the Chinese New Year holiday in 2020.
As
an online retailer and retail platform, we noticed an increase in sales in January and February 2020 as brick and mortar stores
were closed due to the lockdown. Consumers’ purchase behavior also evolved as the fear for contamination remains even after
the Chinese government eased its restrictions, and as a result we saw an increase in sales in 2020. In early 2020, we noticed
an increase in our operating costs, specifically freight costs, as consumers’ needs were mainly fulfilled through online
retailers like us, which in turn significantly increased the demand for freight services. Additionally, the government-imposed
interstate transportation restrictions and quarantine requirement also limited freight service providers’ capacity. The
increased demand and the interruption to freight services results in increased average cost for freight services in January and
February 2020. Starting from March 2020, businesses in China began to reopen, and the interruptions to businesses were gradually
removed. As more freight service companies were able to operate as their full capacity, our average cost for freight services
decreased since March 2020. Additionally, in second half of 2020, we received more orders from certain large distributors who
arranged their own freight, which further reduced our freight costs. Consequently, fulfilment expenses to revenue ratio decreased
comparing 2020 with 2019. Overall, our results of operation in 2020 and consolidated financial position as of December 31, 2020
was not significantly impacted by COVID-19. However, it is not possible to determine the ultimate impact of the COVID-19 pandemic
on our business operations and financial results, which is highly dependent on numerous factors, including the duration and spread
of the pandemic and any resurgence of COVID-19 in China or elsewhere, actions taken by governments, the responses of businesses
and individuals to the pandemic.
Critical
Accounting Policies, Judgments and Estimates
We
prepare our financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) and have been consistently applied. The consolidated financial statements include the accounts of the Company, its
subsidiaries, and the VIE. All intercompany transactions and balances between the Company, its subsidiaries and the VIE are eliminated
upon consolidation.
Consolidation
of Variable Interest Entity
A
VIE is an entity that either has a total equity investment that is insufficient to finance its activities without additional subordinated
financial support, or whose equity investors lack the characteristics of a controlling financial interest, such as through voting
rights, right to receive the expected residual returns of the entity. The variable interest holder, if any, that has a controlling
financial interest in a VIE is deemed to be the primary beneficiary of, and must consolidate, the VIE.
Shanghai
Jowell is deemed to have a controlling financial interest through a series of contracture agreements and be the primary beneficiary
of Shanghai Juhao because it has both of the following characteristics:
|
(1)
|
The
power to direct activities at Shanghai Juhao that most significantly impact such entity’s economic performance, and
|
|
|
|
|
(2)
|
The obligation to
absorb losses of, and the right to receive benefits from, Shanghai Juhao that could potentially be significant to such entity.
|
Pursuant
to the contractual arrangements with Shanghai Juhao, Shanghai Juhao shall pay service fees equal to all of its net profit after
tax payments to Shanghai Jowell. Such contractual arrangements are designed so that the Shanghai Juhao would operate for the benefit
of Shanghai Jowell and ultimately, the Company.
Use
of estimates
In
preparing the consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the
consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting years. Significant
items subject to such estimates and assumptions include, but not limited to, the useful lives of property and equipment, allowance
for doubtful accounts and advance to suppliers, valuation of inventories, Impairment of long-lived assets, and assumptions related
to the consolidation of entities in which the Company holds variable interests. Actual results could differ from those estimates.
Leases
On
January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-02, Leases (as amended by ASU 2018-01,
2018-10, 2018-11, 2018-20, and 2019-01, collectively “ASC 842”). For all leases that were entered into prior to the
effective date of ASC 842, the Company has elected to utilize the package of practical expedients at the time of adoption, which
allows the Company to (1) not reassess whether any expired or existing contracts are or contain leases, (2) not reassess the lease
classification of any expired or existing leases, and (3) not reassess initial direct costs for any existing leases. The Company
also has elected to utilize the short-term lease recognition exemption and, for those leases that qualified, the Company did not
recognize operating lease right-of-use (“ROU”) assets or operating lease liabilities. The Company elected not to record
assets and liabilities on its consolidated balance sheet for new or existing lease arrangements with terms of 12 months or less.
The Company recognizes lease expenses for such lease on a straight-line basis over the lease term.
Upon
the adoption of the new guidance on January 1, 2020, the Company recognized operating lease ROU assets and operating lease liabilities
of approximately $3.6 million. The remaining balance of lease liabilities are presented within current portion of operating lease
liabilities and the non-current portion of operating lease liabilities on the consolidated balance sheets.
Revenue
recognition
The Company through its website www.1juhao.com
and mobile applications, engages primarily in online sale of cosmetic products, health and nutritional supplements and household products
sourced from manufacturers and distributors in China, and also offers an online marketplace that enables third-party sellers to sell their
products to the Company’s consumers. Customers place their orders for products or services online primarily through the Company’s
website and mobile applications. Payment for the purchased products or services is generally made either before delivery or upon delivery.
On
January 1, 2017, the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers
(FASB ASC Topic 606) using the modified retrospective approach. The results of applying Topic 606 using the modified retrospective
approach were insignificant and did not have a material impact on the Company’s consolidated financial condition, results
of operations, cash flows, business process, controls or systems.
Consistent
with the criteria of ASC 606, the Company recognizes revenues when the Company satisfies a performance obligation by transferring
a promised goods or services to a customer. Goods or services is transferred when the customer obtains control of it, which generally
occurs upon the delivery of the products to customers.
In
accordance with ASC 606, the Company evaluates whether it is appropriate to record the gross amount of product sales and related
costs or the net amount earned as commissions. When the Company is a principal, that the Company obtains control of the specified
goods or services before they are transferred to the customers, the revenues should be recognized in the gross amount of consideration
to which it expects to be entitled in exchange for the specified goods or services transferred. When the Company is an agent and
its obligation is to facilitate third parties in fulfilling their performance obligation for specified goods or services, revenues
should be recognized in the net amount for the amount of commission which the Company earns in exchange for arranging for the
specified goods or services to be provided by other parties. Revenue is recorded net of value-added taxes.
The
Company recognizes revenue net of discounts and return allowances when the products are delivered and title passes to customers.
Significant judgement is required to estimate return allowances. For online direct sales business with return conditions, the
Company reasonably estimate the possibility of return based on the historical experience, changes in judgments on these assumptions
and estimates could materially impact the amount of net revenues recognized. The Company generally grants customers 7 days of
free return upon receiving goods according to PRC law regarding online purchased products. As of December 31, 2020 and 2019, no
return allowances were recorded.
The Company primarily sells cosmetic products,
health and nutritional supplements and household products through online direct sales. The Company recognizes product revenues from the
online direct sales on a gross basis as the Company is a principal because it controls the promised good or service before transferring
it to a customer. This control is determined by the following indicators 1) The Company is the primary obligor in the sales transaction
and responsible for fulfilling the promise to provide the product and service; 2) The Company bears the inventory risk. The Company will
first indemnify customers for product damages and then request reimbursements from suppliers if the suppliers are determined to be responsible
for the damages; 3) The Company has discretion in establishing the prices and control over the entire transaction. For the years ended
December 31, 2020, 2019 and 2018, approximately $21.3 million, $50.19 million and $17.78 million cost of products were purchased, packed
and delivered by the Company at the warehouse of a subsidiary of Jiangsu Longrich Group Co., Ltd (“Longrich Group”), a supplier
controlled by the Chairman and CEO of the Company, which generated approximately $23.4 million, $54.39 million and $18.34 million revenues,
respectively.
Other
than revenue from online direct sales, the Company also earns service fees charged to third-party sellers for participating in
the Company’s online marketplace, where the Company generally is acting as an agent and its performance obligation is to
arrange for the provision of the specified goods or services by those third-party sellers. During the years ended December 31,
2020, 2019 and 2018, revenue from service fees were $78,027, nil and $634, respectively.
Unearned
revenue consists of payments received or awards to customers related to unsatisfied performance obligations at the end of the
period, included in deferred revenues in the Company’s Consolidated Balance Sheets. As of December 31, 2020 and 2019, the
Company had total deferred revenue of $1,701,321 and $1,987,105, respectively, which mainly represent the proceeds received for
orders placed at end of each period, while the deliveries were accomplished at the beginning of the next periods, when they were
recognized as revenue.
Revenue
is recognized at a point in time when the goods are transferred to customers, and no remaining performance obligation in future
periods. The Company applies a practical expedient to expense costs as incurred for costs to obtain a contract with a customer
when the amortization period would have been one year or less. The Company has no material incremental costs of obtaining contracts
with customers that the Company expects the benefit of those costs to be longer than one year which need to be recognized as assets.
Income
taxes
The
Company’s subsidiaries in China and Hong Kong are subject to the income tax laws of the PRC and Hong Kong. No taxable income
was generated outside the PRC for the years ended December 31, 2020, 2019 and 2018. The Company accounts for income taxes in accordance
with ASC 740, “Income Taxes”. ASC 740 requires an asset and liability approach for financial accounting and reporting
for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax
benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either
expire before the Company is able to realize their benefits, or future deductibility is uncertain. As of December 31, 2020 and
2019, the Company did not have any significant unrecognized deferred tax assets and liabilities, respectively.
ASC
740-10-25 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken
(or expected to be taken) in a tax return. It also provides guidance on the recognition of income tax assets and liabilities,
classification accounting for interest and penalties associated with tax positions, years open for tax examination, accounting
for income taxes in interim periods and income tax disclosures. There were no material uncertain tax positions as of December
31, 2020 and 2019. As of December 31, 2020, the tax years ended December 31, 2016 through December 31, 2020 for the Company’s
PRC subsidiaries remain open for statutory examination by PRC tax authorities.
JOBS
Act
On
April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, relax certain
reporting requirements for qualifying public companies. We will qualify as an “emerging growth company” and under
the JOBS Act will be allowed to comply with new or revised accounting pronouncements based on the effective date for private (not
publicly traded) companies. We are electing to delay the adoption of new or revised accounting standards, and as a result, we
may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required
for non-emerging growth companies. As a result, our financial statements may not be comparable to companies that comply with new
or revised accounting pronouncements as of public company effective dates.
Quantitative
and Qualitative Disclosures about Market Risks
Liquidity
risk
We
are exposed to liquidity risk, which is the risk that we will be unable to provide sufficient capital resources and liquidity
to meet our commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and
monitoring procedures. When necessary, we will turn to other financial institutions to obtain short-term funding to meet the liquidity
shortage.
Inflation
risk
Inflationary
factors, such as increases in personnel and overhead costs, could impair our operating results. Although we do not believe that
inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the
future may have an adverse effect on our ability to maintain current levels of gross margin and operating expenses as a percentage
of sales revenue if the revenues from our products do not increase with such increased costs.
Interest
rate risk
Our
exposure to interest rate risk primarily relates to the interest rate that our deposited cash can earn, on the other hand, interest-earning
instruments carry a degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates.
An increase, however, may raise the cost of any debt we incur in the future.
Foreign
currency translation and transaction
Our
operating transactions and assets and liabilities are mainly denominated in RMB. RMB is not freely convertible into foreign currencies
for capital account transactions. The value of RMB against the U.S. dollar and other currencies is affected by, among other
things, changes in China’s political and economic conditions and China’s foreign exchange policies. To date, we have
not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk.
Recently
Issued Accounting Pronouncements
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): The amendments in this Update require
a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected
to be collected. The amendments broaden the information that an entity must consider in developing its expected credit loss estimate
for assets measured either collectively or individually. The use of forecasted information incorporates more timely information
in the estimate of expected credit loss, which will be more decision useful to users of the financial statements. This ASU is
effective for annual and interim periods beginning after December 15, 2019 for issuers and December 15, 2020 for non-issuers.
Early adoption is permitted for all entities for annual periods beginning after December 15, 2018, and interim periods therein.
In May 2019, the FASB issued ASU 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief. This
update adds optional transition relief for entities to elect the fair value option for certain financial assets previously measured
at amortized cost basis to increase comparability of similar financial assets. The updates should be applied through a cumulative-effect
adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is,
a modified retrospective approach). In November 19, 2019, the FASB issued ASU 2019-10 to amend the effective date for ASU 2016-13
to be fiscal years beginning after December 15, 2022 and interim periods therein. The Company does not believe this guidance will
have a material impact on its consolidated financial statements.
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which removes
certain exceptions to the general principles in Topic 740, and also improves consistent application of and simplify U.S. GAAP
for other areas of Topic 740 by clarifying and amending existing guidance. For public business entities, the amendments in this
update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all
other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2021, and interim periods
within fiscal years beginning after December 15, 2022. Early adoption of the amendments is permitted. The Company will adopt this
ASU within annual reporting period of September 30, 2022 and expects that the adoption of this ASU will not have a material impact
on the Company’s consolidated financial statements.
The
Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a
material effect on the consolidated financial position, statements of operations and cash flows.
|
5B.
|
Liquidity
and Capital Resources
|
Liquidity and Capital Resources
We are a holding company incorporated in the Cayman
Islands. We conduct our operations primarily through our consolidated VIE in China. As a result, our ability to pay dividends depends
upon dividends paid by Shanghai Jowell. If Shanghai Jowell incurs debt on its behalf in the future, the instruments governing its debt
may restrict its ability to pay dividends to us. In addition, Shanghai Jowell is permitted to pay dividends to us only out of its retained
earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, Shanghai Jowell is required
to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds
reach 50% of its registered capital. Additionally, Shanghai Jowell may allocate a portion of its after-tax profits based on PRC accounting
standards to its enterprise expansion fund and staff bonus and welfare funds, at its discretion. Shanghai Jowell may also allocate a portion
of its after-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion. The statutory reserve funds
and the discretionary funds are not distributable as cash dividends. There is no material impact of Covid-19 to our liquidity.
As of December 31, 2020, we had cash of approximately
$18.2 million. We did not have any other short-term investments. Our current assets were approximately $30.0 million as of December 31,
2020. Our current liabilities were approximately $12.2 million as of December 31, 2020. Our current ratio as of December 31, 2020 is 2.47:1.
Total shareholders’ equity as of December 31, 2020 was approximately $18.7 million.
We have historically funded our working capital
needs from operations, loans from related parties, and capital from shareholders. Presently, our principal sources of liquidity are primarily
generated from our operations. Our working capital requirements are influenced by the level of our operations, the inventory turnover,
and the timing of accounts receivable collections. Additionally, on October 21, 2020, the Company completed a private placement and issued
1,149,425 (after reverse split) Ordinary Shares to three third party investors. The Company received aggregated proceeds of $10,000,000
from aforementioned private placement. Furthermore, on March 19, 2021, the Company closed its initial public offering (“IPO”)
of 3,714,286 ordinary shares, par value $0.0001 per share, priced at $7.00 per share. On March 23, 2021, the underwriter exercised its
over-allotment option to purchase an additional 557,143 ordinary shares at a price of $7.00 per share. The closing for the sale of the
over-allotment shares took place on March 25, 2021. The gross proceeds of the Company’s IPO, including the proceeds from the sale
of the over-allotment shares, totaled approximately $29.9 million, before deducting underwriting discounts and other related expenses.
The Ordinary Shares have been listed on the Nasdaq Capital Market and trading under the ticker symbol “JWEL” since March 17,
2021.
As of December 31, 2020, approximately $13.6 million
cash was held by our VIE with banks and financial institutions inside China as we conducted our operations primarily through our consolidated
VIE in China. The remaining cash was held by Jowell Global and Jowell Tech with banks in Cayman Islands and Hong Kong. Based on our current
operating plan, we believe that our existing resources, including cash generated from operations, will be sufficient to meet our working
capital requirement for our current operations over the next twelve months. In order to fully implement its business plan and sustain
continued growth, the Company may also need to raise capital from outside investors.
The following table sets forth summary of our
cash flows for 2020, 2019 and 2018, respectively:
|
|
For the Years ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Net cash provided by (used in) operating activities
|
|
$
|
6,339
|
|
|
$
|
(856
|
)
|
|
$
|
157
|
|
Net cash used in investing activities
|
|
|
(117
|
)
|
|
|
(46
|
)
|
|
|
(40
|
)
|
Net cash provided by (used in) financing activities
|
|
|
11,345
|
|
|
|
637
|
|
|
|
(7
|
)
|
Effect of exchange rate change on cash
|
|
|
665
|
|
|
|
49
|
|
|
|
(11
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
18,233
|
|
|
|
(216
|
)
|
|
|
99
|
|
Cash, beginning of the period
|
|
|
12
|
|
|
|
228
|
|
|
|
129
|
|
Cash, end of the period
|
|
|
18,244
|
|
|
|
12
|
|
|
|
228
|
|
|
5C.
|
Research
and Development, Patents and Licenses, etc.
|
See
“Item 4. Information on the Company—B. Business Overview --“Intellectual Property.”
Other
than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events
for the period from January 1, 2020 to December 31, 2020 that are reasonably likely to have a material effect on our
net revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to
be not necessarily indicative of future operating results or financial conditions.
|
E.
|
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 shares and classified as shareholder’s
equity or that are not reflected in our consolidated 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.
We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support
to us or engages in leasing, hedging or product development services with us.
|
F.
|
Tabular
Disclosure of Contractual Obligations
|
Our operating lease contractual obligations as of December 31, 2020
were as follows:
12 months ending December 31,
|
|
|
|
2021
|
|
$
|
873,872
|
|
2022
|
|
|
961,259
|
|
2023
|
|
|
1,057,385
|
|
2024
|
|
|
1,163,124
|
|
Total lease payments
|
|
$
|
4,055,640
|
|
Other than those shown above, we did not have
any significant capital and other commitments, long-term obligations, or guarantees as of December 31, 2020.
See
“Forward-Looking Statements”.
ITEM 6.
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
6.A.
Directors and Executive Officers
The
following table sets forth information regarding our executive officers and directors as of the date of this report.
Directors
and Executive Officers
|
|
Age
|
|
Position/Title
|
Zhiwei Xu
|
|
67
|
|
Chief Executive Officer,
Director Chairman of the Board
|
Mei Cai
|
|
41
|
|
Chief Financial Officer
|
Dan (Jessie) Zhao
|
|
47
|
|
Director and Vice President
|
Haitao Wang(1)(2)(3)
|
|
52
|
|
Independent Director
|
Y. Tristan Kuo(1)(2)(3)
|
|
66
|
|
Independent Director
|
William Morris(1)(2)(3)
|
|
67
|
|
Independent Director
|
|
(1)
|
Member
of audit committee.
|
|
(2)
|
Member
of compensation committee.
|
|
(3)
|
Member
of corporate governance and nominating committee.
|
Biography
Zhiwei
Xu. Mr. Zhiwei Xu was appointed as a member of the Board of Directors of the Company (the “Board”) on August 16,
2019, and Chairman of the Board and the Chief Executive Officer of the Company on July 1, 2020. Since 1992, Mr. Xu has served
as the Chairman of the board of directors of Jiangsu Longrich Group Co., Ltd. Since 2012, Mr. Xu has served as the Chairman of
the board of directors of Shanghai Juhao Information Technology Co., Ltd. Mr. Xu graduated from EMBA program of Fudan Qiushi Continuing
Education College in August 2002.
Mei Cai. Ms. Cai was appointed as the
Chief Financial Officer of the Company on November 15, 2020. Ms. Cai has served as director of CN Energy Group Inc. (Nasdaq:
CNEY) since August 2019. From July 23, 2019 to November 11, 2020, Ms. Cai has served as the Chief Financial Officer of China
Eco-Materials Group Co., Limited. From October 2017 to July22, 2019, Ms. Cai has served as manager of Wealth Financial Services LLC.
From December 2013 to September 2017, Ms. Cai served as audit manager at Friedman, LLP. From December 2006 to November 2013, Ms. Cai
served as audit manager at Patrizio & Zhao, LLC. Ms. Cai graduated from Jiangsu Radio & TV University with a major in
Economic Management in December 2003. Ms. Cai is a U.S. citizen and resides in the U.S.
Dan
(Jessie) Zhao. Ms. Zhao was appointed as a member of the Board on December 15, 2019 and vice president of finance of the Company
on September 17, 2020. Since May 2019, Ms. Zhao has served as secretary of the board of directors of Shanghai Juhao Information
Technology Co., Ltd. Since April 2019, Ms. Zhao has served as supervisor of Nantong Zhuama Bioscience Co., Ltd. Since September
2017, Ms. Zhao has served as legal representative and managing director of Suzhou GuanYunShang Investment Management Co., Ltd.
which has no actual operation yet. From April 1996 to May 2019, Ms. Zhao served in various positions at Jiangsu Longrich Group
Co., Ltd. including head of investment department, general manager of its subsidiary company, director of customer service department
and director of planning and information department. Ms. Zhao received her bachelor degree in Economics from Nanjing Audit University
in June 2007. Ms. Zhao received her Senior Customer Service Manager certificate from the American Certification Institute in August
2010. Ms. Zhao passed the fund practitioner test of the Asset Management Association of China in April 2017.
Haitao
Wang. Mr. Haitao Wang was appointed as a member of the Board on December 15, 2019. Since August 2016, Mr. Wang has served
as the vice president of Qichen (Shenzhen) Fund Management Co. Ltd. and supervisor of Shanghai Xiandai Industrial Co., Ltd. From
September 2010 to July 2016, Mr. Wang served as vice president of Beijing Hongtianxia Agriculture Development Joint-Stock Company.
Mr. Wang graduated from Heilongjiang Finance School in 1990 with a major in in planning and statistics.
Y. Tristan Kuo. Mr. Kuo was appointed as
a member of our board of directors on December 23, 2020. Since November 1, 2019, Mr. Kuo has served as a board member, chairman of
the audit committee and a member of compensation committee and corporate governance and nominating committee of Oriental Culture Holding
LTD. (Nasdaq: OCG). Since April 2017, Mr. Kuo has served as chief financial officer of Aerkomm Inc. (EuroNext-Paris: AKOM, OTCQX: AKOM).
From April 2016 to February 2020, Mr. Kuo served as vice president of investor relations and board secretary of Nutrastar International,
Inc. From August 2015 to April 2017, Mr. Kuo served as chief financial officer of Success Holding Group International, Inc. From December
2014 to August 2015, Mr. Kuo served as engagement partner of Tatum. From August 2014 to May 2015, Mr. Kuo served as a member of board
of directors and chairman of the audit committee of KBS Fashion Group Limited (NASDAQ: KBSF). From June 2012 to November 2013, Mr. Kuo
served as chief financial officer of Crown Bioscience, Inc. Mr. Kuo was the chief financial officer of China Biologic Products (NASDAQ:
CBPO) from June 2008 to May 2012 and was the vice president-finance of China Biologic Products September 2007 to May 2008. Mr. Kuo received
Master of Arts in Accounting from The Ohio State University in February 1982 and his Bachelor of Arts in Economics from Soochow University
in Taiwan in May 1977. We believe that Mr. Kuo’s expertise and knowledge of accounting and management will benefit the Company’s
operations and make him a valuable member of the board of directors and its committees.
William
Morris. Mr. William Morris was appointed as a member of the Board on July 1, 2020. Since December 2018, Mr. Morris has served
as the trading advisor for WJM Trading Strategies, LLC. From December 2015 to February 2018, Mr. Morris was the Chief Investment
Officer of Dividend Trade Fund LLC. From October 2010 to July 2012, Mr. Morris served as Options Market Maker for VTrader Pro.
Mr. Morris received his bachelor of art degree in Psychology from the University of Dayton in April 1975.
6.B.
Compensation
For
the fiscal year ended December 31, 2020, we paid an aggregate of approximately $103,230 in cash to our directors and executive
officers. We have not set aside or accrued any amount to provide pension, retirement or other similar benefits to our executive
officers and directors.
Our
PRC subsidiaries and our variable interest entity are required by law to make contributions equal to certain percentages of each
employee’s salary for his or her pension insurance, medical insurance, unemployment insurance and other statutory benefits
and a housing provident fund.
Employment
Agreements, Director Agreements and Indemnification Agreements
We
have entered into employment agreements with each of our executive officers. Pursuant to these agreements, each of our executive
officers is employed for an initial term of one year, renewable upon mutual agreement of the Company and the executive officer.
The
executive officers are entitled to a fixed salary and to participate in our equity incentive plans, if any and other company benefits,
each as determined by the Board from time to time.
We
may terminate the executive officer’s employment for cause, at any time, without notice or remuneration, for certain acts,
such as conviction or plea of guilty to a felony or grossly negligent or dishonest acts to our detriment, or material breach of
any term of any employment or other services, confidentiality, intellectual property or non-competition agreements with the Company.
In such case, the executive officer will solely be entitled to accrued and unpaid salary through the effective date of such termination,
and his/her right to all other benefits will terminate, except as required by any applicable law. The executive officer is not
entitled to severance payments upon any termination.
The
executive officer may voluntarily terminate his/her employment for any reason and such termination shall take effect 30 days after
the receipt by Company of the notice of termination. Upon the effective date of such termination, the executive officer shall
be entitled to (a) accrued and unpaid salary and vacation through such termination date; and (b) all other compensation and benefits
that were vested through such termination date. In the event the executive officer is terminated without notice, it shall be deemed
a termination by the Company for cause.
Each
of our executive officers has agreed not to use for his/her personal purposes nor divulge, furnish, or make accessible to anyone
or use in any way (other than in the ordinary course of the business of the Company) any confidential or secret information or
knowledge of the Company, whether developed by him/herself or by others.
In
addition, each executive officer has agreed to be bound by non-competition restrictions during the term of his or her employment
and for six months following the last date of employment.
Each
executive officer also has agreed not to (i) solicit or induce, on his/her own behalf or on behalf of any other person or
entity, any employee of the Company or any of its affiliates to leave the employ of the Company or any of its affiliates; or (ii) solicit
or induce, on his/her own behalf or on behalf of any other person or entity, any customer or prospective customer of the Company
or any of their respective affiliates to reduce its business with the Company or any of its affiliates.
We
have entered into director agreements with each of our independent directors which agreements set forth the terms and provisions
of their engagement.
In
addition, we have entered into indemnification agreements with each of our directors and executive officers that provide such
persons with additional indemnification beyond that provided in our current memorandum and articles of association.
6.C. Board Practices
Terms
of Directors and Officers
Our
directors may be elected by a resolution of our board of directors, or by an ordinary resolution of our shareholders. Our directors
are not subject to a term of office and hold office until such time as they are removed from office by ordinary resolution of
our shareholders. A director will cease to be a director if, among other things, the director (a) if gives notice in writing to
the Company that he resigns the office of Director; (b) if absents himself (without being represented by proxy or an alternate
Director appointed by him) from three consecutive meetings of the board of Directors without special leave of absence from the
Directors, and they pass a resolution that he has by reason of such absence vacated office; (c) if dies, becomes bankrupt or makes
any arrangement or composition with his creditors generally; or (d) if found a lunatic or becomes of unsound mind.
Our
officers are elected by and serve at the discretion of the board of directors.
Our
board of directors currently consists of 5 directors. We have established an audit committee, a compensation committee and a corporate
governance and nominating committee. Each of the committees of the board of directors has the composition and responsibilities
described below.
Audit
Committee
William
Morris, Haitao Wang, and Y. Tristan Kuo are members of our Audit Committee; Mr. Kuo serves as the chairman of the Audit Committee.
All members of our Audit Committee satisfy the independence standards promulgated by the SEC and by NASDAQ as such standards apply
specifically to members of audit committees.
We
have adopted and approved a charter for the Audit Committee. In accordance with our Audit Committee Charter, our Audit Committee
shall:
|
●
|
evaluate the independence
and performance of, and assess the qualifications of, our independent auditor, and engage such independent auditor;
|
|
|
|
|
●
|
approve the plan
and fees for the annual audit, quarterly reviews, tax and other audit-related services, and approve in advance any non-audit
service to be provided by the independent auditor;
|
|
|
|
|
●
|
monitor the independence
of the independent auditor and the rotation of partners of the independent auditor on our engagement team as required by law;
|
|
●
|
review the financial
statements to be included in our Annual Report on Form 20-F and Current Reports on Form 6-K and review with management and
the independent auditors the results of the annual audit and reviews of our quarterly financial statements;
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●
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oversee all aspects
our systems of internal accounting control and corporate governance functions on behalf of the board;
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●
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review and approve
in advance any proposed related-party transactions and report to the full Board on any approved transactions; and
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●
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provide oversight
assistance in connection with legal, ethical and risk management compliance programs established by management and the Board,
including Sarbanes-Oxley Act implementation, and make recommendations to the Board regarding corporate governance issues and
policy decisions.
|
We
have determined that Y. Tristan Kuo possesses accounting or related financial management experience that qualifies him as an “audit
committee financial expert” as defined by the rules and regulations of the SEC.
Compensation
Committee
William
Morris, Haitao Wang, and Y. Tristan Kuo are members of our Compensation Committee; Mr. Morris serves as the chairman of the Compensation
Committee. All members of our Compensation Committee are qualified as independent under the current definition promulgated by
NASDAQ. We have adopted a charter for the Compensation Committee.
In
accordance with the Compensation Committee’s Charter, the Compensation Committee is responsible for overseeing and making
recommendations to the board of directors regarding the salaries and other compensation of our executive officers and general
employees and providing assistance and recommendations with respect to our compensation policies and practices. The
Compensation Committee shall:
|
●
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approve compensation
principles that apply generally to Company employees;
|
|
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|
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●
|
make recommendations
to the board of directors with respect to incentive compensation plans and equity-based plans taking into account the results
of the most recent rules to provide the shareholders with an advisory vote on executive compensation, generally known as “Say
on Pay Votes” (Section 951 in The Dodd-Frank Wall Street Reform and Consumer Protection Act), if any;
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●
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administer and otherwise
exercise the various authorities prescribed for the Compensation Committee by the Company’s incentive compensation plans
and equity-based plans;
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|
select a peer group
of companies against which to benchmark/compare the Company’s compensation systems for principal officers elected by
the board of directors;
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|
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●
|
annually review
the Company’s compensation policies and practices and assess whether such policies and practices are reasonably likely
to have a material adverse effect on the Company;
|
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●
|
determine and oversee
stock ownership guidelines and stock option holding requirements, including periodic review of compliance by principal officers
and members of the board of directors;
|
Corporate
Governance and Nominating Committee
William
Morris, Haitao Wang, and Y. Tristan Kuo are members of our Corporate Governance and Nominating Committee; Mr. Wang serves as the
chairman of the Corporate Governance and Nominating Committee. All members of our Corporate Governance and Nominating Committee
are qualified as independent under the current definition promulgated by NASDAQ. We have adopted a charter for the Corporate Governance
and Nominating Committee.
In
accordance with its charter, the Corporate Governance and Nominating Committee is responsible for identifying and proposing new
potential director nominees to the board of directors for consideration and reviewing our corporate governance policies. The Corporate
Governance and Nominating shall:
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Identify and screen
individuals qualified to become Board members consistent with the criteria approved by the board of directors, and recommend
to the board of directors director nominees for election at the next annual or special meeting of shareholders at which directors
are to be elected or to fill any vacancies or newly created directorships that may occur between such meetings;
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Recommend directors
for appointment to Board committees;
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Make recommendations
to the board of directors as to determinations of director independence;
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Oversee the evaluation
of the board of directors;
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●
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Make recommendations
to the board of directors as to compensation for the Company’s directors; and
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●
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Review and recommend
to the board of directors the Corporate Governance Guidelines and Code of Business Conduct and Ethics for the Company
|
Director
Independence
Our
Board reviewed the materiality of any relationship that each of our directors has with us, either directly or indirectly, and
the Company has determined that William Morris, Haitao Wang, Y. Tristan Kuo are “independent directors” as
defined by NASDAQ.
6.D. Employees
As
of December 31, 2020, we had a total of 110 employees. We had a total of 57 and 11 employees as of December 31, 2019 and
2018, respectively. The following table sets forth the breakdown of our employees as of December 31, 2020 by function:
Category
|
|
Number of
Employees
|
|
|
Percentage of
workforce
|
|
Management
|
|
14
|
|
|
|
12.75
|
%
|
Fulfillment Center
|
|
51
|
|
|
|
46.36
|
%
|
IT
|
|
5
|
|
|
|
4.55
|
%
|
Finance and Accounting
|
|
10
|
|
|
|
9.09
|
%
|
Investment
|
|
1
|
|
|
|
0.91
|
%
|
Quality Control
|
|
3
|
|
|
|
2.73
|
%
|
Customer Service
|
|
18
|
|
|
|
16.36
|
%
|
Product Development
|
|
1
|
|
|
|
0.91
|
%
|
Design
|
|
4
|
|
|
|
3.64
|
%
|
HR
|
|
2
|
|
|
|
1.82
|
%
|
Benefits
|
|
1
|
|
|
|
0.91
|
%
|
Total
|
|
110
|
|
|
|
100
|
%
|
As
of December 31, 2020, 8 of our employees were based in Shanghai, where our principal executive offices are located, and 102 employees
were located in Changshu City.
We
understand that our success depends on our ability to attract, train and retain our employees. Therefore, as part of our
human resources strategy, we offer employees competitive salaries, performance-based cash bonuses and promotions, engagement activities,
various welfare as well as other incentives. We design and provide training to our employees regularly in order to enhance their
professional skills and foster their career development. We also recognize the importance of keeping our employees safe. In response
to the COVID-19 pandemic, we implemented changes that we determined were in the best interest of our employees and have followed
local government orders to prevent the spread of COVID-19.
As
required by PRC regulations, we participate in various government statutory employee benefit plans, including social insurance
funds, namely a pension contribution plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance
plan and a maternity insurance plan, and a housing provident fund. We are required under PRC law to make contributions to employee
benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount
specified by the local government from time to time. As of the date of this report, we have made adequate employee benefit
payments. However, if we were found by the relevant authorities that we failed to make adequate payment, we may be required to
make up the contributions for these plans as well as to pay late fees and fines. See “Risk Factors—Risks Related
to Doing Business in China—Failure to make adequate contributions to various employee benefit plans as required by PRC regulations
may subject us to penalties.”
We
enter into standard labor and confidentiality agreements with our employees. We believe that we maintain a good working relationship
with our employees, and we have not experienced any major labor disputes.
6.E. Share Ownership
The
following table sets forth information with respect to the beneficial ownership of our ordinary shares as of May 7, 2021 for:
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each beneficial
owner of 5% or more of our outstanding ordinary shares;
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|
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●
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each of our directors
and executive officers; and
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|
●
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all of our directors
and executive officers as a group.
|
Beneficial
ownership is determined in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities
to persons who possess sole or shared voting power or investment power with respect to those securities and include ordinary shares
issuable upon the exercise of options that are immediately exercisable or exercisable within 60 days of the date hereof.
Except
as otherwise indicated, all of the shares reflected in the table are ordinary shares and all persons listed below have sole voting
and investment power with respect to the shares beneficially owned by them, subject to applicable community property laws. The
information is not necessarily indicative of beneficial ownership for any other purpose.
The
calculations in the table below are based on 25,420,854 ordinary shares issued and outstanding as of the date of May 7,
2021.
Except
as otherwise indicated in the table below, addresses of our directors, executive officers and named beneficial owners are in care
of Jowell Global Ltd., 2nd Floor, No. 285 Jiangpu Road, Yangpu District, Shanghai, China 200082. Our telephone number at this
address +86-21-5521-01874.
|
|
Ordinary Shares Beneficially
Owned
|
|
Name of Beneficial Owners
|
|
Number
|
|
|
%
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
Zhiwei Xu (1)
|
|
|
5,341,380
|
|
|
|
21.01
|
|
Mei Cai
|
|
|
-
|
|
|
|
-
|
|
Dan (Jessie) Zhao
|
|
|
-
|
|
|
|
-
|
|
Y. Tristan Kuo
|
|
|
-
|
|
|
|
-
|
|
William Morris
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|
|
-
|
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|
-
|
|
Haitao Wang
|
|
|
-
|
|
|
|
-
|
|
All directors and executive officers as a group (six individuals)
|
|
|
5,341,380
|
|
|
|
21.01
|
|
5% or Greater Shareholders:
|
|
|
|
|
|
|
|
|
Jowell Holdings Ltd. (1)
|
|
|
5,341,380
|
|
|
|
21.01
|
|
|
(1)
|
Mr.
Zhiwei Xu, Chairman of our Board and Chief Executive Officer of the Company, is the sole shareholder of Jowell Holdings Ltd. a
British Virgin Islands company. The registered address of Jowell Holdings Ltd. is Vistra Corporate Services Centre, Wickhams Cay
II, Road Town, Tortola, VG1110, British Virgin Islands. Mr. Zhiwei Xu also owns all 750,000 of the Company’s outstanding
preferred shares, and each holder of one preferred share has the right to 2 votes at a meeting of the shareholders of the Company.
|
ITEM
7.
|
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
7.A. Major Shareholders
See
Item 6.E., “Share Ownership” for a description of our major shareholders.
7.B. Related Party Transactions
Variable
Interest Entity Arrangements
See
“Item 4. Information on the Company—C. Organizational Structure.”
Employment
Agreements, Director Agreements and Indemnification Agreements
See
“Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers—Employment
Agreements, Director Agreements and Indemnification Agreements.”
Other
Transactions with Related Parties
The relationship and the nature of related party
transactions are summarized as follow:
Name of Related Party
|
|
Relationship to the Company
|
|
Nature of Transactions
|
Subsidiaries of Longrich Group
|
|
Controlled by the Chairman and Chief Executive Officer (“CEO”) of the Company
|
|
Purchase advances and operating lease
|
Longliqi International (NIG) Limited
|
|
Controlled by the Chairman and CEO of the Company
|
|
Sales
|
Longrich Goalbridge Company Limited
|
|
Controlled by the Chairman and CEO of the Company
|
|
Sales
|
Longrich America Int’l, Inc.
|
|
Controlled by the Chairman and CEO of the Company
|
|
Sales
|
Longrich Bioscience (M) Berhad
|
|
Controlled by the Chairman and CEO of the Company
|
|
Sales
|
Due to related parties:
The balance in due to related parties account
amounted to $1,240,008 and $61,425 as of December 31, 2020 and 2019, respectively. These dues to related parties, subsidiaries of Longrich
Group, are typically short-term in nature, interest-free and due upon demand. As of March 31, 2021, the balance due to related parties
have been fully repaid.
Related party lease:
The Company leases one warehouses and three offices
from its related party, subsidiaries of Longrich Group, controlled by the Chairman and CEO of the Company, who also is a major shareholder
of the Company. The Company is obligated to pay a quarter base rent under these lease agreements. See Note 11 for further discussion.
Related party purchases:
The Company periodically purchases merchandise
from Longrich Group and its subsidiaries during the ordinary course of business. The purchases made from Longrich Group were $82,551,615,
$50,190,032 and $17,775,398 for the years ended December 31, 2020, 2019 and 2018, respectively.
Related party sales:
The Company made sales to related parties controlled
by the Chairman, CEO, a major shareholder of the Company, in the amount of $1,522,546, $nil and $nil for the years ended December 31,
2020, 2019 and 2018, respectively. As of December 31, 2020, the Company had accounts receivable of $682,315 related to these sales.
7.C. Interests of Experts and Counsel
Not
applicable.
ITEM 8.
|
FINANCIAL INFORMATION
|
Consolidated
Statements and Other Financial Information
The
financial statements required by this item may be found at the end of this Annual Report on 20-F, beginning on page F-1.
Legal
Proceedings
We
are currently not involved in any material legal or administrative proceedings. From time to time, we may be subject to various
legal or administrative claims and proceedings arising in the ordinary course of business. Such legal or administrative claims
and proceedings, even if without merit, could result in the expenditure of financial and management resources and potentially
result in civil liability for damages.
Dividends
We
have not declared or paid cash dividends since the Company was incorporated in August 2019 in Cayman Island and we have no plan
to declare or pay any dividends in the near future on our ordinary shares. We currently intend to retain most, if not all, of
our available funds and any future earnings to operate and expand our business.
We
are a holding company incorporated in the Cayman Islands. We rely principally on dividends from our PRC subsidiaries for our cash
requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries
to pay dividends to us. See “Item 4.B. Business Overview—Regulations —Regulations on Dividend Distribution.”
Our
board of directors has discretion as to whether to distribute dividends, subject to applicable laws. Even if our board of directors
decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements
and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.
Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.
No
Significant Changes
Except
as disclosed elsewhere in this annual report, no other significant changes to our financial condition have occurred since the date
of the annual financial statements contained herein.
ITEM 9.
|
THE OFFER AND LISTING
|
9.A. Offer and Listing Details
Our
ordinary shares are listed for trading on the NASDAQ Capital Market under the symbol “JWEL” The shares began trading
on March 17, 2021 on the NASDAQ Capital Market.
9.B. Plan of Distribution
Not
Applicable.
9.C. Markets
Our
ordinary shares have been listed on the Nasdaq Capital Market since March 17, 2021 under the symbol “JWEL”.
9.D. Selling Shareholders
Not
Applicable.
9.E. Dilution
Not
Applicable.
9.F. Expenses of the Issuer
Not
Applicable.
ITEM 10.
|
ADDITIONAL INFORMATION
|
10.A. Share Capital
Not
Applicable.
10.B. Memorandum and Articles of Association
We
are a Cayman Islands exempted company limited by shares and our affairs are governed by our current memorandum and articles of
association and the Companies Act (As Revised) of the Cayman Islands, which we refer to as the “Companies Law” below,
and the common law of the Cayman Islands.
Our
authorized share capital consists of: (i) 450,000,000 Ordinary Shares, par value $0.0001 per share and (ii) 50,000,000 Preferred
Shares, par value $0.0001 per share. As of May 7, 2021, 25,420,854 Ordinary Shares and 750,000 Preferred Shares are issued
and outstanding.
We
incorporate by reference into this annual report our second amended and restated memorandum and articles of association, which
was filed as Exhibits 3.2 and 3.3 to our registration statement on Form F-1 (File Number 333-250889) initially filed
with the Securities and Exchange Commission on November 23, 2020 and declared effective on March 16, 2021. Our shareholders adopted
our second amended and restated memorandum and articles of association by way of a special resolution on July 1, 2020.
Our
registered office in the Cayman Islands is located at Sertus Chambers, Governors Square, Suite # 5-204, 23 Lime Tree Bay Avenue,
P.O. Box 2547, Grand Cayman, KY1-1104, Cayman Islands.
According
to clause 3 of our second amended and restated memorandum of association, the objects for which the Company is established are
unrestricted and the Company shall have full power and authority to carry out any object not prohibited by the Companies Law or
any other law of the Cayman Islands.
Board
of Directors
See
“Item 6. Directors, Senior Management and Employees.”
Ordinary
Shares
Dividends. Subject
to any rights and restrictions of any other class or series of shares, our Board may, from time to time, declare dividends on
the shares issued and authorize payment of the dividends out of our lawfully available funds. No dividends shall be declared by
the board out of our company except the following:
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●
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profits; or
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|
|
●
|
“share premium
account,” which represents the excess of the price paid to our company on issue of its shares over the par or “nominal”
value of those shares, which is similar to the U.S. concept of additional paid in capital.
|
However,
no dividend shall bear interest against the Company.
Voting
Rights. Each Ordinary Share shall be entitled to one vote on all matters subject to vote at general and special meetings of
our company and each Preferred Share shall be entitled to two (2) votes on all matters subject to vote at general and special
meetings of our company. Voting at any meeting of shareholders is by show of hands unless a poll is demanded. A poll may be demanded
by the chairman of such meeting or any one or more shareholders who together hold not less than 10% of the nominal value of the
total issued voting shares of our company present in person or by proxy. An ordinary resolution to be passed at a meeting by the
shareholders requires the affirmative vote of a simple majority of the votes attaching to the Ordinary Shares cast at a meeting,
while a special resolution requires the affirmative vote of no less than two-thirds of the votes cast attaching to the outstanding
Ordinary Shares at a meeting. A special resolution will be required for important matters such as making changes to our second
amended and restated memorandum and articles of association.
There
are no limitations on non-residents or foreign shareholders in the memorandum and articles to hold or exercise voting rights on
the Ordinary Shares imposed by foreign law or by the charter or other constituent document of our company. However, no person
will be entitled to vote at any general meeting or at any separate meeting of the holders of the Ordinary Shares unless the person
is registered as of the record date for such meeting and unless all calls or other sums presently payable by the person in respect
of Ordinary Shares in the Company have been paid.
Winding
Up; Liquidation. Upon the winding up of our company, after the full amount that holders of any issued shares ranking senior
to the Ordinary Shares as to distribution on liquidation or winding up are entitled to receive has been paid or set aside for
payment, the holders of our Ordinary Shares are entitled to receive any remaining assets of the Company available for distribution
as determined by the liquidator. The assets received by the holders of our Ordinary Shares in a liquidation may consist in whole
or in part of property, which is not required to be of the same kind for all shareholders.
Calls
on Ordinary Shares and Forfeiture of Ordinary Shares. Our board of directors may from time to time make calls upon shareholders
for any amounts unpaid on their Ordinary Shares in a notice served to such shareholders at least 14 days prior to the specified
time and place of payment. Any Ordinary Shares that have been called upon and remain unpaid are subject to forfeiture.
Redemption
of Ordinary Shares. We may issue shares that are, or at its option or at the option of the holders are, subject to redemption
on such terms and in such manner as it may, before the issue of the shares, determine. Under the Companies Act, shares of a Cayman
Islands exempted company may be redeemed or repurchased out of profits of the company, out of the proceeds of a fresh issue of
shares made for that purpose or out of capital, provided the memorandum and articles authorize this and it has the ability to
pay its debts as they come due in the ordinary course of business.
No
Preemptive Rights. Holders of Ordinary Shares will have no preemptive or preferential right to purchase any securities
of our company.
Variation
of Rights Attaching to Shares. All or any of the special rights attached to any class of shares may, subject to the provisions
of the Companies Act, be materially adversely varied with the written consent of the holders of all of the issued shares of that
class or with the sanction of an ordinary resolution passed at a general meeting of the holders of the shares of that class. The
rights conferred upon the holders of the shares of any class issued shall not, unless otherwise expressly provided by the terms
of issue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking pari passu
with such existing class of shares.
Anti-Takeover
Provisions. Some provisions of our current memorandum and articles of association may discourage, delay or prevent a change
of control of our company or management that shareholders may consider favorable, including provisions that authorize our board
of directors to issue preferred shares in one or more series and to designate the price, rights, preferences, privileges and restrictions
of such preferred shares without any further vote or action by our shareholders.
Transfer
of Ordinary Shares. Subject to the restrictions contained in our current articles of association, any of our shareholders
may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or common form or any other form
approved by our board of directors.
Our
board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share which is not fully
paid up or on which we have a lien. Our board of directors may also decline to register any transfer of any ordinary share unless:
|
●
|
the instrument of
transfer is lodged with us, accompanied by the certificate for the ordinary shares to which it relates and such other evidence
as our board of directors may reasonably require to show the right of the transferor to make the transfer;
|
|
●
|
the instrument of
transfer is in respect of only one class of shares;
|
|
●
|
the instrument of
transfer is properly stamped, if required;
|
|
●
|
in the case of a
transfer to joint holders, the number of joint holders to whom the share is to be transferred does not exceed four; and
|
|
●
|
a fee of such maximum
sum as the Nasdaq Capital Market may determine to be payable or such lesser sum as our directors may from time to time require
is paid to us in respect thereof.
|
If
our directors refuse to register a transfer, they shall, within three months after the date on which the instrument of transfer
was lodged, send to each of the transferor and the transferee notice of such refusal.
The
registration of transfers may, on ten calendar days’ notice being given by advertisement in such one or more newspapers,
by electronic means or by any other means in accordance with the Nasdaq Rules, be suspended and the register closed at such times
and for such periods as our board of directors may, in their absolute discretion, from time to time determine, provided, however,
that the registration of transfers shall not be suspended nor the register closed for more than 30 calendar days in any calendar
year.
Inspection
of Books and Records
The Board of Directors may from time to time determine
whether and to what extent and at what times and places and under what conditions or regulations the accounts and books of the Company
or any of them shall be open to the inspection of shareholders not being directors, and no shareholder (not being a director) shall have
any right to inspect any account or book or document of the Company except as conferred by law or authorized by the Board of Directors
or by Ordinary Resolution of the shareholders.
General
Meeting of Shareholders. Shareholders’ meetings may be convened by a majority of our board of directors or our chairman.
Advance notice of at least seven (7) calendar days is required for the convening of our annual general shareholders’
meeting and any other general meeting of our shareholders. A quorum required for and throughout a meeting of shareholders consists
of at least one shareholder entitled to vote and present in person or by proxy or (in the case of a shareholder being a corporation)
by its duly authorized representative representing not less than one-third of all voting power of our share
capital in issue.
Exempted
Company. We are an exempted company with limited liability under the Companies Act. The Companies Act distinguishes between
ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business
mainly outside of the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company
are essentially the same as for an ordinary company except that an exempted company:
|
●
|
does not have to
file an annual return of its shareholders with the Registrar of Companies;
|
|
|
|
|
●
|
is not required
to open its register of members for inspection;
|
|
|
|
|
●
|
does not have to
hold an annual general meeting;
|
|
|
|
|
●
|
may issue shares
with no par value;
|
|
|
|
|
●
|
may obtain an undertaking
against the imposition of any future taxation (such undertakings are usually given for 20 years in the first instance);
|
|
|
|
|
●
|
may register by
way of continuation in another jurisdiction and be deregistered in the Cayman Islands;
|
|
|
|
|
●
|
may register as
a limited duration company; and
|
|
|
|
|
●
|
may register as
a segregated portfolio company.
|
“Limited
liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares
of the company.
Preferred
Shares
Conversion.
Each Preferred Share is convertible into one (1) ordinary share at any time at the option of the holder thereof. In no event
shall Ordinary Shares be convertible into Preferred Shares.
Voting
Rights. Each share of Preferred Shares shall have the voting rights equal to two (2) Ordinary Shares.
Dividends.
Except for voting rights and conversion rights as set out hereof, the Ordinary Shares and the Preferred Shares shall rank
pari passu with one another and shall have the same rights, preferences, privileges and restrictions.
Assignment
and Transfer. The holders of Preferred Shares shall have the right to transfer each share of the Preferred Shares to any third
party at any time in such holder’s sole and absolute discretion, subject to compliance with applicable securities laws.
Upon any sale, transfer, assignment or disposition of any Preferred Share by a shareholder to any person who is not an affiliate
of such shareholder, or upon a change of control of any Preferred Share to any person who is not an affiliate of the registered
shareholder of such share, such Preferred Share shall be automatically and immediately converted into one (1) ordinary share.
10.C. Material Contracts
We
have not entered into any material contracts other than in the ordinary course of business and other than those described
in this annual report.
10.D. Exchange Controls
Cayman
Islands
Currently
there is no exchange control regulations in the Cayman Islands applicable to us and shareholders.
See
“Item 4. Information on the Company—B. Business Overview—Regulation—PRC Laws and Regulations Relating
to Foreign Exchange” for exchange controls in China.
10.E. Taxation
The
following summary of the material Cayman Islands, PRC and U.S. tax consequences of an investment in our ordinary shares is based
upon laws and relevant interpretations thereof in effect as of the date hereof, all of which are subject to change, possibly with
retroactive effect. This summary is not intended to be, nor should it be construed as, legal or tax advice and is not exhaustive
of all possible tax considerations. This summary also does not deal with all possible tax consequences relating to an investment
in our ordinary shares, such as the tax consequences under state, local, or under the tax laws of jurisdictions other than the
Cayman Islands, PRC and the United States. Investors should consult their own tax advisors with respect to the tax consequences
of the acquisition, ownership and disposition of our ordinary shares.
Cayman
Islands Taxation
The
Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and
there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied
by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or, after
execution, brought within the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax treaties that
are applicable to any payments made to or by our company. There are no exchange control regulations or currency restrictions in
the Cayman Islands.
Payments
of dividends and capital in respect of our Ordinary Shares will not be subject to taxation in the Cayman Islands and no withholding
will be required on the payment of a dividend or capital to any holder of our Ordinary Shares, nor will gains derived from the
disposal of our Ordinary Shares be subject to Cayman Islands income or corporation tax.
No
stamp duty is payable in respect of the issue of the shares or on an instrument of transfer in respect of a share.
People’s
Republic of China Taxation
Under
the EIT Law, an enterprise established outside the PRC with a “de facto management body” within the PRC is considered
a PRC resident enterprise for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax
rate on its worldwide income as well as tax reporting obligations. Under the Implementation Rules, a “de facto management
body” is defined as a body that has material and overall management and control over the manufacturing and business operations,
personnel and human resources, finances and properties of an enterprise. In addition, SAT Circular 82 issued in April 2009 specifies
that certain offshore-incorporated enterprises controlled by PRC enterprises or PRC enterprise groups will be classified as PRC
resident enterprises if all of the following conditions are met: (a) senior management personnel and core management departments
in charge of the daily operations of the enterprises have their presence mainly in the PRC; (b) their financial and human
resources decisions are subject to determination or approval by persons or bodies in the PRC; (c) major assets, accounting
books and company seals of the enterprises, and minutes and files of their board’s and shareholders’ meetings are
located or kept in the PRC; and (d) half or more of the enterprises’ directors or senior management personnel with
voting rights habitually reside in the PRC. Further to SAT Circular 82, the SAT issued SAT Bulletin 45, which took effect in September
2011, to provide more guidance on the implementation of SAT Circular 82. SAT Bulletin 45 provides for procedures and administration
details of determination on PRC resident enterprise status and administration on post-determination matters. If the PRC tax authorities
determine that the Company is a PRC resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax
consequences could follow. For example, Shanghai Juhao may be subject to enterprise income tax at a rate of 25% with respect to
its worldwide taxable income. Also, a 10% withholding tax would be imposed on dividends we pay to our non-PRC enterprise shareholders
and with respect to gains derived by our non-PRC enterprise shareholders from transferring our shares or Ordinary Shares and potentially
a 20% of withholding tax would be imposed on dividends we pay to our non-PRC individual shareholders and with respect to gains
derived by our non-PRC individual shareholders from transferring our shares or Ordinary Shares.
It
is unclear whether, if we are considered a PRC resident enterprise, holders of our shares or Ordinary Shares would be able to
claim the benefit of income tax treaties or agreements entered into between China and other countries or areas. See “Risk
Factors—Risks Related to Doing Business in China— If we are classified as a PRC resident enterprise for PRC income
tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders”.
The
SAT issued SAT Circular 59 together with the Ministry of Finance in April 2009 and SAT Circular 698 in December 2009. Both SAT
Circular 59 and SAT Circular 698 became effective retroactively as of January 1, 2008, and Circular 7, in replacement of some
of the existing rules in Circular 698, became effective in February 2015. On October 17, 2017, the SAT promulgated Bulletin
37, and Circular 698 was replaced effective December 1, 2017. Under Circular 7, where a non-resident enterprise conducts
an “indirect transfer” by transferring taxable assets, including, in particular, equity interests in a PRC resident
enterprise, indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise, being
the transferor, or the transferee or the PRC entity which directly owned such taxable assets, may report such indirect transfer
to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence
of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding
or deferring PRC tax. We and non-resident enterprises in such transactions may become at risk of being subject to filing obligations
or being taxed, under Circular 59 or Circular 7 and Bulletin 37, and may be required to expend valuable resources to comply with
Circular 59, Circular 7 and Bulletin 37 or to establish that we and our non-resident enterprises should not be taxed under these
circulars. In addition, in accordance with the Individual Income Tax Law promulgated by the Standing Committee of NPC, later amended
on August 31, 2018, and effective January 1, 2019, where an individual carries out other arrangements without reasonable business
purpose and obtains improper tax gains, the tax authorities shall have the right to make tax adjustments based on a reasonable
method, and levy additional tax and collect interest if there is a need to levy additional tax after making tax adjustments. As
a result, our beneficial owners, who are PRC residents, may be deemed to have carried out other arrangements without reasonable
business purpose and obtained improper tax gains for such indirect transfer, and thus be levied tax. See “Risk Factors—Risks
Related to Doing Business in China—We face uncertainty regarding the PRC tax reporting obligations and consequences for
certain indirect transfers of our operating company’s equity interests. Enhanced scrutiny over acquisition transactions
by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.”
Pursuant to the Arrangement between the Mainland
China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Tax Arrangement,
where a Hong Kong resident enterprise which is considered a non-PRC tax resident enterprise directly holds at least 25% of a PRC enterprise,
the withholding tax rate in respect of the payment of dividends by such PRC enterprise to such Hong Kong resident enterprise is reduced
to 5% from a standard rate of 10%, subject to approval of the PRC local tax authority. Pursuant to the Notice of the State Administration
of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or Circular 81, a resident enterprise
of the counter-party to such Tax Arrangement should meet the following conditions, among others, in order to enjoy the reduced withholding
tax under the Tax Arrangement: (i) it must directly own the required percentage of equity interests and voting rights in such PRC
resident enterprise; and (ii) it should directly own such percentage in the PRC resident enterprise anytime in the 12 months prior
to receiving the dividends. Furthermore, the Administrative Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties
(for Trial Implementation), or the Administrative Measures, which became effective in October 2009, requires that the non-resident
enterprises must obtain the approval from the relevant tax authority in order to enjoy the reduced withholding tax rate under the tax
treaties. There are also other conditions for enjoying such reduced withholding tax rate according to other relevant tax rules and
regulations. Accordingly, Shanghai Juhao may be able to enjoy the 5% withholding tax rate for the dividends it receives from the WFOE,
if it satisfies the conditions prescribed under Circular 81 and other relevant tax rules and regulations, and obtains the approvals
as required under the Administrative Measures. However, according to Circular 81, if the relevant tax authorities consider the transactions
or arrangements are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable
withholding tax in the future.
United
States Federal Income Tax Considerations
The
following is a discussion of United States federal income tax considerations relating to the acquisition, ownership, and disposition
of our ordinary shares by a U.S. Holder, as defined below, that acquires our ordinary shares and holds our ordinary shares as
“capital assets” (generally, property held for investment) under the United States Internal Revenue Code of 1986,
as amended (the “Code”). This discussion is based upon existing United States federal income tax law, which is subject
to differing interpretations or change, possibly with retroactive effect. No ruling has been sought from the Internal Revenue
Service (the “IRS”) with respect to any United States federal income tax consequences described below, and there can
be no assurance that the IRS or a court will not take a contrary position. This discussion does not address all aspects of United
States federal income taxation that may be important to particular investors in light of their individual circumstances, including
investors subject to special tax rules (such as, for example, certain financial institutions, insurance companies, regulated investment
companies, real estate investment trusts, broker-dealers, traders in securities that elect mark-to-market treatment, partnerships
and their partners, tax-exempt organizations (including private foundations)), investors who are not U.S. Holders, investors that
own (directly, indirectly, or constructively) 10% or more of our voting stock, investors that hold their ordinary shares as part
of a straddle, hedge, conversion, constructive sale or other integrated transaction), or investors that have a functional currency
other than the U.S. dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. In
addition, this discussion does not address any tax laws other than the United States federal income tax laws, including any state,
local, alternative minimum tax or non-United States tax considerations, or the Medicare tax. Each potential investor is urged
to consult its tax advisor regarding the United States federal, state, local and non-United States income and other tax considerations
of an investment in our ordinary shares.
General
For
purposes of this discussion, a “U.S. Holder” is a beneficial owner of our ordinary shares that is, for United States
federal income tax purposes, (i) an individual who is a citizen or treated as a tax resident of the United States, (ii) a corporation
(or other entity treated as a corporation for United States federal income tax purposes) created in, or organized under the laws
of, the United States or any state thereof or the District of Columbia, (iii) an estate the income of which is includible in gross
income for United States federal income tax purposes regardless of its source, or (iv) a trust (A) the administration of which
is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority
to control all substantial decisions of the trust or (B) that has otherwise elected to be treated as a United States person under
the Code.
If
a partnership (or other entity treated as a partnership for United States federal income tax purposes) is a beneficial owner of
our ordinary shares, the tax treatment of a partner in the partnership will depend upon the status of the partner and the activities
of the partnership. Partnerships and partners of a partnership holding our ordinary shares are urged to consult their tax advisors
regarding an investment in our ordinary shares.
The
discussion set forth below is addressed only to U.S. Holders that purchase ordinary shares. Prospective purchasers are urged to
consult their own tax advisors about the application of the U.S. federal income tax rules to their particular circumstances as
well as the state, local, foreign and other tax consequences to them of the purchase, ownership and disposition of our ordinary
shares.
Taxation
of Dividends and Other Distributions on our Ordinary Shares
Subject
to the passive foreign investment company rules discussed below, the gross amount of distributions made by us to you with respect
to the ordinary shares (including the amount of any taxes withheld therefrom) will generally be includable in your gross income
as dividend income on the date of receipt by you, but only to the extent that the distribution is paid out of our current or accumulated
earnings and profits (as determined under U.S. federal income tax principles). With respect to corporate U.S. Holders, the dividends
will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other
U.S. corporations.
With
respect to non-corporate U.S. Holders, including individual U.S. Holders, dividends will be taxed at the lower capital gains rate
applicable to qualified dividend income, provided that (1) the ordinary shares are readily tradable on an established securities
market in the United States, or we are eligible for the benefits of an approved qualifying income tax treaty with the United States
that includes an exchange of information program, (2) we are not a passive foreign investment company (as discussed below) for
either our taxable year in which the dividend is paid or the preceding taxable year, and (3) certain holding period requirements
are met. Because there is no income tax treaty between the United States and the Cayman Islands, clause (1) above can be satisfied
only if the ordinary shares are readily tradable on an established securities market in the United States. Under U.S. Internal
Revenue Service authority, ordinary shares are considered for purpose of clause (1) above to be readily tradable on an established
securities market in the United States if they are listed on certain exchanges, which presently include the Nasdaq. You are urged
to consult your tax advisors regarding the availability of the lower rate for dividends paid with respect to our ordinary shares,
including the effects of any change in law after the date of this report.
To
the extent that the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S.
federal income tax principles), it will be treated first as a tax-free return of your tax basis in your ordinary shares, and to
the extent the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain. We do not intend to
calculate our earnings and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a distribution
will be treated as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital
gain under the rules described above.
Taxation
of Dispositions of Ordinary Shares
Subject
to the passive foreign investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange
or other taxable disposition of a share equal to the difference between the amount realized (in U.S. dollars) for the share and
your tax basis (in U.S. dollars) in the ordinary shares. The gain or loss will be capital gain or loss. If you are a non-corporate
U.S. Holder, including an individual U.S. Holder, who has held the ordinary shares for more than one year, you may be eligible
for reduced tax rates on any such capital gains. The deductibility of capital losses is subject to limitations.
Passive
Foreign Investment Company (“PFIC”)
A
non-U.S. corporation is considered a PFIC for any taxable year if either:
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at least 75% of
its gross income for such taxable year is passive income; or
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at
least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable
to assets that produce or are held for the production of passive income (the “asset test”).
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Passive
income generally includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct
of a trade or business) and gains from the disposition of passive assets. We will be treated as owning our proportionate share
of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly,
at least 25% (by value) of the stock. In determining the value and composition of our assets for purposes of the PFIC asset test,
(1) the cash we hold will generally be considered to be held for the production of passive income and (2) the value of our assets
must be determined based on the market value of our ordinary shares from time to time, which could cause the value of our non-passive
assets to be less than 50% of the value of all of our assets (including the cash raised in any offering) on any particular quarterly
testing date for purposes of the asset test.
We
must make a separate determination each year as to whether we are a PFIC. Depending on the amount of cash we hold, together with
any other assets held for the production of passive income, it is possible that, for our current taxable year or for any subsequent
taxable year, at least 50% of our assets may be assets held for the production of passive income. We will make this determination
following the end of any particular tax year. Although the law in this regard is unclear, we treat our consolidated variable interest
entities, as being owned by us for United States federal income tax purposes, not only because we exercise effective control over
the operation of such entities but also because we are entitled to substantially all of their economic benefits, and, as a result,
we consolidate their operating results in our consolidated financial statements. In particular, because the value of our assets
for purposes of the asset test will generally be determined based on the market price of our ordinary shares and because cash
is generally considered to be an asset held for the production of passive income, our PFIC status will depend in large part on
the market price of our ordinary shares and the amount of cash we hold. Accordingly, fluctuations in the market price of the ordinary
shares may cause us to become a PFIC. In addition, the application of the PFIC rules is subject to uncertainty in several respects.
We are under no obligation to take steps to reduce the risk of our being classified as a PFIC, and as stated above, the determination
of the value of our assets will depend upon material facts (including the market price of our ordinary shares from time to time
that may not be within our control). If we are a PFIC for any year during which you hold ordinary shares, the shares will continue
to be treated as stock in a PFIC for all succeeding years during which you hold ordinary shares. However, if we cease to be a
PFIC and you did not previously make a timely “mark-to-market” election as described below, you may avoid some of
the adverse effects of the PFIC regime by making a “purging election” (as described below) with respect to the ordinary
shares.
If
we are a PFIC for your taxable year(s) during which you hold ordinary shares, you will be subject to special tax rules with respect
to any “excess distribution” that you receive and any gain you realize from a sale or other disposition (including
a pledge) of the ordinary shares, unless you make a “mark-to-market” election as discussed below. Distributions you
receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the
three preceding taxable years or your holding period for the ordinary shares will be treated as an excess distribution. Under
these special tax rules:
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the excess distribution
or gain will be allocated ratably over your holding period for the ordinary shares;
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the
amount allocated to your current taxable year, and any amount allocated to any of your taxable year(s) prior to the first taxable
year in which we were a PFIC, will be treated as ordinary income, and
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the
amount allocated to each of your other taxable year(s) will be subject to the highest tax rate in effect for that year and the
interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.
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The
tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset
by any net operating losses for such years, and gains (but not losses) realized on the sale of the ordinary shares cannot be treated
as capital, even if you hold the ordinary shares as capital assets.
A
U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to
elect out of the tax treatment discussed above. If you make a mark-to-market election for first taxable year which you hold (or
are deemed to hold) ordinary shares and for which we are determined to be a PFIC, you will include in your income each year an
amount equal to the excess, if any, of the fair market value of the ordinary shares as of the close of such taxable year over
your adjusted basis in such ordinary shares, which excess will be treated as ordinary income and not capital gain. You are allowed
an ordinary loss for the excess, if any, of the adjusted basis of the ordinary shares over their fair market value as of the close
of the taxable year. However, such ordinary loss is allowable only to the extent of any net mark-to-market gains on the ordinary
shares included in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well
as gain on the actual sale or other disposition of the ordinary shares, are treated as ordinary income. Ordinary loss treatment
also applies to any loss realized on the actual sale or disposition of the ordinary shares, to the extent that the amount of such
loss does not exceed the net mark-to-market gains previously included for such ordinary shares. Your basis in the ordinary shares
will be adjusted to reflect any such income or loss amounts. If you make a valid mark-to-market election, the tax rules that apply
to distributions by corporations which are not PFICs would apply to distributions by us, except that the lower applicable capital
gains rate for qualified dividend income discussed above under “— Taxation of Dividends and Other Distributions on
our ordinary shares” generally would not apply.
The
mark-to-market election is available only for “marketable stock”, which is stock that is traded in other than de minimis
quantities on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other
market (as defined in applicable U.S. Treasury regulations), including Nasdaq. If the ordinary shares are regularly traded on
Nasdaq and if you are a holder of ordinary shares, the mark-to-market election would be available to you were we to be or become
a PFIC.
Alternatively,
a U.S. Holder of stock in a PFIC may make a “qualified electing fund” election with respect to such PFIC to elect
out of the tax treatment discussed above. A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC
will generally include in gross income for a taxable year such holder’s pro rata share of the corporation’s earnings
and profits for the taxable year. However, the qualified electing fund election is available only if such PFIC provides such U.S.
Holder with certain information regarding its earnings and profits as required under applicable U.S. Treasury regulations.
We
do not currently intend to prepare or provide the information that would enable you to make a qualified electing fund election.
If you hold ordinary shares in any taxable year in which we are a PFIC, you will be required to file U.S. Internal Revenue Service
Form 8621 in each such year and provide certain annual information regarding such ordinary shares, including regarding distributions
received on the ordinary shares and any gain realized on the disposition of the ordinary shares.
If
you do not make a timely “mark-to-market” election (as described above), and if we were a PFIC at any time during
the period you hold our ordinary shares, then such ordinary shares will continue to be treated as stock of a PFIC with respect
to you even if we cease to be a PFIC in a future year, unless you make a “purging election” for the year we cease
to be a PFIC. A “purging election” creates a deemed sale of such ordinary shares at their fair market value on the
last day of the last year in which we are treated as a PFIC. The gain recognized by the purging election will be subject to the
special tax and interest charge rules treating the gain as an excess distribution, as described above. As a result of the purging
election, you will have a new basis (equal to the fair market value of the ordinary shares on the last day of the last year in
which we are treated as a PFIC) and holding period (which new holding period will begin the day after such last day) in your ordinary
shares for tax purposes.
You
are urged to consult your tax advisors regarding the application of the PFIC rules to your investment in our ordinary shares and
the elections discussed above.
Information
Reporting and Backup Withholding
Dividend
payments with respect to our ordinary shares and proceeds from the sale, exchange or redemption of our ordinary shares may be
subject to information reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding. Backup withholding
will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required
certification on U.S. Internal Revenue Service Form W-9 or who is otherwise exempt from backup withholding. U.S. Holders who are
required to establish their exempt status generally must provide such certification on U.S. Internal Revenue Service Form W-9.
U.S. Holders are urged to consult their tax advisors regarding the application of the U.S. information reporting and backup withholding
rules.
Backup
withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income
tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate
claim for refund with the U.S. Internal Revenue Service and furnishing any required information. We do not intend to withhold
taxes for individual shareholders. However, transactions effected through certain brokers or other intermediaries may be subject
to withholding taxes (including backup withholding), and such brokers or intermediaries may be required by law to withhold such
taxes.
Under
the Hiring Incentives to Restore Employment Act of 2010, certain U.S. Holders are required to report information relating to our
ordinary shares, subject to certain exceptions (including an exception for ordinary shares held in accounts maintained by certain
financial institutions), by attaching a complete Internal Revenue Service Form 8938, Statement of Specified Foreign Financial
Assets, with their tax return for each year in which they hold ordinary shares and all specified foreign financial assets held
exceed a threshold amount (such as $100,000 as of the end of the year for married taxpayers filing joint returns). Failure to
report the information could result in substantial penalties. You should consult your own tax advisor regarding your obligation
to file Form 8938.
10.F. Dividends and Paying Agents
Not
Applicable.
10.G. Statement by Experts
Not
Applicable.
10.H. Documents on Display
We
are subject to periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers.
Accordingly, we are required to file reports, including annual reports on Form 20-F, and other information with the SEC.
All information filed with the SEC can be obtained over the internet at the SEC’s website at www.sec.gov or inspected
and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. The public
may obtain information regarding the Washington, D.C. Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains a web site at www.sec.gov that contains reports and other information regarding registrants that make electronic
filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules under the Exchange Act
prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders
are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. You
may also visit us on the world wide web at http://www.1juhao.com. However, information contained on our website does not
constitute a part of this annual report.
10.I. Subsidiary Information
Not
Applicable.
ITEM 11.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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Liquidity
risk
We
are exposed to liquidity risk, which is the risk that we will be unable to provide sufficient capital resources and liquidity
to meet our commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and
monitoring procedures. When necessary, we will turn to other financial institutions to obtain short-term funding to meet the liquidity
shortage.
Inflation
risk
Inflationary
factors, such as increases in personnel and overhead costs, could impair our operating results. Although we do not believe that
inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the
future may have an adverse effect on our ability to maintain current levels of gross margin and operating expenses as a percentage
of sales revenue if the revenues from our products do not increase with such increased costs.
Interest
rate risk
Our
exposure to interest rate risk primarily relates to the interest rate that our deposited cash can earn, on the other hand, interest-earning
instruments carry a degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates.
An increase, however, may raise the cost of any debt we incur in the future.
Foreign
currency translation and transaction
Our
operating transactions and assets and liabilities are mainly denominated in RMB. RMB is not freely convertible into foreign currencies
for capital account transactions. The value of RMB against the U.S. dollar and other currencies is affected by, among other
things, changes in China’s political and economic conditions and China’s foreign exchange policies. To date, we have
not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk.
ITEM 12.
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DESCRIPTION OF
SECURITIES OTHER THAN EQUITY SECURITIES
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Not
applicable.
Not
applicable.
Not
applicable.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying
notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Jowell Global Ltd. (“Jowell
Global” or the “Company”) is a limited liability company established under the laws of the Cayman Islands on August
16, 2019 as a holding company. The Company, through its consolidated Variable Interest Entity (“VIE”) that serves customers
using its retail website www.1juhao.com and mobile applications, engages primarily in online sale of cosmetic products, health and nutritional
supplements and household products sourced from manufacturers and distributors in China, and offers an online marketplace that also enables
third-party sellers to sell their products on the Company’s online platform.
A reorganization of the Company’s legal structure (“Reorganization”)
was completed on November 1, 2019. The Reorganization involved the incorporation of Jowell Global, a Cayman Islands holding company, Jowell
Technology Limited (“Jowell Tech”), a Hong Kong holding company; the incorporation of Shanghai Jowell Technology Co., Ltd.
(“Shanghai Jowell”), a wholly foreign-owned entity (“WFOE”) formed by Jowell Tech under the laws of the People’s
Republic of China (“China” or the “PRC”).
The Company primarily sells cosmetic products,
health and nutritional supplements and household products through online direct sales. The Company recognizes product revenues from the
online direct sales on a gross basis as the Company is a principal because it controls the promised good or service before transferring
it to a customer. This control is determined by the following indicators 1) The Company is the primary obligor in the sales transaction
and responsible for fulfilling the promise to provide the product and service; 2) The Company bears the inventory risk. The Company will
first indemnify customers for product damages and then request reimbursements from suppliers if the suppliers are determined to be responsible
for the damages; 3) The Company has discretion in establishing the prices and control over the entire transaction. For the year ended
December 31, 2020, 2019 and 2018, approximately $21.3 million, $50.19 million and $17.78 million cost of products were purchased, packed
and delivered by the Company at the warehouse of a subsidiary of Jiangsu Longrich Group Co., Ltd (“Longrich Group”), a supplier
controlled by the Chairman and CEO of the Company, which generated approximately $23.4 million, $54.39 million and $18.34 million revenues,
respectively.
Sales revenue represents the invoiced value of
goods, net of VAT. The applicable VAT rate was 16% or 10% (depending on the type of goods involved) for products sold in the PRC. The
applicable VAT rate of 16% and 10% decreased to 13% and 9% starting from April 1, 2019. The VAT may be offset by VAT paid by the Company
on raw materials and other materials included in the cost of producing or acquiring its finished products. The Company recorded a VAT
payable or recoverable net of payments in the accompanying consolidated financial statements. All of the VAT returns filed by the Company’s
subsidiaries and VIE in China, have been and remain subject to examination by the tax authorities for five years from the date of filing.
The Company sources majority of its products from
Jiangsu Longrich Group Co., Ltd (“Longrich Group”), controlled by the Chairman and CEO of the Company, and its subsidiaries
and makes periodic advances to Longrich Group for product purchases in the normal course of business. Advances to suppliers consisted
of the following:
Jowell Global is established
under the laws of the Cayman Islands on August 16, 2019 with 450,000,000 authorized Ordinary Shares and 50,000,000 authorized Preferred
Shares. The Company initially had a total of 60,000,000 of its Ordinary Shares and a total of 750,000 of its Preferred shares issued
and outstanding. On October 21, 2020, the Company issued 3,448,274 Ordinary Shares to three investors in a private placement transaction
for aggregated proceeds of $10,000,000. On November 6, 2020, the Company effected a reverse stock split of its Ordinary Shares
at a ratio of 1-for-3 pursuant to which all existing shareholders of record on that date surrendered an aggregate of 42,298,849 Ordinary
Shares, or 66.67% of the then outstanding Ordinary Shares to the Company for no consideration. The shares surrendered were subsequently
cancelled (“Reverse Split”). The Company believes it is appropriate to reflect the reverse split of its Ordinary Shares on
a retroactive basis pursuant to ASC 260. Consequently, as of December 31, 2020 and 2019, 21,149,425 and 20,000,000 Ordinary Shares, and
750,000 and 750,000 Preferred Shares were issued and outstanding, respectively, with a par value of US$0.0001, giving effect to the above-mentioned
reverse split. Each Preferred Share has voting rights equal to two Ordinary Shares of the Company and each Preferred Share is convertible
into one Ordinary Share at any time. Except for voting rights and conversion rights, the Ordinary Shares and the Preferred Shares shall
rank pari passu with one another and shall have the same rights, preferences, privileges and restrictions. As a part of the Company’s
recapitalization prior to completion of its initial public offering, the Company has retroactively applied all share and per share data
for all the periods presented.
In July 2019, the Shanghai Juhao’s Board
of Directors approved and paid a cash dividend of RMB 10,659,339 (equivalent to $1,551,081) to its shareholder at the time of record,
out of the retained earnings balance of Shanghai Juhao.
The Company leases one warehouses and three offices
from its related party, subsidiaries of Longrich Group, controlled by the Chairman and CEO of the Company, who also is a major shareholder
of the Company. The Company is obligated to pay a quarter base rent under these lease agreements. See Note 11 for further discussion.
The Company made sales to related parties controlled
by the Chairman, CEO, a major shareholder of the Company, in the amount of $1,522,546, $nil and $nil for the years ended December 31,
2020, 2019 and 2018, respectively. As of December 31, 2020, the Company had accounts receivable of $682,315 related to these sales.
The Company entered into following lease agreements
with its related parties controlled by the Chairman, CEO and a major shareholder of the Company, to lease warehouse and office spaces.
The Company intend to continue these leases for the next three years.
On January 1, 2020, the Company entered into the
fourth one-year operating lease agreement with a subsidiary of Longrich Group to rent another office space with 404 square meters in Changshu
City, Jiangsu Province. The rental payment related to this lease were $32,261 for the years ended December 31, 2020. On December 31, 2020,
the Company entered into another lease agreement for fiscal year 2021 and the leased space is increased to 5,976 square meters with annual
rent of approximately $420,000.
As of December 31, 2020 and 2019, the balance
of income tax payable was $907,133 and 113,049, respectively. Due to the impact of COVID-19, the government has relaxed the time for tax
payment for fiscal year 2020. The Company plans to pay it by the end of May 2021.
These consolidated financial statements were approved
by management and available for issuance on May 10, 2021. The Company evaluated subsequent events through the date these consolidated
financial statements were issued.
On March 19, 2021, the Company closed its initial
public offering (“IPO”) of 3,714,286 ordinary shares, par value $0.0001 per share, priced at $7.00 per share. On March
23, 2021, the underwriter exercised its over-allotment option to purchase an additional 557,143 ordinary shares at a price of $7.00 per
share. The closing for the sale of the over-allotment shares took place on March 25, 2021. The gross proceeds of the Company’s IPO,
including the proceeds from the sale of the over-allotment shares, totaled approximately $29.9 million, before deducting underwriting
discounts and other related expenses. The Ordinary Shares have been listed on the Nasdaq Capital Market and trading under the ticker symbol
“JWEL” since March 17, 2021.