UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO 1 to
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): August 14,
2020
AS Capital, Inc.
(Exact name of registrant as specified in its charter)
Nevada |
|
000-55999 |
|
83-2187195 |
(State or other jurisdiction of
incorporation) |
|
(Commission File Number) |
|
(I.R.S. Employer Identification No.) |
Room 1206, 12th Floor, 301, 3-17 F, Building 5
Block 1, Hangfeng Road
Fengtai District, Beijing
+86-10-63622901
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
3609 Hammerkop Drive
North Las Vegas, Nevada 89084
(Former address of principal executive offices)
Check the appropriate box below if the Form 8-K filing is
intended to simultaneously satisfy the filing obligation of the
registrant under any of the following provisions (see
General Instruction A.2. below):
☐ |
|
Written communications pursuant to Rule 425 under
the Securities Act (17 CFR 230.425) |
☐ |
|
Soliciting material pursuant to Rule 14a-12 under
the Exchange Act (17 CFR 240.14a-12) |
☐ |
|
Pre-commencement communications pursuant to Rule
14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b)) |
☐ |
|
Pre-commencement communications pursuant to Rule
13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Title of each
Class |
Trading Symbol |
Name of each exchange on which
registered |
Common
Stock, par value US$0.0001 |
ASIN |
N/A
|
Indicate by check mark whether the registrant is an emerging growth
company as defined in Rule 405 of the Securities Act of 1933
(§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange
Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company þ
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
☐
EXPLANATORY NOTE
This Amendment No. 1 to the Company’s Current Report of Form 8-K
(the “Amendment”) amends the Current Report on Form 8-K of AS
Capital, Inc. (the “Form 8-K”), as filed with the Securities and
Exchange Commission (the “Commission”) on August 7, 2020. The
Amendment is being filed to update the Form 8-K to: (i) amend Item
2.01 Completion of an Acquisition or Disposition of Assets to
include updated market, key vendor, and other information for the
six months ended June 30, 2020, in the section entitled
“Description of Business of Beijing Luji Technology Co., Ltd.,
include an additional risk factor in the section entitled “Risk
Factors,” include discussion of results of operations for the three
and six months ended June 30, 2020 in the section entitled
“Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” and include updated information in the
sections entitled “Delinquent Section 16(a) Reports” and
“Compensation of Directors,” and other ancillary related updates;
and (ii) amend the financial statements to include unaudited
condensed consolidated financial statements for the three and six
months ended June 30, 2020 and the unaudited pro forma condensed
combined financial statements as of June 30, 2020.
Except as expressly set forth above, this Amendment does not, and
does not purport to, amend, update or restate the information in
any other item of the Form 8-K or reflect any events that have
occurred after the filing of the original Form 8-K.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Except for historical information, this report contains
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. Such forward-looking statements involve risks and
uncertainties, including, among other things, statements regarding
our business strategy, future revenues and anticipated costs and
expenses. Such forward-looking statements include, among
others, those statements including the words "expects,"
"anticipates," "intends," "believes" and similar
language. Our actual results may differ significantly
from those projected in the forward-looking statements. Factors
that might cause or contribute to such differences include, but are
not limited to, those discussed in the sections "Description of
Business," "Risk Factors" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations." You should
carefully review the risks described in this Current Report on Form
8-K and in other documents we file from time to time with the
Securities and Exchange Commission. You are cautioned not to place
undue reliance on the forward-looking statements, which speak only
as of the date of this report. We undertake no obligation to
publicly release any revisions to the forward-looking statements or
reflect events or circumstances after the date of this
document.
Although we believe that the expectations reflected in these
forward-looking statements are based on reasonable assumptions,
there are a number of risks and uncertainties that could cause
actual results to differ materially from such forward-looking
statements.
All references in this Form 8-K to the "Company," "we," "us" or
"our" are to AS Capital, Inc. on a consolidated basis.
Item 2.01 Completion of an Acquisition or Disposition of
Assets.
On August 6, 2020, AS Capital, Inc. (the “Company” or “ASIN”) and
HanJiao International Holding Limited, a private limited liability
company incorporated under the laws of the British Virgin Islands
(“HJ” or “HanJiao”) and HJ’s shareholders entered into a Share
Acquisition Agreement (the “Share Exchange Agreement”) to acquire
up to one hundred (100) Ordinary Shares of HJ held by its five
shareholders (the “HJ Shares”), representing 100% of the issued and
outstanding securities of HJ, for 86,000,000 shares of our common
stock at a per share price of US$0.46, (the “Share Exchange”). The
share acquisition was consummated on August 6, 2020. As a result,
we entered into the business of selling healthcare and other
related products to middle-aged and elderly market segments in the
People’s Republic of China (“PRC” or China”) through its online to
offline platform, and HJ shareholders received 86,000,000 shares of
the Company’s common stock (the “Shares”). It is our understanding
that HJ shareholders are not U.S. Persons within the meaning of
Regulations S. Accordingly, the Shares were issued pursuant to the
exemption provided by Section 4(a)(2) of the Securities Act of
1933, as amended, Regulation D and Regulation S promulgated
thereunder. The foregoing description of the Share Exchange
Agreement is qualified in its entirety by reference to the Share
Exchange Agreement which is filed as Exhibit 10.1 to this Current
Report and is incorporated herein by reference.
HJ is engaged in the sale of healthcare and other related products
to the middle-aged and elderly market segments in the PRC through
its internet platform and offline service centers.
In connection with the acquisition, effective from August 6,
2020, the following individuals were appointed to serve in
the capacities set forth next to their names until his or her
successor(s) shall be duly elected or appointed, unless he or she
resigns, is removed from office or is otherwise disqualified from
serving as an executive officer or director of the Company:
Name |
|
Positions |
Tian Xiangyang
|
|
Chief Executive Officer, Director
and Chairperson of the Board of Director |
Shan Yonghua |
|
Chief Financial Officer, and
Director |
Tian
Zhihai |
|
Chief Operating Officer and
Director |
Yin
Jianen |
|
Secretary and
Director |
Wang
Jirui |
|
Director |
Prior to the acquisition, the Company was considered as a shell
company due to its nominal assets and limited operation. Upon the
acquisition, HJ and its subsidiaries and affiliated entities will
comprise the ongoing operations of the combined entity and its
senior management will serve as the senior management of the
combined entity. HJ is deemed to be the accounting acquirer for
accounting purposes. The transaction will be treated as a
recapitalization of the Company. Accordingly, the consolidated
assets, liabilities and results of operations of the Company will
be the historical financial statements of HJ, and the Company’s
assets, liabilities and results of operations will be consolidated
with HJ and subsidiaries, beginning on the acquisition date. HJ was
the legal acquiree. The Company was the legal acquirer but HJ is
deemed to be the accounting acquirer in the reverse merger. The
historical financial statements prior to the acquisition are those
of the accounting acquirer (HJ and subsidiaries). Historical
stockholders’ equity of the accounting acquirer prior to the merger
are retroactively restated (a recapitalization) for the equivalent
number of shares received in the merger. Operations prior to the
merger are those of the accounting acquirer. After completion of
the share exchange transaction, the Company’s consolidated
financial statements include the assets and liabilities, the
operations and cash flow of the accounting acquirer.
CORPORATE HISTORY
Overview
On August 6, 2020, we consummated the acquisition of One Hundred
(100) Shares of HJ, representing 100% of the issued and outstanding
stock of HJ. HJ is a holding company that, through its subsidiaries
and variable interest entity, is engaged in the business of selling
healthcare and other related products to the middle-aged and
elderly market segments in the PRC through its internet platform
and offline service centers. HJ’s consolidated business is
conducted through Beijing Luji Technology Co., Ltd., a variable
interest entity formed in Beijing, China on March 27, 2007.
Prior to our acquisition of HJ, we were a shell company with
nominal assets and limited operations. Our former business
objective was to seek long term growth through one or more business
combinations with operating companies.
History
We were incorporated on June 15, 2006 under the laws of the State
of Nevada as Jupiter Resources, Inc. 75,000,000 shares of common
Stock par value $0.001 and no other classes of stock were
authorized. On March 27, 2007, we entered into an agreement with
Ms. Helen Louise Robinson of Vernon, British Columbia, whereby she
agreed to sell to us one mineral claim located approximately 30
kilometers northwest of Vernon, British Columbia in an area having
the potential to contain silver or copper mineralization or
deposits. In order to acquire a 100% interest in this claim, we
paid $7,500 to Ms. Robinson. However, we were unable to keep the
mineral claim in good standing due to lack of funding and our
interest in it lapsed.
On March 25, 2009, the Company’s articles of incorporation were
amended to authorize an addition of 10 million preferred shares
making a total of 85,000,000 shares authorized (75M common, 10M
preferred).
On March 30, 2009, Jupiter Resources, Inc. (the “Company”) entered
into a binding letter of intent (the “Letter of Intent”) with
NatProv Holdings, Inc., a British Virgin Islands corporation
(“Natprov”). Pursuant to the terms of the Letter of Intent, Natprov
and the Company were to commence the negotiation and preparation of
a definitive share exchange agreement which contained customary
representations, warranties and indemnities as agreed upon by
Natprov, the Company and the shareholders of Natprov, whereby the
Company, Natprov and the shareholders of Natprov were to complete a
share exchange transaction (the “Transaction”) on or before May 26,
2009, subject to certain conditions precedent to the closing of the
Transaction.
On April 30, 2009, the Company filed an amendment to change the
name of the corporation to Rineon Group, Inc.
On May 01, 2009, we filed a Certificate of Designation to designate
36,000 shares of Series A Convertible Preferred Stock, out of the
10 million preferred stock. These shares have no votes for matters
brought before the common shareholders, only with matters regarding
the Series A shares where they will be the only voters. They can
convert into common but cannot at anytime convert to hold more than
4.95% of the issued and outstanding common shares of the
Company.
On May 14, 2009, we entered into a preferred stock purchase
agreement dated as of April 30, 2009 (the “Preferred Stock Purchase
Agreement”) under which the Company sold an aggregate of 36,000
shares of its Series A convertible preferred stock (the “Series A
Preferred Stock”) to Intigy Absolute Return Ltd., a British Virgin
Islands corporation (“Intigy”), for a purchase price of
$36,000,000, or $1,000 per share of Series A $0.001 Par Value
Preferred Stock. In addition, pursuant to the terms of the stock
purchase agreement dated as of May 14, 2009, Rineon agreed to
acquire 1,985,834 shares of Amalphis from NatProv Holdings Inc
(“NatProv”) for a total consideration of $36,000,000. Of the
2,437,500 shares of Amalphis held by NatProv, 1,985,834 were
converted into Class A Preferred non-voting shares, which were then
assigned by NatProv to Rineon. As a result, NatProv owned 451,666
Common Shares of Amalphis, representing 100% of the voting shares
of Amalphis, and Rineon owned 1,985,834 of Amalphis’ Class A
Preferred Shares which have the same rights and privileges as the
common shares except that they have a liquidation preference and no
voting rights. Amalphis’ Class A Preferred Shares were not
convertible into Common Shares.
The transactions consummated as set forth above resulted in a
change of control of the Company. In connection with such change in
control, on May 14, 2009, the board of directors of the Company
authorized a change in the fiscal year end of the Company from May
31 to December 31.
Amalphis Group, Inc., (“Amalphis”) was formed in July 2008 as a
British Virgin Islands (BVI) Business Company. Amalphis, through
its wholly owned subsidiary Allied Provident, Inc. (“API”), offers
customized reinsurance products in markets where traditional
reinsurance alternatives are limited. In addition, Amalphis was
formed to directly sell a variety of property and casualty
insurance products to businesses around the world. In September
2008, Amalphis acquired API, an entity that issues customized
reinsurance to a United States insurance carrier that offers
automotive insurance coverage to drivers who are unable to obtain
insurance from standard carriers. API was formed in Barbados on
November 9, 2007 by NatProv Holdings Inc., (“NatProv”) a British
Virgin Islands corporation.
There was no business activity between the filing of the Form 15 on
November 10, 2010, and prior to August 9, 2018. The Company had
Exchange Act disclosure requirements from January 11, 2008 to
November 10, 2010. The Company has no knowledge or records related
to the assets referenced above and therefor there is some level of
uncertainty in the above descriptions.
Prior Company management was unresponsive to shareholders and had
refused to respond to requests to meet statutory requirements to
get current with the secretary of state and with the required
filings of the Securities and Exchange Commission (“SEC”).
On August 9, 2018, XTC, Inc. was appointed to serve as the
custodian of the Company in a shareholder filed action with the
Eighth Judicial District Court in Clark County, Nevada and was
instructed to revive the Company. XTC, Inc. was a shareholder of
record as shown in the court documents (500 shares) attached as
Exhibit 99.1 to this Current Report. XTC acquired its 500 common
shares on June 14, 2018 in the open market at a price of $0.05 per
share.
Enclosed as Exhibit 99.1 hereto are the entire court records, from
filing to closing documents.
On September 25, 2018, the Company filed a Certificate of
Designation whereby the following preferred shares were designated
by the Company and the rights, privileges and designations of the
Series A Convertible Preferred Stock were amended and restated.
The number of Series A Convertible Preferred Stock was increased
from 36,000 to 1,000,000.
|
· |
3,000,000 Series B
Convertible Preferred Stock were created with no voting rights, and
conversion rights of 1000:1, with the restriction that holders
cannot convert to hold more the 4.95% of issued and outstanding
common stock. |
|
· |
1,000,000 Series C
Convertible Preferred Stock were created. (each Series C shall have
100,000 vote per share, with 1:1 conversion rights. |
On September 25, 2018, the Company issued 964,000 shares of Series
A Convertible Preferred shares to XRC, LLC at $0.001 per share and
1,000,000 shares of Series C Convertible Preferred shares at $0.001
per share to XRC, LLC, a company controlled by Chris Lotito, in
exchange for paying the costs to revive the company with the State
of Nevada, giving it voting control.
On September 28, 2018, a shareholders meeting was held wherein the
shareholders gave the board authority to reorganize the Company,
including making a possible name change, and/or engaging in a
reverse stock split. In addition, the Series A shareholders voted
to approve a reverse split of 1 preferred share for each 1,000
shares outstanding of the Series A Convertible Preferred and to
authorize a new designation.
On October 1, 2018, the Company made filings with the Nevada
Secretary of State to change our name to “AS Capital, Inc.” and to
exercise a 10-to-1 reverse stock split for the Common stock and a
1,000 to 1 reverse of the Series A Convertible Preferred, with
conversion rights of 1 common share for every 12,000 shares of
Series A Convertible Preferred Stock held. As a result, the number
of issued and outstanding Series A Convertible Preferred Stock was
reduced to 1,000 shares.
On December 6, 2018, the Court granted an Order discharging the
custodian and approved all actions taken by the custodian.
Change in Control
On June 4, 2019, AS Capital, Inc., a Nevada corporation, XRC, LLC,
a Colorado limited liability company (“XRC”) and Gao Xue Ran
(“Purchaser”) entered into a Stock Purchase Agreement (the “SPA”),
pursuant to which Purchaser agreed to purchase from XRC 11,000,000
shares of common stock of the Company, par value $0.0001, and 964
shares of Series A Convertible Preferred Stock Preferred Stock of
the Company, par value $0.001 (collectively, the “Shares”), for
aggregate consideration of Four Hundred and Ten Thousand Dollars
($410,000) in accordance with the terms and conditions of the SPA.
XRC is the controlling shareholder of the Company. On June 13,
2019, and in anticipation of the sales transaction with Ms. Gao,
the Company assigned its line of credit and the current balance due
thereunder, including all outstanding principal and accrued
interest, to XRC in consideration of 10,000,000 shares of common
stock of the Company. At the time of the transfer, $48,595 was due
under the item of credit. At the same time XRC converted its
1,000,000 shares of Series C Convertible Preferred Stock into
1,000,000 shares of common stock. Chris Lotito was the managing
member of XRC.
The acquisition of the Shares consummated on July 18, 2019, and the
Shares were ultimately purchased by the following three individuals
using their own personal funds:
Name |
No. of Shares |
Percentage of Issued and
Outstanding |
Consideration Paid |
Gao Xue Ran |
8,581,063 of Common Stock;
964 shares of Series A Preferred Stock
|
76.61% |
$319,840 |
Zhang Yan Hua |
1,935,633 of Common Stock |
17.28% |
$72,146 |
Cheung Kwok Chiu Kris |
483,304 of Common Stock |
4.31% |
$18,014 |
Total |
11,000,000 of Common Stock;
964 shares of Series A Preferred Stock
|
100% |
|
Ms. Gao holds a controlling interest in the Company and may
unilaterally determine the election of the Board and other
substantive matters requiring approval of the Company’s
stockholders.
Upon the consummation of the sale of the Shares, Chris Lotito, our
Chief Executive Officer and sole director, and John Karatzaferis,
our President, resigned from all of their positions with the
Company, effective July 18, 2019. Their resignations were not due
to any dispute or disagreement with the Company on any matter
relating to the Company’s operations, policies or practices.
Concurrent with such resignations, Gao Xue Ran was appointed to
serve as the Chief Executive Officer, Chief Financial Officer,
President, Secretary and sole Director of the Company, until the
next annual meeting of stockholders of the Company and until such
director’s successor is elected and qualified or until such
director’s earlier death, resignation or removal. None of the
directors or executive officers has a direct family relationship
with any of the Company’s directors or executive officers, or any
person nominated or chosen by the Company to become a director or
executive officer. Ms. Gao will serve in her positions without
compensation.
Acquisition of HJ
On August 6, 2020, we consummated the acquisition of
One Hundred (100) Shares of HJ, representing 100% of the issued and
outstanding stock of HJ by issuing 86,000,000 shares of the common
stock. HJ is a holding company that, through its subsidiaries and
variable interest entity, is engaged in the business of selling
healthcare and other related products to the middle-aged and
elderly market segments in the PRC through its internet platform
and offline service centers. HJ’s consolidated business is
conducted through Beijing Luji Technology Co., Ltd., a variable
interest entity formed in Beijing, China on March 27, 2007.
In connection with the acquisition, effective August 6,
2020, the following individuals were appointed to serve in
the capacities set forth next to their names until his or her
successor(s) shall be duly elected or appointed, unless he or she
resigns, is removed from office or is otherwise disqualified from
serving as an executive officer or director of the Company:
Name |
|
Positions |
|
Number of Shares
Held |
|
Percentage of Total Common
Equity |
Tian Xiangyang |
|
Chief
Executive Officer, Director and Chairperson of the Board of
Director |
|
68,800,000 |
|
70.78% |
Shan
Yonghua |
|
Chief Financial Officer, and
Director |
|
- |
|
- |
Tian
Zhihai |
|
Chief Operating Officer and
Director |
|
4,300,000 |
|
4.63% |
Yin
Jianen |
|
Secretary and
Director |
|
- |
|
- |
Wang
Jirui |
|
Director |
|
- |
|
- |
Upon the consummation of the sale of the HJ Shares, Gao Xue Ran
resigned from all of her positions with the Company, effective
August 6, 2020. Her resignation was not due to any
dispute or disagreement with the Company on any matter relating to
the Company’s operations, policies or practices.
Our principal executive offices are located at Room 1206,
12th Floor, 301, 3-17 F, Building 5, Block 1, Hangfeng
Road, Fengtai District, Beijing and our telephone number is
+86-10-63622901. We maintain an Internet website at
www.lujiguoji.com. The information contained in, or accessible
from, our website is not a part of this Current Report.
DESCRIPTION OF BUSINESS OF BEIJING LUJI TECHNOLOGY CO.,
LTD.
Beijing Luji Technology Co., Ltd. (“Beijing Luji”), previously
known as Beijing Luji Culture Media Co. Ltd., a variable interest
entity that we control through contractual arrangements, was formed
in Beijing, China, on March 27, 2007. Originally, Beijing Luji was
focused on the provision of services in paper media, publication of
magazines and books, and investment in media businesses. Due to the
downturn of the paper media industry and the rise of the elderly
healthcare services industry, in 2013 Beijing Luji shifted its
business focus to the provision of healthcare related products
through its E-commerce platform to the middle-aged and elderly
populations.
In 2016, Beijing Luji expanded its E-commerce operations and
introduced its “Fozgo” branded online to offline (O2O) marketplace.
The O2O platform integrates its E-commerce platform with physical
outlets to connect consumers and merchants in a dynamic
marketplace. Its platform not only offers users the convenience of
making online purchases, but also provides users the possibility to
purchase and receive products at offline service centers.
Currently, Beijing Luji’s core product categories include sales of
home appliances (such as water purifiers and air purifiers),
healthcare products (such as nutrient supplements) and cosmetics
products. As of March 31, 2020, Beijing Luji has developed several
branch offices with outlets across the PRC with approximately
158,000 users. In 2018, it was granted hi-tech enterprise status in
the PRC.
On March 15, 2019, Beijing Luji executed a Share Purchase Agreement
with Rongcheng Health Group Co., Ltd. and acquired a 44% equity
interest in Rongcheng Tianrun Taxus Co., Ltd. (“Rongcheng Tianrun”)
for RMB 79,830,000 (approximately $11.4 million). Rongcheng Tianrun
is organized and registered in the PRC, and it is engaged primarily
in the cultivation and marketing of Taxus, a type of medicinal
plant. The ownership transfer and related registration procedures
were completed on June 20, 2019. The foregoing description of the
Equity Acquisition Agreement is qualified in its entirety by
reference to the Share Purchase Agreement, an English translation
of which is filed as Exhibit 10.2 to this Current Report and
incorporated herein by reference.
Corporate Structure
Our current corporate structure is as follows:

(1) |
HanJiao International Holding Limited. (“HJ” or
“HanJiao”) was incorporated on July 5, 2018 in the British Virgin
Islands. |
(2) |
LuJi
Technology International Holding Limited (“Luji Technology”) was
incorporated on July 5, 2018 in the British Virgin Islands and is
wholly owned by HJ. |
(3) |
Inooka Holding Ltd. was established on July 18,
2018 in Hong Kong and is wholly owned by Luji
Technology. |
(4) |
Beijing Hongtao Management Consulting Co., Ltd.
(“Beijing Hongtao”), a Wholly Foreign-Owned Enterprise
(“WFOE”), was established in the PRC on October 11, 2018 and is a
wholly owned subsidiary of Inooka Holding Ltd. It currently
provides consulting and technical services to Beijing Luji
Technology Co., Ltd. (“Beijing Luji”). |
(5) |
Beijing Luji was established in the PRC on March
27, 2007. It is engaged in the business of selling goods in
China. Beijing Hongtao controls Beijing Luji via various
variable interest contractual arrangements (“VIE agreements”) to
realize its economic benefits. Currently, the shareholders of
Beijing Luji are Ms. Tian Xiangyang, Mr. Tian Zhihai, Mr. Liu
Zexian, Ms. Gao Xuewei and Ms. Li Chunduo, together the “Beijing
Luji Shareholders”. |
(6) |
Guoyi
Investment Fund Management (Beijing) Co., Ltd. (“Beijing Guoyi”)
was formed on February 19, 2016, and is wholly owned by Beijing
Luji. Beijing Guoyi has no business activity as of the date of this
Current Report. |
Contractual Agreements between Beijing Hongtao, Beijing Luji and
Beijing Luji Shareholders
We do not have a direct equity ownership interest in Beijing Luji
but rely on a series of contractual arrangements, the variable
interest agreements (“VIE Agreements”), to control and receive the
economic benefits of Beijing Luji’s business. We rely on
contractual arrangements with our variable interest entities to
operate our E-commerce business in the PRC and other businesses in
which foreign investment is restricted or prohibited.
Beijing Hongtao, Beijing Luji, and its shareholders entered
into the VIE Agreements on May 15, 2019. The VIE agreements
are designed to provide Beijing Hongtao with the power, rights and
obligations equivalent in all material respects to those it would
possess as the sole equity holder of Beijing Luji, including
absolute control rights and the rights to the assets, property and
revenue of Beijing Luji. Each of the VIE Agreements is
described in detail below.
Exclusive Consulting and Services Agreement
Pursuant to the Exclusive Consulting and Service Agreement signed
on May 15, 2019, between Beijing Hongtao and Beijing Luji, Beijing
Hongtao agrees to provide various services exclusively to Beijing
Luji including development and research services for
business-related software, pre-job and on-the-job training
services, technology development and transfer services, public
relations services, market research and consulting services, short
and medium-term market development and planning services, various
technical support services, consulting services related to business
compliance, organization and planning services related to marketing
and membership activities. For services rendered to Beijing Luji by
Beijing Hongtao under this agreement, Beijing Hongtao is
entitled to collect 100% of the net income of Beijing Luji.
The Exclusive Consulting and Services Agreement shall remain in
effect for ten years from the date of signing unless it is
terminated by Beijing Hongtao in advance or upon the mutual
agreement of both parties. Beijing Luji may terminate the agreement
subject to payment of all service fees for completed services and
compensation to Beijing Hongtao for losses. Prior to the
termination of this agreement, the parties may extend the term of
this agreement in accordance with the requirements of Beijing
Hongtao.
The foregoing description of the Exclusive Consulting and Services
Agreement is qualified in its entirety by reference to the
Consulting and Services Agreement, an English translation of which
is filed as Exhibit 10.3 to this Current Report and incorporated
herein by reference.
Business Operation Agreement
Pursuant to the Business Operation Agreement signed on May 15,
2019, by and among the Beijing Luji Shareholders, Beijing Luji and
Beijing Hongtao. Beijing Luji agrees not to conduct any
transactions that may materially affect its assets, business,
personnel, obligations, rights or company operations, without the
prior written consent of Beijing Hongtao. Beijing Hongtao agrees to
provide advice to Beijing Luji from time to time regarding the
appointment and dismissal of employees, daily management and
financial management systems. Beijing Luji and Beijing Luji
Shareholders also agreed to appoint designees of Beijing Hongtao to
serve as Board of directors and on the senior management team of
the Beijing Luji. In connection with this agreement, the Beijing
Luji Shareholders executed a Power of Attorney at Annex 1 of
the Business Operation Agreement in which the Beijing Luji
shareholders shall irrevocably authorize the designated personnel
of Beijing Hongtao to exercise their shareholders’ rights on their
behalf, including voting rights at the shareholders’ meeting in the
name of the shareholders. The Beijing Luji Shareholders further
agree that they will replace the person authorized in the above
Power of Attorney at any time upon Beijing Hongtao’s request. The
Business Operation Agreement shall remain in effect for ten years
from the date of signing unless earlier terminated by Beijing
Hongtao by delivering 30 days prior written notice or upon the
mutual agreement of all parties. Beijing Luji and the Beijing Luji
Shareholders do not have the right to terminate the agreement
unilaterally. Upon the termination of any agreement between Beijing
Hongtao and Beijing Luji, Beijing Hongtao shall be entitled to
terminate all agreements between such parties.
The foregoing description of the Business Operation Agreement is
qualified in its entirety by reference to the Business Operation
Agreement, an English translation of which is filed as Exhibit 10.4
to this Current Report and incorporated herein by reference.
Equity Disposal Agreement
Pursuant to the Equity Disposal Agreement signed on May 15, 2019,
by and among the Beijing Luji Shareholders, Beijing Luji and
Beijing Hongtao, the Beijing Luji Shareholders granted to Beijing
Hongtao an exclusive option right to purchase all of their equity
interests in Beijing Luji to secure the execution of the Equity
Pledge Agreement in which the details are set out below. Under
the terms of this agreement, Beijing Hongtao has an exclusive right
to purchase, to the extent permitted under the PRC law, at any
time, all or any part of the equity interests of the Beijing Luji
Shareholders in Beijing Luji or an option to transfer the equity
interests in Beijing Luji to any third party designated by Beijing
Hongtao. The option price shall be the minimum permitted by the
laws and regulations of the PRC. The Equity Disposal Agreement has
a term of ten years from the date of signing, and it may be renewed
at Beijing Hongtao’s discretion.
The foregoing description of the Equity Disposal Agreement is
qualified in its entirety by reference to the Equity Disposal
Agreement, an English translation of which is filed as Exhibit 10.5
to this Current Report and incorporated herein by reference.
Equity Pledge Agreement
Pursuant to the Equity Pledge Agreement signed on May 15, 2019, by
and among the Beijing Luji Shareholders and Beijing Hongtao, the
Beijing Luji Shareholders pledged all of their equity interests in
Beijing Luji to Beijing Hongtao to guarantee the performance of
Beijing Luji’s obligations under the Exclusive Consulting and
Services Agreement, the Equity Disposal Agreement and the Business
Operation Agreement. Under the terms of the agreement, in the
event that Beijing Luji or its shareholders breach their respective
contractual obligations under the Exclusive Consulting and Services
Agreement, the Equity Disposal Agreement and the Business Operation
Agreement, or upon occurrence of any event of default as set forth
in the Equity Pledge Agreement, Beijing Hongtao shall be entitled
to exercise its rights under this agreement, subject to certain
cure periods. The Beijing Luji Shareholders further agree not to
dispose of the pledged equity interests or take any actions that
would prejudice Beijing Hongtao’s interest.
The Equity Pledge Agreement shall be effective until Beijing Luji
and the Beijing Luji Shareholders have performed all of their
obligations under the Exclusive Consulting and Services Agreement,
the Equity Disposal Agreement and the Business Operations Agreement
and the written approval of Beijing Hongtao has been obtained.
The foregoing description of the Equity Pledge Agreement is
qualified in its entirety by reference to the Equity Pledge
Agreement, an English translation of which is filed as Exhibit 10.6
to this Current Report and incorporated herein by reference.
Agency Agreement
Pursuant to the Agency Agreement signed on May 15, 2019, among the
Beijing Luji Shareholders and Beijing Hongtao, the Beijing Luji
Shareholders granted Beijing Hongtao an irrevocable license for the
longest period permitted under law the right to exercise the voting
rights of the Beijing Luji Shareholders in accordance with the laws
of the PRC and the Articles of Association of Beijing Luji. During
the term of this Agreement, none of the Beijing Luji Shareholders
shall be entitled to transfer its interest in Beijing Luji to any
third party other than entities or individuals designated by
Beijing Hongtao. This Agency Agreement shall be irrevocable and
continuously valid from the date of execution of this Agency
Agreement, and it can be terminated at Beijing Hongtao’s
discretion.
The foregoing description of the Agency Agreement is qualified in
its entirety by reference to the Agency Agreement, an English
translation of which is filed as Exhibit 10.7 to this Current
Report and incorporated herein by reference.
Market Overview
Home Appliances: Water Purifiers and Air Purifiers
The standard of living in China has been steadily rising in the
past decade. As a result, domestic consumption standards have also
risen, with a focus on health and wellness lifestyle products and
services. Because air and water quality and foods have a direct
impact on health, we believe that the demand for clean drinking
water, air quality and health foods will become an increasingly
important issue. We believe that this demand will translate into a
demand for domestic water and air purification technology. We
anticipate that water purifiers and air purifiers will eventually
become widely used, essential home appliances.
According to the statistics from AskCI Consulting (“ASKCI”), the
annual compound growth rate of water purifier units sold in China
reached 8.1% from 2011 to 2017. ASKCI expects that the demand for
household water purifiers will continue to grow at a rapid pace in
coming years, with the market size reaching over RMB 33 billion
(approximately USD 4.7 billion) in 2018. According to research data
from IMEDIA Research, sales volume of water purifiers in China
increased year by year from 2012 to 2019. From 5.8 million units in
2012 to 8.9 million units in 2013, the sales volume of water
purifiers achieved rapid growth, with an increase rate of about
54.8%. In 2017, 16.4 million water purifiers were sold in China,
while 17.9 million units were sold in 2018 and 18.3 million units
were sold in 2019.
According to the statistics from the Prospective Industry Research
Institute, the annual compound growth rate of air purifiers in
sales was about 8.4% from 2014 to 2017, with the estimated market
size reaching over RMB 11 billion (approximately USD 1.6 billion)
in 2018. According to data released by Grand View Research, the
compound growth rate of the global air purifier market from 2016 to
2019 is 10.8%, and the global air purifier market in 2019 was
nearly US$8.04 billion.
Health
Food Market
Total sales of health food in China amounted to about RMB 290
billion (approximately USD 41.3 billion) in 2018, and their share
in the global market rose from 4.6% in 2010 to 11.6%. As total
sales of health food continue to grow, we believe that the market
outlook should remain attractive. The market size of health
products in China is about 397 billion yuan in 2019. With the
continuous growth of the total sales volume of healthy food, we
believe that the market prospect will remain attractive.
The health food market in China is dominated by dietary products
which make up 55.2% of the market. This is followed in size of
market share by health foods with a nourishing function (33.5%),
health foods for weight management (6.5%) and health foods for
children and athletes (4.8%). It is estimated that the sales
revenue of China's health products industry will reach 480.3
billion yuan in 2020. We believe that dietary supplements
and health foods with a nourishing function will become
increasingly popular among young females and the middle-aged in the
future.
Cosmetics Market
According to the National Bureau of Statistics, China's retail
sales of cosmetics reached RMB 261.9 billion in 2018, up 9.6
percent year-on-year, 0.6 percentage points higher than the growth
rate of total retail sales of consumer goods in the same period.
Retail sales of cosmetics in China reached RMB 28 billion by
December 2019, up 11.9% year on year. Retail sales of cosmetics in
China reached RMB 299.2 billion from January to December 2019, up
12.6 percent from the same period last year.
Domestic cosmetics brands are performing very well with a market
share of approximately 56%, primarily due to their expansion into
second- and third-tier markets. They have also been vigorously
developing online sales and boosting advertising on new-media
platforms (WeChat and Weibo) to raise brand
recognition, propagation speed and propagation scale. It is
estimated that the scale of Chinese cosmetics market will reach RMB
485.2 billion in 2021.
Smart Home Market
According to the "China Smart home Equipment Industry Market
Outlook and Investment Strategy Planning Report" released by
Foresight Industry Research Institute, the size of China's smart
home market has been growing year by year in recent years. In 2015,
the size of China's smart home market only reached US $705 million.
By 2018, the size of China's smart home market had grown to
approximately US 6.5 billion, and in 2019, the size of China's
smart home market is about US $8 billion. It is predicted that the
size of China's smart home market will grow to about US $10.5
billion in 2020.
Online to Offline
(“O2O”)
In recent years, local lifestyle service O2O has expanded rapidly,
with an increasing number of customers purchasing daily goods on
the internet, According to China Internet Watch, the gross merchandise volume (“GMV”)
of local lifestyle service O2O in China reached over RMB1.5
trillion (approximately US$ 232 billion) in 2018, soaring about
37.5% from a year earlier. According to iResearch Consulting Group,
the main reasons of the success of the O2O platforms can be
attributed to:
Popularity of smart phones and mobile payment which provides
convenient conditions for the development of the Internet in local
life;
|
1. |
O2O’s increasing coverage of life
service demands meeting consumers’ demand for diversified
consumption; and |
|
2. |
Emergence of a great number of
products and de-intermediation that facilitated the use of internet
purchasing, which lead to frequent usage. |
Although local lifestyle service O2O market has an extensive
market, its penetration in the Internet service market is only
12.7%, implying that there is still huge potential for its
development.
Products
Beijing Luji is engaged in the business of selling healthcare and
other related products to the middle-aged and elderly market
segments in China. Beijing Luji sells its own branded “Fozgo”
products through its website. It also sells products for other
vendors. The Company is focused on creating its national sales
network and establishing its marketing channels to capitalize on
its brand advantages.
A majority of the products being sold since 2019 were “Fozgo”
branded nutrition supplements. During the period of six months
ended June 30, 2020, revenues were mainly attributable to the sales
of smart watches, health foods, and cosmetics products,
representing 50.3%, 9.4%, and 1.3% of revenues, respectively.
During to the same period of 2019, revenues were mainly
attributable to the sales of health foods, home appliances and
cosmetics products, representing 65.9%, 18.6% and 15.0% of
revenues, respectively. During the year ended December 31, 2019,
the top products categories were health foods, home appliances and
cosmetics products, representing 70.92%, 11.38% and 7.32% of the
revenue, respectively. During the year ended December 31, 2018, the
top product categories were home appliances and cosmetics products,
representing 78.8% and 14.0% of the revenue respectively.
Platform Users
Beijing Luji has approximately 158,000 and 157,000 users as of June
30, 2020 and 2019. During the year ended December 31, 2019, the
number of new users increased by approximately 71,000 users, or
81%, from approximately 87,300 users for the year ended December
31, 2018. The users spread over 27 provinces and cities across the
PRC.
The COVID-19 pandemic has adversely affected the operations and
projected revenues of Beijing Luji during the first half of 2020.
In HJ’s unaudited condensed consolidated financial statements for
the three and six months ended June 30, 2020, it has included a
note about its ability to continue as a going concern due to
consecutive quarterly losses from operations in the first half of
2020 as a result of COVID-19. We are actively monitoring its
effects on the operations of Beijing Luji and cannot accurately
predict the overall financial statements impact of COVID-19 on our
full year 2020 results of operations. Based on Beijing Luji’s
revised business plan, it intends to grow its registered users to
approximately 200,000 by the end of 2020; 250,000 by the end of
2021 and 300,000 by the end of year 2022 through a variety of
promotional activities, offline meetings, online community
marketing and other network marketing through its Fozgo online
mall.
Sales and Marketing
Beijing Luji creates awareness of its brand and products directly
through several channels: conferences and events marketing, social
media platforms, and cross collaboration with business
partners.
|
· |
Conference and
events marketing: Beijing Luji believes this can
effectively enhance brand awareness of its targeted
customers. |
|
· |
Social Media
Platforms: Beijing Luji promotes its products on various
social media platforms such as WeChat, etc. |
|
· |
Business
Partners: Beijing Luji actively seeks businesses for brand
partnerships to cross-promote its brand, products. |
|
· |
Referral and
Resellers: Beijing Luji actively encourages the development of
a community of resellers and outlets that will be incentivized to
sell its products. Beijing Luji expects to rely on conferences and
events to develop new resellers and new outlets in new provinces
across the PRC. Beijing Luji also plans to attract more new users
by using WeChat QR code and the Internet.
|
Strategy for Growth
Beijing Luji is focused on promoting its O2O cloud platform to
middle-aged and elderly market segments in the PRC. Its strategies
include:
|
1. |
Increase the number of offline
service outlets and stores, enhance the user experience in the O2O
business model, and continue to increase branches across China.
Beijing Luji has 10 branches as of June 30, 2020. It is expected
that by December 31, 2020, the number of branches will reach 12.
There will be 15 branches established in China in the next 18
months. It is estimated that by December 31, 2022, there will be 20
branches established in China; |
|
2. |
Refining the variety of its product
categories to better meet the needs of our users. Beijing Luji
plans to develop its products from common products to intelligent
health care in the next 18 months; |
|
3. |
Beijing Luji intends to cooperate
with healthcare institutions, provide door-to-door healthcare
services for the middle-aged and elderly people at the same time,
and deliver customers in need of Beijing Luji’s healthcare services
to its base for on-site experience after preliminary
screening. |
In coming years, Beijing Luji intends to provide more personalized
services to its targeted group to include the following:
|
1. |
Fozgo online mall: Promote its
products and services to its targeted group through its O2O online
mall and outlets. |
|
2. |
Healthcare institutions: carry out
strategic cooperation with healthcare institutions to provide
healthcare experience services nationwide. Users can enjoy
professional and systematic care with a reasonable price. |
|
3. |
Medical examination institutions:
strategically cooperate with different medical examination
institutions to promote health checkups with full medical
examinations at reasonable prices to its users. |
|
4. |
In-home elderly care service:
introduce community in-home elderly care services so a user can
place an order on its platform, and enjoy professional offline
door-to-door elderly care services. |
The impact of COVID-19 on our results of operations has been
significant. In HJ’s unaudited condensed consolidated financial
statements for the three and six months ended June 30, 2020, it has
included a note about its ability to continue as a going concern
due to consecutive quarterly losses from operations in the first
half of 2020 as a result of COVID-19. We cannot predict the future
effects of COVID-19 on Beijing Luji’s operations and financial
condition. Assuming resumption of normal operations starting in the
third quarter of 2020, we believe that Beijing Luji could generate
sufficient cashflow over the next 12 months to implement its
revised business plan.
Years |
|
Branches |
|
Service Centers |
|
Total Users |
2020 |
|
12 |
|
200 |
|
200,000 |
2021 |
|
15 |
|
250 |
|
250,000 |
2022 |
|
18 |
|
300 |
|
300,000 |
Vendors
Beijing Luji partners with various merchants and manufacturers
across the PRC to identify suitable products for sale to our users
in the PRC. During the six months ended June 30, 2020 and 2019,
Beijing Luji’s major vendors that contributed more than 10% to its
total purchases are as follow:
|
|
Six
months ended |
|
|
|
June
30, 2020 |
|
|
|
US$ |
|
|
% |
|
Baoqingmeilai
Modern Agriculture Service Co. Ltd. |
|
|
5,650,000 |
|
|
|
92.3 |
|
|
|
Six
months ended |
|
|
|
June
30, 2019 |
|
|
|
US$ |
|
|
% |
|
Beijing
Qingchangfeng Trading Co., Ltd. |
|
|
291,309 |
|
|
|
35.2 |
|
One
Four One Three (Tianjin) Network Technology Development Co.,
Ltd. |
|
|
205,960 |
|
|
|
24.9 |
|
Tianjin
Meichen Co., Ltd. |
|
|
101,667 |
|
|
|
12.3 |
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2019 and 2018, Beijing Luji’s
major vendors that accounted more than 10% of its total purchases
are as follow:
|
|
Year ended
December 31, 2019
|
|
|
|
US$ |
|
|
% |
|
Harbin Xinyue
Technology Co., Ltd. |
|
|
5,772,000 |
|
|
|
72.4 |
|
|
|
Year
ended |
|
|
|
December 31, 2018 |
|
|
|
US$ |
|
|
% |
|
Guangzhou Olansi Water Treatment Equipment Co., Ltd. |
|
|
1,233,000 |
|
|
|
27.8 |
|
Harbin Xinyue Technology Co.,
Ltd. |
|
|
698,000 |
|
|
|
15.7 |
|
Tianjin Meichen Biotechnology Co.,
Ltd. |
|
|
466,000 |
|
|
|
14.5 |
|
INTELLECTUAL PROPERTY AND PATENTS
We rely on, trade secrets, copyrights, know-how, trademarks,
license agreements and contractual provisions to establish our
intellectual property rights and protect the “Fozgo” brand of
Beijing Luji. These legal means, however, afford only limited
protection and may not adequately protect our rights. Litigation
may be necessary in the future to enforce our intellectual property
rights, protect our trade secrets or determine the validity and
scope of the proprietary rights of others. Litigation could result
in substantial costs and diversion of resources and management
attention. Any unauthorized disclosure or use of our intellectual
property increase our business cost and harm our operating
results.
The laws of the PRC may not protect our brand and intellectual
property to the same extent as U.S. laws, if at all. We may be
unable to fully protect our intellectual property rights in our
country. Further, companies in the internet, social media
technology and other industries may own large numbers of patents,
copyrights and trademarks and may frequently request license
agreements, threaten litigation or file suit against us based on
allegations of infringement or other violations of their
intellectual property rights.
Beijing Luji intends to seek the widest possible protection for
significant product and process developments in our major markets
through a combination of trade secrets, trademarks, copyrights and
patents, if applicable. We anticipate that the form of protection
will vary depending upon the level of protection afforded by the
particular jurisdiction. Initially, we expect that our revenue will
be derived principally from our operations in the PRC where
intellectual property protection may be more limited and difficult
to enforce. In such instances, we may seek protection of our
intellectual property through measures taken to increase the
confidentiality of our findings.
Beijing Luji intends to register trademarks as a means of
protecting the brand names of our companies and products. We intend
to protect our trademarks against infringement and also seek
protection of registered design and product patent.
Beijing Luji relies on trade secrets and unpatentable know-how that
we seek to protect, in part, by confidentiality agreements. We
expect that, where applicable, we will require our employees to
execute confidentiality agreements upon the commencement of
employment with us. We expect these agreements to provide that all
confidential information developed or made known to the individual
during the course of the individual’s relationship with us is to be
kept confidential and not disclosed to third parties except in
specific limited circumstances. The agreements will also provide
that all inventions conceived by the individual while rendering
services to us shall be assigned to us as the exclusive property of
the Company. There can be no assurance, however, that all persons
who we desire to sign such agreements will sign, or if they do,
that these agreements will not be breached, that we would have
adequate remedies for any breach, or that our trade secrets or
unpatentable know-how will not otherwise become known or be
independently developed by competitors.
COMPETITION
Our VIE, Beijing Luji, operates in a highly competitive, price and
service sensitive home appliances and health food industry. It
competes with Hefei Xili Electrical Appliance, Zhejiang Qinyuan Water Treatment
Technology, Wanlvcheng Group and Guangdong Youxingzhijia
Intelligent Elderly Care Service Co., Ltd., which provide the same or similar
products and services in O2O and online marketing fields. We
believe that main competitive factors in the market
include:
|
· |
Customer loyalty –
strong customer loyalty towards the platform with large repeated
purchasers and referrals from existing customers |
|
· |
Product advantages –
products that have a higher added value with good customer
experience |
|
· |
Services positioning –
services that meet rigid demands of precise customers |
|
· |
Brand awareness –
capability and recognition of propagation speed of the
brand |
Although we believe we compete favorably on the factors described
above, many of our current and potential competitors have longer
operating histories, significantly greater financial, technical,
marketing and other resources, larger product and services
offerings, a larger customer base and greater brand recognition.
These factors may allow our competitors to benefit from their
existing customer or subscriber base with lower acquisition costs
or to respond quicker than we can to new or emerging technologies
and changes in customer requirements. These competitors may engage
in more extensive research and development efforts, undertake more
far-reaching marketing campaigns and adopt more aggressive pricing
policies, which may allow them to build a larger subscriber base or
to monetize that subscriber base more effectively than us. Our
competitors may develop products or services that are similar to
our products and services or that achieve greater market acceptance
than our products and services. In addition, although we do not
believe that merchant payment terms are a principal competitive
factor in our market, they may become such a factor and we may be
unable to compete fairly on such terms.
EMPLOYEES
As of June 30, 2020, Beijing Luji has the following number of
employees:
Senior
Management |
|
9 |
|
Sales and Marketing |
|
8 |
|
Merchant |
|
11 |
|
Customer
Services |
|
5 |
|
Business Development |
|
5 |
|
Information System Technology |
|
18 |
|
Administration / Finance / HR |
|
14 |
|
Others |
|
4 |
|
Total |
|
74 |
|
All of Beijing Luji’s employees are located in the PRC. None of its
employees are members of a trade union. We believe that Beijing
Luji maintains good relationships with its employees and has not
experienced any strikes or shutdowns and has not been involved in
any material labor disputes.
According to the Social
Insurance Law of the People’s Republic of China, Beijing
Luji is required to make contributions to a pension fund, basic
medical insurance, work injury insurance, unemployment insurance
and maternity insurance for all of our eligible employees in the
PRC. Beijing Luji is required to contribute a specified percentage
of the participants’ relevant income based on their wage level. The
total contributions were $55,195 and $105,945 for the six months
ended June 30, 2020, and 2019, respectively. The total
contributions were $189,765 and $124,542 for the years ended
December 31, 2019, and 2018, respectively.
Moreover, according to the Regulations on Management of Housing
Provident Fund, Beijing Luji is required to make a contribution to
the housing provident fund for all of its eligible employees in the
PRC based on a certain percentage of their relevant income.
GOVERNMENT AND INDUSTRY REGULATIONS
Business License
Any company that conducts business in the PRC must have a business
license that covers a particular type of work. Beijing Luji’s
business license covers its present business of technology
development, technical services, technology promotion; organizing
cultural and artistic exchange activities (excluding performances);
sales of daily necessities, clothing, shoes and hats, electronic
products, communication equipment, computer software and auxiliary
equipment, automobiles, arts and crafts, household appliances;
publishing; engaged in Internet cultural activities; sales of
foods. We do not expect to conduct business outside the scope of
this business license and will update the scope of such business
license in accordance with our business development in the future.
In the event that we elect to engage in a business outside the
scope of such license, we will be required to apply and receive
approval from the PRC government.
Value-added Telecommunications Business Permit
Operators of value-added telecommunications services in the PRC
must obtain a Value-added Telecommunications Business Permit
approved by the telecommunications administration authorities.
Provision of value-added telecommunications services in China is
regulated by various rules and regulations depending on the
varieties of value-added telecommunications services. Beijing Luji
holds Value-added Telecommunications Business Permits for the
operation of its online platform. In this respect, it is subject to
requirements and provisions of the Telecommunications Regulations
of the PRC, The Catalogue of Telecommunications Businesses, the
Administrative Measures on Telecommunications Business Operating
Licenses, the Administrative Measures on Internet Information
Services and other value-added telecommunications business related
rules and regulations, which set out requirements relating to,
among others, application for the permit, information content
published or circulated online, and network security.
Network Culture Business Permit
Under the Interim Administrative Provisions on Internet Culture,
any commercial entity engaged in Internet culture activities is
required to apply to the appropriate local culture authority for an
Online Culture Business Permit. Internet culture activities refer
to activities carried out for providing Internet culture products
and services, which mainly include production, reproduction,
import, release or broadcast of Internet culture products, on-line
distribution activities of publishing cultural products on
internet, or sending cultural products through the internet, mobile
communication network and other information networks to customer
equipment as well as Internet bar and other Internet online service
operating premises available for users to browse, read, appreciate,
use or download such contents, as well as the exhibitions and
competitions and other similar activities concerning Internet
culture products. Internet culture products comprise cultural
products produced, spread and distributed through the Internet,
including without limitation to online music, online games, online
shows (programs), online performance, online arts, and online
cartoons. Beijing Luji holds an Online Culture Business Permit for
the provision of online culture products on our online
platform.
Employment Laws
Beijing Luji is subject to laws and regulations governing our
relationship with its employees, including, among others, wage and
hour requirements, working and safety conditions, protection for
female and juvenile workers, vocational training, social insurance
and welfare. These include local labor laws and regulations, which
may require substantial resources for compliance. China’s Labor
Law, which became effective on January 1, 1995, and amended on
August 27, 2009 and December 29, 2018, and China’s Labor Contract
Law, which became effective on January 1, 2008, and amended on
December 28, 2012, permit workers in both state and private
enterprises in China to bargain collectively. The Labor Law and the
Labor Contract Law provide for collective contracts to be developed
through collaboration between the labor union (or worker
representatives in the absence of a union) and management that
specify such matters as working conditions, wage scales, and hours
of work. The laws also permit workers and employers in all types of
enterprises to sign individual contracts, which are to be drawn up
in accordance with the collective contract.
Intellectual Property Protection in China
Patent. The PRC has domestic laws for the protection
of copyrights, patents, trademarks and trade secrets. The PRC is
also signatory to some of the world’s major intellectual property
conventions, including:
|
· |
Convention establishing the World Intellectual
Property Organization (WIPO Convention) (June 4, 1980); |
|
|
|
|
· |
Paris
Convention for the Protection of Industrial Property (March 19,
1985); |
|
|
|
|
· |
Patent Cooperation Treaty (January 1, 1994);
and |
|
|
|
|
· |
The
Agreement on Trade-Related Aspects of Intellectual Property Rights
(TRIPs) (November 11, 2001). |
Patents in the PRC are governed by the China Patent Law and its
Implementing Regulations, each of which went into effect in 1985.
Amended versions of the China Patent Law came into effect in 1993,
2001 and 2009.
The PRC is signatory to the Paris Convention for the Protection of
Industrial Property, in accordance with which any person who has
duly filed an application for a patent in one signatory country
shall enjoy, for the purposes of filing in the other countries, a
right of priority during the period fixed in the convention (12
months for inventions and utility models, and 6 months for
industrial designs).
The Patent Law covers three kinds of patents — patents for
inventions, utility models and designs. The Chinese patent system
adopts the principle of first to file, which means that a patent
may be granted only to the person who first files an application.
Consistent with international practice, the PRC allows the
patenting of inventions or utility models that possess the
characteristics of novelty, inventiveness and practical
applicability only. For a design to be patentable it cannot be
identical with, or similar to, any design which, before the date of
filing, has been publicly disclosed in publications in the country
or abroad or has been publicly used in the country, and should not
be in conflict with any prior right of another.
Copyright. Copyright in the PRC, including
copyrighted software, is principally protected under the Copyright
Law of the PRC and related rules and regulations. Under the
Copyright Law, the term of protection for copyrighted software is
50 years.
Trademark. Registered trademarks are protected under
the Trademark Law of the PRC and related rules and regulations.
Trademarks are registered with the Trademark Office of the SAIC.
Where registration is sought for a trademark that is identical or
similar to another trademark which has already been registered or
given preliminary examination and approval for use in the same or
similar category of commodities or services, the application for
registration of such trademark may be rejected. Trademark
registrations are effective for a renewable ten-year period, unless
otherwise revoked. The duration of a trademark is 10 years from the
date of registration.
Domain names. Domain name registrations are handled
through domain name service agencies established under the relevant
regulations, and applicants become domain name holders upon
successful registration.
Regulations on Tax
PRC Corporate Income Tax
The PRC corporate income tax, or CIT, is calculated based on the
taxable income determined under the applicable CIT Law and its
implementation rules, which became effective on January 1, 2008 and
amended on February 24, 2017 and December 29, 2018 respectively.
The CIT Law imposes a uniform corporate income tax rate of 25% on
all resident enterprises in China, including foreign-invested
enterprises. As Beijing Luji is a national high-tech enterprise,
15% of the enterprise income tax is imposed on national high-tech
enterprises in accordance with provisions of the Chinese tax
law.
Uncertainties exist with respect to how the CIT Law applies to the
tax residence status of the Company and our offshore subsidiaries.
Under the CIT Law, an enterprise established outside of China with
a “de facto management body” within China is considered a “resident
enterprise,” which means that it is treated in a manner similar to
a Chinese enterprise for corporate income tax purposes. Although
the implementation rules of the CIT Law define “de facto management
body” as a managing body that exercises substantive and overall
management and control over the production and business, personnel,
accounting books and assets of an enterprise, the only official
guidance for this definition currently available is set forth in
Circular 82 issued by the State Administration of Taxation, which
provides guidance on the determination of the tax residence status
of a Chinese-controlled offshore incorporated enterprise, defined
as an enterprise that is incorporated under the laws of a foreign
country or territory and that has a PRC enterprise or enterprise
group as its primary controlling shareholder. Although the Company
does not have a PRC enterprise or enterprise group as our primary
controlling shareholder and is therefore not a Chinese-controlled
offshore incorporated enterprise within the meaning of Circular 82,
in the absence of guidance specifically applicable to us, we have
made reference to the guidance set forth in Circular 82 to evaluate
the tax residence status of the Company and our subsidiaries
organized outside the PRC.
According to Circular 82, a Chinese-controlled offshore
incorporated enterprise will be regarded as a PRC tax resident by
virtue of having a “de facto management body” in China and will be
subject to PRC corporate income tax on its worldwide income only if
all of the following criteria are met:
|
· |
the
primary location of the day-to-day operational management is in the
PRC; |
|
|
|
|
· |
decisions relating to the enterprise’s financial
and human resource matters are made or are subject to approval by
organizations or personnel in the PRC; |
|
|
|
|
· |
the
enterprise’s primary assets, accounting books and records, company
seals, and board and shareholders meeting minutes are located or
maintained in the PRC; and |
|
|
|
|
· |
50%
or more of voting board members or senior executives habitually
reside in the PRC. |
We believe that our entities inside China are considered as PRC
resident enterprise for PRC tax purposes as defined above. However,
the tax resident status of an enterprise is subject to
determination by the PRC tax authorities and uncertainties remain
with respect to the interpretation of the term “de facto management
body.” As all of our management members are based in China, it
remains unclear how the tax residency rule will apply to our case.
If the PRC tax authorities determine that we or any of our
subsidiaries outside of China is a PRC resident enterprise for PRC
enterprise income tax purposes, then we or such subsidiary could be
subject to PRC tax at a rate of 25% on its world-wide income, as
our entity enterprise in China is an state high-tech enterprise, it
is possible to be impose 15% enterprise income tax on state
high-tech enterprises in accordance with provisions of the Chinese
tax law, thus materially reducing our net income. In addition, we
will also be subject to PRC enterprise income tax reporting
obligations. Furthermore, if the PRC tax authorities determine that
we are a PRC resident enterprise for enterprise income tax
purposes, gains realized on the sale or other disposition of our
ordinary shares may be subject to PRC tax, at a rate of 10% in the
case of non-PRC enterprises or 20% in the case of non-PRC
individuals (in each case, subject to the provisions of any
applicable tax treaty), if such gains are deemed to be from PRC
sources. It is unclear whether non-PRC shareholders of our company
would be able to claim the benefits of any tax treaties between
their country of tax residence and the PRC in the event that we are
treated as a PRC resident enterprise. Any such tax may reduce the
returns on your investment in our ordinary shares.
Chinese companies operating in the high-technology and software
industry that meet relevant requirements may qualify for
preferential treatment within the scope of the PRC national plan.
For a qualified high and new technology enterprise, the applicable
enterprise income tax rate is 15%. The high and new technology
enterprise qualification is re-assessed by the relevant authorities
every three years.
Value-Added Tax and Business Tax
The Provisional Regulations of the PRC on Value-added Tax (“VAT”)
were promulgated by the State Council on December 13, 1993 and came
into effect on January 1, 1994 which were subsequently amended on
November 10, 2008, February 6, 2016 and November 19, 2017. The
Detailed Rules for the Implementation of the Provisional
Regulations of the PRC on Value-added Tax (Revised in 2011) were
promulgated by the Ministry of Finance and the State Administration
of Taxation (“SAT”) on 28 October 2011 and came into effect on
November 1, 2011 (collectively, the “VAT Law”). According to the
VAT Law, all enterprises and individuals engaged in the sale of
goods, the provision of processing, repair and replacement
services, and the importation of goods within the territory of the
PRC must pay value-added tax. For general VAT taxpayers selling or
importing goods other than those specifically listed in the VAT
Law, the VAT rate is 17%. Starting from April 1, 2019, the VAT rate
for revenue generated from providing products was changed from 16%
into 13%. VAT is reported as a deduction of revenue when incurred.
Entities that are VAT general taxpayers are allowed to offset
qualified input VAT paid to suppliers against their output VAT
liabilities. Net VAT balance between input VAT and output VAT is
recorded in taxes payable.
On March 23, 2016, the Ministry of Finance and the SAT jointly
issued the Circular on Full Implementation of Business Tax to
Value-added Tax Reform which has been partially repealed on July 1,
2017 and January 1, 2018, confirms that business tax would be
completely replaced by VAT from May 1, 2016.
Regulations Relating to Foreign Exchange and Dividend
Distribution
Foreign Exchange Regulations
The principal regulations governing foreign currency exchange in
China are the Foreign Exchange Administration Regulations. Under
the PRC foreign exchange regulations, payments of current account
items, such as profit distributions and trade and service-related
foreign exchange transactions, may be made in foreign currencies
without prior approval from the State Administration of Foreign
Exchange (“SAFE”) by complying with certain procedural
requirements. By contrast, approval from or registration with
appropriate government authorities is required where RMB is to be
converted into foreign currency and remitted out of China to pay
capital expenses such as the repayment of foreign
currency-denominated loans or foreign currency is to be remitted
into China under the capital account, such as a capital increase or
foreign currency loans to our PRC subsidiaries.
In November 2012, SAFE promulgated the Circular of Further
Improving and Adjusting Foreign Exchange Administration Policies on
Foreign Direct Investment. Pursuant to this circular, the opening
of various special purpose foreign exchange accounts, such as
pre-establishment expense accounts, foreign exchange capital
accounts and guarantee accounts, the reinvestment of RMB proceeds
by foreign investors in the PRC, and remittance of foreign exchange
profits and dividends by a foreign-invested enterprise to its
foreign shareholders no longer require the approval or verification
of SAFE, and multiple capital accounts for the same entity may be
opened in different provinces, which was not possible previously.
In addition, SAFE promulgated the Circular on Printing and
Distributing the Provisions on Foreign Exchange Administration over
Domestic Direct Investment by Foreign Investors and the Supporting
Documents in May 2013, which specifies that the administration by
SAFE or its local branches over direct investment by foreign
investors in the PRC shall be conducted by way of registration and
banks shall process foreign exchange business relating to the
direct investment in the PRC based on the registration information
provided by SAFE and its branches.
Additionally, pursuant to the Notice of the State Administration of
Foreign Exchange on Further Simplifying and Improving the Direct
Investment related Foreign Exchange Administration Policies (“SAFE
Notice No. 13”), which was promulgated on February 13, 2015 and
became effective on June 1, 2015, the foreign exchange registration
in relation to foreign direct investment shall be directly reviewed
and handled by qualified banks in accordance with SAFE Notice No.
13, and SAFE and its branches shall perform indirect regulation
over the foreign exchange registration via qualified banks.
We typically do not need to use our offshore foreign currency to
fund our PRC operations. In the event we need to do so, we will
apply to obtain the relevant approvals of, registration or filing
with SAFE and other PRC government authorities as necessary.
SAFE Circular 37
SAFE promulgated the Circular on Relevant Issues Concerning Foreign
Exchange Control on Domestic Residents’ Offshore Investment and
Financing and Roundtrip Investment through Special Purpose
Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the
former circular commonly known as “SAFE Circular 75” promulgated by
SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents
to register with local branches of SAFE in connection with their
direct establishment or indirect control of an offshore entity, for
the purpose of overseas investment and financing, with such PRC
residents’ legally owned assets or equity interests in domestic
enterprises or offshore assets or interests, referred to in SAFE
Circular 37 as a “special purpose vehicle.” SAFE Circular 37
further requires amendment to the registration in the event of any
significant changes with respect to the special purpose vehicle,
such as increase or decrease of capital contributed by PRC
individuals, share transfer or exchange, merger, division or other
material event. In the event that a PRC shareholder holding
interests in a special purpose vehicle fails to fulfill the
required SAFE registration, the PRC subsidiaries of that special
purpose vehicle may be prohibited from making profit distributions
to the offshore parent and from carrying out subsequent
cross-border foreign exchange activities, and the special purpose
vehicle may be restricted in its ability to contribute additional
capital into its PRC subsidiary. Furthermore, failure to comply
with the various SAFE registration requirements described above
could result in liability under PRC law for evasion of foreign
exchange controls. On February 13, 2015, SAFE Notice No. 13 was
promulgated, pursuant to which the aforementioned registration
shall be conducted with and handled by qualified banks.
We have notified substantial beneficial owners of our ordinary
shares who we know are PRC residents of their filing obligation,
and to the best of our knowledge, those shareholders whom we know
are PRC residents have completed the registration or will carry out
the registration as required under SAFE Circular 37. However, we
may not be aware of the identities of all our beneficial owners who
are PRC residents. In addition, we do not have control over our
beneficial owners and cannot assure you that all of our PRC
resident beneficial owners will comply with SAFE Circular 37. The
failure of our beneficial owners who are PRC residents to register
or amend their SAFE registrations in a timely manner pursuant to
SAFE Circular 37 or the failure of future beneficial owners of our
company who are PRC residents to comply with the registration
procedures set forth in SAFE Circular 37 may subject such
beneficial owners or our PRC subsidiaries to fines and legal
sanctions. Failure to register or amend the registration may also
limit our ability to contribute additional capital to our PRC
subsidiaries or receive dividends or other distributions from our
PRC subsidiaries or other proceeds from disposal of our PRC
subsidiaries, or we may be penalized by SAFE.
Share Option Rules
Under the Administration Measures on Individual Foreign Exchange
Control issued by the PBOC on December 25, 2006, all foreign
exchange matters involved in employee share ownership plans and
share option plans in which PRC citizens participate require
approval from SAFE or its authorized branch. Pursuant to SAFE
Circular 37, PRC residents who participate in share incentive plans
in overseas non-publicly-listed companies may submit applications
to SAFE or its local branches for the foreign exchange registration
with respect to offshore special purpose companies. In addition,
under the Notices on Issues concerning the Foreign Exchange
Administration for Domestic Individuals Participating in Share
Incentive Plans of Overseas Publicly-Listed Companies, or the Share
Option Rules, issued by SAFE on February 15, 2012, PRC residents
who are granted shares or share options by companies listed on
overseas stock exchanges under share incentive plans are required
to (i) register with SAFE or its local branches, (ii) retain a
qualified PRC agent, which may be a PRC subsidiary of the overseas
listed company or another qualified institution selected by the PRC
subsidiary, to conduct the SAFE registration and other procedures
with respect to the share incentive plans on behalf of the
participants, and (iii) retain an overseas institution to handle
matters in connection with their exercise of share options,
purchase and sale of shares or interests and funds transfers. We
will make efforts to comply with these requirements upon completion
of our initial public offering.
Regulation of Dividend Distributions
The principal laws, rules and regulations governing dividend
distributions by foreign-invested enterprises in the PRC are the
Company Law of the PRC, as amended, the Wholly Foreign-owned
Enterprise Law and its implementation regulations, the
Chinese-foreign Cooperative Joint Venture Law and its
implementation regulations, and the Chinese-foreign Equity Joint
Venture Law and its implementation regulations. Under these laws,
rules and regulations, foreign-invested enterprises may pay
dividends only out of their accumulated profit, if any, as
determined in accordance with PRC accounting standards and
regulations. Both PRC domestic companies and wholly-foreign owned
PRC enterprises are required to set aside a general reserve of at
least 10% of their after-tax profit, until the cumulative amount of
such reserve reaches 50% of their registered capital. A PRC company
is not permitted to distribute any profits until any losses from
prior fiscal years have been offset. Profits retained from prior
fiscal years may be distributed together with distributable profits
from the current fiscal year.
INSURANCE
The Company does not have any general business or product liability
insurance.
Beijing Luji maintains certain insurance in accordance customary
industry practices in the PRC. Under the PRC law it is a
requirement that all employers in the city must purchase work
injury insurance for all employees to cover their liability in the
event that their staff suffers an injury or illness during the
normal course of their work.
CORPORATE INFORMATION
Our principal executive and registered offices are located Room
1206, 12th Floor, 301, 3-17 F, Building 5, Block 1, Hangfeng Road,
Fengtai District, Beijing, The PRC, telephone number +86 10
63622901.
RISK FACTORS
An investment in our securities involves a high degree of risk.
You should consider carefully the following information about these
risks, together with the other information contained in this
Current Report before making an investment decision. Our business,
prospects, financial condition, and results of operations may be
materially and adversely affected as a result of any of the
following risks. The value of our securities could decline as a
result of any of these risks. You could lose all or part of your
investment in our securities. Some of the statements in “Risk
Factors” are forward looking statements.
Risks Relating to our Business
COVID-19 has had an adverse effect that is material on our
business and may continue to do so for the next twelve
months.
During March 2020, the World Health Organization declared the
rapidly growing coronavirus outbreak to be a global pandemic. The
COVID-19 pandemic has significantly impacted health and economic
conditions throughout Hong Kong and China. National, regional and
local governments took a variety of actions to contain the spread
of COVID-19, including office and store closures, quarantining
suspected COVID-19 patients, extended the Chinese New Year holiday,
and capacity limitations. These developments have significantly
impacted Beijing Luji’s results of operations, financial condition
and cash flows.
In response to the outbreak, our Company and Beijing Luji have
taken a series of measures accordingly, including telecommute
working for some employees, reducing pay and benefits for remaining
employees, and cutting back capital spending and temporary closure
of some service centers (offline experience stores). The above
measures have affected Beijing Luji’s operating capacity and work
efficiency, and negatively impacted its sales and marketing
activities as well as its business performance. The extent to which
COVID-19 affects our business performance will depend on the future
development of the epidemic, including new actions taken by the PRC
government to contain the outbreak, which is highly uncertain and
unpredictable. In addition, if the Chinese economy as a whole is
negatively impacted by the outbreak, our operating performance will
also be adversely affected.
In HJ’s unaudited condensed consolidated financial statements for
the three and six months ended June 30, 2020, it has included a
note about its ability to continue as a going concern due to
consecutive quarterly losses from operations in the first half of
2020 as a result of COVID-19. If COVID-19 continues to adversely
affect its business and financial performance, it may not be able
to generate sufficient cash flow to meet its operating
expenses.
In light of the uncertainty as to when Beijing Luji can resume full
operations and the uncertain customer demand environment, we have
scheduled a series of marketing and promotional events in the third
quarter of 2020. Based on Beijing Luji’s revised business plan and
updated forecast, we believe the Company will have sufficient
operating cash flows to operate as a going concern over the next 12
months.
Continued business closures or restrictions on operations due
to COVID-19 may adversely our ability to continue as a going
concern.
The consolidated financial statements of HJ have been prepared on a
going concern basis, which assumes that we will be able to continue
to operate in the future in the normal course of business. In HJ’s
unaudited condensed consolidated financial statements for the three
and six months ended June 30, 2020, it has included a note about
our ability to continue as a going concern due to consecutive
quarterly losses from operations in the first half of 2020 as a
result of COVID-19. Business closures in the PRC and limitations on
business operations arising from COVID-19 has significantly
disrupted Beijing Luji’s ability to generate revenues and cash flow
during the first half of 2020. The uncertainty regarding the length
of the disruption may adversely impact our ability to meet our
operating and financial targets for the full year 2020. The
ultimate impact of the COVID-19 pandemic on our business, results
of operations, financial condition and cash flows will depend on
our ability to generate sales and manage our working capital
requirements and liquidity prudently during the second half of
2020.
We are susceptible to economic conditions in the PRC where
our principal business, assets, suppliers, merchants and customers
are located.
Our business and assets are primarily located in the PRC. Our
results of operations, financial state of affairs and future growth
are, to a significant degree, subject to China’s economic,
political and legal development and related uncertainties. Our
operations and results could be materially affected by a number of
factors, including, but not limited to:
|
· |
Changes in policies by
the PRC government resulting in changes in laws or regulations or
the interpretation of laws or regulations; changes in
taxation; |
|
· |
Political and economic
disturbance in the PRC; |
|
· |
Changes in employment
restrictions; |
|
· |
Import duties;
and |
|
· |
Currency
revaluation and restrictions. |
Our business plans for expansion may make it difficult for us
to accurately forecast our operating results and control our
business expenses which means we face a higher risk of business
failure which could result in the loss of your
investment.
Our planned expense levels are, and will continue to be, based in
part on our expectations, which are difficult to forecast
accurately in light of our expansion plans and factors outside of
our control. We may be unable to adjust spending in a timely manner
to compensate for any unexpected developments. Further, business
development expenses, like customer acquisition costs, may increase
significantly as we expand operations or make acquisitions. To the
extent that any unexpected expenses are incurred, or are not
rapidly followed by, a corresponding increase in revenue, our
business, operating results, and financial condition may be
materially and adversely affected which could result in the loss of
your investment.
Our future performance depends to a significant degree upon
the continued service of key members of management as well as
marketing, sales and product development personnel.
We are dependent upon the continued service of Ms. Tian Xiangyang,
CEO, Chairman of the Board, Director and major shareholder, Mr.
Shan Yonghua, our CFO and Director, and Mr. Tian Zhihai, our COO
and Director. The loss of Ms. Tian, Mr. Shan, Mr. Tian or one or
more of our other key personnel would have a material adverse
effect on our business, operating results and financial condition.
We believe our future success will also depend in a large part upon
our ability to attract, retain and further motivate highly skilled
management, marketing, sales and product development personnel. We
expect to establish an incentive compensation plan for our key
personnel to retain their services. We have experienced intense
competition for personnel, and we cannot assure you that we will be
able to retain our key employees or that we will be successful in
attracting, assimilating and retaining talents in the future.
Because our Chief Executive Officer, Chairperson of the Board
and Director controls a large percentage of our voting securities,
she has the ability to influence matters affecting our
shareholders.
Ms. Tian Xiangyang, our CEO, Chairman of the Board, Director and
shareholder beneficially controls over 70.78% of our outstanding
voting securities. As a result, she has the ability to influence
matters affecting our shareholders, including the election of our
directors, the acquisition or disposition of our assets, and the
future issuance of our shares. Because she controls such shares,
investors may find it difficult to replace our directors and
management if they disagree with the way our business is being
operated. Because the influence by Ms. Tian could result in
management making decisions that are in the best interest of her
and not in the best interest of the investors, you may lose some or
all of the value of your investment in our common stock. See
“Securities of Certain Beneficial Owners and Management”.
The relative lack of United States public company experience
of our management team may put us at a competitive
disadvantage.
Our management team lacks United States public company experience,
which could impair our ability to comply with applicable legal and
regulatory requirements. Such responsibilities may include
complying with federal securities laws and making required filings
and disclosures on a timely basis. Our senior management may be
unable to implement programs and policies in an effective and
timely manner that adequately responds to the increased legal,
regulatory and reporting requirements associated with being a
publicly traded company. Our failure to comply with all applicable
requirements could lead to the imposition of fines and penalties,
distract our management from attending to the management and growth
of our business, result in a loss of investor confidence in our
financial reports and have an adverse effect on our business and
stock price.
We may grow our business through acquisitions in the near
future, which may result in operating difficulties, dilution, and
other harmful consequences.
We expect to achieve our business plan through a combination of
organic growth and acquisitions and investments. We periodically
evaluate an array of potential strategic transactions and may make
one or more acquisitions in the near future. The process of
integrating an acquired company, business, or technology may create
unforeseen operating difficulties and expenditures. The areas where
we face risks include:
|
· |
Implementation or
remediation of controls, procedures, and policies at the acquired
company; |
|
· |
Diversion of
management time and focus from operating our business to
acquisition integration challenges; |
|
· |
Cultural challenges
associated with integrating employees from the acquired company
into our organization; |
|
· |
Retention of employees
from the businesses we acquire; |
|
· |
Integration of the
acquired company’s accounting, management information, human
resources, and other administrative systems; |
|
· |
Liability for
activities of the acquired company before the acquisition,
including patent and trademark infringement claims, violations of
laws, commercial disputes, tax liabilities, and other known and
unknown liabilities; |
|
· |
Litigation or other
claims in connection with the acquired company, including claims
from terminated employees, customers, former stockholders, or other
third parties; |
|
· |
In the case of foreign
acquisitions, the need to integrate operations across different
cultures and languages and to address the particular economic,
currency, political, and regulatory risks associated with specific
countries; and |
|
· |
Failure
to successfully further develop the acquired product, service or
technology. |
Our failure to address these risks or other problems encountered in
connection with future acquisitions and investments could cause us
to fail to realize the anticipated benefits of such acquisitions or
investments, incur unanticipated liabilities, and harm our business
generally.
Future acquisitions may also result in dilutive issuances of our
equity securities, the incurrence of debt, contingent liabilities,
or amortization expenses, or write-offs of goodwill, any of which
could harm our financial condition and results. Also, the
anticipated benefit of our acquisitions or investments may not
materialize.
If we are unable to successfully manage and achieve growth,
our business and operating results could be adversely
affected.
We expect the growth of our business and operations to place
significant demands on our management, operational and financial
infrastructure. If we do not effectively manage and achieve growth,
the quality of our products and services could suffer, which could
negatively affect our reputation and operating results. Our
expansion and growth in international markets heighten these risks
as a result of the particular challenges of supporting a rapidly
growing business in an environment of multiple languages, cultures,
customs, legal systems, alternative dispute systems, regulatory
systems, and commercial infrastructures. To effectively manage this
growth, we will need to develop and improve our operational,
financial and management controls, and our reporting systems and
procedures. These system enhancements and improvements may require
significant capital expenditures and management resources. Failure
to implement these improvements could hurt our ability to manage
our growth and our financial position and results.
If our relationships with suppliers, especially with single
source suppliers of goods, were to terminate or our purchase
arrangements were to be disrupted, our business could be
interrupted and adversely affected.
We purchase our goods from third-party suppliers and vendors. While
there are several product suppliers available, we currently choose
to partner with one or a limited number of suppliers for several of
our goods and products. Our reliance on a single or limited number
of vendors involves a number of risks, including:
|
· |
potential delay in
shipments; |
|
· |
product performance
shortfalls |
|
· |
potential insolvency
of these vendors; and |
|
· |
reduced control over
delivery schedules, manufacturing capabilities, quality and
costs. |
We cannot assure you that there will not be any dispute with our
major suppliers or vendors, or that we will be able to maintain
business relationships with our existing suppliers or vendors. We
have entered into the purchase agreement or distributorship
agreement with our suppliers, there is no assurance the
relationship will not be unfavorably amended, revoked or
terminated, or discontinued in the future. If we cannot locate
alternative suppliers for replacement in a timely manner and/or on
comparable commercial terms, our business operations may be
hindered, which would adversely affect our profitability.
A significant disruption in our computer systems and our
inability to adequately maintain and update those systems could
adversely affect our operations and our ability to maintain user
confidence.
We rely extensively on our computer systems to manage and account
for inventory, process user transactions, manage and maintain the
privacy of user data, communicate with our vendors and other third
parties, service accounts, and summarize and analyze results. We
also rely on continued and unimpeded access to the Internet to use
our computer systems. Our systems are subject to damage or
interruption from power outages, telecommunications failures,
computer viruses, malicious attacks, security breaches, and
catastrophic events. If our systems are damaged or fail to function
properly or reliably, we may incur substantial repair or
replacement costs, experience data loss or theft and impediments to
our ability to manage inventories or process user transactions,
engage in additional promotional activities to retain our users,
and encounter lost user confidence, which could adversely affect
our results of operations.
We continually invest to maintain and update our computer systems.
Implementing significant system changes increases the risk of
computer system disruption. The potential problems and
interruptions associated with implementing technology initiatives,
as well as providing training and support for those initiatives,
could disrupt or reduce our operational efficiency, and could
negatively impact user experience and user confidence.
If our efforts to protect the security of information about
our customers, and other third parties are unsuccessful, we may
face additional costly government enforcement actions and private
litigation, and our sales and reputation could suffer.
We regularly receive and store information about our customers,
merchants, vendors and other third parties. However, because the
techniques used to obtain unauthorized access, disable or degrade
service, or sabotage systems change frequently and may be difficult
to detect for long periods of time, we may be unable to anticipate
these techniques or implement adequate preventive measures. In
addition, hardware, software, or applications we develop or procure
from third parties or through open source solutions may contain
defects in design or manufacture or other problems that could
unexpectedly compromise information security. Unauthorized parties
may also attempt to gain access to our systems or facilities, or
those of third parties with whom we do business, through fraud,
trickery, or other forms of deceiving our team members,
contractors, and vendors.
To date, we have not encountered any data breach that was material
to our consolidated financial statements. If we, our vendors, or
other third parties with whom we do business experience significant
data security breaches or fail to detect and appropriately respond
to significant data security breaches, we could be exposed to
government enforcement actions and private litigation. In addition,
our users could lose confidence in our ability to protect their
information, which could cause them to discontinue using our
services or stop shopping with us altogether.
If we become subject to governmental investigations or
compulsory measures, our business operation and reputation could be
harmed and our financial condition could be adversely
affected.
Governmental authorities may carry out investigations on us by
reason of routine administration or complaints or reports made.
Besides, they may impose compulsory measures on the object of
investigation for the purpose of facilitating the investigation,
such as seizure of premises, facilities or other properties,
Freezing deposits or remittances, detainment of properties and
restrictions on personal freedom of citizens. Any governmental
investigation and/or compulsory measure could divert our
management’s attention as well as other resources away from our
business, and negatively affect our reputation and brand image. In
the event that any unfavorable conclusion was drawn after the
investigation, we may be subject to administrative orders,
penalties, or even criminal charges, which could materially
adversely affect our business, financial condition and results of
operations.
If we are unable to continue using the properties we lease,
our business could be interrupted and adversely
affected
We lease properties in the PRC for office and other use. Some of
the lessors have refused to provide us with the ownership
certificate and/or other authorization supporting documents.
Moreover, certain properties have been leased by us for uses that
are not in conformity with those registered with or approved by
relevant governmental authorities. Therefore, in the event that any
of the leases are deemed by a court or administrative authority to
be invalid or unenforceable, or we are required to vacate from the
leased property, our business could be interrupted and adversely
affected, and we may incur additional costs in identifying new
premises and relocation.
Moreover, if we fail to register our lease agreements with the
relevant PRC governmental authorities, we may be subject to a fine
not exceeding RMB10,000 (approximately USD 1,400) for each
unregistered lease agreement if the relevant PRC government
authorities require us to rectify such non-compliance and we fail
to do so within the specific time. If we are subject to such fines,
our financial condition and results of operations may be adversely
affected.
Other factors can have a material adverse effect on our
future profitability and financial condition.
Many other factors can affect our profitability and financial
condition, including:
|
· |
changes in, or
interpretations of laws and regulations including changes in
accounting standards and taxation requirements; |
|
· |
changes in the rate of
inflation, interest rates and the performance of investments held
by us; |
|
· |
changes in the
creditworthiness of counterparties that transact business
with; |
|
· |
changes in business,
economic, and political conditions, including: war, political
instability, terrorist attacks, the threat of future terrorist
activity and related military action; natural disasters; the cost
and availability of insurance due to any of the foregoing events;
labor disputes, strikes, slow-downs, or other forms of labor or
union activity; and, pressure from third-party interest
groups; |
|
· |
changes in our
business and investments and changes in the relative and absolute
contribution of each to earnings and cash flow resulting from
evolving business strategies, changing product mix, changes in tax
rates and opportunities existing now or in the future; |
|
· |
difficulties related
to our information technology systems, any of which could adversely
affect business operations, including any significant breakdown,
invasion, hacking, destruction, or interruption of these
systems; |
|
· |
changes in credit
markets impacting our ability to obtain financing for our business
operations; or |
|
· |
legal difficulties,
any of which could preclude or delay commercialization of products
or technology or adversely affect profitability, including claims
asserting statutory or regulatory violations, adverse litigation
decisions, and issues regarding compliance with any governmental
consent decree. |
Risks Related to Doing Business in the PRC
We face the risk that changes in the policies of the PRC
government could have a significant impact upon the business we may
be able to conduct in the PRC and the profitability of such
business.
We conduct substantially all of our operations and generate most of
our revenue through our VIE in the PRC. Accordingly,
economic, political and legal developments in the PRC will
significantly affect our business, financial condition, results of
operations and prospects. The PRC economy is in
transition from a planned economy to a market-oriented economy
subject to plans adopted by the government that set national
economic development goals. Policies of the PRC
government can have significant effects on economic conditions in
the PRC. While we believe that the PRC will continue to strengthen
its economic and trading relationships with foreign countries and
that business development in the PRC will continue to follow market
forces, we cannot assure you that this will be the
case. Our interests may be adversely affected by changes
in policies by the PRC government, including:
|
· |
changes in laws,
regulations or their interpretation; |
|
· |
confiscatory
taxation; |
|
· |
restrictions on
currency conversion, imports or sources of supplies; |
|
· |
expropriation or
nationalization of private enterprises; and |
|
· |
the allocation of
resources. |
Although the PRC government has been pursuing economic reform
policies for more than two decades, the PRC government continues to
exercise significant control over economic growth in the PRC
through the allocation of resources, controlling payments of
foreign currency, setting monetary policy and imposing policies
that impact particular industries in different ways. We
cannot assure you that the PRC government will continue to pursue
policies favoring a market oriented economy or that existing
policies will not be significantly altered, especially in the event
of a change in leadership, social or political disruption, or other
circumstances affecting political, economic and social life in the
PRC.
A slowdown of the Chinese economy or adverse changes in
economic and political policies of the PRC government could
negatively impact China’s overall economic growth, which could
materially adversely affect our business.
We are a holding company and all of the combined company’s
operations are entirely conducted in the PRC. Although the PRC
economy has grown in recent years, the pace of growth has slowed,
and even that rate of growth may not continue. The annual rate of
growth in the PRC declined from 6.9% in 2017 to 6.3% in 2019
according to the National Bureau of Statistics of China. According
to a recent national information forecast, China’s economic growth
rate in 2020 will slow to 2% to 4% because of the effect of
epidemic, its lowest since 1990. A slowdown in overall economic
growth, an economic downturn or recession or other adverse economic
developments in the PRC may materially reduce the demand for the
combined company’s products and may have a materially adverse
effect on our business.
China’s economy differs from the economies of most other countries
in many respects, including the amount of government involvement in
the economy, the general level of economic development, growth
rates and government control of foreign exchange and the allocation
of resources. While the PRC economy has grown significantly over
the past few decades, this growth has remained uneven across
different periods, regions and economic sectors.
The PRC government also exercises significant control over China’s
economic growth by allocating resources, controlling the payment of
foreign currency-denominated obligations, setting monetary policy
and providing preferential treatment to particular industries or
companies. Any actions and policies adopted by the PRC government
could negatively impact the Chinese economy or the economy of the
region the combined Company serves, which could materially
adversely affect the combined Company’s business.
Substantial uncertainties and restrictions with respect to
the political and economic policies of the PRC government and PRC
laws and regulations could have a significant impact upon the
business that we may be able to conduct in the PRC and accordingly
on the results of our operations and financial
condition.
Our business operations may be adversely affected by the current
and future political environment in the PRC. The Chinese government
exerts substantial influence and control over the manner in which
we must conduct our business activities. Our ability to operate in
China may be adversely affected by changes in Chinese laws and
regulations. Under the current government leadership, the
government of the PRC has been pursuing economic reform policies
that encourage private economic activities and greater economic
decentralization. However, the government of the PRC may not
continue to pursue these policies, or may significantly alter these
policies from time to time without notice.
There are substantial uncertainties regarding the interpretation
and application of PRC laws and regulations, including, but not
limited to, the laws and regulations governing our business, or the
enforcement and performance of our contractual arrangements with
borrowers in the event of the imposition of statutory liens, death,
bankruptcy or criminal proceedings. Only after 1979 did the Chinese
government begin to promulgate a comprehensive system of laws that
regulate economic affairs in general, deal with economic matters
such as foreign investment, corporate organization and governance,
commerce, taxation and trade, as well as encourage foreign
investment in China. Although the influence of the law has been
increasing, China has not developed a fully integrated legal system
and recently enacted laws and regulations may not sufficiently
cover all aspects of economic activities in China. Also, because
these laws and regulations are relatively new, and because of the
limited volume of published cases and their lack of force as
precedents, interpretation and enforcement of these laws and
regulations involve significant uncertainties. New laws and
regulations that affect existing and proposed future businesses may
also be applied retroactively. In addition, there have been
constant changes and amendments of laws and regulations over the
past 30 years in order to keep up with the rapidly changing society
and economy in China. Because government agencies and courts
provide interpretations of laws and regulations and decide
contractual disputes and issues, their inexperience in adjudicating
new business and new polices or regulations in certain less
developed areas causes uncertainty and may affect our business.
Consequently, we cannot predict the future direction of Chinese
legislative activities with respect to either businesses with
foreign investment or the effectiveness on enforcement of laws and
regulations in China. The uncertainties, including new laws and
regulations and changes of existing laws, as well as judicial
interpretation by inexperienced officials in the agencies and
courts in certain areas, may cause possible problems to foreign
investors.
We may be exposed to liabilities under the Foreign Corrupt
Practices Act, and any determination that we violated the Foreign
Corrupt Practices Act could have a material adverse effect on our
business.
We are subject to the Foreign Corrupt Practice Act, or FCPA, and
other laws that prohibit improper payments or offers of payments to
foreign governments and their officials and political parties by
U.S. persons and issuers as defined by the statute for the purpose
of obtaining or retaining business. We will have operations,
agreements with third parties and make sales in the PRC, which may
experience corruption. Our proposed activities may create the risk
of unauthorized payments or offers of payments by one of the
employees, consultants, or sales agents of our Company, because
these parties are not always subject to our control. It will be our
policy to implement safeguards to discourage these practices by our
employees. Also, our existing practices and any future improvements
may prove to be less than effective, and the employees,
consultants, or sales agents of our Company may engage in conduct
for which we might be held responsible. Violations of the FCPA may
result in severe criminal or civil sanctions, and we may be subject
to other liabilities, which could negatively affect our business,
operating results and financial condition. In addition, the
government may seek to hold our Company liable for successor
liability FCPA violations committed by companies in which we invest
or that we acquire.
Failure to make adequate contributions to various employee
benefit plans as required by PRC regulations may subject us to
penalties.
We are required under PRC laws and regulations to participate in
various government sponsored employee benefit plans, including
certain social insurance, housing funds and other welfare-oriented
payment obligations, and contribute to the plans in amounts equal
to certain percentages of salaries, including bonuses and
allowances, of our employees up to a maximum amount specified by
the local government from time to time at locations where we
operate our businesses. The requirement of employee benefit plans
has not been implemented consistently by the local governments in
China given the different levels of economic development in
different locations. We have made adequate employee benefit
payments. We may be required to make up the contributions for these
plans as well as to pay late fees where applicable. In the event
that we fail to make a supplementary payment for the social
insurance within a specified period designated by the competent
government authority, we may be subject to fines, the amount
payable of which shall be determined usually 1 to 3 times of the
underpaid amount according to the Social Insurance Law of the
PRC. If we are subject to supplementary payments, late fees or
fines in relation to the underpaid employee benefits, our financial
condition and results of operations may be adversely affected.
Restrictions on currency exchange may limit our ability to
utilize our revenue effectively.
The Renminbi is currently convertible under the “current account,”
which includes dividends, trade and service-related foreign
exchange transactions, but not under the “capital account,” which
includes foreign direct investment and loans. Currently, our PRC
subsidiaries, which are wholly-foreign owned enterprises, may
purchase foreign currency for settlement of “current account
transactions,” including payment of dividends to us, without the
approval of SAFE by complying with certain procedural requirements.
However, the relevant PRC governmental authorities may limit or
eliminate our ability to purchase foreign currencies in the future
for current account transactions. Since a significant amount of our
future revenue will be denominated in Renminbi, any existing and
future restrictions on currency exchange may limit our ability to
utilize revenue generated in Renminbi to fund our business
activities outside of the PRC or pay dividends in foreign
currencies to our shareholders. Foreign exchange transactions under
the capital account remain subject to limitations and require
approvals from, or registration with, SAFE or banks and other
relevant PRC governmental authorities. This could affect our
ability to obtain foreign currency through debt or equity financing
for all of our PRC subsidiaries.
Because our holding company structure creates restrictions on
the payment of dividends, our ability to pay dividends is
limited.
We are a holding company whose primary assets are our ownership of
the equity interests in our subsidiaries and our agreements with
our variable interest entities. We conduct no other business and,
as a result, we depend entirely upon our subsidiaries and variable
interest entities’ earnings and cash flow. If we decide in the
future to pay dividends, as a holding company, our ability to pay
dividends and meet other obligations depends upon the receipt of
dividends or other payments from our operating subsidiaries and
variable interest entities. Our subsidiaries, variable interest
entities and projects may be restricted in their ability to pay
dividends, make distributions or otherwise transfer funds to us
prior to the satisfaction of other obligations, including the
payment of operating expenses or debt service, appropriation to
reserves prescribed by laws and regulations, covering losses in
previous years, restrictions on the conversion of local currency
into U.S. dollars or other hard currency, completion of relevant
procedures with governmental authorities or banks and other
regulatory restrictions. Under the applicable PRC laws and
regulations, foreign-invested enterprises in China may pay
dividends only out of their accumulated profits, if any, determined
in accordance with PRC accounting standards and regulations. In
addition, a foreign-invested enterprise in China is required to set
aside a portion of its after-tax profit to fund specific reserve
funds prior to payment of dividends. In particular, at least 10% of
its after-tax profits based on PRC accounting standards each year
is required to be set aside towards its general reserves until the
accumulative amount of such reserves reach 50% of its registered
capital. These reserves are not distributable as cash dividends. If
future dividends are paid in RMB, fluctuations in the exchange rate
for the conversion of any of these currencies into U.S. dollars may
adversely affect the amount received by U.S. stockholders upon
conversion of the dividend payment into U.S. dollars. We do not
presently have any intention to declare or pay dividends in the
future. You should not purchase shares of our common stock in
anticipation of receiving dividends in future periods.
If any dividend is declared in the future and paid in a
foreign currency, you may be taxed on a larger amount in U.S.
dollars than the U.S. dollar amount that you will actually
ultimately receive.
If you are a U.S. holder of our shares of common stock, you will be
taxed on the U.S. dollar value of your dividends, if any, at the
time you receive them, even if you actually receive a smaller
amount of U.S. dollars when the payment is in fact converted into
U.S. dollars. Specifically, if a dividend is declared and paid in a
foreign currency such as the RMB, the amount of the dividend
distribution that you must include in your income as a U.S. holder
will be the U.S. dollar value of the payments made in the foreign
currency, determined at the spot rate of the foreign currency to
the U.S. dollar on the date the dividend distribution is includible
in your income, regardless of whether the payment is in fact
converted into U.S. dollars. Thus, if the value of the foreign
currency decreases before you actually convert the currency into
U.S. dollars, you will be taxed on a larger amount in U.S. dollars
than the U.S. dollar amount that you will actually ultimately
receive.
Dividends payable to our foreign investors and gains on the
sale of our shares of common stock by our foreign investors may
become subject to tax by the PRC.
Under the Enterprise Income Tax Law and its implementation
regulations issued by the State Council of the PRC, unless
otherwise provided under relevant tax treaties, a 10% PRC
withholding tax is applicable to dividends payable to investors
that are non-resident enterprises, which do not have an
establishment or place of business in the PRC or which have such
establishment or place of business but the dividends are not
effectively connected with such establishment or place of business,
to the extent such dividends are derived from sources within the
PRC. Similarly, any gain realized on the transfer of shares by such
investors is also subject to PRC tax at a current rate of 10%,
subject to any reduction or exemption set forth in relevant tax
treaties, if such gain is regarded as income derived from sources
within the PRC. If we are deemed a PRC resident enterprise,
dividends paid on our shares, and any gain realized from the
transfer of our shares, would be treated as income derived from
sources within the PRC and would as a result be subject to PRC
taxation. Furthermore, if we are deemed a PRC resident enterprise,
dividends payable to individual investors who are non-PRC residents
and any gain realized on the transfer shares by such investors may
be subject to PRC tax at a current rate of 20%, subject to any
reduction or exemption set forth in applicable tax treaties. It is
unclear whether we or any of our subsidiaries established outside
of China are considered a PRC resident enterprise or whether
holders of shares would be able to claim the benefit of income tax
treaties or agreements entered into between China and other
countries or areas. If dividends payable to our non-PRC investors,
or gains from the transfer of our shares by such investors are
subject to PRC tax, the value of your investment in our shares may
decline significantly.
Our global income may be subject to PRC taxes under the PRC
Enterprise Income Tax Law, which could have a material adverse
effect on our results of operations.
Under the PRC Enterprise Income Tax Law, or the New EIT Law, and
its amendment and implementation rules, which became effective in
January 2008, an enterprise established outside of the PRC with a
“de facto management body” located within the PRC is considered a
PRC resident enterprise and will be subject to the enterprise
income tax at the rate of 25% on its global income. The
implementation rules define the term “de facto management bodies”
as “establishments that carry out substantial and overall
management and control over the manufacturing and business
operations, personnel and human resources, finance and treasury,
and business combination and disposition of properties and other
assets of an enterprise.” On April 22, 2009, the State
Administration of Taxation (the “SAT”), issued a circular, or SAT
Circular 82, which provides certain specific criteria for
determining whether the “de facto management body” of a
PRC-controlled enterprise that is incorporated offshore is located
in China. Although the SAT Circular 82 only applies to offshore
enterprises controlled by PRC enterprises or PRC enterprise groups,
not those controlled by PRC individuals or foreigners, the
determining criteria set forth in the SAT Circular 82 may reflect
the SAT’s general position on how the “de facto management body”
text should be applied in determining the resident status of all
offshore enterprises for the purpose of PRC tax, regardless of
whether they are controlled by PRC enterprises or individuals.
Although we do not believe that our legal entities organized
outside of the PRC constitute PRC resident enterprises, it is
possible that the PRC tax authorities could reach a different
conclusion. In such case, we may be considered a PRC resident
enterprise and may therefore be subject to the 25% enterprise
income tax on our global income, which could significantly increase
our tax burden and materially and adversely affect our cash flow
and profitability. In addition to the uncertainty regarding how the
new PRC resident enterprise classification for tax purposes may
apply, it is also possible that the rules may change in the future,
possibly with retroactive effect.
Furthermore, our WFOE’s ability to pay dividends may be restricted
due to foreign exchange control policies and the availability of
its cash balance. Substantially all of the Operating Companies’
operations are conducted in China and all of the revenue we
recognize, through our WFOE will be denominated in RMB. RMB is
subject to exchange control regulation in China, and, as a result,
our WFOE may be unable to distribute any dividends outside of China
due to PRC exchange control regulations that restrict our ability
to convert RMB into U.S. dollars.
The lack of dividends or other payments from our WFOE may limit our
ability to make investments or business combinations that could be
beneficial to our business, pay dividends or otherwise fund, and
conduct our business. Our funds may not be readily available to us
to satisfy obligations which have been incurred outside the PRC,
which could adversely affect our business and prospects or our
ability to meet our cash obligations. Accordingly, if we do not
receive dividends from our WFOE, our liquidity and financial
condition will be materially and adversely affected.
We and our shareholders face uncertainties with respect to
indirect transfers of equity interests in PRC resident enterprises
by their non-PRC holding companies.
On February 3, 2015, the State Administration of Taxation issued an
Announcement on Several Issues Concerning Enterprise Income Tax on
Income Arising from Indirect Transfers of Property by Non-PRC
Resident Enterprises, or Announcement 7, with the same effective
date. Under Announcement 7, an “indirect transfer” refers to a
transaction where a non-resident enterprise transfers its equity
interest and other similar interest in an offshore holding company,
which directly or indirectly holds Chinese taxable assets (the
assets of an “establishment or place” situated in China; real
property situated in China and equity interest in Chinese resident
enterprises) and any indirect transfer without reasonable
commercial purposes are subject to the PRC taxation. In addition,
Announcement 7 specifies the conditions under which an indirect
transfer is deemed to lack a reasonable commercial purpose which
include: (1) 75% or more of the value of the offshore holding
company’s equity is derived from Chinese taxable assets, (2)
anytime in the year prior to the occurrence of the indirect
transfer of Chinese taxable assets, 90% or more of the total assets
(excluding cash) of the offshore holding company are direct or
indirect investments in China, or 90% or more of the revenue of the
offshore holding company was sourced from China; (3) the functions
performed and risks assumed by the offshore holding company(ies),
although incorporated in an offshore jurisdiction to conform to the
corporate law requirements there, are insufficient to substantiate
their corporate existence and (4) the foreign income tax payable in
respect of the indirect transfer is lower than the Chinese tax
which would otherwise be payable in respect of the direct transfer
if such transfer were treated as a direct transfer. As a result,
gains derived from such indirect transfer will be subject to PRC
enterprise income tax, currently at a tax rate of 10%.
Announcement 7 grants a safe harbor under certain qualifying
circumstances, including transfers in the public securities market
and certain intragroup restricting transactions, however, there is
uncertainty as to the implementation of Announcement 7. For
example, Announcement 7 requires the buyer to withhold the
applicable taxes without specifying how to obtain the information
necessary to calculate taxes and when the applicable tax shall be
submitted. Announcement 7 may be determined by the tax authorities
to be applicable to our offshore restructuring transactions or sale
of the shares of our offshore subsidiaries where non-resident
enterprises, being the transferors, were involved. Though
Announcement 7 does not impose a mandatory obligation of filing the
report of taxable events, the transferring party shall be subject
to PRC withholding tax if the certain tax filing conditions are
met. Non-filing may result in an administrative penalty varying
from 50% to 300% of unpaid taxes. As a result, we and our
non-resident enterprises in such transactions may become at risk of
being subject to taxation under Announcement 7, and may be required
to expend valuable resources to comply with Announcement 7 or to
establish that we and our non-resident enterprises should not be
taxed under Announcement 7, for any restructuring or disposal of
shares of our offshore subsidiaries, which may have a material
adverse effect on our financial condition and results of
operations.
PRC laws and regulations have established more complex
procedures for certain acquisitions of Chinese companies by foreign
investors, which could make it more difficult for us to pursue
growth through acquisitions in China.
Further to the Regulations on Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors, or the New M&A Rules, the
Anti-monopoly Law of the PRC, the Rules of Ministry of Commerce on
Implementation of Security Review System of Mergers and
Acquisitions of Domestic Enterprises by Foreign Investors
promulgated by MOFCOM or the MOFCOM Security Review Rules, was
issued in August 2011, which established additional procedures and
requirements that are expected to make merger and acquisition
activities in China by foreign investors more time-consuming and
complex, including requirements in some instances that MOFCOM be
notified in advance of any change of control transaction in which a
foreign investor takes control of a PRC enterprise, or that the
approval from MOFCOM be obtained in circumstances where overseas
companies established or controlled by PRC enterprises or residents
acquire affiliated domestic companies. PRC laws and regulations
also require certain merger and acquisition transactions to be
subject to merger control review and or security review.
The MOFCOM Security Review Rules, effective from September 1, 2011,
which implement the Notice of the General Office of the State
Council on Establishing the Security Review System for Mergers and
Acquisitions of Domestic Enterprises by Foreign Investors
promulgated on February 3, 2011, further provide that, when
deciding whether a specific merger or acquisition of a domestic
enterprise by foreign investors is subject to the security review
by MOFCOM, the principle of substance over form should be applied
and foreign investors are prohibited from bypassing the security
review requirement by structuring transactions through proxies,
trusts, indirect investments, leases, loans, control through
agreements control or offshore transactions.
Further, if the business of any target company that the combined
company seeks to acquire falls into the scope of security review,
the combined company may not be able to successfully acquire such
company either by equity or asset acquisition, capital contribution
or through any contractual agreements. The combined company may
grow its business in part by acquiring other companies operating in
its industry. Complying with the requirements of the relevant
regulations to complete such transactions could be time consuming,
and any required approval processes, including approval from
MOFCOM, may delay or inhibit its ability to complete such
transactions, which could affect our ability to maintain or expand
our market share.
In addition, SAFE promulgated the Circular on the Settlement of
Foreign Currency Capital of Foreign-invested Enterprises, or
Circular 19, on June 1, 2015. Under Circular 19, registered capital
of a foreign-invested company settled in RMB converted from foreign
currencies may only be used within the business scope approved by
the applicable governmental authority and the equity investments in
the PRC made by the foreign-invested company shall be subject to
the relevant laws and regulations about the foreign-invested
company’s reinvestment in the PRC. In addition, foreign-invested
companies cannot use such capital to make the investments in
securities, and cannot use such capital to issue the entrusted RMB
loans (except approved in its business scope), repay the RMB loans
between the enterprises and the ones which have been transferred to
the third party. Circular 19 may significantly limit our ability to
effectively use the proceeds from future financing activities as
the Chinese subsidiaries may not convert the funds received from us
in foreign currencies into RMB, which may adversely affect their
liquidity and our ability to fund and expand our business in the
PRC.
SAFE issued the Circular on Reforming and Regulating Policies on
the Control over Foreign Exchange Settlement of Capital Accounts
(“Circular 16”), on June 9, 2016, which became effective
simultaneously. Pursuant to Circular 16, enterprises registered in
the PRC may also convert their foreign debts from foreign currency
to RMB on a self-discretionary basis. Circular 16 provides an
integrated standard for conversion of foreign exchange under
capital account items (including but not limited to foreign
currency capital and foreign debts) on a self-discretionary basis
which applies to all enterprises registered in the PRC. Circular 16
reiterates the principle that RMB converted from foreign
currency-denominated capital of a company may not be directly or
indirectly used for purpose beyond its business scope or prohibited
by PRC Laws or regulations, while such converted RMB shall not be
utilized as loans to its non-affiliated entities. As Circular 16 is
newly issued and SAFE has not provided detailed guidelines with
respect to its interpretation or implementation, it is uncertain
how these rules will be interpreted and implemented.
If we become directly subject to the recent scrutiny,
criticism and negative publicity involving U.S.-listed Chinese
companies, we may have to expend significant resources to
investigate and resolve the matter which could harm our business
operations and our reputation and could result in a loss of your
investment in our shares, especially if such matter cannot be
addressed and resolved favorably.
U.S. public companies that have substantially all of their
operations in China have been the subject of intense scrutiny,
criticism and negative publicity by investors, financial
commentators and regulatory agencies, such as the SEC. Much of the
scrutiny, criticism and negative publicity has centered around
financial and accounting irregularities, a lack of effective
internal controls over financial accounting and reporting,
inadequate corporate governance policies or a lack of adherence
thereto and, in many cases, allegations of fraud. As a result of
the scrutiny, criticism and negative publicity, the publicly traded
stock of many U.S. listed Chinese companies has sharply decreased
in value and, in some cases, has become virtually worthless. Many
of these companies are now subject to shareholder lawsuits and SEC
enforcement actions and are conducting internal and external
investigations into the allegations. It is not clear what effect
this sector-wide scrutiny, criticism and negative publicity will
have on our company and our business. If we become the subject of
any unfavorable allegations, whether such allegations are proven to
be true or untrue, we may have to expend significant resources to
investigate such allegations and/or defend the Company. This
situation may be a major distraction to our management. If such
allegations are not proven to be groundless, our Company and
business operations will be severely hampered and your investment
in our stock could be rendered worthless.
In addition, major issues with other U.S. listed Chinese companies
in the future, could have a negative effect on the value of your
investment, even though the Company is not involved.
There are uncertainties under the PRC Securities Law relating
to the procedures and requisite timing for the U.S. securities
regulatory agencies to conduct investigations and collect evidence
within the territory of the PRC.
On December 28, 2019, the newly amended Securities Law of the PRC
(the “PRC Securities Law”) was promulgated, which became effective
on March 1, 2020. According to Article 177 of the PRC Securities
Law (“Article 177”), the securities regulatory authority of the
State Council may establish a regulatory cooperation mechanism with
securities regulatory authorities of another country or region for
the implementation of cross-border supervision and administration.
Article 177 further provides that overseas securities regulatory
authorities shall not engage in activities pertaining to
investigations or evidence collection directly conducted within the
territories of the PRC, and that no Chinese entities or individuals
shall provide documents and information in connection with
securities business activities to any organizations and/or persons
aboard without the prior consent of the securities regulatory
authority of the State Council and the competent departments of the
State Council. As of the date of this prospectus, we are not aware
of any implementing rules or regulations which have been published
regarding application of Article 177.
We believe Article 177 is only applicable where the activities of
overseas authorities constitute a direct investigation or evidence
collection by such authorities within the territory of the PRC. Our
principal business operation is conducted in the PRC. In the event
that the U.S. securities regulatory agencies carry out an
investigation on us such as an enforcement action by the Department
of Justice, the SEC or other authorities, such agencies’ activities
will constitute conducting an investigation or collecting evidence
directly within the territory of the PRC and accordingly fall
within the scope of Article 177. In that case, the U.S. securities
regulatory agencies may have to consider establishing cross-border
cooperation with the securities regulatory authority of the PRC by
way of judicial assistance, diplomatic channels or establishing a
regulatory cooperation mechanism with the securities regulatory
authority of the PRC. However, there is no assurance that the U.S.
securities regulatory agencies will succeed in establishing such
cross-border cooperation in this particular case and/or establish
such cooperation in a timely manner.
Furthermore, as Article 177 is a recently promulgated provision, it
remains unclear as to how it will be interpreted, implemented or
applied by the Chinese Securities Regulatory Commission or other
relevant government authorities. As such, there are uncertainties
as to the procedures and requisite timing for the U.S. securities
regulatory agencies to conduct investigations and collect evidence
within the territory of the PRC. If the U.S. securities regulatory
agencies are unable to conduct such investigations, there exists a
risk that they may determine to suspend or de-register our
registration with the SEC and may also delist our securities from
applicable trading market within the US.
It may be difficult for stockholders to enforce any judgment
obtained in the United States against us, which may limit the
remedies otherwise available to our stockholders.
Substantially all of our assets are located in the PRC. Moreover,
our current directors and officers are Chinese nationals. All or a
substantial portion of their assets are located outside the United
States. As a result, it may be difficult for our stockholders to
effect service of process within the United States upon our
subsidiaries and variable interest entities or any individuals.
In addition, there is uncertainty as to whether
the courts of the PRC would recognize or enforce judgments of U.S.
courts obtained against us or our officers and/or
directors predicated upon the civil liability provisions of
the securities laws of the United States or any state thereof or be
competent to hear original actions brought in the PRC against us or
such persons predicated upon
the securities laws of the United States or any state
thereof. It is unclear if extradition treaties now in effect
between the United States and the PRC would permit effective
enforcement against us or our officers and directors of criminal
penalties under the United States Federal securities laws or
otherwise.
Risks Relating to Our Corporate Structure
We conduct our principal business through Beijing Luji, by
means of contractual arrangements. If the PRC courts or
administrative authorities determine that these contractual
arrangements do not comply with applicable regulations, we could be
subject to severe penalties and our business could be adversely
affected. In addition, changes in such Chinese laws and regulations
may materially and adversely affect our business.
There are uncertainties regarding the interpretation and
application of PRC laws, rules and regulations, including but not
limited to the laws, rules and regulations governing the validity
and enforcement of the VIE contractual arrangements. The
contractual arrangements were entered into among Beijing Hongtao,
Beijing Luji and/or its shareholders. We have been advised by our
PRC counsel, Jingtian & Gongcheng, based on their understanding
of the current PRC laws, rules and regulations, that (i) the
structure for operating our business in China will not result in
any violation of PRC laws or regulations currently in effect, and
(ii) the contractual arrangements among Beijing Hongtao, Beijing
Luji and its shareholders are valid, binding and enforceable, and
will not result in any violation of PRC laws or regulations
currently in effect. If the PRC courts or regulatory
authorities determine that our contractual arrangements are in
violation of applicable PRC laws, rules or regulations, our
contractual arrangements will become invalid or unenforceable.
If we or our ownership structure or the contractual arrangements,
are determined to be in violation of any existing or future PRC
laws, rules or regulations, or we fail to obtain or maintain any of
the required governmental permits or approvals, the relevant PRC
regulatory authorities would have broad discretion in dealing with
such violations, including:
|
· |
revoking
our business and operating licenses; |
|
· |
discontinuing
or restricting our operations; |
|
· |
imposing
conditions or requirements with which we may not be able to
comply; |
|
· |
requiring
us to restructure the relevant ownership structure or
operations; |
|
· |
restricting
or prohibiting our use of the proceeds to finance our business and
operations in China; or |
|
· |
imposing
fines. |
The imposition of any of these penalties would severely disrupt our
ability to conduct our business and have a material adverse effect
on our financial condition, results of operations and
prospects.
It is uncertain whether any new PRC laws, rules or regulations
relating to the variable interest entity structure will be adopted
or if adopted, what they would provide.
The PRC government may determine that our contractual
arrangements do not comply with the applicable laws and
regulations
There can be no assurance that the VIE contractual arrangements
will be deemed by the relevant governmental or judicial authorities
to be in compliance with the existing or future applicable PRC laws
and regulations, or the relevant governmental or judicial
authorities may in the future interpret the existing laws or
regulations with the result that the contractual arrangements will
be deemed to be in compliance of the PRC laws and regulations.
On 15 March 2019, the National People’s Congress promulgated the
Foreign Investment Law of the PRC, the (‘‘Foreign Investment
Law’’), which will come into effect on 1 January 2020. The Foreign
Investment Law will replace the Law on Sino-Foreign Equity Joint
Ventures, the Law on Sino-Foreign Contractual Joint Ventures and
the Law on Wholly Foreign-Owned Enterprises to become the legal
foundation for foreign investment in the PRC. The Foreign
Investment Law stipulates certain forms of foreign investment,
which do not include the contractual arrangements as a form of
foreign investment. However, the Foreign Investment Law stipulates
that foreign investment includes “foreign investors invest through
any other methods under laws, administrative regulations or
provisions prescribed by the State Council”. Therefore, there are
possibilities that future laws, administrative regulations or
provisions prescribed by the State Council may regard contractual
arrangements as a form of foreign investment, and then whether our
contractual arrangements will be recognized as a foreign
investment, whether our contractual arrangements will be deemed to
be in violation of the foreign investment access requirements and
how our contractual arrangements will be handled are uncertain.
Therefore, there is no guarantee that our contractual arrangements
and the business of our PRC operating subsidiaries will not be
materially and adversely affected in the future.
The Foreign Investment Law provides that a negative list for
foreign investments is adopted by government authorities. Whether
or not a foreign investment is prohibited or restricted is
determined according to the negative list. Under the current
negative list, value-added telecommunication services and online
culture operation businesses engaged by our PRC operating entities
are foreign investment restricted and prohibited businesses.
Considering that a number of existing entities engaged in the
value-added telecommunication business and/or online culture
operation business, some of which have obtained listing status
abroad, are operating under contractual arrangements, our Directors
are of the view that it is unlikely, if any interpretation or
implementation regulations, rules or measures of the Foreign
Investment Law are subsequently promulgated, that the relevant
authorities will apply it retrospectively to require relevant
enterprises to remove or otherwise unwind their contractual
arrangements.
The Board is monitoring and will continue to monitor the
development of the Foreign Investment Laws in order to assess its
possible impact on the contractual arrangements and the business of
Beijing Luji. In case there would be material impact on the
Company’s business, the Company will timely publish announcements
in relation to material developments of and arising from the
Foreign Investment Law.
Our contractual arrangements may not be as effective as
direct ownership in providing control over Beijing
Luji.
We rely on the VIE contractual arrangements with Beijing Luji to
operate the O2O business and such other related business activities
in the PRC. These contractual arrangements may not be as effective
in providing control over Beijing Luji as direct ownership.
In the event that any of the Beijing Luji Shareholders or Beijing
Luji fails to perform each of their respective obligations under
the VIE contractual arrangements, our management may have to take
time to ask for rectification and even bring legal proceedings
against the relevant defaulting party, which may result in
diversion of resources and management’s attention, and therefore
materially and adversely affect our business and results of
operations.
The Beijing Luji Shareholders may potentially have a conflict
of interests with us.
Our control over Beijing Luji is based on the VIE contractual
arrangements. Conflict of interests of the Beijing Luji
Shareholders therefore could adversely affect the interests of our
Company. Pursuant to the Power of Attorney, the Beijing Luji
Shareholders will irrevocably authorize designated persons
appointed by us as their representatives to exercise their rights
as shareholders of Beijing Luji. However, cooperation from the
Beijing Luji Shareholders is needed in exercising and performing
relevant shareholder’s rights and obligations sometimes, for
example in case of registration for changes with governmental
authorities or remitting the dividend payable to us. In the event
that conflict of interests between the Company and the Beijing Luji
Shareholders arises, there can be no assurance that all or any of
the Beijing Luji Shareholders will act in our interest. If the
Beijing Luji Shareholders act in a way compromising our interest or
fail to act, our business, financial conditions and results of
operations may be adversely affected.
In addition, the Beijing Luji Shareholders own a significant
portion of the Company’s outstanding common stock and are able to
vote and direct our operations. The decisions made by these
shareholders may not be in your best interest and could negatively
affect the value of your investment.
The contractual arrangements may be subject to scrutiny of
the PRC tax authorities and transfer pricing adjustments and
additional tax may be imposed.
We could face material adverse tax consequences if the PRC tax
authorities determine that the contractual arrangements were not
entered into based on arm’s length negotiations. If the PRC tax
authorities determine that these agreements were not entered into
on an arm’s length basis, they may adjust our income and expenses
for PRC tax purposes in the form of a transfer pricing adjustment.
A transfer pricing adjustment could adversely affect our financial
position by increasing the relevant tax liability, and this could
further result in late payment fees and other penalties to the
Company for unpaid taxes. As a result, any transfer pricing
adjustment could have a material adverse effect on our financial
position and results of operations.
A substantial amount of costs and time may be involved in
transferring the ownership of Beijing Luji to us under the Equity
Disposal Agreement.
The Equity Disposal Agreement grants the WFOE a right to acquire
part or all of the equity interest in the registered capital or
part or all of the assets of Beijing Luji at the lowest price
permitted by PRC law, under which the WFOE or its designated party
is entitled to acquire all or part of the equity interest of
Beijing Luji from the Beijing Luji Shareholders.
Nevertheless, such rights can only be exercised by the WFOE as and
when permitted by the relevant PRC laws and regulations, in
particular, when there are no limitations on foreign ownership in
PRC companies that are engaged in the value-added telecommunication
services and related online business.
In addition, a substantial amount of costs and time may be involved
in transferring the ownership or assets of Beijing Luji to the WFOE
if it chooses to exercise the exclusive right to acquire all or
part of the equity interest in Beijing Luji under the Equity
Disposal Agreement, which may have a material adverse impact on our
business, prospects and results of operation.
The Company does not have any insurance which covers the
risks relating to the contractual arrangements and the transactions
contemplated thereunder.
We do not have insurance that covers the risks relating to the
contractual arrangements and the transactions contemplated
thereunder and the Company has no intention to purchase any
insurance in this regard. If any risk arises from the contractual
arrangements in the future, such as those affecting the
enforceability of the contractual arrangements and the relevant
agreements for the transactions contemplated thereunder and the
operation of the Company, our results may be adversely affected.
However, we will monitor the relevant legal and operational
environment from time to time to comply with the applicable laws
and regulations. In addition, we will implement relevant internal
control measures to reduce the operational risk.
Risks Related to our Common Stock
We can provide no assurances as to our future financial
performance or the investment results of a purchase of our Common
Stock.
Any projected results of operations involve significant risks and
uncertainties and should be considered speculative, and depend on
various assumptions which may not be correct. The future
performance of our Company and the return on our common stock
depends on a complex series of events that are beyond our control
and that may or may not occur. Actual results for any period may or
may not approximate any assumptions that are made and may differ
significantly from such assumptions. We can provide no assurance or
prediction as to our future profitability or to the ultimate
success of an investment in our Common Stock.
Because there is no established public trading market for our
common stock, you may experience difficulties in reselling your
stock.
We cannot assure you that there will be an established market in
the future for our common stock. The trading of securities on the
OTC Pink is often sporadic and investors may have difficulty buying
and selling our shares or obtaining market quotations for them,
which may have a negative effect on the market price of our common
stock. You may not be able to sell your shares at your purchase
price or at any price. Accordingly, you may have difficulty
reselling any shares you purchase.
The market price of our common stock may be volatile, and our
stock price may fall below your purchase price at the time you
desire to sell your shares of our common stock, resulting in a loss
on your investment.
The market price of our common stock may fluctuate substantially
due to a variety of factors, many of which are beyond our control,
including, without limitation:
|
· |
actual
or anticipated variations in our quarterly and annual operating
results, financial condition or asset quality; |
|
· |
changes
in general economic or business conditions, both domestically and
internationally; |
|
· |
the
effects of, and changes in, trade, monetary and fiscal policies,
including the interest rate policies of the Federal Reserve or the
PRC Government, or in laws and regulations affecting
us; |
|
· |
the
number of securities analysts covering us; |
|
· |
the
volatility of the Renminbi and the United States
dollar; |
|
· |
publication
of research reports about us, our competitors, or changes in, or
failure to meet, securities analysts’ estimates of our financial
and operating performance, or lack of research reports by industry
analysts or ceasing of coverage; |
|
· |
changes
in market valuations or earnings of companies that investors deemed
comparable to us; |
|
· |
the
average daily trading volume of our common stock; |
|
· |
future
issuances of our common stock or other securities; |
|
· |
additions
or departures of key personnel; |
|
· |
perceptions
in the marketplace regarding our competitors and/or us; |
|
· |
significant
acquisitions or business combinations, strategic partnerships,
joint ventures or capital commitments by or involving our
competitors or us; and |
|
· |
other
news, announcements or disclosures (whether by us or others)
related to us, our competitors or our core market. |
The stock market has experienced significant fluctuations in recent
years. In many cases, these changes have been unrelated to the
operating performance and prospects of particular companies. In
addition, significant fluctuations in the trading volume in our
common stock may cause significant price variations to occur.
Increased market volatility may materially and adversely affect the
market price of our common stock, which may make it difficult for
you to resell your shares at the volume, prices and times
desired.
Future issuances of our common stock will dilute current
stockholders or adversely affect the market.
Our business plan contemplates expanding our operations through
acquisitions which may involve significant issuances of our common
stock. Future issuances of our common stock may be at values
substantially below the price paid by the current holders of our
common stock. In addition, common stock could be issued to fend off
unwanted tender offers or hostile takeovers without further
stockholder approval. Sales of substantial amounts of our common
stock, or even just the prospect of such sales, could depress the
prevailing price of our common stock and our ability to raise
equity capital in the future. Additionally, large share issuances
would generally have a negative impact on our share price. It is
possible that, due to additional share issuances, you could lose a
substantial amount, or all, of your investment. In addition, if a
trading market develops for our common stock, we may attempt to
raise capital by selling shares of our common stock, possibly at a
discount to market. These actions will result in dilution of the
ownership interests of existing shareholders, further dilute common
stock book value, and that dilution may be material.
We may be subject to the “penny stock” rules which will
adversely affect the liquidity of our common stock.
In the event that our shares are traded, and our stock trades below
$5.00 per share, our stock would be classified as a “penny stock”,
which is subject to various regulations involving disclosures to be
given to any buyer prior to the purchase of any penny stock. The
U.S. SEC has adopted regulations which generally define a “penny
stock” to be any equity security that has a market price of less
than $5.00 per share, subject to certain exceptions. Depending on
market fluctuations, our common stock could be considered to be a
“penny stock”. A penny stock is subject to rules that impose
additional sales practice requirements on broker/dealers who sell
these securities to persons other than established members and
accredited investors. For transactions covered by these rules, the
broker/dealer must make a special suitability determination for the
purchase of these securities. In addition, the broker/dealers must
receive the purchaser’s written consent to the transaction prior to
the purchase. The broker/dealers must also provide certain written
disclosures to the purchaser. Consequently, the “penny stock” rules
may restrict the ability of broker/dealers to sell our securities,
and may negatively affect the ability of holders of shares of our
common stock to resell them. These disclosures require you to
acknowledge that you understand the risks associated with buying
penny stocks and that you can absorb the loss of your entire
investment. Penny stocks are low priced securities that usually do
not have a very high trading volume. Consequently, the price of the
stock is often volatile and you may not be able to buy or sell the
stock when you want to. These rules also limit the ability of
broker-dealers to solicit purchases of our Common Stock and
therefore reduce the liquidity of the public market for our shares
should one develop.
The market for penny stocks has experienced numerous frauds
and abuses that could adversely impact investors in our
stock.
Company management believes that the market for penny stocks has
suffered from patterns of fraud and abuse. Such patterns
include:
|
· |
Control
of the market for the security by one or a few broker-dealers that
are often related to the promoter or issuer; |
|
· |
Manipulation
of prices through prearranged matching of purchases and sales and
false and misleading press releases; |
|
· |
"Boiler
room" practices involving high pressure sales tactics and
unrealistic price projections by sales persons; |
|
· |
Excessive
and undisclosed bid-ask differentials and markups by selling
broker-dealers; and |
|
· |
Wholesale
dumping of the same securities by promoters and broker-dealers
after prices have been manipulated to a desired level, along with
the inevitable collapse of those prices with consequent investor
losses. |
It is not likely that we will pay dividends on the Common
Stock or any other class of stock.
We intend to retain any future earnings for the operation and
expansion of our business. We do not anticipate paying cash
dividends on our Common Stock, or any other class of stock, in the
foreseeable future. Stockholders should look solely to appreciation
in the market price, if any, of our common shares to obtain a
return on their investment.
Investing in our Company is highly speculative and could
result in the entire loss of your investment.
An investment in our shares is highly speculative and involves
significant risk. Our shares should not be purchased by any person
who cannot afford to lose their entire investment. Our business
objectives are also speculative, and it is possible that we would
be unable to accomplish them. Our shareholders may be unable to
realize any return on their purchase of our common shares and may
lose their entire investment. For this reason, each prospective
purchaser of our common shares should read this Form 8-K and all of
its exhibits carefully and consult with their attorney, business
and/or investment advisor.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
This discussion summarizes significant factors affecting the
operating results, financial conditions, liquidity and cash flows
of HJ for the years ended December 31, 2019, and December 31, 2018
and its unaudited condensed consolidated financial statements for
the three and six months ended June 30, 2020 and June 30, 2019. The
discussion and analysis below should be read together with the
section entitled “Forward Looking Statements” and our financial
statements and notes to the financial statements included elsewhere
in this Current Report on Form 8-K.
Except for historical information, the matters discussed in this
section are forward looking statements that involve risks and
uncertainties and are based upon judgments concerning various
factors that are beyond the Company’s control. Consequently, and
because forward-looking statements are inherently subject to risks
and uncertainties, the actual results and outcomes may differ
materially from the results and outcomes discussed in the
forward-looking statements. You are urged to carefully review and
consider the various disclosures made by us in this report.
Overview
On August 6, 2020, we consummated the acquisition of one hundred
(100) Shares of HJ, representing 100% of the issued and outstanding
stock of HJ. HJ conducts its business through its variable interest
entity, Beijing Luji. As a result, we entered into the business of
selling healthcare and other related products to the middle-aged
and elderly market segments in the PRC through its online to
offline platform.
In 2016, Beijing Luji expanded its E-commerce operations and
introduced its “Fozgo” branded online to offline (O2O) marketplace.
The O2O platform integrates our E-commerce platform with physical
outlets to connect consumers and merchants in a dynamic
marketplace. Our platform not only offers users the convenience of
making online purchases, but also provides the possibility to
purchase and receive products and services offline. Currently, our
core product categories include sales of home appliances (such as
water purifiers and air purifiers), health foods and cosmetics
products. As of March 31, 2020, Beijing Luji has developed several
branch offices with outlets across the PRC with approximately
158,300 users. In 2018, we were granted with hi-tech enterprise
status in the PRC.
On March 15, 2019, Beijing Luji signed a Share Purchase Agreement
with Rongcheng Health Group Co., Ltd. to purchase 44% of total
shares of Rongcheng Tianrun Taxus Co., Ltd. for RMB79,830,000, or
approximately US$11.6 million. Rongcheng Tianrun Taxus Co., Ltd. is
primarily engaged in the cultivation and marketing of Taxus, a type
of small evergreen tree or shrub which is believed to purify the
air. As of the report date, the transaction has not been completed
and is pending registration procedures with the government. The
foregoing description of the Share Purchase Agreement is qualified
in its entirety by reference to the Equity Acquisition Agreement,
an English translation of which is filed as Exhibit 10.2 to this
Current Report and incorporated herein by reference.
History
We were incorporated on June 15, 2006 under the laws of the State
of Nevada as Jupiter Resources, Inc. 75,000,000 shares of stock was
authorized all as common stock with a par value $0.001 and no other
classes of stock were authorized. On March 25, 2009, the articles
were amended to authorize an addition of 10 million preferred
shares making a total of 85,000,000 shares authorized (75M common,
10M preferred). On April 30, 2009 the Company filed an amendment to
change the name of the corporation to Rineon Group, Inc. On May 14,
2009, the board of directors of the Company authorized a change in
the fiscal year end of the Company from May 31 to December 31.
From inception to November 1, 2018, the date of the filing of the
Company’s Form 15, the Company attempted unsuccessfully to enter
into business combinations with various target companies. There was
no business activity between the filing of the Form 15 and prior to
August 9, 2018. The Company had Exchange Act disclosure
requirements from January 11, 2008 to November 10, 2010. The
Company has no knowledge or records related to the assets
referenced above and therefor there is some level of uncertainty in
the above descriptions.
Prior Company management was unresponsive to shareholders and had
refused to respond to requests to meet statutory requirements to
get current with the secretary of state and the Securities and
Exchange Commission’s filing requirements. Accordingly, on August
9, 2018, XTC, Inc. was appointed to serve as the custodian of the
Company in a shareholder filed action with the Eighth Judicial
District Court in Clark County, Nevada and was instructed to revive
the company. XTC, Inc. was a shareholder of record as shown in the
court documents of 500 common shares attached as Exhibit 99.1 to
this Current Report. XTC acquired its 500 common shares on 6/14/18
in the open market at a price of $0.05 per share.
On September 25, 2018, the Company filed a Certificate of
Designation whereby the following preferred shares were designated
and the rights, privileges and designations of the Series A and C
Convertible Preferred Stock were amended and restated.
|
· |
The
number of Series A Convertible Preferred was increased from 36,000
to 1,000,000. |
|
· |
3,000,000
shares of Series B Convertible Preferred Stock were created with no
voting rights, and conversion rights of 1000:1, with the
restriction that holders cannot convert to hold more the 4.95% of
issued and outstanding common stock. |
|
· |
1,000,000
shares of Series C Convertible Preferred Stock were created with
each Series C having 100,000 votes per share, with 1:1 conversion
rights. |
On September 25, 2018, the Company issued 964,000 shares of Series
A Convertible Preferred shares to XRC, LLC at $0.001 per share and
1,000,000 shares of Series C Convertible Preferred shares at $0.001
per share to XRC, LLC, a company controlled by Chris Lotito, in
exchange for paying the costs to revive the Company with the State
of Nevada, giving it voting control.
On September 28, 2018, a shareholders meeting was held wherein the
shareholders gave the board authority to reorganize the Company,
including making possible a name change, and/or engaging in a
reverse stock split. In addition, the Series A shareholders voted
to approve a reverse split of the Series A Convertible Preferred
and to authorize a new designation.
On October 1, 2018, the Company made filings with the Nevada
Secretary of State to change our name to "AS Capital, Inc.” and
approve a 1 for 10 reverse stock split for the Common stock and a 1
for 1,000 reverse of the Series A Convertible Preferred, with
conversion rights of 1 common share for every 12,000 shares of
Series A Convertible Preferred Stock held. As a result, the number
of issued and outstanding Series A Convertible Preferred Stock was
reduced to 1,000 shares.
On December 6, 2018, the Court granted an Order discharging the
custodian and approved all actions taken by the custodian.
Change in Control
On June 4, 2019, AS Capital, Inc., a Nevada corporation (“we,”
“ASIN” or the “Company”), XRC, LLC, a Colorado limited liability
company (“XRC”) and Gao Xue Ran (“Purchaser”) entered into a Stock
Purchase Agreement (the “SPA”), pursuant to which the Purchaser
agreed to purchase from XRC 11,000,000 shares of common stock of
the Company, par value $0.001, and 964 shares of Series A
Convertible Preferred Stock of the Company, par value $0.001
(collectively, the “Shares”), for aggregate consideration of Four
Hundred and Ten Thousand Dollars ($410,000) in accordance with the
terms and conditions of the SPA. XRC was the controlling
shareholder of the Company. The acquisition of the Shares was
consummated on July 18, 2019, and the Shares were ultimately
purchased by the following three individuals using their own
personal funds:
Name |
|
No.
of Shares |
|
Percentage
of Issued and Outstanding |
|
Consideration
Paid |
Gao
Xue Ran |
|
8,581,063 of Common Stock;
964 shares of Series A Preferred Stock
|
|
76.61% |
|
$319,840 |
Zhang
Yan Hua |
|
1,935,633
of Common Stock |
|
17.28% |
|
$72,146 |
Cheung
Kwok Chiu Kris |
|
483,304
of Common Stock |
|
4.31% |
|
$18,014 |
Upon the consummation of the sale of the Shares, Chris Lotito, our
Chief Executive Officer and sole director, and John Karatzaferis,
our President, resigned from all of their positions with the
Company, effective July 18, 2019. Their resignations were not due
to any dispute or disagreement with the Company on any matter
relating to the Company's operations, policies or practices.
Concurrently with such resignations, Gao Xue Ran was appointed to
serve as the Chief Executive Officer, Chief Financial Officer,
President, Secretary and sole Director of the Company, until the
next annual meeting of stockholders of the Company and until such
director’s successor is elected and qualified or until such
director’s earlier death, resignation or removal. None of the
directors or executive officers has a direct family relationship
with any of the Company’s directors or executive officers, or any
person nominated or chosen by the Company to become a director or
executive officer. Ms. Gao will serve in her positions without
compensation.
Acquisition of HJ
On August 6, 2020, we consummated the acquisition of one hundred
(100) Shares of HJ, representing 100% of the issued and outstanding
stock of HJ for the issuance of 86,000,000 shares of our common
stock. HJ is a holding company that, through its subsidiaries and
variable interest entity, is engaged in the business of selling
healthcare and other related products to the middle-aged and
elderly market segments in the PRC through its internet platform
and offline service centers. HJ’s consolidated business is
conducted through Beijing Luji Technology Co., Ltd., a variable
interest entity formed in Beijing, China on March 27, 2007.
In connection with the acquisition, effective August 6, 2020, the
following individuals were appointed to serve in the capacities set
forth next to their names until his or her successor(s) shall be
duly elected or appointed, unless he or she resigns, is removed
from office or is otherwise disqualified from serving as an
executive officer or director of the Company:
Name |
|
Positions |
Tian
Xiangyang |
|
Chief
Executive Officer, Director and Chairperson of the Board of
Director |
Shan
Yonghua |
|
Chief
Financial Officer, and Director |
Tian
Zhihai |
|
Chief
Operating Officer and Director |
Yin
Jianen |
|
Secretary
and Director |
Wang
Jirui |
|
Director |
Upon the consummation of the sale of the HJ Shares, Gao Xue Ran
resigned from all of her positions with the Company, effective
August 6, 2020. Her resignation was not due to any dispute or
disagreement with the Company on any matter relating to the
Company's operations, policies or practices.
Results of Operations for HJ (Acquired Company)
Results of Operations for the Three Months Ended June 30, 2020
and 2019
Our consolidated financial statements have been prepared on a going
concern basis, which assumes that we will be able to continue to
operate in the future in the normal course of business. In HJ’s
unaudited condensed consolidated financial statements for the three
and six months ended June 30, 2020, it has included a note about
its ability to continue as a going concern due to consecutive
quarterly losses from operations in the first half of 2020 as a
result of COVID-19. Business closures in the PRC and limitations on
business operations arising from COVID-19 has significantly
disrupted Beijing Luji’s ability to generate revenues and cash flow
during the first half of 2020.
The following table sets forth certain financial data for the three
months ended June 30, 2020 and 2019 (in thousands):
|
|
For the Three Months Ended June 30, |
|
|
Percentage |
|
|
|
2020 |
|
|
2019 |
|
|
Change |
|
|
|
Dollars |
|
|
% |
|
|
Dollars |
|
|
% |
|
|
% |
|
Revenues |
|
$ |
94 |
|
|
|
100.0 |
|
|
$ |
44,902 |
|
|
|
100.0 |
|
|
|
(99.8 |
) |
Cost of revenues |
|
|
(167 |
) |
|
|
(177.7 |
) |
|
|
(32,998 |
) |
|
|
(73.5 |
) |
|
|
(99.5 |
) |
Gross (loss) profit |
|
|
(73 |
) |
|
|
(77.7 |
) |
|
|
11,904 |
|
|
|
26.5 |
|
|
|
(100.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
|
740 |
|
|
|
787.2 |
|
|
|
2,698 |
|
|
|
6.0 |
|
|
|
(72.6 |
) |
Selling expenses |
|
|
2,385 |
|
|
|
2,537.2 |
|
|
|
981 |
|
|
|
2.2 |
|
|
|
143.1 |
|
Finance expenses, net |
|
|
12 |
|
|
|
12.8 |
|
|
|
293 |
|
|
|
0.7 |
|
|
|
(95.9 |
) |
Total operating expenses |
|
|
3,137 |
|
|
|
3,337.2 |
|
|
|
3,972 |
|
|
|
8.9 |
|
|
|
(21.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
(3,210 |
) |
|
|
(3,414.9 |
) |
|
|
7,932 |
|
|
|
17.7 |
|
|
|
(140.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses, net |
|
|
(577 |
) |
|
|
(613.8 |
) |
|
|
(705 |
) |
|
|
(1.6 |
) |
|
|
(18.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses, net |
|
|
(577 |
) |
|
|
(613.8 |
) |
|
|
(705 |
) |
|
|
(1.6 |
) |
|
|
(18.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before provision for income taxes |
|
|
(3,787 |
) |
|
|
(4,028.7 |
) |
|
|
7,227 |
|
|
|
16.1 |
|
|
|
(152.4 |
) |
Provision for income taxes |
|
|
– |
|
|
|
– |
|
|
|
1,406 |
|
|
|
3.1 |
|
|
|
(100.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income |
|
$ |
(3,787 |
) |
|
|
(4,028.7 |
) |
|
$ |
5,821 |
|
|
|
13.0 |
|
|
|
(165.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(9 |
) |
|
|
(9.6 |
) |
|
|
(376 |
) |
|
|
(0.8 |
) |
|
|
(97.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income |
|
$ |
(3,796 |
) |
|
|
(4,038.3 |
) |
|
$ |
5,445 |
|
|
|
12.1 |
|
|
|
(169.7 |
) |
Revenues:
Revenues were approximately $94,000 and approximately $44.9 million
for the three months ended June 30, 2020 and 2019 respectively. The
decrease in revenues of approximately $44.8 million or 99.8% is due
primarily to business interruptions arising from COVID-19. During
the three months ended June 30, 2020 and 2019, all revenue was
generated in the PRC. During the period of three months ended June
30, 2020, revenues were mainly attributable to the sales of smart
watches, health foods, and cosmetics products, representing 68.5%,
12.8%, and 1.7% of revenues, respectively. During to the same
period of 2019, the revenues were mainly attributable to the sales
of health foods, home appliances and cosmetics products,
representing 63.2%, 20.1% and 16.1% of revenues, respectively.
During the three months ended June 30, 2020 and 2019, no customers
accounted for 10% or more of total revenues.
Cost of revenues: Cost of revenues consists primarily
of the cost of merchandise sold, delivery cost, service fees, sales
incentives and commissions that are directly attributable to the
sale of certain designated products. Cost of revenues of
approximately $167,000 for the three months ended June 30, 2020
consisted of provision for slow-moving inventory of approximately
$133,000. The decrease in cost of revenues of approximately $32.8
million or 99.5% from the comparable period of 2019 was due mainly
to decrease in product sales as a result of COVID-19.
Gross (Loss) Profit. Gross loss for the three months
ended June 30, 2020 of approximately $73,000 was attributed mainly
to the provision for slowing-moving inventory of $133,000. Gross
profit for the three months ended June 30, 2019 of approximately
$11.9 million was attributed mainly to revenues of approximately
$44.9 million.
General and Administrative Expenses. General and
administrative expenses (“G&A expenses”) consist primarily of
costs in salary and benefits for our general administrative and
management staff, facilities costs, depreciation expenses,
professional fees, audit fees, and other miscellaneous expenses
incurred in connection with general operations. G&A expenses
decreased 72.6% or approximately $2.0 million from approximately
$2.7 million for the three months ended June 30, 2019 was due
primarily to the decrease in advisory fees, salary and
benefits.
Selling Expenses. Selling expenses consist
mainly of payroll and benefits for employees involved in the sales
and distribution functions, meeting/event fees, advertisement, and
marketing and selling expenses that are related to events and
activities at the Company’s service centers designed to promote
product sales. Selling expenses increased by 143.1% or
approximately $1.4 million to approximately $2.4 million in the
three months ended June 30, 2020 from approximately $981,000 in the
same period of 2019. The increase was due mainly to costs incurred
in marketing and other promotional activities (such as product
exhibition in various regions) in the second quarter of 2020.
Finance Expenses, net. Finance expenses consist
mainly of service fees related to the use of third-party online
payment platforms, bank fees and interest expenses related to
borrowings; net of interest income from bank and related bank
products. Total net financial expenses were approximately $12,000
and 293,000 for the three months ended June 30, 2020, and 2019,
respectively. The decrease in net financial expense was due mainly
to interest income earned in the three months period ended June 30,
2020.
Operating (loss) income. Operating loss was
approximately $3.2 million for the three months ended June 30,
2020, compared to approximately $7.9 million of operating income
for the same period of 2019. The decrease in operating income in
2020 was due primary to the significant decline in revenues in 2020
due to the impact of COVID-19.
Total other expenses, net. Other income consists
primarily of income from the administration of Beijing Luji’s
online marketplace. Other expenses consist mainly of estimated tax
penalties and charitable contributions. Total net other expense was
approximately $577,000 for the three months ended June 30, 2020,
compared to approximately $705,000 for the same period of 2019. The
decrease in net other expense in 2020 was due primary to
approximately $153,000 income tax refund in the second quarter of
2020.
Provision for income taxes. Provision for income
taxes was $0 for the three months ended June 30, 2020, compared to
approximately $1.4 million for the same period of 2019.
Net (loss) income. As a result of the factors
described above, net loss was approximately 3.8 million for the
three months ended June 30, 2020, a decrease of approximately $9.6
million from approximately $5.8 million of net income for the same
period of 2019.
Comprehensive Loss (Income). Comprehensive loss was approximately
$3.8 million for the three months ended June 30, 2020, as compared
to other comprehensive income of approximately $5.4 million for the
three months ended June 30, 2019.
Results of Operations for the Six Months Ended June 30, 2020 and
2019
The following table sets forth certain financial data for the six
months ended June 30, 2020 and 2019
(in thousands)
|
|
For the Six Months Ended June 30, |
|
|
Percentage |
|
|
|
2020 |
|
|
2019 |
|
|
Change |
|
|
|
Dollars |
|
|
% |
|
|
Dollars |
|
|
% |
|
|
% |
|
Revenues |
|
$ |
128 |
|
|
|
100.0 |
|
|
$ |
51,058 |
|
|
|
100.0 |
|
|
|
(99.7 |
) |
Cost of revenues |
|
|
(205 |
) |
|
|
(160.2 |
) |
|
|
(37,289 |
) |
|
|
(73.0 |
) |
|
|
(99.5 |
) |
Gross (loss) profit |
|
|
(77 |
) |
|
|
(60.2 |
) |
|
|
13,769 |
|
|
|
27.0 |
|
|
|
(100.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
|
1,872 |
|
|
|
1,462.5 |
|
|
|
4,165 |
|
|
|
8.2 |
|
|
|
(55.1 |
) |
Selling expenses |
|
|
3,658 |
|
|
|
2,857.8 |
|
|
|
1,631 |
|
|
|
3.2 |
|
|
|
124.3 |
|
Finance (income) expenses, net |
|
|
(170 |
) |
|
|
(132.8 |
) |
|
|
95 |
|
|
|
0.2 |
|
|
|
(278.9 |
) |
Total operating expenses |
|
|
5,360 |
|
|
|
4,187.5 |
|
|
|
5,891 |
|
|
|
11.5 |
|
|
|
(9.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
(5,437 |
) |
|
|
(4,247.7 |
) |
|
|
7,878 |
|
|
|
15.4 |
|
|
|
(169.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses, net |
|
|
(2,769 |
) |
|
|
(2,163.3 |
) |
|
|
(1,161 |
) |
|
|
2.3 |
|
|
|
138.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses, net |
|
|
(2,769 |
) |
|
|
(2,163.3 |
) |
|
|
(1,161 |
) |
|
|
2.3 |
|
|
|
138.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before provision for income taxes |
|
|
(8,206 |
) |
|
|
(6,410.9 |
) |
|
|
6,717 |
|
|
|
13.2 |
|
|
|
(222.2 |
) |
Provision for income taxes |
|
|
– |
|
|
|
– |
|
|
|
1,436 |
|
|
|
2.8 |
|
|
|
(100.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income |
|
$ |
(8,206 |
) |
|
|
(6,410.9 |
) |
|
$ |
5,281 |
|
|
|
10.3 |
|
|
|
(255.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(93 |
) |
|
|
(72.7 |
) |
|
|
(29 |
) |
|
|
(0.1 |
) |
|
|
220.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income |
|
$ |
(8,299 |
) |
|
|
(6,483.6 |
) |
|
$ |
5,252 |
|
|
|
10.3 |
|
|
|
(258.0 |
) |
Revenues: Revenues were approximately $128,000 and
approximately $51.1 million for the six months ended June 30, 2020,
and 2019, respectively. The decrease in revenues of approximately
$50.9 million or 99.7% is due primarily to business interruptions
arising from COVID-19. During the six months ended June 30, 2020
and 2019, all revenue was generated in the PRC. During the period
of six months ended June 30, 2020, revenues were mainly
attributable to the sales of smart watches, health foods, and
cosmetics products, representing 50.3%, 9.4%, and 1.3% of revenues,
respectively. During to the same period of 2019, revenues were
mainly attributable to the sales of health food, home appliances
and cosmetics products, representing 65.9%, 18.6% and 15.0% of
revenues, respectively. During the six months ended June 30, 2020
and 2019, no customers accounted for 10% or more of total
revenues.
Cost of revenues: Cost of revenues consists primarily
of the cost of merchandise sold, delivery cost, service fees, sales
incentives and commissions that are directly attributable to the
sale of certain designated products. Cost of revenues of
approximately $205,000 for the six months ended June 30, 2020
consisted of provision for slow-moving inventory of approximately
$167,000. The decrease in cost of revenues of approximately $37.1
million or 99.5% from the comparable period of 2019 was due mainly
to decrease in product sales as a result of COVID-19.
Gross (Loss) Profit. Gross loss for the six months
ended June 30, 2020 of approximately $77,000 was attributed mainly
to the provision for slowing-moving inventory of $167,000. Gross
profit for the six months ended June 30, 2019 of approximately
$13.8 million was attributed mainly to revenues of approximately
$51.1 million.
General and Administrative Expenses. General and
administrative expenses (“G&A expenses”) consist primarily of
costs in salary and benefits for our general administrative and
management staff, facilities costs, depreciation expenses,
professional fees, audit fees, and other miscellaneous expenses
incurred in connection with general operations. G&A expenses
decreased 55.1% or approximately $2.3 million from approximately
$4.2 million for the six months ended June 30, 2019 was due
primarily to the decrease in advisory fees, salary and
benefits.
Selling Expenses. Selling expenses consist
mainly of payroll and benefits for employees involved in the sales
and distribution functions, meeting/event fees, advertisement, and
marketing and selling expenses that are related to events and
activities at the Company’s service centers designed to promote
product sales. Selling expenses increased by 124.3% or
approximately $2.0 million to approximately $3.7 million in the six
months ended June 30, 2020 from approximately $1.6 million in
the same period of 2019. The increase was due mainly to costs
incurred in marketing and other promotional activities (such as
product exhibition in various regions) in the first half year of
2020.
Finance (Income) Expenses, net. Finance income
represents interest income from bank and related bank products, net
of service fees related to the use of third-party online payment
platforms. Finance expenses consist mainly of service fees related
to the use of third-party online payment platforms, bank fees and
interest expenses related to borrowings; net of interest income
from bank and related bank products. Total net financial income and
expense were approximately $170,000 and 95,000 for the six months
ended June 30, 2020, and 2019, respectively. The increase in net
financial income was due mainly to interest income earned in the
six months period ended June 30, 2020.
Operating (loss) income. Operating loss was
approximately $5.4 million for the six months ended June 30, 2020,
compared to approximately $7.9 million of operating income for the
same period of 2019. The decrease in operating income in 2020 was
due primary to the significant decline in revenues in 2020 due to
the impact of COVID-19.
Total other expenses, net. Other income consists
primarily of income from the administration of Beijing Luji’s
online marketplace. Other expenses consist mainly of estimated tax
penalties and charitable contributions. Other expense of
approximately $2.8 million for the six months ended June 30, 2020
consisted mainly of donation to Binzhou Red Cross Society for
approximately $1.4 million and estimated tax penalties related to
unpaid VAT and income taxes of approximately $1.5 million.
Provision for income taxes. Provision for income
taxes was $0 for the six months ended June 30, 2020, compared to
approximately $1.4 million for the same period of 2019.
Net (loss) income. As a result of the factors
described above, net loss was approximately 8.2 million for the six
months ended June 30, 2020, a decrease of approximately $13.5
million from approximately $5.3 million of net income for the same
period of 2019.
Comprehensive Loss (Income). Comprehensive loss was
approximately $8.3 million for the six months ended June 30, 2020,
as compared to other comprehensive income of approximately $5.3
million for the six months ended June 30, 2019.
Results of Operations for the Years Ended December 31, 2019 and
2018
The following table sets forth certain operational data for the
years ended December 31, 2019, and 2018:
(in
thousands)
|
|
Years ended December 31, |
|
|
Percentage |
|
|
|
2019 |
|
|
2018 |
|
|
Change |
|
|
|
Dollars |
|
|
% |
|
|
Dollars |
|
|
% |
|
|
% |
|
Revenues |
|
$ |
58,233 |
|
|
|
100.0 |
|
|
$ |
53,445 |
|
|
|
100.0 |
|
|
|
9.0 |
|
Cost of revenues |
|
|
41,764 |
|
|
|
71.7 |
|
|
|
38,762 |
|
|
|
72.5 |
|
|
|
7.7 |
|
Gross profit |
|
|
16,469 |
|
|
|
28.3 |
|
|
|
14,683 |
|
|
|
27.5 |
|
|
|
12.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
expenses |
|
|
8,111 |
|
|
|
13.9 |
|
|
|
3,929 |
|
|
|
7.4 |
|
|
|
106.5 |
|
Selling expenses |
|
|
3,596 |
|
|
|
6.2 |
|
|
|
1,689 |
|
|
|
3.2 |
|
|
|
112.9 |
|
Finance expenses (income),
net |
|
|
83 |
|
|
|
0.1 |
|
|
|
(29 |
) |
|
|
(0.1 |
) |
|
|
391.8 |
|
Total operating
expenses |
|
|
11,790 |
|
|
|
20.2 |
|
|
|
5,589 |
|
|
|
10.5 |
|
|
|
111.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
4,679 |
|
|
|
8.0 |
|
|
|
9,094 |
|
|
|
17.0 |
|
|
|
(48.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses, net |
|
|
(2,378 |
) |
|
|
(4.1 |
) |
|
|
(1,882 |
) |
|
|
(3.5 |
) |
|
|
26.4 |
|
Loss from equity
investment |
|
|
(31 |
) |
|
|
(0.1 |
) |
|
|
0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses,
net |
|
|
(2,409 |
) |
|
|
(4.1 |
) |
|
|
(1,882 |
) |
|
|
(3.5 |
) |
|
|
28.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for
income taxes |
|
|
2,270 |
|
|
|
3.9 |
|
|
|
7,212 |
|
|
|
13.5 |
|
|
|
(68.5 |
) |
Provision for income
taxes |
|
|
931 |
|
|
|
1.6 |
|
|
|
1,349 |
|
|
|
2.5 |
|
|
|
(31.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,339 |
|
|
|
2.3 |
|
|
$ |
5,863 |
|
|
|
11.0 |
|
|
|
(77.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment |
|
|
(164 |
) |
|
|
(0.3 |
) |
|
|
(721 |
) |
|
|
(1.3 |
) |
|
|
(77.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
1,175 |
|
|
|
2.0 |
|
|
$ |
5,142 |
|
|
|
9.6 |
|
|
|
(77.1 |
) |
Revenues. Revenues were approximately $58.2 million
and $53.4 million for the year ended December 31, 2019, and 2018,
respectively, representing an increase of approximately $4.8
million, or 9.0%. The increase revenues is due mainly to the
increase in product sales and increase in the number of platform
users. For the years ended December 31, 2019 and 2018, revenues
were derived mainly from the sale of home appliances, health foods
and cosmetics products in the PRC. During the twelve months ended
December 31, 2019, and 2018, no customers accounted for 10% or more
of our total net revenues.
Cost of revenues. Cost of revenues consists primarily
of the cost of merchandise sold, delivery cost, service fees, sales
incentives and commissions that are directly attributable to the
sale of certain designated products. Cost of revenues increased to
approximately $41.8 million for the year ended December 31, 2019
from $38.8 million for the same period in 2018. An increase of
approximately $3 million or 7.7% due mainly higher product cost and
commission.
Gross Profit. Gross profit increased from
approximately $14.7 million for the year ended December 31, 2018 to
approximately $16.5 million for the same period in 2019. Gross
profit margin increased from 27.5% for the year ended December 31,
2018 to 28.3% for the same period in 2019 due mainly to favorable
product mix.
Selling Expenses. Selling expenses consist mainly of
payroll and benefits for employees involved in the sales and
distribution functions, meeting/event fees, advertisement, and
marketing and selling expenses that are related to events and
activities at the Company’s service centers designed to promote
product sales. Selling expenses increased by approximately $1.9
million to $3.6 million in the year ended December 31,
2019 from $1.7 million in the same period of 2018. The
increase was due mainly to the increase of promotion and marketing
events in 2019.
General and administrative Expenses. G&A expenses
consist primarily of costs in salary and benefits for our general
administrative and management staff, facilities costs, depreciation
expenses, professional fees, audit fees, and other miscellaneous
expenses incurred in connection with general operations. G&A
increased by approximately $4.2 million from $3.9 million for
the year ended December 31, 2018 to approximately $8.1
million in the same period of 2019. The increase was due mainly to
the increase of advisory fees of approximately $1 million and
higher bad debt expense of approximately $1.4 million in 2019.
Finance Expenses, net. Finance expenses consist
mainly of service fees related to the use of third-party online
payment platforms, bank fees and interest expenses related to
borrowings; net of interest income from bank and related bank
products. The increase in finance expenses was due mainly to
increase in the use of third-party online payment platforms in
2019.
Operating Income. Operating income was approximately
$4.7 million for the year ended December 31, 2019, compared to
approximately $9.1 million for the same period of 2018. The
decrease in operating income in 2019 was primary due to the
increase in operating expenses.
Total other expenses, net. Other expenses consist
mainly of estimated tax penalties for unpaid VAT and income taxes
and charitable contributions. For the year ended December 31, 2019,
other expenses consisted mainly of estimated tax penalties. For the
year ended December 31, 2018, other expenses consisted mainly of
charitable contributions.
Provision for Income Taxes. Provision for income
taxes was approximately $0.9 million for the year ended December
31, 2019, compared to $1.3 million for the same period of 2018. The
decrease was attributable mainly to lower pre-tax income.
Net Income. As a result of the factors described
above, net income was approximately $1.3 million for the year ended
December 31, 2019, a decrease of $4.5 million from net income $5.9
million for the same period of 2018.
Comprehensive Income. Comprehensive income was $1.2
million for the year ended December 31, 2019, as compared to
comprehensive income of $5.1 million for the year ended December
31, 2018. The decrease was due mainly to higher operating expenses
in 2019.
Liquidity and Capital Resources for HJ (Acquired
Company)
Six Months Ended June 30, 2020 Compared to Six Months Ended
June 30, 2019
As of June 30, 2020 and December 31, 2019, we had cash and cash
equivalents of approximately $5.9 million and $28.9 million,
respectively.
The following table sets forth a summary of our cash flows for the
periods as indicated:
|
|
For the Six Months ended |
|
|
|
June 30, |
|
|
|
2020 |
|
|
2019 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Net cash (used in) provided by operating activities |
|
$ |
(19,233,677 |
) |
|
$ |
32,250,730 |
|
Net
cash (used in) investing activities |
|
$ |
(1,773,998 |
) |
|
$ |
(11,758,601 |
) |
Net
cash (used in) financing activities |
|
$ |
(1,742,847 |
) |
|
$ |
(110,832 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
$ |
(269,063 |
) |
|
$ |
(183,787 |
) |
Net
(decrease) increase in cash and cash equivalents |
|
$ |
(23,019,585 |
) |
|
$ |
20,197,510 |
|
Cash and cash equivalents at beginning of period |
|
$ |
28,919,817 |
|
|
$ |
18,019,617 |
|
Cash and cash equivalents at end of period |
|
$ |
5,900,232 |
|
|
$ |
38,217,127 |
|
The following table sets forth a summary of our working
capital:
|
|
June
30, |
|
|
December
31, |
|
|
|
|
|
|
|
|
|
2020 |
|
|
2019 |
|
|
Variation |
|
|
% |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets |
|
$ |
14,864,376 |
|
|
$ |
31,095,695 |
|
|
$ |
(16,231,319 |
) |
|
|
(52.2 |
) |
Total Current Liabilities |
|
$ |
26,697,505 |
|
|
$ |
32,354,228 |
|
|
$ |
(5,656,723 |
) |
|
|
(17.5 |
) |
Working Capital |
|
$ |
(11,833,129 |
) |
|
$ |
(1,258,533 |
) |
|
$ |
(10,574,596 |
) |
|
|
840.2 |
|
Working Capital. Total working capital as of June 30, 2020
amounted to approximately negative $11.8 million, as compared to
approximately negative $1.3 million as of December 31, 2019. The
deterioration in working capital was due mainly to a decline in net
assets.
For the six months ended June 30, 2020, cash used in operating
activities was approximately $19.2 million. For six months ended
June 30, 2019, cash provided by operating activities was
approximately $32.3 million. The change of approximately $51.5
million was due primary to net changes in (1) advances to suppliers
of approximately $5.7 million, (2) inventory of approximately
$132,000, (3) due from related parties, net of approximately $10.3
million, (4) prepayment and other current assets of approximately
$921,000, (5) advances from customers of approximately $5.6
million, (6) taxes payable of approximately $9.3 million, (7)
accrued expenses of approximately $2.8 million, and (8) other
payables and other current liabilities of approximately $3.4
million.
Net cash used in investing activities was approximately $1.8
million for the six months ended June 30, 2020, as compared to net
cash used in investing activities of $11.8 million for the six
months ended June 30, 2019. The change of approximately $10 million
was due primary to net changes in (1) purchases of property and
equipment of approximately $1.8 million, and (2) investment in
equity investee of $11.7 million.
Net cash used in financing activities was approximately $1.7
million for the six months ended June 30, 2020, as compared to net
cash used in financing activities of approximately $110,000 for the
six months ended June 30, 2019. The increase was due mainly to
increase of repayment of loans of approximately $1 million and
increase in dividends paid of approximately $616,000.
Year Ended December 31, 2019 Compared to Year Ended December
31, 2018
The following table sets forth a summary of our cash flows for the
periods as indicated:
|
|
For
the Year ended |
|
|
|
December 31, |
|
|
|
2019 |
|
|
2018 |
|
|
|
(Audited) |
|
|
(Audited) |
|
Net cash provided by
operating activities |
|
$ |
24,730,684 |
|
|
$ |
12,765,264 |
|
Net cash (used in) investing
activities |
|
$ |
(11,581,326 |
) |
|
$ |
(188,250 |
) |
Net cash (used in) financing
activities |
|
$ |
(1,865,742 |
) |
|
$ |
(754,761 |
) |
Effect of exchange rate changes on
cash and cash equivalents |
|
$ |
(383,416 |
) |
|
$ |
(824,990 |
) |
Net increase in cash and cash
equivalents |
|
$ |
10,900,200 |
|
|
$ |
10,997,263 |
|
Cash and cash equivalents at
beginning of year |
|
$ |
18,019,617 |
|
|
$ |
7,022,354 |
|
Cash and cash equivalents at end of
year |
|
$ |
28,919,817 |
|
|
$ |
18,019,617 |
|
The following table sets forth a summary of our working
capital:
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
|
|
|
2019 |
|
|
2018 |
|
|
Variation |
|
|
% |
|
|
|
(Audited) |
|
|
(Audited) |
|
|
|
|
|
|
|
|
|
Total Current Assets |
|
$ |
31,095,695 |
|
|
$ |
33,101,338 |
|
|
$ |
(2,005,643 |
) |
|
|
(6.1 |
) |
Total Current Liabilities |
|
$ |
32,354,228 |
|
|
$ |
19,344,592 |
|
|
$ |
13,009,636 |
|
|
|
67.3 |
|
Working Capital |
|
$ |
(1,258,533 |
) |
|
$ |
13,756,746 |
|
|
$ |
(15,015,279 |
) |
|
|
(109.1 |
) |
Working Capital. Total working capital as of December 31,
2019 amounted to approximately negative $1.3 million, as compared
to approximately negative $13.8 million as of December 31, 2018.
The deterioration in working capital was due mainly to higher
operating expenses in year 2019.
Net cash generated from operating activities was $24.7 million for
the year ended December 31, 2019, and consisted primarily of a net
income of $3.1 million, adjusted for depreciation and amortization
of $0.2 million, a decrease in advances from customers of $3.5
million, an increase in accrued expenses and other liabilities of
$4.3 million, an increase in taxes payable of $9.0 million, a
decrease in prepaid expenses and other assets of $1.5 million, an
increase in due from related parties of $10.2 million, a decrease
in advances to suppliers of $0.3 million.
Net cash generated from operating activities was $12.8 million for
the year ended December 31, 2018, and consisted primarily of a net
income of $5.1 million, adjusted for depreciation and amortization
of $0.1 million, an increase in advances from customers of $3.1
million, an increase in accrued expenses and other liabilities of
$5.3 million, an increase in taxes payable of $9.9 million, an
increase in prepaid expenses and other assets of $1.5 million, an
increase in inventory of $1.1 million, a decrease in due from
related parties of $7.7 million, an increase in advances to
suppliers of $0.5 million.
Net cash used in investing activities for the fiscal year ended
December 31, 2019, was $11.6 million which was used for purchase of
equity investment. Net cash used in investing activities was $0.2
million for the year ended December 31, 2018.
Net cash used in financing activities for the fiscal year ended
December 31, 2019, was approximately $1.9 million which was used
primarily for the distribution of dividends. Net cash used in
financing activities for the fiscal year ended December 31, 2018,
was approximately $0.8 million which was used for the distribution
of dividends.
Off-Balance Sheet Arrangements
We have not entered into any financial guarantees or other
commitments to guarantee the payment obligations of any third
parties. In addition, we have not entered into any derivative
contracts that are indexed to our own shares and classified as
shareholders’ equity, or that are not reflected in our financial
statements. Furthermore, we do not have any retained or contingent
interest in assets transferred to an unconsolidated entity that
serves as credit, liquidity or market risk support to such entity.
Moreover, we do not have any variable interest in an unconsolidated
entity that provides financing, liquidity, market risk or credit
support to us or engages in leasing, hedging or research and
development services with us.
Critical Accounting Policies and Estimates
Basis of Presentation
The accompanying consolidated financial statements and related
notes have been prepared in accordance with accounting principles
generally accepted in the United States of America (“US GAAP”) and
pursuant to the rules and regulations of the U.S. Securities and
Exchange Commission (“SEC”).
Principles of Consolidation
The accompanying consolidated financial statements include the
financial statements of HanJiao International Holding Limited (“HJ”
or “HanJiao”), its wholly-owned subsidiaries, WOFE, the VIE and its
subsidiaries. All inter-company transactions and balances have been
eliminated upon consolidation.
VIE Agreements with Beijing Hongtao
HanJiao does not have a direct equity ownership interest in Beijing
Luji but relies on the VIE Agreements to control and receive the
economic benefits of Beijing Luji’s business. The Company relies on
contractual arrangements with its variable interest entity to
operate its online to office (O2O) business in the PRC in which
foreign investment is restricted or prohibited. The O2O platform
integrates the Company’s e-commerce platform with physical outlets
(service centers) to connect consumers and merchants in a dynamic
marketplace. Pursuant to the VIE Agreements, HanJiao, through
Beijing Hongtao, is able to exercise effective control over, bears
the risks of, enjoys substantially all of the economic benefits its
VIE and its subsidiary and has an exclusive option to purchase all
or part of the equity interests in the VIE when and to the extent
permitted by PRC law. The Company’s management concluded that
Beijing Luji and its subsidiary are variable interest entities of
the Company and Beijing Hongtao is the primary beneficiary of
Beijing Luji and its subsidiary. As such, the financial statements
of the VIE and its subsidiary are included in the consolidated
financial statements of the Company. Each of the VIE Agreements is
described in detail below:
Exclusive Consulting and Services Agreement
Pursuant to the Exclusive Consulting and Services Agreement signed
on May 15, 2019, between Beijing Hongtao and Beijing Luji, Beijing
Hongtao agrees to provide various services exclusively to Beijing
Luji including development and research services for
business-related software, pre-job and on-the-job training
services, technology development and transfer services, public
relations services, market research and consulting services, short
and medium-term market development and planning services, various
technical support services, consulting services related to business
compliance, organization and planning services related to marketing
and membership activities. For services rendered to Beijing Luji by
Beijing Hongtao under this agreement, Beijing Hongtao is
entitled to collect 100% of the net income of Beijing Luji.
The Exclusive Consulting and Services Agreement shall remain in
effect for ten years from the date of signing unless it is
terminated by Beijing Hongtao in advance or upon the mutual
agreement of both parties. Beijing Luji may terminate the agreement
subject to payment of all service fees for completed services and
compensation to Beijing Hongtao for losses. Prior to the
termination of this agreement, the parties may extend the term of
this agreement in accordance with the requirements of Beijing
Hongtao.
Business Operations Agreement
Pursuant to the Business Operations Agreement signed on May 15,
2019, by and among the Beijing Luji shareholders, Beijing Luji and
Beijing Hongtao. Beijing Luji agreed not to conduct any
transactions that may materially affect its assets, business,
personnel, obligations, rights or company operations, without the
prior written consent of Beijing Hongtao. Beijing Hongtao agrees to
provide advice to Beijing Luji from time to time regarding the
appointment and dismissal of employees, daily management and
financial management systems. Beijing Luji and Beijing Luji
shareholders also agree to appoint designees of Beijing Hongtao to
serve as board of directors and on the senior management team of
Beijing Luji. In connection with this agreement, the Beijing Luji
shareholders executed a power of attorney of the Business
Operations Agreement in which the Beijing Luji shareholders shall
irrevocably authorize the designated personnel of Beijing Hongtao
to exercise their shareholders’ rights on their behalf, including
voting rights at the shareholders' meeting in the name of the
shareholders. The Beijing Luji shareholders further agree that they
will replace the person authorized in the above power of attorney
at any time upon Beijing Hongtao's request. The Business Operations
Agreement shall remain in effect for ten years from the date of
signing unless earlier terminated by Beijing Hongtao by delivering
30 days prior written notice or upon the mutual agreement of all
parties. Beijing Luji and the Beijing Luji shareholders do not have
the right to terminate the agreement unilaterally. Upon the
termination of any agreement between Beijing Hongtao and Beijing
Luji, Beijing Hongtao shall be entitled to terminate all agreements
between such parties.
Equity Disposal Agreement
Pursuant to the Equity Disposal Agreement signed on May 15, 2019,
by and among the Beijing Luji shareholders, Beijing Luji and
Beijing Hongtao, the Beijing Luji shareholders granted to Beijing
Hongtao an exclusive option right to purchase all of their equity
interests in Beijing Luji to secure the execution of the Equity
Pledge Agreement in which the details are set out below. Under
the terms of this agreement, Beijing Hongtao has an exclusive right
to purchase, to the extent permitted under the PRC law, at any
time, all or any part of the equity interests of the Beijing Luji
shareholders in Beijing Luji or an option to transfer the equity
interests in Beijing Luji to any third party designated by Beijing
Hongtao. The option price shall be the minimum permitted by
the laws and regulations of the PRC. The Equity Disposal Agreement
has a term of ten years from the date of signing, and it may be
renewed at Beijing Hongtao’s discretion.
Equity Pledge Agreement
Pursuant to the Equity Pledge Agreement signed on May 15, 2019, by
and among the Beijing Luji shareholders and Beijing Hongtao, the
Beijing Luji shareholders pledged all of their equity interests in
Beijing Luji to Beijing Hongtao to guarantee the performance of
Beijing Luji’s obligations under the Exclusive Consulting and
Services Agreement, the Equity Disposal Agreement and the Business
Operations Agreement. Under the terms of the agreement, in
the event that Beijing Luji or its shareholders breach their
respective contractual obligations under the Exclusive Consulting
and Services Agreement, the Equity Disposal Agreement and the
Business Operations Agreement, or upon occurrence of any event of
default as set forth in the Equity Pledge Agreement, Beijing
Hongtao shall be entitled to exercise its rights under this
agreement, subject to certain cure periods. The Beijing Luji
shareholders further agree not to dispose of the pledged equity
interests or take any actions that would prejudice Beijing
Hongtao’s interest.
The Equity Pledge Agreement shall be effective until Beijing Luji
and the Beijing Luji shareholders have performed all of their
obligations under the Exclusive Consulting and Services Agreement,
the Equity Disposal Agreement and the Business Operations Agreement
and the written approval of Beijing Hongtao has been obtained.
Agency Agreement
Pursuant to the Agency Agreement signed on May 15, 2019, among the
Beijing Luji shareholders and Beijing Hongtao, the Beijing Luji
shareholders granted Beijing Hongtao an irrevocable license for the
longest period permitted under law the right to exercise the voting
rights of the Beijing Luji shareholders in accordance with the laws
of the PRC and the Articles of Association of Beijing Luji. During
the term of this Agreement, none of the Beijing Luji shareholders
shall be entitled to transfer their interest in Beijing Luji to any
third party other than entities or individuals designated by
Beijing Hongtao. This Agency Agreement shall be irrevocable and
continuously valid from the date of execution of this Agency
Agreement, and it can be terminated at Beijing Hongtao’s
discretion.
Use of Estimates
The preparation of the
consolidated financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period.
Significant accounting estimates reflected in HanJiao’s
consolidated financial statements include the allowance for
doubtful accounts and slow-moving inventory, and the useful lives
of property and equipment. Since the use of estimates is an
integral component of the financial reporting process, actual
results could differ from those estimates.
Fair Value of Financial Instruments
HanJiao follows Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) FASB ASC Section 820,
“Fair Value Measurements and Disclosures.” ASC 820 clarifies the
definition of fair value, prescribes methods for measuring fair
value, and establishes a fair value hierarchy to classify the
inputs used in measuring fair value as follows:
Level 1 applies to assets or liabilities for which there are quoted
prices in active markets for identical assets or liabilities.
Level 2 applies to assets or liabilities for which there are
inputs, other than quoted prices in level 1, that are
observable for the asset or liability such as quoted prices for
similar assets or liabilities in active markets; quoted prices for
identical assets or liabilities in markets with insufficient volume
or infrequent transactions (less active markets); or model-derived
valuations in which significant inputs are observable or can be
derived principally from, or corroborated by, observable market
data.
Level 3 applies to assets or liabilities for which there are
unobservable inputs to the valuation methodology that are
significant to the measurement of the fair value of the asset or
liability.
The carrying value of financial instruments included in current
assets and liabilities approximate their fair values because of the
short-term nature of these instruments.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, cash on deposit
and other highly liquid investments which are unrestricted as to
withdrawal or use, and which have original maturities of three
months or less when purchased. Beijing Luji maintains cash with
various financial institutions mainly in the PRC.
Risks and Uncertainties
The operations of Beijing Luji are located in the PRC. Accordingly,
its business, financial condition, and results of operations may be
influenced by the political, economic, and legal environment in the
PRC, as well as by the general state of the PRC economy. The
Company’s operations in the PRC are subject to special
considerations and significant risks not typically associated with
companies in North America and Western Europe. These include risks
associated with, among other factors, the political, economic and
legal environment and foreign currency restrictions. Beijing Luji’s
results may be adversely affected by changes in the political,
regulatory and social conditions in the PRC, and by changes in
governmental policies or interpretations with respect to laws and
regulations, anti-inflationary measures, currency conversion,
remittances abroad, and rates and methods of taxation, among other
things. Although the Company has not experienced losses from these
situations and believes that it is in compliance with existing laws
and regulations, changes in the future could affect the Company’s
interest in these entities.
Inventories
Inventories consist of finished goods and they are stated at the
lower of cost or net realizable value. Cost is determined using the
weighted average method. Beijing Luji periodically evaluates its
inventories and will record an allowance for inventories that are
either slow-moving, may not be saleable or whose cost exceeds its
net realizable value.
Advance to Suppliers
Advances to suppliers consist of payments to suppliers for finished
goods that have not been received by Beijing Luji. Beijing Luji
periodically evaluates and reviews its advance to suppliers to
determine whether its carrying value has been impaired.
Long-term Investment
Long-term investment consists mainly of Beijing Luji’s equity
investment for strategic or business development purposes. The
Company applies the equity method of accounting to account for an
equity investment, according to FASB ASC 323 “Investment—Equity
Method and Joint Ventures,” over which it has significant influence
but does not own a majority equity interest or otherwise control.
Under the equity method, Beijing Luji’s share of the profits or
losses of the equity investees are recorded in its consolidated
statements of income and comprehensive income.
Beijing Luji reviews its investment at least annually to determine
whether a decline in fair value to below the carrying value is
other-than-temporary. The primary factors Beijing Luji considers in
its determination are the duration and severity of the decline in
fair value; the financial condition, operating performance and the
prospects of the equity investee; and other company specific
information such as recent financing rounds. If the decline in fair
value is deemed to be other-than-temporary, the carrying value of
the investment will be written down to its fair value.
Property and Equipment, Net
Property and equipment are carried at cost and are depreciated on a
straight-line basis over the estimated useful lives of the
underlying assets. The cost of repairs and maintenance is expensed
as incurred; major replacements and improvements are capitalized.
When assets are retired or disposed of, the cost and accumulated
depreciation and amortization are removed from the accounts, and
any resulting gains or losses are included in income in the year of
disposition. Beijing Luji examines the possibility of decreases in
the value of its property and equipment, when events or changes in
circumstances reflect the fact that their recorded value may not be
recoverable.
Estimated useful lives are as follows, taking into account the
assets’ estimated residual value:
Classification |
|
Estimated
useful lives |
Vehicles |
|
10
years |
Office
equipment |
|
3
years |
Furniture
and fixtures |
|
3
years |
Software |
|
3
years |
Long-lived Assets
Finite-lived assets and intangibles are reviewed for impairment
testing when circumstances require. For purposes of evaluating the
recoverability of long-lived assets, when undiscounted future cash
flows will not be sufficient to recover an asset’s carrying amount,
the asset is written down to its fair value. The long-lived assets
of Beijing Luji that are subject to evaluation consist primarily of
property, plant and equipment, land use rights, and long-term
prepaid leases.
Revenue Recognition
On January 1, 2019, Beijing Luji adopted FASB ASC 606, Revenue from
Contracts with Customers using the modified retrospective method
for all contracts not completed as of the date of adoption.
Accordingly, revenue for the year ended December 31, 2019 was
presented under ASC 606, while comparative information has not been
restated and continues to be reported under the accounting
standards in effect for the prior period.
The core principle underlying the revenue recognition standard is
that Beijing Luji will recognize revenue to represent the transfer
of products or services to customers in an amount that reflects the
consideration to which Beijing Luji expects to be entitled in such
exchange. This will require Beijing Luji to identify contractual
performance obligations and determine whether revenue should be
recognized at a point in time or over time, based on when control
of the product or the benefit of the services transfers to the
customer. Under the guidance of ASC 606, Beijing Luji is required
to (a) identify the contract with a customer,
(b) identify the performance obligations in the contract,
(c) determine the transaction price, (d) allocate the
transaction price to the performance obligations in the contract
and (e) recognize revenue when (or as) Beijing Luji satisfies
its performance obligations.
The adoption of ASC 606 did not significantly change (i) the
timing and pattern of revenue recognition for Beijing Luji’s
revenues, and (ii) the presentation of revenues as gross
versus net. Therefore, the adoption of ASC 606 did not have a
significant impact on Beijing Luji’s financial position, results of
operations, equity or cash flows as of the adoption date and for
the year ended December 31, 2019. Persuasive evidence of an
arrangement is demonstrated via sales orders; and the consideration
is fixed upon the initiation of the purchase order by the
customer.
Product Sales: Beijing Luji is primarily engaged in the sale
of healthcare and other related products (such as nutrition or
dietary supplements; water or air purifiers) to the middle aged and
elderly market segments in the PRC. Beijing Luji sells these
products under its own “Fozgo” brand and related healthcare
products for other vendors through its internet platform and
offline service centers. Revenue from product sales is recognized
when control passes to the customer, which generally occurs at a
point in time when products are delivered. Allowance for sales
returns, that reduces revenues, are estimated based on historical
experience. Revenues are recorded net of value-added taxes,
business taxes, discounts and surcharges and allowance for
returns.
Beijing Luji collects cash from customers before or upon delivery
of products mainly through banks and third-party online payment
platforms (such as Alipay). Cash collected from customers before
product delivery is recognized as advance from customers.
Cost of Revenues
Cost of revenues consists primarily of the cost of merchandise
sold, delivery cost, service fees, sales incentives and commissions
that are directly attributable to the sale of certain designated
products.
General and Administrative Expenses
General and administrative expenses consist mainly of payroll and
related costs for employees involved in general corporate
functions, including accounting, finance, tax, legal and human
resources, professional fees and other general corporate expenses
as well as costs associated with the use by these functions of
facilities and equipment, such as depreciation and rental
expenses.
Selling Expenses
Selling expenses consist mainly of payroll and benefits related
costs for employees involved in the sales and distribution
functions, meeting/event fees, advertisement and marketing and
selling expenses that are related to events and activities at the
Company’s service centers designed to promote product sales.
Finance Expenses (Income)
Finance expenses consist mainly of service fees related to the use
of third-party online payment platforms, bank fees and interest
expenses related to borrowings; net of interest income from bank
and related bank products.
Other Income (Expenses)
Other income consists primarily of income from the administration
of the online marketplace. Other expenses consist mainly of
estimated tax penalties and charitable contributions.
Income Taxes
Beijing Luji follows FASB ASC Topic 740, “Income Taxes,” which
requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this
method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases
of assets and liabilities and their financial reporting amounts at
each period end based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to
affect taxable income. Deferred tax assets are also recognized for
operating losses that are available to offset the future taxable
income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be
realized.
Beijing Luji follows FASB ASC 740-10-25, “Accounting for
Uncertainty in Income Taxes”, which requires income tax positions
to meet a more-likely-than-not recognition threshold to be
recognized in the financial statements. Under ASC 740-10-25, tax
positions that previously failed to meet the more-likely-than-not
threshold should be recognized in the first subsequent financial
reporting period in which that threshold is met. Previously
recognized tax positions that no longer meet the
more-likely-than-not threshold should be derecognized in the first
subsequent financial reporting period in which that threshold is no
longer met. The Company believes that it does not have any
uncertain tax positions. It is not expected that there will be any
uncertain tax position within 12 months of December 31, 2019.
The application of tax laws and regulations is subject to legal and
factual interpretation, judgment and uncertainty. Tax laws and
regulations themselves are subject to change as a result of changes
in fiscal policy, changes in legislation, the evolution of
regulations and court rulings. Therefore, the actual liability may
be materially different from our estimates, which could result in
the need to record additional tax liabilities or potentially
reverse previously recorded tax liabilities or the deferred tax
asset valuation allowance. Due to the lack of temporary differences
between the tax bases and their financial reporting amounts,
Beijing Luji has not recognized any deferred tax assets or
liabilities as of December 31, 2019 and 2018, respectively.
Enterprise Income Tax
Under the Provisional Regulations of the PRC concerning income tax
on enterprises promulgated by the PRC (the “EIT Law”), Beijing Luji
was qualified as a high and new technology enterprise starting in
2018, and enjoys a preferential tax rate of 15% for 3 years
expiring in 2020.An entity can re-apply to be a high and new
technology enterprise when the prior certificate expires. Income
tax is payable at a rate of 15% of our taxable income for the six
months ended June 30, 2020 and 2019 and for the years ended
December 31, 2019 and 2018.
Value-Added Tax
Prior to May 1, 2018, the Company was subject to value-added tax
(“VAT”) at rates of 6% and 17% on revenue generated from providing
services and products, respectively. Starting from May 1, 2018, the
VAT rate for revenue generated from providing products was changed
from 17% to 16%. Starting from April 1, 2019, the VAT rate for
revenue generated from providing products changed from 16% to 13%.
VAT is reported as a reduction of revenue when incurred. Entities
that are VAT general taxpayers are allowed to offset qualified
input VAT paid to suppliers against their output VAT liabilities.
The net VAT balance between input VAT and output VAT is recorded in
taxes payable.
Foreign Currency Translation
The functional currency of the Beijing Luji’s operations in the PRC
is the Chinese Yuan or Renminbi (“RMB”). The consolidated financial
statements are translated into U.S. dollars (“USD”) using the
period end rates of exchange for assets and liabilities, equity is
translated at historical exchange rates, and average rates of
exchange (for the period) are used for revenues and expenses and
cash flows. As a result, amounts relating to assets and liabilities
reported on the statements of cash flows may not necessarily agree
with the changes in the corresponding balances on the balance
sheets. Translation adjustments resulting from the process of
translating the local currency financial statements into USD are
included in determining comprehensive income (loss). Transactions
denominated in foreign currencies are translated into the
functional currency at the exchange rates prevailing on the
transaction dates. Assets and liabilities denominated in foreign
currencies are translated into the functional currency at the
exchange rates prevailing at the balance sheet date with any
transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than
the functional currency are included in the results of operations
as incurred.
All of Beijing Luji’s revenue transactions are transacted in its
functional currency. Beijing Luji does not enter into any material
transaction in foreign currencies. Transaction gains or losses have
not had, and are not expected to have, a material effect on the
results of operations of the Company.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of two components, net income
(loss) and other comprehensive income (loss). Other comprehensive
income (loss) refers to revenue, expenses, gains and losses that
under GAAP are recorded as an element of shareholders’ equity but
are excluded from net income (loss). Other comprehensive income
(loss) consists entirely of foreign currency translation
adjustments resulting from Beijing Luji’s translation of its
financial statements from its functional currency into USD.
Earnings (loss) Per Share
Basic earnings (loss) per share is computed by dividing net income
(loss) by the weighted-average number of ordinary shares
outstanding during the period. Diluted earnings per share is
computed by dividing net income by the weighted-average number of
ordinary shares plus dilutive potential ordinary shares outstanding
during the period. When Beijing Luji has a loss, the potential
ordinary shares are not included since their inclusion would be
anti-dilutive. For the years ended December 31, 2019 and 2018,
there were no potential ordinary shares, such as options, warrants
or conversion rights, that would have a dilutive effect on the
Company’s earnings per share.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Amendments to the
ASC 842 Leases. This update requires a lessee to recognize an asset
and liability (the lease liability) arising from operating leases
on the balance sheet for the lease term. When measuring assets and
liabilities arising from a lease, a lessee (and a lessor) should
include payments to be made in optional periods only if the lessee
is reasonably certain to exercise an option to extend the lease or
not to exercise an option to terminate the lease. Leases with a
twelve months or less lease term, a lessee is permitted to make an
accounting policy election not to recognize lease assets and
liabilities. If a lessee makes this election, it should recognize
lease expense on a straight-line basis over the lease term. In
transition, this update will be effective for public entities for
fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. The Company expects to adopt of
ASU 2016-02 when it completes its proposed transaction with a
public entity, and does not expect the adoption of ASU 2016-02 to
have a material impact on its financial statements.
In July 2017, the FASB Issued ASU 2017-11, Earnings Per Share
(Topic 260), Distinguishing Liabilities from Equity (Topic 480) and
Derivatives and Hedging (Topic 815). The amendments in Part I of
the Update change the reclassification analysis of certain
equity-lined financial instruments (or embedded features) with down
round features. The amendments in Part II of this Update
recharacterize the indefinite deferral of certain provisions of
Topic 480 that now are presented as pending content in the
Codification, to a scope exception. For public business entities,
the amendments in Part I of this Update are effective for fiscal
years, and interim periods within those fiscal years, beginning
after December 15, 2018. For all other entities, the amendments in
Part I of this Update are effective for fiscal years beginning
after December 15, 2019, and interim periods within fiscal years
beginning after December 15, 2020. Early adoption is permitted for
all entities, including adoption in an interim period. If an entity
early adopts the amendments in an interim period, any adjustments
should be reflected as of the beginning of the fiscal year that
includes that interim period. The amendments in Part II of this
Update do not require any transition guidance because those
amendments do not have an accounting effect. The Company does not
believe the adoption of this ASU would have a material effect on
the Company’s consolidated financial statements.
In August 2018, the FASB Accounting Standards Board issued ASU No.
2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework
Changes to the Disclosure Requirements for Fair Value Measurement”
(“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements
on fair value measurements. ASU 2018-13 is effective for public
entities for fiscal years beginning after December 15, 2019, with
early adoption permitted for any removed or modified disclosures.
The removed and modified disclosures will be adopted on a
retrospective basis and the new disclosures will be adopted on a
prospective basis. The Company does not expect this guidance will
have a material impact on its consolidated financial
statements.
The Company believes that other recent accounting pronouncement
will not have a material effect on the Company’s consolidated
financial position, results of operations and cash flows.
PROPERTIES
We maintain our approximately 303 square meter corporate office at
Room 1206, 12th Floor, 301, 3-17 F, Building 5, Block 1, Hangfeng
Road, Fengtai District, Beijing, The PRC through a sublease with
Beijing Hongtao. According to the sublease, we are obligated to pay
a monthly rent of approximately RMB 51,713 (approximately US
$7,700) during the term of 2 years. The lease expires July 19,
2022. The foregoing description of the lease is qualified in its
entirety by reference to the Lease Agreement, an English
translation of which is filed as Exhibit 10.8 to this Current
Report and incorporated herein by reference.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth certain information concerning the
number of shares of our common stock owned beneficially as of
August 6, 2020 by: (i) each person (including any group) known to
us to own more than five percent (5%) of any class of our voting
securities, (ii) each of our directors and each of our named
executive officers (as defined under Item 402(m)(2) of Regulation
S-K), and (iii) officers and directors as a group. Unless otherwise
indicated, the shareholders listed possess sole voting and
investment power with respect to the shares shown except to the
extent voting power may be shared with a spouse. Unless otherwise
indicated, the address for each director and executive officer
listed is: c/o AS Capital, Inc., Room 1206, 12th Floor,
301, 3-17 F, Building 5, Block 1, Hangfeng Road, Fengtai District,
Beijing, China.
|
|
Common Stock Beneficially
Owned |
|
Name and Address of Beneficial
Owner |
|
Number of Shares
and Nature of
Beneficial
Ownership |
|
|
Percentage of
Total Common
Equity (1) |
|
TIAN Xiangyang
(2) |
|
|
68,800,000 |
|
|
|
70.78% |
|
TIAN
Zhihai (3) |
|
|
4,300,000 |
|
|
|
4.63% |
|
|
|
|
|
|
|
|
|
|
All
executive officers and directors as a Group |
|
|
72,300,000 |
|
|
|
75.41% |
|
|
|
|
|
|
|
|
|
|
5% or Greater
Stockholders: |
|
|
|
|
|
|
|
|
GAO Xue Ran |
|
|
8,581,063 |
|
|
|
8.83% |
|
(1) |
Beneficial
ownership is determined in accordance with SEC rules and generally
includes voting or investment power with respect to securities. For
purposes of this table, a person or group of persons is deemed to
have “beneficial ownership” of any shares of common stock that such
person has the right to acquire within 60 days of August 6, 2020.
Applicable percentage ownership is based on 97,201,030 shares of
common stock outstanding as of August 6, 2020, and any shares that
such person or persons has the right to acquire within 60 days of
August 6, 2020, is deemed to be outstanding for such person, but is
not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person. The inclusion herein of
any shares listed as beneficially owned does not constitute an
admission of beneficial ownership. |
|
|
(2) |
Rhone
Holding Limited, a limited liability company organized under the
laws of the British Virgin Islands, is the record holder of such
securities. Ms. Tian is the sole shareholder and director of Rhone
Holding Limited. Ms. Tian has served as the Chairman, Chief
Executive Officer and Director of the Board of Directors of Beijing
Luji since July 2018 and was appointed to serve as the Chief
Executive Officer and Director of the Company on August 6,
2020. |
|
|
(3) |
Donau Holding Limited, a limited
liability company organized under the laws of the British Virgin
Islands, is the record holder of such securities. Mr. Tian is the
sole shareholder and director of Donau Holding Limited. Mr. Tian
has served as the Chief Operating Officer of Beijing Luji since
January 2017 and was appointed to serve as the Chief Operating
Officer and Director of the Company on August 6, 2020. |
Changes In Control
On June 4, 2019, AS Capital, Inc., a Nevada corporation (“we,”
“ASIN” or the “Company”), XRC, LLC, a Colorado limited liability
company (“XRC”) and Gao Xue Ran (“Purchaser”) entered into a Stock
Purchase Agreement (the “SPA”), pursuant to which Purchaser agreed
to purchase from XRC 11,000,000 shares of common stock of the
Company, par value $0.001, and 964 shares of Series A Convertible
Preferred Stock of the Company, par value $0.001 (collectively, the
“Shares”), for aggregate consideration of Four Hundred and Ten
Thousand Dollars ($410,000) in accordance with the terms and
conditions of the SPA. XRC is the controlling shareholder of the
Company. The acquisition of the Shares consummated on July 18,
2019, and the Shares were ultimately purchased by the following
three individuals using their own personal funds:
Name |
|
No.
of Shares |
|
Percentage
of Issued and Outstanding |
|
Consideration
Paid |
Gao
Xue Ran |
|
8,581,063 of Common Stock;
964 shares of Series A Preferred Stock
|
|
76.61% |
|
$319,840 |
Zhang
Yan Hua |
|
1,935,633
of Common Stock |
|
17.28% |
|
$72,146 |
Cheung
Kwok Chiu Kris |
|
483,304
of Common Stock |
|
4.30% |
|
$18,014 |
Ms. Gao held a controlling interest in the Company and may
unilaterally determine the election of the Board and other
substantive matters requiring approval of the Company’s
stockholders.
Upon the consummation of the sale of the Shares, Chris Lotito, our
Chief Executive Officer and sole director, and John Karatzaferis,
our President, resigned from all of their positions with the
Company, effective July 18, 2019. Their resignations were not due
to any dispute or disagreement with the Company on any matter
relating to the Company's operations, policies or practices.
Concurrently with such resignations, Gao Xue Ran was appointed to
serve as the Chief Executive Officer, Chief Financial Officer,
President, Secretary and sole Director of the Company, until the
next annual meeting of stockholders of the Company and until such
director’s successor is elected and qualified or until such
director’s earlier death, resignation or removal. None of the
directors or executive officers has a direct family relationship
with any of the Company’s directors or executive officers, or any
person nominated or chosen by the Company to become a director or
executive officer. Ms. Gao will serve in her positions without
compensation.
Acquisition of HJ
On August 6, 2020, we consummated the acquisition of One Hundred
(100) Shares of HJ, representing 100% of the issued and outstanding
stock of HJ. HJ is a holding company that, through its subsidiaries
and variable interest entity, is engaged in the business of selling
healthcare and other related products to the middle-aged and
elderly market segments in the PRC through its internet platform
and offline service centers. HJ’s consolidated business is
conducted through Beijing Luji Technology Co., Ltd., a variable
interest entity formed in Beijing, China on March 27, 2007.
In connection with the acquisition, effective August 6, 2020, the
following individuals were appointed to serve in the capacities set
forth next to their names until his or her successor(s) shall be
duly elected or appointed, unless he or she resigns, is removed
from office or is otherwise disqualified from serving as an
executive officer or director of the Company:
Tian
Xiangyang |
|
Chief
Executive Officer, Director and Chairperson of the Board of
Director |
Shan
Yonghua |
|
Chief
Financial Officer |
Tian
Zhihai |
|
Chief
Operating Officer and Director |
Yin
Jianen |
|
Secretary
and Director |
Wang
Jirui |
|
Director |
Upon the consummation of the sale of the HJ Shares, Gao Xue Ran
resigned from all of her positions with the Company, effective
August 6, 2020. Her resignation was not due to any dispute or
disagreement with the Company on any matter relating to the
Company's operations, policies or practices.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS
Set forth below are the present directors, director nominees and
executive officers of the Company. There are no other persons who
have been nominated or chosen to become directors nor are there any
other persons who have been chosen to become executive officers.
There are no arrangements or understandings between any of the
directors, officers and other persons pursuant to which such person
was selected as a director or an officer. Directors are elected to
serve until the next annual meeting of stockholders and until their
successors have been elected and have qualified. Officers are
appointed to serve until the meeting of the board of directors
following the next annual meeting of stockholders and until their
successors have been elected and qualified.
Name |
|
Age |
|
Position |
Tian
Xiangyang |
|
48 |
|
Chief
Executive Officer, Director and Chairperson of the Board of
Director |
Shan
Yonghua |
|
52 |
|
Chief
Financial Officer and Director |
Tian
Zhihai |
|
44 |
|
Chief
Operating Officer and Director |
Yin
Jianen |
|
46 |
|
Secretary
and Director |
Wang
Jirui |
|
55 |
|
Director |
Set forth below is a brief description of the background and
business experience of our sole executive officer and director:
Ms. Xiangyang Tian, 48 years old, joined Hanjiao
international on July 5, 2018 as HJ Chief Executive Officer,
Director and Chairperson of the Board. She is one of the founders
of Beijing Luji, and has served as an Executive Director of Beijing
Luji since March 2007. She has served as a director of HJ since
July 2018, and has served as Chief Executive Officer and Chairman
of Hanjiao international the board since April 2019, and is
responsible for the overall strategic planning and day-to-day
operations of Beijing Luji Technology Co., Ltd at the same time. Ms
Tian has introduced a business model by creating a cloud platform
called "Fozgo" for the elderly.
Prior to establishing Beijing Luji, Ms. Tian served as the Chief
Secretary at Supply and Marketing Agency of Huailai County, Hebei
Province from January 2000 to February 2007. From January 1996 to
December 1999, she served as the Political Cadre for the Government
Office of Tumu Town in Huailai County, Hebei Province. Ms. Tian was
the staff for the Zhangbei County Grain Bureau of Hebei Province
from July 1991 to December 1995. Ms. Tian graduated from Hebei
Provincial Party Collecge, majoring in Economic Management, and
EMBA Business Administration at Peking University. She brings to
the Board her experience in financial planning, overview and
strategic planning.
Mr. Yonghua Shan, 52 years old, has served as Chief
Financial Officer of Hanjiao International since March 2020. Mr.
Shan has over 31 years working experience in financial management,
tax planning, investment and financing management. Prior to joining
HJ, Mr. Shan served as the Financial Director of Beijing Luji
Technology Co., Ltd. since September 2016. During July 2013 to
August 2016, Mr. Shan was the Financial Director of Beijing
Beichuang Non-Woven Co. Mr. Shan was the Financial Manager of
Beijing Ligao Technology Co., Ltd. from February 2006 to June 2013
and the General Manager Assistant and Investment Manager of Kelon
Electric Co., Ltd from August 2000 to January 2006. Mr. Shan
obtained his Master degree in Management Engineering from Wuhan
University of Technology. Mr. Shan brings to the Board his
experience in financial management.
Mr. Zhihai Tian, 44 years old, joined Hanjiao
International in July 2018 and has served as Chief Operating
Officer and Director of Hanjiao International since April 2020. Mr.
Tian joined Beijing Luji in 2008 and has served as Chief Operating
Officer of Beijing Luji since July 2018. Mr. Tian is mainly
responsible for the daily operation and customer relationship
management. He had more than 10 years of experience in company
operations, customer development and relationship management.
Before joining Beijing Luji, Mr. Tian worked at Hongshu Group from
July 2000 to December 2007. Mr. Tian obtained EMBA at the School of
Economics and Management, Peking University. Mr. Tian brings to the
Board his deep industry operational expertise.
Mr. Jianen Yin, 46 years old, joined Hanjiao
international on June, 2020. He has served as HJ Secretary and
Director since April 2020. He serves HJ with his management
experience, business and social network with investment and
financing knowledge. Before joining us, Mr. Yin was the Vice
General Manager of Fixed Income Department of Jiuzhou Securities
from May 2016 to June 2019 and of Western Securities during August
2009 to April 2016. From April 2002 to June 2007, he served as the
Marketing Director for Sumitomo Forestry Machinery. Mr. Yin has
obtained the MBA degree from Guanghua School of Management, Peking
University and graduated with Hotel Management degree from Beijing
Union University. Mr. Yin brings to the Board his management,
finance and investment experience.
Mr. Jirui Wang, 55 years old, joined Hanjiao
international on June, 2020 and has served as the Director of HJ
since April 2020. Mr. Wang has over 23 years working experience in
financial industry with extensive knowledge in investment banking
and fixed income sectors. Before joining HJ, Mr. Wang worked for
Jiuzhou Securities from September 2017 to December 2019 and of
Western Securities during April 2016 to September 2017. From June
1995 to December 2016, Mr. Wang served as the Chief Representative
of the Southern Representative District of the Beijing Office of
South Korea Sincere Chemical Co., Ltd. During October 1987 to May
1995, Mr. Wang was the Purchaser for Hunan Tobacco Company. Mr.
Wang graduated from Xiangtan University in Hunan Province in 1987.
Mr. Want brings to the Board his expertise in investment banking
and finance.
Family Relationships
Ms. Tian Xiangyang is the aunt of Mr. Tian Zhihai. Except as set
forth above, there are no family relationships between any of our
directors or executive officers.
Involvement in Certain Legal Proceedings
No executive officer or director is a party in a legal proceeding
adverse to us or any of our subsidiaries or has a material interest
adverse to us or any of our subsidiaries.
No executive officer or director has been involved in the last ten
years in any of the following:
|
· |
Any
bankruptcy petition filed by or against any business or property of
such person, or of which such person was a general partner or
executive officer either at the time of the bankruptcy or within
two years prior to that time; |
|
· |
Any
conviction in a criminal proceeding or being subject to a pending
criminal proceeding (excluding traffic violations and other minor
offenses); |
|
· |
Being
subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of
business, securities or banking activities; |
|
· |
Being
found by a court of competent jurisdiction (in a civil action), the
SEC or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law, and the judgment
has not been reversed, suspended, or vacated; |
|
· |
Being
the subject of or a party to any judicial or administrative order,
judgment, decree or finding, not subsequently reversed, suspended
or vacated relating to an alleged violation of any federal or state
securities or commodities law or regulation, or any law or
regulation respecting financial institutions or insurance
companies, including but not limited to, a temporary or permanent
injunction, order of disgorgement or restitution, civil money
penalty or temporary or permanent cease-and-desist order, or
removal or prohibition order, or any law or regulation prohibiting
mail, fraud, wire fraud or fraud in connection with any business
entity; or |
|
· |
Being the subject of or a party to any sanction or order, not
subsequently reversed, suspended or vacated, of any self-regulatory
organization (as defined in Section 3(a)(26) of the Exchange Act,
any registered entity (as defined in Section 1(a)(29) of the
Commodity Exchange Act), or any equivalent exchange, association,
entity or organization that has disciplinary authority over its
members or persons associated with a member.
|
Board Committees
We have not formed separate Audit, Corporate Governance,
Compensation and Nominating committees. Our entire Board performs
the functions of the Audit, Corporate Governance, Compensation and
Nominating committees.
Delinquent Section 16(a) Reports
Section 16(a) of the Securities Exchange Act requires our executive
officers and directors, and persons who own more than 10% of our
common stock, to file reports regarding ownership of, and
transactions in, our securities with the Securities and Exchange
Commission and to provide us with copies of those filings. Based
solely on our review of the copies of such forms received by us, or
written representations from certain reporting persons, we believe
that during fiscal year ended December 31, 2019, and up to the date
of this current report, our officers, directors and greater than
10% percent beneficial owners timely filed all reports required by
Section 16(a) of the Securities Exchange Act except as follows:
XRC, LLC failed to file Forms 3 and 4 disclosing its ownership of
our securities; and each of Tian Xiangyang, Shan Yonghua, and Yin
Jianen filed their Form 3s and Schedule 13D, as applicable on
August 14, 2020. Wang Jirui filed his Form 3 on August 13, 2020.
Tian Zhihai has not yet filed his Form 3.
Code of Ethics
We have not yet adopted a Code of Ethics that applies to our
directors, officers, and employees. We expect to adopt such a code
in the future once we have integrated our acquisition of HJ.
Board Meetings
Our board of directors currently consists of Ms Tian Xiangyang, Mr.
Yin Jian’en, Mr. Shan Yonghua, Mr. Tian Zhihai and Mr. Wang Jirui.
The board did not hold formal meetings during the year ended
December 31, 2019, but took actions via unanimous written consent.
We expect our current board to act by written consent or through
board meetings in accordance with the provisions of the Nevada
Revised Statutes and our Bylaws.
Nomination Process
Our board of directors does not have a policy with regards to the
consideration of any director candidates recommended by our
shareholders. We have not adopted advance notice provisions in our
bylaws. Our board of directors has determined that it is in the
best position to evaluate our Company’s requirements as well as the
qualifications of each candidate when the board considers a nominee
for a position on our board of directors.
Corporate Governance & Board Independence
Our Board of Directors consists of five directors: Ms. Tian
Xiangyang, Mr. Yin Jian’en, Mr. Shan Yonghua, Mr. Tian Zhihai and
Mr. Wang Jirui. We do not currently have a standing audit,
nominating or compensation committee of the board of directors, or
any committee performing similar functions. Our board of directors
performs the functions of audit, nominating and compensation
committees. As of the date of this report, no member of our board
of directors qualifies as an “audit committee financial expert” as
defined in 17 CFR 229.407(d)(5) promulgated under the Securities
Act. We hope to attract a director who qualifies as an “audit
committee financial expert” as our business matures.
Our board of directors intends to appoint such persons and form
such committees as are required to meet the corporate governance
requirements imposed by the national securities exchanges as
necessary. Our board of directors does not believe that it is
necessary to have such committees at the early stage of the
Company’s development, and our board of directors believes that the
functions of such committees can be adequately performed by the
members of our board of directors.
Board Leadership Structure and the Board’s Role in Risk
Oversight
The Board of Directors is chaired by the Chairman who is also the
CEO. The Board believes that the most effective leadership
structure at this time is not to separate the roles of Chairman and
CEO. A combined structure provides the Company with a single leader
who represents our stockholders, regulators, business partners and
other stakeholders, among reasons set forth below. Should the Board
conclude otherwise, the Board will separate the roles and appoint
an independent Chairman.
|
· |
This
structure creates efficiency in the preparation of the meeting
agendas and related Board materials as the Company’s Chief
Executive Officer works directly with those individuals preparing
the necessary Board materials and is more connected to the overall
daily operations of the Company. Agendas are also prepared with the
permitted input of the full Board of Directors allowing for any
concerns or risks of any individual director to be discussed as
deemed appropriate. The Board believes that the Company has
benefited from this structure, and Ms. Tian’s continuation in the
combined role of the Chairman and CEO conforms with the best
interest of stockholders. |
|
· |
The
Company believes that the combined structure is necessary and
allows for efficient and effective oversight, given the Company’s
relatively small size, its corporate strategy and
focus. |
The Board of Directors have played a certain role in risk oversight
of the Company. The Chairperson, President and Chief Executive
Officer and other executive officers and employees of the Company
provide the Board of Directors with information regarding the
Company’s risks.
Involvement in Certain Legal Proceedings
From time to time, we may be involved in various claims, lawsuits,
and disputes with third parties, actions involving allegations of
discrimination or breach of contract actions incidental to the
normal operations of the business. We may be named as a defendant
in such lawsuits and thus become subject to the attendant risk of
substantial damage awards. There can be no assurance, however, that
we will not be sued, that any such lawsuit will not exceed our
insurance coverage, if any, or that we will be able to maintain
such coverage at acceptable costs and on favorable terms.
We are not a party to, nor is any of our property the subject of,
any legal proceedings. There are no proceedings pending in which
any of our officers, directors or 5% shareholders are adverse to us
or any of our subsidiaries or in which they are taking a position
or have a material interest that is adverse to us or any of our
subsidiaries.
EXECUTIVE COMPENSATION
Compensation Philosophy and Objectives
Currently, our executive directors and officers receive cash
compensation for services in such capacities. We expect to
establish an incentive compensation plan as our Company matures. We
expect that our executive compensation philosophy will be to create
a long-term direct relationship between pay and our performance.
Our executive compensation program will be designed to provide a
balanced total compensation package over the executive’s career
with us. The compensation program objectives will be to attract,
motivate and retain the qualified executives that help ensure our
future success, to provide incentives for increasing our profits by
awarding executives when corporate goals are achieved and to align
the interests of executives and long-term stockholders. We expect
the compensation package of our named executive officers to consist
of the following main elements:
|
1. |
base
salary for our executives that is competitive relative to the
market, and that reflects individual performance, retention and
other relevant considerations; |
|
2. |
incentive
compensation consisting of stock options, restricted stock and the
like; and |
|
3. |
discretionary
bonus awards payable in cash and or securities of the Company tied
to the satisfaction of corporate objectives. |
Process for Setting Executive Compensation
As we do not have Compensation Committee, our Board will be
responsible for developing and overseeing the implementation of our
philosophy with respect to the compensation of executives and for
monitoring the implementation and results of the compensation
philosophy to ensure compensation remains competitive, creates
proper incentives to enhance stockholder value and rewards superior
performance. The Board will annually review and approve for each
named executive officer, and particularly with regard to the Chief
Executive Officer, all components of the executive’s compensation.
The Board may award discretionary bonuses to each of the named
executives, and reviews and approves the process and factors
(including individual and corporate performance measures and actual
performance versus such measures) used by the Chief Executive
Officer to recommend such awards. Additionally, the Board will
review and approve the base salary, equity-incentive awards (if
any) and any other special or supplemental benefits of the named
executive officers.
We expect our Chief Executive Officer to periodically provide the
Board with an evaluation of each named executive officer’s
performance, based on the individual performance goals and
objectives developed by the Chief Executive Officer at the
beginning of the year, as well as other factors. The Board will
provide an evaluation for the Chief Executive Officer. These
evaluations will serve as the bases for bonus recommendations and
changes in the compensation arrangements of our named
executives.
Our Compensation Peer Group
We expect to engage in informal market analysis in evaluating our
executive compensation arrangements. As the Company and its
businesses mature, we may retain compensation consultants that will
assist us in developing a formal benchmark and selecting a
compensation peer group of companies similar to us in size or
business for the purpose of comparing executive compensation
levels.
Program Components
We expect our executive compensation program to consist of the
following elements:
Base Salary
Our base salary structure will be designed to encourage internal
growth, attract and retain new talent, and reward strong leadership
that will sustain our growth and profitability. The base salary for
each named executive officer will reflect our past and current
operating profits, the named executive officer’s individual
contribution to our success throughout their career, internal pay
equity and informal market data regarding comparable positions
within similarly situated companies. In determining and setting
base salary, the Board will consider all of these factors, though
it will not assign specific weights to any factor. The Board will
generally review the base salary for each named executive officer
on an annual basis. For each of our named executive officers, we
expect to review base salary data internally obtained by the
Company for comparable executive positions in similarly situated
companies to ensure that the base salary rate for each executive is
competitive relative to the market.
Discretionary Bonus
The objectives of our bonus awards will be to encourage and reward
our employees, including the named executive officers, who
contribute to and participate in our success by their ability,
industry, leadership, loyalty or exceptional service and to recruit
additional executives who will contribute to that success.
Each of our named executive officers will be eligible for
consideration for a discretionary cash bonus. The Chief Executive
Officer will make recommendations regarding bonus awards for the
named executive officers and the Board provides the bonus
recommendation for the Chief Executive Officer. However, the
Board/Compensation Committee will have sole and final authority and
discretion in designating to whom awards are made, the size of the
award, if any, and its terms and conditions. The bonus
recommendation for each of the named executive officers depends on
a number of factors, including (i) the performance of the
Company for the year, (ii) the satisfaction of certain
individual and corporate performance measures, and (iii) other
factors which the Board may deem relevant. The Company did not
award any cash bonuses during fiscal year 2019.
Stock Holdings
The Board recognizes the importance of having a portion of the
named executive officers’ compensation be paid in the form of
equity, to help align the executives’ interests with the interests
of the Company’s stockholders. Initially, we expect the Board to
emphasize the cash-based portion of our compensation program over a
stock program because it believes the discretionary nature of the
cash-based compensation gives it the needed flexibility to factor
in and reward the attainment of longer-term goals for the Company
and the executives, as the Board deems appropriate.
We have not timed nor do we plan to time our release of material
non-public information for the purpose of affecting the value of
executive compensation.
Summary Compensation Table
The following tables set forth, for each of the last two completed
fiscal years of the Company, the total compensation awarded to,
earned by or paid to any person who was a principal executive
officer during the preceding fiscal year and every other highest
compensated executive officers earning more than $100,000 during
the last fiscal year (together, the “Named Executive Officers”).
The tables set forth below reflect the compensation of the Named
Executive Officers.
Name and Principal
Position |
Fiscal Year |
Salary
($)
|
Bonus
($)
|
Equity
Awards
($)
|
All Other
Compensation
($)
|
Total
($)
|
Tian Xiangyang (1)
(Chief Executive Officer, Director and Chairperson of the
Board)
|
2019 |
74,165 |
0 |
0 |
81,446 |
155,611 |
2018 |
41,059 |
0 |
0 |
67,941 |
109,000 |
(1) |
Effective
since August 6, 2020, Ms. Tian was appointed to serve as our CEO
and Chairman of the Board of Director. |
Narrative Disclosure to Summary Compensation Table
Each of Ms. Tian Xiangyang, Mr. Shan Yonghua, Mr. Tian Zhihai, Mr.
Yin Jianen and Mr. Wang Jirui are parties to an employment
agreement with Beijing Luji, our VIE, as of the dates and for the
salary set forth below:
Name |
|
Position with the Company |
|
Monthly Salary
(RMB/ USD)
|
|
Effective Date/Expiration
Date |
Ms
Tian Xiangyang |
|
Chief Executive Officer,
Director and Chairperson of the Board of Director
|
|
100,000 / 14,286 |
|
January 1, 2019 / December 31, 2022 |
Mr.
Shan Yonghua |
|
Chief Financial Officer and
Director |
|
30,000
/ 4,286 |
|
January 1, 2017 / December 31, 2021 |
Mr.
Tian Zhihai |
|
Chief Operating Officer and
Director |
|
26,000
/ 3,714 |
|
January 1, 2017 / December 31, 2021 |
Mr.
Yin Jianen |
|
Secretary and
Director |
|
0* |
|
January 1, 2019 / December 31, 2021 |
Mr.
Wang Jirui |
|
Director |
|
0** |
|
January 1, 2019 / December 31, 2021 |
_____________________
* Mr. Yin did not receive compensation in his capacity as Secretary
but accrued compensation in his capacity as a Director of the
Company as more fully described in the section entitled
“Compensation of Directors.”
**Mr. Wang accrued compensation in his capacity as a Director of
the Company as more fully described in the section entitled
“Compensation of Directors.”
Employment Contracts
Each executive may terminate his or her employment agreement by
giving three months prior written notice thereof. Otherwise,
Beijing Luji has the right to deduct the wage, bonus, on-duty fees,
etc. that have not been paid if such action causes serious economic
loss to Beijing Luji.
Beijing Luji is entitled to reassign duties of Executive in the
event that his or her performance does not meet the standards set
forth in her performance appraisal for three consecutive
months.
Beijing Luji is entitled to terminate this employment agreement
upon the occurrence of the following events:
(1) Executive violates labor discipline or the Company’s rules and
systems;
(2) Executive commits serious gross negligence or jobbery, which
causes serious damage to the Company’s interests; or
(3) Executive is subjected to the investigation of criminal
responsibilities as per laws.
Executive is entitled to reimbursement for reasonable travel and
other out-of-pocket expenses incurred in connection with his or her
services on our behalf. He or she is also entitled to certain
health and welfare benefits, transportation allowances, and
relevant professional membership fees and course fees.
The foregoing description of the Employment Agreements of each of
Ms. Tian Xiangyang, Mr. Shan Yonghua, Mr. Tian Zhihai, Mr. Yin
Jianen and Mr. Wang Jirui is qualified in its entirety by reference
to such agreements which are filed as Exhibits 10.9 through and
including 10.13 to this Current Report and are incorporated herein
by reference.
Other than set out above and below, there are no arrangements or
plans in which we provide pension, retirement or similar benefits
for directors or executive officers. We expect to establish one or
more incentive compensation plans in the future. Our directors and
executive officers may receive securities of the Company as
incentive compensation at the discretion of our board of directors
in the future. We do not have any material bonus or profit sharing
plans pursuant to which cash or non-cash compensation is or may be
paid to our directors or executive officers.
Equity Awards
As of the reported date, there are no options, warrants or
convertible securities outstanding. At no time during the last
fiscal year with respect to any of any of our executive officers
was there:
|
· |
any
outstanding option or other equity-based award repriced or
otherwise materially modified (such as by extension of exercise
periods, the change of vesting or forfeiture conditions, the change
or elimination of applicable performance criteria, or the change of
the bases upon which returns are determined); |
|
· |
any
waiver or modification of any specified performance target, goal or
condition to payout with respect to any amount included in
non-stock incentive plan compensation or payouts; |
|
· |
any
option or equity grant; |
|
· |
any
non-equity incentive plan award made to a named executive
officer; |
|
· |
any
nonqualified deferred compensation plans including nonqualified
defined contribution plans; or |
|
· |
any
payment for any item to be included under All Other Compensation in
the Summary Compensation Table. |
Compensation of Directors
During our fiscal year ended December 31, 2019, we did not provide
compensation to any of our employee directors for serving as a
director. Effective January 1, 2020, we entered into a
Supplementary Agreement of Labor Contract with each of Messrs. Yin
and Wang pursuant to which Messrs. Yin and Wang accrued the
following compensation effective January 1, 2020 for their services
as directors:
Name |
Fees earned or paid in cash
($) |
Stock awards
($) |
Option awards
($) |
Non-equity incentive plan
compensation
($) |
Change in pension value and
nonqualified deferred compensation earnings |
All other compensation
($) |
Total
($) |
Yin Jianen |
11,432 |
|
|
|
|
|
11,432 |
Wang Jirui |
11,432 |
|
|
|
|
|
11,432 |
Narrative to Director Compensation Table
Each of Messrs. Yin and Wang are parties to a Supplementary
Agreement of Labor Contract, made effective January 1, 2020, which
is an addendum to their original Labor Contract. Pursuant to the
terms of such Supplementary Agreement of Labor Contract, each
director is entitled to a monthly compensation of RMB 10,000
(approximately $1,429) for their services as a director on our
Board of Directors. The compensation is payable in one lump sum at
the end of calendar year 2020. Directors are entitled to
reimbursement for reasonable travel and other out-of-pocket
expenses incurred in connection with attendance at meetings of our
board of directors. Our board of directors may award special
remuneration to any director undertaking any special services on
our behalf other than services ordinarily required of a director.
The foregoing description of each Supplementary Agreement of Labor
Contract is qualified in its entirety by reference to such
Supplementary Agreement of Labor Contract with each of Messrs. Yin
and Wang, a form of which is filed as Exhibit 10.14 and 10.15,
respectively, to this Current Report and are incorporated herein by
reference.
We hope to enter into Director Retainer Agreements which will set
forth the terms and conditions upon which our directors will serve
on our board. A form of the Director Retainer Agreement is filed as
Exhibit 10.16 to this Current Report and is incorporated herein by
reference.
Compensation Risk Management
Our Board of directors and human resources staff conducted an
assessment of potential risks that may arise from our compensation
programs. Based on this assessment, we concluded that our policies
and practices do not encourage excessive and unnecessary risk
taking that would be reasonably likely to have material adverse
effect on the Company. The assessment included our cash incentive
programs, which awards non-executives with cash bonuses for
punctuality. Our compensation programs are substantially identical
among business units, corporate functions and global locations
(with modifications to comply with local regulations as
appropriate). The risk-mitigating factors considered in this
assessment included:
|
· |
the
alignment of pay philosophy, peer group companies and compensation
amounts relative to local competitive practices to support our
business objectives; and |
|
· |
effective
balance of cash, short- and long-term performance periods, caps on
performance-based award schedules and financial metrics with
individual factors and Board and management discretion. |
Compensation Committee Interlocks and Insider
Participation
We have not yet established a Compensation Committee. Our Board of
Directors performs the functions that would be performed by a
compensation committee.
Our Bylaws provide that the number of directors shall be fixed from
time to time by resolution of the Board of Directors. Our Bylaws
may be amended, altered or repealed by a majority of the directors
serving on our Board of Directors.
Our Bylaws also provide that our directors may be removed with or
without cause by the affirmative vote of the holders of at least a
majority of the shares then entitled to vote at an election of
directors. An election of our directors by our stockholders will be
determined by a plurality of the votes cast by the stockholders
entitled to vote on the election.
Our current and future executive officers and significant employees
serve at the discretion of our board of directors. Our board of
directors may also choose to form certain committees, such as a
compensation and an audit committee.
Compensation Committee Report
Our Board has reviewed and discussed the Compensation Discussion
and Analysis in this report with management. Based on its review
and discussion with management, the Board of Directors recommended
that the Compensation Discussion and Analysis be included in this
Current Report on Form 8-K. The material in this report is not
deemed filed with the SEC and is not incorporated by reference in
any of our filings under the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, as amended, whether made on,
before, or after the date of this Current Report on Form 8-K and
irrespective of any general incorporation language in such
filing.
Submitted by members of the Board of Directors:
Ms. Tian Xiangyang
Mr Yin Jianen
Mr Shan Yonghua
Mr Tian Zhihai
Mr Wang Jirui
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The balance of due from related parties is approximately $1,100, $0
and $11.6 million as of June 30, 2020, December 31, 2019 and
December 31, 2018 respectively. As of June 30, 2020, December 31,
2019 and December 31, 2018, due from related parties were due from
Ms. Tian Xiangyang, the founder of Beijing Luji, Chairperson of the
Board and Chief Executive Officer of the Company. Ms. Tian obtained
these advances in connection with running the operations of Beijing
Luji. Ms. Tian repaid $10.6 million to Beijing Luji in May 2019.
Subsequently, on August 10, 2019, Beijing Luji approved dividend
distributions of RMB33.7 million (equal to approximately $4.8
million) to Beijing Luji’s shareholders. Subsequently, Ms. Tian
paid off the remaining balance of $1.3 million to Beijing Luji. At
the date of this filing, there were no balances due from related
parties.
As of June 30, 2020, December 31, 2019 and December 31, 2018, the
outstanding amounts due from related parties are as follows: (in
thousands)
|
|
June 30, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2020 |
|
|
2019 |
|
|
2018 |
|
Tian Xiangyang |
|
$ |
1 |
|
|
$ |
0 |
|
|
$ |
11,609 |
|
We have not adopted policies or procedures for approval of related
person transactions but review them on a case-by-case basis. Except
as set forth above, we have not entered into any material
transactions with any director, executive officer, and promoter,
beneficial owner of five percent or more of our common stock, or
family members of such persons.
Director Independence
Our board of directors currently consists of Tian Xianyang, our
CEO, Yin Jian’en, our Secretary, Shan Yonghua, our CFO, Tian
Zhihai, our COO, and Wang Jirui. None of our directors qualify as
an independent director under the published listing requirements of
the NASDAQ Stock Market or the NYSE because they are executive
officers of the Company. As of the date hereof, we have not adopted
a standard of independence nor do we have a policy with respect to
independence requirements for our board members or that a majority
of our board be comprised of “independent directors.”
LEGAL PROCEEDINGS
We are not a party to any legal or administrative proceedings that
we believe, individually or in the aggregate, would be likely to
have a material adverse effect on our financial condition or
results of operations. We may from time to time become a party to
various legal or administrative proceedings arising in the ordinary
course of our business. There are no pending legal proceedings in
which any director, officer or affiliate of the Company, any owner
of record or beneficially of more than 5% of any class of voting
securities of the Company, is a party adverse to the Company or has
a material interest adverse to the Company.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a)
Market Information
Shares of our common stock are quoted on the OTC Pink under the
symbol “ASIN”. As of August 6, 2020, the last closing price of our
securities was $0.22, with little to no quoting activity. Our
common stock began quoting on the OTC Pink on January 14, 2019.
There is no established public trading market for our securities
and a regular trading market may not develop, or if developed, may
not be sustained.
The following table sets forth, for the fiscal quarters indicated,
the high and low bid information for our common stock, as reported
on the OTC Pink Sheets. The following quotations reflect
inter-dealer prices, without retail mark-up, mark-down or
commissions and may not represent actual transactions.
Quarterly period |
|
High |
|
|
Low |
|
Quarter ended June 30, 2020 |
|
$ |
0.30 |
|
|
$ |
0.25 |
|
Quarter ended March 31, 2020 |
|
$ |
0.55 |
|
|
$ |
0.30 |
|
Fiscal year ended December 31, 2019: |
|
|
|
|
|
|
|
|
Fourth Quarter |
|
$ |
1.09 |
|
|
$ |
0.22 |
|
Third Quarter |
|
$ |
1.20 |
|
|
$ |
0.22 |
|
Second Quarter |
|
$ |
1.55 |
|
|
$ |
1.20 |
|
First Quarter |
|
$ |
1.82 |
|
|
$ |
0.22 |
|
(b)
Approximate Number of Holders of Common Stock
As of August 6, 2020, there were approximately 50 shareholders of
record of our common stock. Such number does not include any
shareholders holding shares in nominee or “street name”.
(c)
Dividends
Holders of our common stock are entitled to receive such dividends
as may be declared by our board of directors. We paid no dividends
during the periods reported herein, nor do we anticipate paying any
dividends in the foreseeable future.
(d)
Equity Compensation Plan Information
None.
(e)
Recent Sales of Unregistered Securities
None.
DESCRIPTION OF SECURITIES
The following is a description of the material provisions of our
capital stock, as well as other material terms of our Articles of
Incorporation, as amended, and Amended and Restated Bylaws, or the
Restated Bylaws. We refer you to our Articles of
Incorporation, as amended, and Restated Bylaws, copies of which
have been filed as exhibits to this report.
We are authorized to issue up to 100,000,000 shares of common
stock, par value $0.0001 per share. Effective August 20, 2020, our
authorized shares of common stock will increase to 500,000. Each
outstanding share of common stock entitles the holder thereof to
one vote per share on all matters. Our bylaws provide that
elections for directors shall be by a plurality of votes.
Stockholders do not have pre-emptive rights to purchase shares in
any future issuance of our common stock. Upon our liquidation,
dissolution or winding up, and after payment of creditors and
preferred stockholders, if any, our assets will be divided pro-rata
on a share-for-share basis among the holders of the shares of
common stock.
The holders of shares of our common stock are entitled to dividends
out of funds legally available when and as declared by our board of
directors. Our board of directors has never declared a dividend and
does not anticipate declaring a dividend in the foreseeable future.
Should we decide in the future to pay dividends, as a holding
company, our ability to do so and meet other obligations depends
upon the receipt of dividends or other payments from our
subsidiaries and other holdings and investments. In addition, our
operating subsidiary, from time to time, may be subject to
restrictions on its ability to make distributions to us, including
as a result of statutory reserve requirements in the PRC,
restrictive covenants in loan agreements, restrictions on the
conversion of local currency into U.S. dollars or other hard
currency and other regulatory restrictions. In the event of our
liquidation, dissolution or winding up, holders of our common stock
are entitled to receive, ratably, the net assets available to
stockholders after payment of all creditors and preferred
shareholders.
All of the issued and outstanding shares of our common stock are
duly authorized, validly issued, fully paid and non-assessable. To
the extent that additional shares of our common stock are issued,
the relative interests of existing stockholders will be
diluted.
Preferred Stock
We are authorized to issue up to 10,000,000 shares of preferred
stock, par value $0.0001 per share, in one or more classes or
series within a class as may be determined by our board of
directors, who may establish, from time to time, the number of
shares to be included in each class or series, may fix the
designation, powers, preferences and rights of the shares of each
such class or series and any qualifications, limitations or
restrictions thereof. Any preferred stock so issued by the board of
directors will rank senior to the common stock with respect to the
payment of dividends or amounts upon liquidation, dissolution or
winding up of us, or both. Moreover, under certain circumstances,
the issuance of preferred stock or the existence of the unissued
preferred stock might tend to discourage or render it more
difficult to enter into a merger or other change of control
transaction. As of the date of this Current Report, the Board has
designated 1,000 Series A Convertible Preferred Stock, 3,000,000
Series B Preferred Stock and 1,000,000 Series C Preferred Stock. As
of the date of this Current Report, there are outstanding 1,000
shares of Series A Convertible Preferred Stock and no shares of
Series B or Series C Preferred Stock.
Series A Convertible Preferred Stock
A summary of the Certificate of Designation for the Series A
Convertible Preferred Stock is set forth below:
Voting. Except as provided otherwise under law, holders of
the Series A Convertible Preferred Stock are entitled to vote only
on matters pertaining to the Series A Convertible Preferred Stock
and will have no voting rights on matters presented to holders of
our Common Stock.
Conversion. Shares of Series A Convertible Preferred Stock
is convertible, at any time at the option of the holder, at a ratio
of one (1) Common Share for every twelve thousand (12,000) shares
of Series A Convertible Preferred Stock. Notwithstanding the
foregoing, conversion shall be restricted to prohibit a holder of
the Series A Preferred Stock from holding Common Stock in excess of
4.95% of the issued and outstanding shares of our Common Stock.
Dividends. Holders of the Series A Convertible Preferred
Stock shall not be entitled to receive dividends.
Liquidation. Holders of the Series A Convertible Preferred
Stock then outstanding shall not be entitled to any liquidation
preference.
Series B Preferred Stock
A summary of the Certificate of Designation for the Series B
Preferred Stock is set forth below:
Voting. Except as required under law, holders of the Series
B Preferred Stock are not entitled to vote.
Conversion. Each share of Series B Preferred Stock is
convertible, at any time at the option of the holder, into one
thousand (1,000) shares of Common Stock. Notwithstanding the
foregoing, conversion shall be allowed only if the converting
holder of the Series B Preferred Stock does not end up with Common
Stock in excess of 4.95% of the issued and outstanding shares of
our Common Stock.
Dividends. Holders of the Series B Preferred Stock shall not
be entitled to receive dividends.
Liquidation. Holders of the Series B Preferred Stock then
outstanding shall not be entitled to any liquidation
preference.
Series C Preferred Stock
A summary of the Certificate of Designation for the Series C
Preferred Stock is set forth below:
Voting. Except as provided otherwise under law, holders of
the Series C Preferred Stock are entitled to vote on matters
presented to holders of our Common Stock as if they held one
hundred thousand (100,000) shares of Common Stock for each one (1)
share of Series C Preferred Stock.
Conversion. Shares of Series C Preferred Stock are
convertible, at any time at the option of the holder, at a ratio of
one (1) Common Share for every one (1) share of Series C Preferred
Stock.
Dividends. Holders of the Series C Preferred Stock shall not
be entitled to receive dividends.
Liquidation. Holders of the Series C Preferred Stock then
outstanding shall not be entitled to any liquidation
preference.
Anti-takeover Effects of Our Articles of Incorporation, as
Amended, and Restated Bylaws
Our Articles of Incorporation, as amended, and Restated Bylaws
contain certain provisions that may have anti-takeover effects,
making it more difficult for or preventing a third party from
acquiring control of the Company or changing our board of directors
and management. According to our Restated Bylaws and Articles of
Incorporation, as amended, neither the holders of our common stock
nor the holders of our preferred stock have cumulative voting
rights in the election of our directors.
|
· |
No Cumulative Voting. The
Nevada Revised Statutes provide that stockholders are not entitled
to the right to cumulative votes in the election of directors
unless a corporation’s certificate of incorporation provides
otherwise. Our Amended and Restated Certificate of Incorporation
and Bylaws do not provide for cumulative voting. The combination of
the present ownership by a few stockholders of a significant
portion of our issued and outstanding common stock and lack of
cumulative voting makes it more difficult for other stockholders to
replace our board of directors or for a third party to obtain
control of the Company by replacing its board of directors. |
|
· |
Issuance of “Blank Check”
Preferred Stock. Our board of directors has the authority,
without further action by the stockholders, to issue up to
additional 9,999,000 shares of “blank check” preferred stock with
rights and preferences, including voting rights, designated from
time to time by our board of directors. The existence of authorized
but unissued shares of preferred stock enables our board of
directors to render it more difficult or to discourage an attempt
to obtain control of us by means of a merger, tender offer, proxy
contest, or otherwise; |
|
· |
Advance Notice Provisions.
Our stockholders may not call special meetings of our stockholders
unless they hold in excess of 50% of the shares entitled to vote at
a meeting of stockholders. Stockholders requesting a special
meeting to act on any matter that may properly be considered at a
meeting of stockholders must submit a written request to the
secretary of the Corporation. Such meeting request must contain all
information required pursuant to the Restated Bylaws, be sent to
the secretary by registered mail, return receipt requested, and be
received by the secretary within 60 days after the record date. The
Restated Bylaws include special provisions relating to the
mechanics of calling and canceling special meetings of the
stockholders; In any annual meeting of our stockholders,
stockholders may not act on any matter not properly brought before
the meeting. A matter is considered to have been properly brought
before a meeting if the stockholder has given timely notice thereof
in writing to the secretary of the Corporation and such business is
a proper matter for action by the stockholders. To be timely, a
stockholder’s notice shall set forth all information required
pursuant to the Restated Bylaws and shall be delivered to the
secretary at the principal executive office of the Corporation not
earlier than the 150th day nor later than 5:00 p.m., Eastern Time,
on the 120th day prior to the first anniversary of the date of the
proxy statement for the preceding year’s annual meeting; provided,
however, that in the event that the date of the annual meeting is
advanced or delayed by more than 30 days from the first anniversary
of the date of the preceding year’s annual meeting, notice by the
stockholder to be timely, such notice must be so delivered not
earlier than the 150th day prior to the date of such annual meeting
and not later than 5:00 p.m., Eastern Time, on the later of the
120th day prior to the date of such annual meeting, as originally
convened, or the tenth day following the day on which public
announcement of the date of such meeting is first made. The public
announcement of a postponement or adjournment of an annual meeting
shall not commence a new time period for the giving of a
stockholder’s notice as described above. |
|
· |
Special Nomination
Procedures. Our stockholders may not nominate persons to our
Board unless they comply with certain nomination procedures. A
stockholder must deliver notice of its intent to nominate persons
to be elected to the Board to the secretary of the Company not
earlier than the 150th day nor later than 5:00 p.m., Eastern Time,
on the 120th day prior to the first anniversary of the date of the
proxy statement for the preceding year’s annual meeting; provided,
however, that in the event that the date of the annual meeting is
advanced or delayed by more than 30 days from the first anniversary
of the date of the preceding year’s annual meeting, notice by the
stockholder to be timely, such notice must be so delivered not
earlier than the 150th day prior to the date of such annual meeting
and not later than 5:00 p.m., Eastern Time, on the later of the
120th day prior to the date of such annual meeting, as originally
convened, or the tenth day following the day on which public
announcement of the date of such meeting is first made. The public
announcement of a postponement or adjournment of an annual meeting
shall not commence a new time period for the giving of a
stockholder’s notice as described above. Such stockholder’s notice
must include all information required pursuant to the Restated
Bylaws, which shall include information regarding (i) the
stockholder, (ii) any person acting in concert with such
stockholder, (iii) any beneficial owner of shares of stock of the
Corporation owned of record or beneficially by such stockholder
(other than a stockholder that is a depositary) and (iv) any person
that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with,
such stockholder or any of the persons described in sections (ii)
and (iii) above. Such notice shall contain, among other
things, a written undertaking certifying that such proposed nominee
is not, and will not become a party to, any agreement, arrangement
or understanding with any person or entity other than the Company
in connection with service or action as a director that has not
been disclosed to the Company. |
|
· |
Bylaws Amendments Without
Stockholder Approval. Our Amended and Restated Bylaws provide
that a majority of the authorized number of directors will
generally have the power to adopt, amend or repeal our bylaws
without stockholder approval; |
|
· |
Broad Indemnity. We are
permitted to indemnify directors and officers against losses that
they may incur in investigations and legal proceedings resulting
from their services to us, which may include services in connection
with takeover defense measures. This provision may make it more
difficult to remove directors and officers and delay a change in
control of our management. |
Anti-takeover Effects of Nevada Law
Business Combinations
The “business combination” provisions of Sections 78.411 to 78.444,
inclusive, of the Nevada Revised Statutes, or NRS, generally
prohibit a Nevada corporation with at least 200 stockholders from
engaging in various “combination” transactions with any interested
stockholder for a period of three years after the date of the
transaction in which the person became an interested stockholder,
unless the transaction is approved by the board of directors prior
to the date the interested stockholder obtained such status; and
extends beyond the expiration of the three-year period, unless:
|
· |
the transaction was
approved by the board of directors prior to the person becoming an
interested stockholder or is later approved by a majority of the
voting power held by disinterested stockholders, or |
|
· |
if the consideration
to be paid by the interested stockholder is at least equal to the
highest of: (a) the highest price per share paid by the interested
stockholder within the three years immediately preceding the date
of the announcement of the combination or in the transaction in
which it became an interested stockholder, whichever is higher, (b)
the market value per share of common stock on the date of
announcement of the combination and the date the interested
stockholder acquired the shares, whichever is higher, or (c) for
holders of preferred stock, the highest liquidation value of the
preferred stock, if it is higher. |
A “combination” is generally defined to include mergers or
consolidations or any sale, lease exchange, mortgage, pledge,
transfer or other disposition, in one transaction or a series of
transactions, with an "interested stockholder" having: (a) an
aggregate market value equal to 5% or more of the aggregate market
value of the assets of the corporation, (b) an aggregate market
value equal to 5% or more of the aggregate market value of all
outstanding shares of the corporation, (c) 10% or more of the
earning power or net income of the corporation, and (d) certain
other transactions with an interested stockholder or an affiliate
or associate of an interested stockholder.
In general, an “interested stockholder” is a person who, together
with affiliates and associates, owns (or within three years, did
own) 10% or more of a corporation's voting stock. The statute could
prohibit or delay mergers or other takeover or change in control
attempts and, accordingly, may discourage attempts to acquire our
company even though such a transaction may offer our stockholders
the opportunity to sell their stock at a price above the prevailing
market price.
Because we have less than 200 shareholders of record, these
“business combination” provisions do not currently apply to us. We
intend to amend our Amended and Restated Articles of Incorporation
to elect not to be governed by the “business combination”
provisions.
Control Share Acquisitions
The “control share” provisions of Sections 78.378 to 78.3793,
inclusive, of the NRS apply to “issuing corporations,” which are
Nevada corporations with at least 200 stockholders, including at
least 100 stockholders of record who are Nevada residents, and
which conduct business directly or indirectly in Nevada. The
control share statute prohibits an acquirer, under certain
circumstances, from voting its shares of a target corporation's
stock after crossing certain ownership threshold percentages,
unless the acquirer obtains approval of the target corporation's
disinterested stockholders. The statute specifies three thresholds:
one-fifth or more but less than one-third, one-third but less than
a majority, and a majority or more, of the outstanding voting
power. Generally, once an acquirer crosses one of the above
thresholds, those shares in an offer or acquisition and acquired
within 90 days thereof become “control shares” and such control
shares are deprived of the right to vote until disinterested
stockholders restore the right.
These provisions also provide that if control shares are accorded
full voting rights and the acquiring person has acquired a majority
or more of all voting power, all other stockholders who do not vote
in favor of authorizing voting rights to the control shares are
entitled to demand payment for the fair value of their shares in
accordance with statutory procedures established for dissenters’
rights.
The effect of the Nevada control share statutes is that the
acquiring person, and those acting in association with the
acquiring person, will obtain only such voting rights in the
control shares as are conferred by a resolution of the
disinterested stockholders at an annual or special meeting. The
Nevada control share law, if applicable, could have the effect of
discouraging takeovers of our Company.
A corporation may elect to not be governed by, or “opt out” of, the
control share provisions by making an election in its articles of
incorporation or bylaws, provided that the opt-out election must be
in place on the 10th day following the date an acquiring person has
acquired a controlling interest, that is, crossing any of the three
thresholds described above. Our Amended and Restated Articles of
Incorporation state that we have elected not to be governed by the
“control share” provisions, therefore such provisions currently do
not apply to us.
Options
As of the date of this Report, we had no outstanding options to
purchase shares of our common stock.
Transfer Agent and Registrar
Our stock transfer agent is Transhare Securities Transfer and
Registrar, located at 2849 Executive Drive, Suite 200, Clearwater,
Florida 33762, telephone number (303) 662-1112.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
We are a Nevada corporation and generally governed by the Nevada
Private Corporations Code, Title 78 of the Nevada Revised Statutes,
or NRS.
Section 78.138 of the NRS provides that, unless the corporation’s
articles of incorporation provide otherwise, a director or officer
will not be individually liable unless it is proven that (i) the
director's or officer's acts or omissions constituted a breach of
his or her fiduciary duties, and (ii) such breach involved
intentional misconduct, fraud or a knowing violation of the
law.
Section 78.7502 of the NRS permits a company to indemnify its
directors and officers against expenses, judgments, fines, and
amounts paid in settlement actually and reasonably incurred in
connection with a threatened, pending, or completed action, suit,
or proceeding, except an action by or on behalf of the corporation,
if the officer or director (i) is not liable pursuant to NRS
78.138, or (ii) acted in good faith and in a manner the officer or
director reasonably believed to be in or not opposed to the best
interests of the corporation and, if a criminal action or
proceeding, had no reasonable cause to believe the conduct of the
officer or director was unlawful. Section 78.7502 of the NRS also
requires a corporation to indemnify its officers and directors if
they have been successful on the merits or otherwise in defense of
any claim, issue, or matter resulting from their service as a
director or officer.
Section 78.751 of the NRS permits a Nevada company to indemnify its
officers and directors against expenses incurred by them in
defending a civil or criminal action, suit, or proceeding as they
are incurred and in advance of final disposition thereof, upon
determination by the stockholders, the disinterested board members,
or by independent legal counsel. Section 78.751 of NRS requires a
corporation to advance expenses as incurred upon receipt of an
undertaking by or on behalf of the officer or director to repay the
amount if it is ultimately determined by a court of competent
jurisdiction that such officer or director is not entitled to be
indemnified by the company if so provided in the corporations
articles of incorporation, bylaws, or other agreement. Section
78.751 of the NRS further permits the company to grant its
directors and officers additional rights of indemnification under
its articles of incorporation, bylaws or other agreement.
Section 78.752 of the NRS provides that a Nevada company may
purchase and maintain insurance or make other financial
arrangements on behalf of any person who is or was a director,
officer, employee or agent of the company, or is or was serving at
the request of the company as a director, officer, employee or
agent of another company, partnership, joint venture, trust or
other enterprise, for any liability asserted against him and
liability and expenses incurred by him in his capacity as a
director, officer, employee or agent, or arising out of his status
as such, whether or not the company has the authority to indemnify
him against such liability and expenses.
Our Articles of Incorporation, as amended, and Restated Bylaws
implement the indemnification and insurance provisions permitted by
Chapter 78 of the NRS by providing that:
|
· |
We
may indemnify our directors and officers to the fullest extent
permitted by the NRS against expense, liability and loss reasonably
incurred or suffered by them in connection with their service as an
officer or director of the Corporation or of another corporation or
enterprise (if such service was at our request); |
|
· |
we
are authorized to advance expenses incurred by or on behalf of a
director, officer or other persons to which we are permitted to
provide indemnification in advance of the final disposition of any
action or proceeding. |
|
· |
The
liability of our directors for monetary damages is limited to the
fullest extent permitted by Nevada law; and |
|
· |
We
may purchase and maintain insurance, or make other financial
arrangements, on behalf of any person who holds or who has held a
position as s director, officer, or representative against
liability, cost, payment, or expense incurred by such
person. |
At the present time, there is no pending litigation or proceeding
involving a director, officer, employee or other agent of ours in
which indemnification would be required or permitted. We are not
aware of any threatened litigation or proceeding which may result
in a claim for such indemnification.
We intend to enter into indemnification agreements with each of our
directors and executive officers that are broader than the specific
indemnification provisions contained in the Nevada Revised
Statutes. These indemnification agreements may require us, among
other things, to indemnify our directors and executive officers
against liabilities that may arise by reason of their status or
service. These indemnification agreements may also require us to
advance all expenses incurred by the directors and executive
officers in investigating or defending any such action, suit, or
proceeding. We believe that these agreements are necessary to
attract and retain qualified individuals to serve as directors and
executive officers.
The limitation of liability and indemnification provisions in our
Amended and Restated Certificate of Incorporation and Bylaws or in
any indemnification agreements may discourage stockholders from
bringing a lawsuit against our directors for breach of their
fiduciary duty. They may also reduce the likelihood of derivative
litigation against our directors and officers, even though an
action, if successful, might benefit us and other stockholders.
Further, a stockholder’s investment may be adversely affected to
the extent that we pay the costs of settlement and damage awards
against directors and officers as required by these indemnification
provisions. At present, we are not aware of any pending litigation
or proceeding involving any person who is or was one of our
directors, officers, employees, or other agents or is or was
serving at our request as a director, officer, employee, or agent
of another corporation, partnership, joint venture, trust, or other
enterprise, for which indemnification is sought, and we are not
aware of any threatened litigation that may result in claims for
indemnification.
We may obtain insurance policies under which, subject to the
limitations of the policies, coverage is provided to our directors
and officers against loss arising from claims made by reason of
breach of fiduciary duty or other wrongful acts as a director or
officer, including claims relating to public securities matters,
and to us with respect to payments that may be made by us to these
officers and directors pursuant to our indemnification obligations
or otherwise as a matter of law.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers, or persons
controlling our company pursuant to the foregoing provisions, we
have been informed that, in the opinion of the SEC, such
indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Item 5.01 Changes in Control of Registrant.
The information regarding change of control of the Company in
connection with the Share Exchange set forth in Item 2.01,
“Completion of an Acquisition or Disposition of Assets” is
incorporated herein by reference.
Item 5.02 Departure of Directors or Principal Officers; Election
of Directors; Appointment of Principal Officers; Compensatory
Arrangements of Certain Officers.
The information regarding departure and election of directors and
departure and appointment of principal officers of the Company in
connection with the Share Exchange set forth in Item 2.01,
“Completion of Acquisition or Disposition of Assets” is
incorporated herein by reference.
Item 5.06 Change in Shell Company Status.
Prior to the Share Exchange, we were a “shell company” (as such
term is defined in Rule 12b-2 under the Securities Exchange Act of
1934, as amended (the “Exchange Act”)). As a result of the Share
Exchange, we have ceased to be a shell company. The information
contained in this Current Report constitutes the current “Form 10
information” necessary to satisfy the conditions contained in Rule
144(i)(2) under the Securities Act of 1933, as amended (the
“Securities Act”).
HanJiao International Holding Limited and Subsidiaries
Unaudited Condensed Consolidated Financial Statements As of
and
For the Six Months Ended June 30, 2020 and 2019
TABLE OF CONTENTS
HANJIAO INTERNATIONAL HOLDING LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED
BALANCE SHEETS
|
|
June 30, |
|
|
December 31, |
|
|
|
2020 |
|
|
2019 |
|
|
|
(Unaudited) |
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
5,900,232 |
|
|
$ |
28,919,817 |
|
Advance to suppliers |
|
|
6,119,435 |
|
|
|
266,237 |
|
Inventories, net |
|
|
2,097,919 |
|
|
|
1,601,151 |
|
Prepayments and other current assets |
|
|
743,868 |
|
|
|
196,272 |
|
Due from related parties, net |
|
|
2,922 |
|
|
|
112,218 |
|
Total current assets |
|
|
14,864,376 |
|
|
|
31,095,695 |
|
Long-term investment, net |
|
|
11,245,917 |
|
|
|
11,412,441 |
|
Property and equipment, net |
|
|
212,603 |
|
|
|
263,640 |
|
Deposits and other assets, non current |
|
|
1,817,165 |
|
|
|
46,487 |
|
Total assets |
|
$ |
28,140,061 |
|
|
$ |
42,818,263 |
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders’ equity |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Taxes payable |
|
$ |
18,954,369 |
|
|
$ |
19,647,502 |
|
Dividends payable |
|
|
– |
|
|
|
4,300 |
|
Due to related parties |
|
|
211,879 |
|
|
|
1,013,396 |
|
Accrued expenses |
|
|
67,462 |
|
|
|
4,823,543 |
|
Other payables and other current liabilities |
|
|
7,463,795 |
|
|
|
6,865,487 |
|
Total current liabilities |
|
|
26,697,505 |
|
|
|
32,354,228 |
|
Total liabilities |
|
|
26,697,505 |
|
|
|
32,354,228 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
– |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
Ordinary shares: par value $1 per share, 50,000
shares authorized; 100 shares issued and outstanding at June
30, 2020 and December 31, 2019 * |
|
|
100 |
|
|
|
100 |
|
Additional paid-in capital * |
|
|
7,249,775 |
|
|
|
7,249,775 |
|
Statutory reserves |
|
|
1,687,125 |
|
|
|
1,687,125 |
|
(Deficit) retained earnings |
|
|
(6,792,595 |
) |
|
|
2,136,211 |
|
Accumulated other comprehensive loss |
|
|
(701,849 |
) |
|
|
(609,176 |
) |
Total shareholders’ equity |
|
|
1,442,556 |
|
|
|
10,464,035 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
28,140,061 |
|
|
$ |
42,818,263 |
|
* Giving retroactive effect to the corporate reorganization
effected on September 16, 2019.
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
HANJIAO INTERNATIONAL HOLDING LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
|
|
For the Three Months Ended
June 30, |
|
|
For the Six Months Ended
June 30, |
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
94,172 |
|
|
$ |
44,903,321 |
|
|
$ |
128,503 |
|
|
$ |
51,058,088 |
|
Cost of revenues |
|
|
(166,535 |
) |
|
|
(32,998,463 |
) |
|
|
(205,316 |
) |
|
|
(37,288,303 |
) |
Gross (loss) profit |
|
|
(72,363 |
) |
|
|
11,904,858 |
|
|
|
(76,813 |
) |
|
|
13,769,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
|
739,714 |
|
|
|
2,697,573 |
|
|
|
1,872,180 |
|
|
|
4,165,236 |
|
Selling expenses |
|
|
2,385,503 |
|
|
|
981,181 |
|
|
|
3,658,417 |
|
|
|
1,631,027 |
|
Finance expenses (income), net |
|
|
11,984 |
|
|
|
293,254 |
|
|
|
(170,154 |
) |
|
|
95,145 |
|
Total operating expenses |
|
|
3,137,201 |
|
|
|
3,972,008 |
|
|
|
5,360,443 |
|
|
|
5,891,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
(3,209,564 |
) |
|
|
7,932,850 |
|
|
|
(5,437,256 |
) |
|
|
7,878,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses, net |
|
|
(577,276 |
) |
|
|
(705,447 |
) |
|
|
(2,769,005 |
) |
|
|
(1,161,288 |
) |
Total other expenses, net |
|
|
(577,276 |
) |
|
|
(705,447 |
) |
|
|
(2,769,005 |
) |
|
|
(1,161,288 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before provision for income taxes |
|
|
(3,786,840 |
) |
|
|
7,227,403 |
|
|
|
(8,206,261 |
) |
|
|
6,717,089 |
|
Provision for income taxes |
|
|
– |
|
|
|
1,406,460 |
|
|
|
– |
|
|
|
1,435,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(3,786,840 |
) |
|
$ |
5,820,943 |
|
|
$ |
(8,206,261 |
) |
|
$ |
5,281,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(8,901 |
) |
|
|
(376,028 |
) |
|
|
(92,673 |
) |
|
|
(29,451 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income |
|
$ |
(3,795,741 |
) |
|
$ |
5,444,915 |
|
|
$ |
(8,298,934 |
) |
|
$ |
5,251,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per ordinary share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted* |
|
$ |
(37,868 |
) |
|
$ |
58,209 |
|
|
$ |
(82,063 |
) |
|
$ |
52,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of ordinary shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted* |
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
* Giving retroactive effect to corporate reorganization effected on
September 16, 2019.
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
HANJIAO INTERNATIONAL HOLDING LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
|
|
Ordinary shares* |
|
|
Additional |
|
|
|
|
|
|
|
|
Accumulated other |
|
|
Total |
|
|
|
Number of shares |
|
|
Amount |
|
|
paid-in
capital |
|
|
Statutory reserves |
|
|
Retained
earnings |
|
|
comprehensive loss |
|
|
shareholders’ equity |
|
Balance as
of December 31, 2018 |
|
|
100 |
|
|
$ |
100 |
|
|
$ |
7,249,775 |
|
|
$ |
1,547,861 |
|
|
$ |
5,855,424 |
|
|
$ |
(445,922 |
) |
|
$ |
14,207,238 |
|
Dividends declared |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(294,817 |
) |
|
|
– |
|
|
|
(294,817 |
) |
Net income |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
5,281,316 |
|
|
|
– |
|
|
|
5,281,316 |
|
Foreign currency
translation |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(29,451 |
) |
|
|
(29,451 |
) |
Balance as of June 30, 2019
(unaudited) |
|
|
100 |
|
|
$ |
100 |
|
|
$ |
7,249,775 |
|
|
$ |
1,547,861 |
|
|
$ |
10,841,923 |
|
|
$ |
(475,373 |
) |
|
$ |
19,164,286 |
|
|
|
Ordinary shares* |
|
|
Additional |
|
|
|
|
|
Retained |
|
|
Accumulated other |
|
|
Total |
|
|
|
Number of shares |
|
|
Amount |
|
|
paid-in
capital |
|
|
Statutory reserves |
|
|
earnings (deficit) |
|
|
comprehensive loss |
|
|
shareholders’ equity |
|
Balance as of December 31, 2019 |
|
|
100 |
|
|
$ |
100 |
|
|
$ |
7,249,775 |
|
|
$ |
1,687,125 |
|
|
$ |
2,136,211 |
|
|
$ |
(609,176 |
) |
|
$ |
10,464,035 |
|
Dividends declared |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(722,545 |
) |
|
|
– |
|
|
|
(722,545 |
) |
Net
loss |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(8,206,261 |
) |
|
|
– |
|
|
|
(8,206,261 |
) |
Foreign currency translation |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(92,673 |
) |
|
|
(92,673 |
) |
Balance as of June 30, 2020
(unaudited) |
|
|
100 |
|
|
$ |
100 |
|
|
$ |
7,249,775 |
|
|
$ |
1,687,125 |
|
|
$ |
(6,792,595 |
) |
|
$ |
(701,849 |
) |
|
$ |
1,442,556 |
|
* Giving retroactive effect to the corporate reorganization
effected on September 16, 2019.
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
HANJIAO INTERNATIONAL HOLDING LIMITED
AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For the Six Months Ended
June 30, |
|
|
|
2020 |
|
|
2019 |
|
Cash flows from operating
activities |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(8,206,261 |
) |
|
$ |
5,281,316 |
|
Adjustments to reconcile net loss to
net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and
amortization |
|
|
49,950 |
|
|
|
71,470 |
|
Provision for (reversal of) bad debt
expense |
|
|
(1,835 |
) |
|
|
(8,058 |
) |
Provision for slow-moving
inventories |
|
|
168,148 |
|
|
|
– |
|
Changes in operating assets and
liabilities: |
|
|
|
|
|
|
|
|
Advance to suppliers |
|
|
(5,896,718 |
) |
|
|
(219,452 |
) |
Inventories |
|
|
(691,798 |
) |
|
|
(559,824 |
) |
Due from related parties,
net |
|
|
108,386 |
|
|
|
10,421,183 |
|
Prepayments and other current
assets |
|
|
(564,135 |
) |
|
|
356,775 |
|
Advance from customers |
|
|
22,008 |
|
|
|
5,593,144 |
|
Taxes payable |
|
|
(409,198 |
) |
|
|
8,868,504 |
|
Accrued expenses |
|
|
(4,717,406 |
) |
|
|
(1,906,081 |
) |
Other payables and other current
liabilities |
|
|
905,182 |
|
|
|
4,351,753 |
|
Net cash (used in) provided by
operating activities |
|
|
(19,233,677 |
) |
|
|
32,250,730 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities |
|
|
|
|
|
|
|
|
Purchases of property and
equipment |
|
|
(1,773,998 |
) |
|
|
(8,607 |
) |
Investment in equity
investee |
|
|
– |
|
|
|
(11,749,994 |
) |
Net cash used in investing
activities |
|
|
(1,773,998 |
) |
|
|
(11,758,601 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities |
|
|
|
|
|
|
|
|
Repayment of loans from related
parties |
|
|
(229,618 |
) |
|
|
– |
|
Repayment of loans from third
parties |
|
|
(786,414 |
) |
|
|
– |
|
Dividends paid |
|
|
(726,815 |
) |
|
|
(110,832 |
) |
Net cash used in financing
activities |
|
|
(1,742,847 |
) |
|
|
(110,832 |
) |
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents |
|
|
(269,063 |
) |
|
|
(183,787 |
) |
Net (decrease) increase in cash and
cash equivalents |
|
|
(23,019,585 |
) |
|
|
20,197,510 |
|
Cash and cash equivalents at
beginning of period |
|
|
28,919,817 |
|
|
|
18,019,617 |
|
Cash and cash equivalents at end of
period |
|
$ |
5,900,232 |
|
|
$ |
38,217,127 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow
information: |
|
|
|
|
|
|
|
|
Cash paid for income
taxes |
|
$ |
62,754 |
|
|
$ |
24,474 |
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
HANJIAO INTERNATIONAL HOLDING LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
HanJiao International Holding Limited (“HanJiao”) is a holding
company incorporated in the British Virgin Islands on July 5, 2018.
HanJiao and its wholly owned subsidiaries, variable interest entity
(“VIE”) and its subsidiary (collectively, the “Company”) are
primarily engaged in the sale of healthcare and other related
products to the middle-aged and elderly market segments in the
People’s Republic of China (the “PRC”) through its internet
platform and offline service centers.
LuJi Technology International Holding Limited (“Luji Technology”),
a holding company incorporated in the British Virgin Islands on
July 5, 2018, is wholly owned by HanJiao.
Inooka Holding Ltd. (“Inooka”), a company established in Hong Kong
on July 18, 2018, is wholly owned by Luji Technology.
Beijing Hongtao Management Consulting Co., Ltd. (“Beijing
Hongtao”), a wholly foreign-owned enterprise (“WFOE”) was
established in the PRC on October 11, 2018 and it is a wholly owned
subsidiary of Inooka. Beijing Hongtao currently provides consulting
and technical services to Beijing Luji Technology Co., Ltd.
(“Beijing Luji” or “VIE”) was incorporated in the PRC on March 27,
2007. Beijing Luji established Guoyi Investment Fund Management
(Beijing) Co., Ltd. (“Beijing Guoyi”) with registered capital of
RMB 50 million (approximately US$973,000) on February 19, 2016.
The following table shows how the Company is organized:

Reorganization and Variable Interest
Entities
On May 15, 2019, Beijing Hongtao, Beijing Luji and their
shareholders entered into a series of contractual arrangements (the
“VIE Agreements”) to control and receive the economic benefits of
Beijing Luji’s business. The VIE Agreements are designed to provide
Beijing Hongtao with the power, rights and obligations equivalent
in all material respects to those it would possess as the sole
equity holder of Beijing Luji, including absolute control rights
and the rights to the assets, property, revenue and income of
Beijing Luji.
HANJIAO INTERNATIONAL HOLDING LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
To complete the corporate reorganization, the shareholders of Luji
Technology transferred their respective ownership interest in Luji
Technology in exchange for their respective ownership interest in
HanJiao on September 16, 2019 (the “Share Transfer”).
Based on the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (‘ASC’) Topic 805, the VIE
Agreements executed between the Beijing Hongtao and Beijing Luji
and the Share Transfer constituted a reorganization of entities
under common control since all these entities were controlled by
the same major shareholders before and after the reorganization. As
such, the Company’s consolidated financial statements have been
prepared as if the reorganization had occurred retroactively and
the existing corporate structure had been in existence throughout
all periods presented.
NOTE 2 - GOING CONCERN
As indicated in the accompanying unaudited condensed consolidated
financial statements, the Company had a net loss of approximately
$8.2 million for the six months ended June 30, 2020; negative
working capital and deficit of approximately $11.8 million and $6.8
million, respectively, as of June 30, 2020. Management of the
Company has considered whether there is substantial doubt about its
ability to continue as a going concern due to consecutive quarterly
losses from operations in the first half of 2020 as a result of
COVID-19; and evaluated its available cash balance against its
working capital requirements over the next twelve months.
While management cannot accurately predict the full impact of
COVID-19 on the Company’s business, management believes that its
business will turnaround in the second half of 2020 and expects to
make a net profit for the full year of 2020. Based on its latest
cash flows projection, management believes that the Company is able
to generate sufficient cash flows from operations to meet its
working capital requirements for year 2020; and that its capital
resources are currently sufficient to maintain its business
operations for the next twelve months.
The accompanying unaudited condensed consolidated financial
statements have been prepared assuming that the Company will
continue as a going concern, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of
business. The accompanying unaudited condensed consolidated
financial statements do not include any adjustments related to the
recoverability and/or classification of the recorded asset amounts
and/or the classification of the liabilities that might be
necessary should the Company be unable to continue as a going
concern.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements and related notes have been prepared in accordance with
accounting principles generally accepted in the United States of
America (“US GAAP”) for interim financial information pursuant to
the rules and regulations of the Securities and Exchange Commission
(“SEC”). The unaudited condensed consolidated financial
statements include the accounts of the Company and include the
assets, liabilities, revenues and expenses of the subsidiaries and
VIEs. In the opinion of management, all adjustments (including
normal recurring accruals) considered necessary for a fair
presentation of financial position, results of operations and cash
flows at the dates and for the periods presented have been
included. Interim results are not necessarily indicative of results
to be expected for the full year. The information included in this
report should be read in conjunction with the information included
in the Company’s annual report for the year ended December 31,
2019.
HANJIAO INTERNATIONAL HOLDING LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
Principles of Consolidation
The accompanying unaudited condensed consolidated financial
statements include the financial statements of HanJiao, its
wholly-owned subsidiaries, WOFE, the VIE and its subsidiary. All
inter-company transactions and balances have been eliminated upon
consolidation.
VIE Agreements with Beijing Hongtao
The Company does not have a direct equity ownership interest in
Beijing Luji but relies on the VIE Agreements to control and
receive the economic benefits of Beijing Luji’s business. The
Company relies on contractual arrangements with its variable
interest entity to operate its online to office (O2O) business in
the PRC in which foreign investment is restricted or prohibited.
The O2O platform integrates the Company’s e-commerce platform with
physical outlets (service centers) to connect consumers and
merchants in a dynamic marketplace. Pursuant to the VIE Agreements,
HanJiao, through Beijing Hongtao, is able to exercise effective
control over, bears the risks of, enjoys substantially all of the
economic benefits its VIE and its subsidiary and has an exclusive
option to purchase all or part of the equity interests in the VIE
when and to the extent permitted by PRC law. The Company’s
management concluded that Beijing Luji and its subsidiary are
variable interest entities of the Company and Beijing Hongtao is
the primary beneficiary of Beijing Luji and its subsidiary. As
such, the financial statements of the VIE and its subsidiary are
included in the unaudited condensed consolidated financial
statements of the Company.
Use of Estimates
The preparation of the
unaudited condensed consolidated financial statements in conformity
with US GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
unaudited condensed consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
period.
Significant accounting estimates reflected in the Company’s
unaudited condensed consolidated financial statements include the
allowance for doubtful accounts and slow-moving inventory, and the
useful lives of property and equipment. Since the use of estimates
is an integral component of the financial reporting process, actual
results could differ from those estimates.
Fair Value of Financial Instruments
The Company follows Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) FASB ASC Section 820,
“Fair Value Measurements and Disclosures.” ASC 820 clarifies the
definition of fair value, prescribes methods for measuring fair
value, and establishes a fair value hierarchy to classify the
inputs used in measuring fair value as follows:
Level 1 applies to assets or liabilities for which there are quoted
prices in active markets for identical assets or liabilities.
Level 2 applies to assets or liabilities for which there are
inputs, other than quoted prices in level 1, that are
observable for the asset or liability such as quoted prices for
similar assets or liabilities in active markets; quoted prices for
identical assets or liabilities in markets with insufficient volume
or infrequent transactions (less active markets); or model-derived
valuations in which significant inputs are observable or can be
derived principally from, or corroborated by, observable market
data.
Level 3 applies to assets or liabilities for which there are
unobservable inputs to the valuation methodology that are
significant to the measurement of the fair value of the asset or
liability.
The carrying value of financial instruments included in current
assets and liabilities approximate their fair values because of the
short-term nature of these instruments.
HANJIAO INTERNATIONAL HOLDING LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, cash on deposit
and other highly liquid investments which are unrestricted as to
withdrawal or use, and which have original maturities of three
months or less when purchased. The Company maintains cash with
various financial institutions mainly in the PRC. As of June 30,
2020 and December 31, 2019, the Company had cash and cash
equivalents of approximately $5.9 million and $28.9 million,
respectively. The Company’s cash equivalents included approximately
$0 and $11.6 million (RMB 80 million) of the bank’s financial
products as of June 30, 2020 and December 31, 2019,
respectively.
Risks and Uncertainties
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
environment in the PRC, as well as by the general state of the PRC
economy. The Company’s operations in the PRC are subject to special
considerations and significant risks not typically associated with
companies in North America and Western Europe. These include risks
associated with, among other factors, the political, economic and
legal environment and foreign currency restrictions. The Company’s
results may be adversely affected by changes in the political,
regulatory and social conditions in the PRC, and by changes in
governmental policies or interpretations with respect to laws and
regulations, anti-inflationary measures, currency conversion,
remittances abroad, and rates and methods of taxation, among other
things. Although the Company has not experienced losses from these
situations and believes that it is in compliance with existing laws
and regulations, changes in the future could affect the Company’s
interest in these entities.
The outbreak of COVID-19 that started in late January 2020 in the
PRC had negatively affected our business. In March 2020, the World
Health Organization declared COVID-19 as a pandemic and has
resulted in quarantines, travel restrictions, and the temporary
closure of stores and business facilities in China and the U.S. in
the subsequent months. Given the rapidly expanding nature of the
COVID-19 pandemic, and because substantially all of the Company’s
business operations and its workforce are concentrated in China,
the Company’s business, results of operations, and financial
condition for the first half of 2020 have been adversely affected.
To mitigate the overall financial impact of COVID-19 on the
Company’s business in the second half of 2020, management has
worked closely with its service centers to enhance their marketing
and promotion activities in August 2020 that are designed to
generate sales in the third quarter of 2020.
Inventories
Inventories consist of finished goods and they are stated at the
lower of cost or net realizable value. Cost is determined using the
weighted average method. The Company periodically evaluates its
inventories and will record an allowance for inventories that are
either slow-moving, may not be saleable or whose cost exceeds its
net realizable value.
Advance to Suppliers
Advances to suppliers consist of payments to suppliers for finished
goods that have not been received by the Company. The Company
periodically evaluates and reviews its advance to suppliers to
determine whether its carrying value has been impaired.
HANJIAO INTERNATIONAL HOLDING LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
Long-term Investment
Long-term investment consists mainly of the Company’s equity
investment for strategic or business development purposes. The
Company applies the equity method of accounting to account for an
equity investment, according to FASB ASC 323 “Investment—Equity
Method and Joint Ventures,” over which it has significant influence
but does not own a majority equity interest or otherwise control.
Under the equity method, the Company’s share of the profits or
losses of the equity investees are recorded in its consolidated
statements of comprehensive income (loss).
The Company reviews its investment at least annually to determine
whether a decline in fair value to below the carrying value is
other-than-temporary. The primary factors the Company considers in
its determination are the duration and severity of the decline in
fair value; the financial condition, operating performance and the
prospects of the equity investee; and other company specific
information such as recent financing rounds. If the decline in fair
value is deemed to be other-than-temporary, the carrying value of
the investment will be written down to its fair value.
No events have occurred that indicated an other-than-temporary
decline in fair value for the six months ended June 30, 2020.
Property and Equipment, Net
Property and equipment are carried at cost and are depreciated on
the straight-line basis over the estimated useful lives of the
underlying assets. The cost of repairs and maintenance is expensed
as incurred; major replacements and improvements are capitalized.
When assets are retired or disposed of, the cost and accumulated
depreciation and amortization are removed from the accounts, and
any resulting gains or losses are included in income in the year of
disposition. The Company examines the possibility of decreases in
the value of its property and equipment, when events or changes in
circumstances reflect the fact that their recorded value may not be
recoverable.
Estimated useful lives are as follows, taking into account the
assets’ estimated residual value:
Classification |
Estimated useful
lives |
Vehicles |
10 years |
Office
equipment |
3 years |
Furniture and
fixtures |
3 years |
Software |
3 years |
Long-lived Assets
Finite-lived assets and intangibles are reviewed for impairment
testing when circumstances require. For purposes of evaluating the
recoverability of long-lived assets, when undiscounted future cash
flows will not be sufficient to recover an asset’s carrying amount,
the asset is written down to its fair value. The long-lived assets
of the Company that are subject to evaluation consist primarily of
property, plant and equipment, land use rights, and long-term
prepaid leases. For the six months ended June 30, 2020 and 2019,
the Company did not recognize any impairment of its long-lived
assets.
Revenue Recognition
On January 1, 2019, the Company adopted FASB ASC 606, Revenue from
Contracts with Customers using the modified retrospective method
for all contracts not completed as of the date of adoption.
Accordingly, revenue for six months ended June 30, 2020 and 2019
was presented under ASC 606.
The core principle underlying the revenue recognition standard is
that the Company will recognize revenue to represent the transfer
of products or services to customers in an amount that reflects the
consideration to which the Company expects to be entitled in such
exchange. This will require the Company to identify contractual
performance obligations and determine whether revenue should be
recognized at a point in time or over time, based on when control
of the product or the benefit of the services transfers to the
customer. Under the guidance of ASC 606, the Company is required to
(a) identify the contract with a customer, (b) identify
the performance obligations in the contract, (c) determine the
transaction price, (d) allocate the transaction price to the
performance obligations in the contract and (e) recognize
revenue when (or as) the Company satisfies its performance
obligations.
HANJIAO INTERNATIONAL HOLDING LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
Product Sales: Beijing Luji is primarily engaged in the sale
of healthcare and other products (such as nutrition or dietary
supplements; water or air purifiers) to the middle aged and elderly
market segments in the PRC. Beijing Luji sells these products under
its own “Fozgo” brand and related healthcare products for
other vendors through its internet platform and offline service
centers. Revenue from product sales is recognized when control
passes to the customer, which generally occurs at a point in time
when products are delivered. Allowance for sales returns, that
reduces revenues, are estimated based on historical experience.
Revenues are recorded net of value-added taxes, business taxes,
discounts and surcharges and allowance for returns.
The Company collects cash from customers before or upon delivery of
products mainly through banks and third-party online payment
platforms (such as Alipay). Cash collected from customers before
product delivery is recognized as advance from customers.
Cost of Revenues
Cost of revenues consists primarily of the cost of merchandise
sold, delivery cost, service fees, sales incentives and commissions
that are directly attributable to the sale of certain designated
products.
General and Administrative Expenses
General and administrative expenses consist mainly of payroll and
related costs for employees involved in general corporate
functions, including accounting, finance, tax, legal and human
resources, professional fees and other general corporate expenses
as well as costs associated with the use by these functions of
facilities and equipment, such as depreciation and rental
expenses.
Selling Expenses
Selling expenses consist mainly of payroll and benefits for
employees involved in the sales and distribution functions,
meeting/event fees, advertisement, marketing and selling expenses
that are related to events and activities at the Company’s service
centers designed to promote product sales.
Finance Expenses (Income)
Finance expenses consist mainly of service fees related to the use
of third-party online payment platforms, bank fees and interest
expenses related to borrowings; net of interest income from bank
and related bank products.
Other Income (Expenses)
Other income consists primarily of income from the administration
of Beijing Luji’s online marketplace. Other expenses consist mainly
of estimated tax penalties and charitable contributions.
Income Taxes
The Company follows FASB ASC Topic 740, “Income Taxes,” which
requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this
method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases
of assets and liabilities and their financial reporting amounts at
each period end based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to
affect taxable income. Deferred tax assets are also recognized for
operating losses that are available to offset the future taxable
income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be
realized.
HANJIAO INTERNATIONAL HOLDING LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
The Company follows FASB ASC 740-10-25, “Accounting for Uncertainty
in Income Taxes”, which requires income tax positions to meet a
more-likely-than-not recognition threshold to be recognized in the
financial statements. Under ASC 740-10-25, tax positions that
previously failed to meet the more-likely-than-not threshold should
be recognized in the first subsequent financial reporting period in
which that threshold is met. Previously recognized tax positions
that no longer meet the more-likely-than-not threshold should be
derecognized in the first subsequent financial reporting period in
which that threshold is no longer met. The Company believes that it
does not have any uncertain tax positions. It is not expected that
there will be any uncertain tax position within six months of June
30, 2020.
The application of tax laws and regulations is subject to legal and
factual interpretation, judgment and uncertainty. Tax laws and
regulations themselves are subject to change as a result of changes
in fiscal policy, changes in legislation, the evolution of
regulations and court rulings. Therefore, the actual liability may
be materially different from our estimates, which could result in
the need to record additional tax liabilities or potentially
reverse previously recorded tax liabilities or the deferred tax
asset valuation allowance. Due to the lack of temporary differences
between the tax bases and their financial reporting amounts, the
Company has not recognized any deferred tax assets or liabilities
as of June 30, 2020 and December 31, 2019.
Enterprise Income Tax
Under the Provisional Regulations of the PRC concerning income tax
on enterprises promulgated by the PRC (the “EIT Law”), the Company
was qualified as a high and new technology enterprise starting in
2018, and enjoys a preferential tax rate of 15% for 3 years
expiring in 2020. An entity can re-apply to be a high and new
technology enterprise when the prior certificate expires. Income
tax is payable at a rate of 15% of our taxable income for six
months ended June 30, 2020 and 2019.
Value-Added Tax
Prior to May 1, 2018, the Company was subject to value-added tax
(“VAT”) at rates of 6% and 17% on revenue generated from providing
services and products, respectively. Starting from May 1, 2018, the
VAT rate for revenue generated from providing products was changed
from 17% to 16%. Starting from April 1, 2019, the VAT rate for
revenue generated from providing products changed from 16% to 13%.
VAT is reported as a reduction of revenue when incurred. Entities
that are VAT general taxpayers are allowed to offset qualified
input VAT paid to suppliers against their output VAT liabilities.
The net VAT balance between input VAT and output VAT is recorded in
taxes payable.
Foreign Currency Translation
The functional currency of the Company’s operations in the PRC is
the Chinese Yuan or Renminbi (“RMB”). The condensed consolidated
financial statements are translated into U.S. dollars (“USD”) using
the period end rates of exchange for assets and liabilities, equity
is translated at historical exchange rates, and average rates of
exchange (for the period) are used for revenues and expenses and
cash flows. As a result, amounts relating to assets and liabilities
reported on the statements of cash flows may not necessarily agree
with the changes in the corresponding balances on the balance
sheets. Translation adjustments resulting from the process of
translating the local currency financial statements into USD are
included in determining comprehensive income (loss). Transactions
denominated in foreign currencies are translated into the
functional currency at the exchange rates prevailing on the
transaction dates. Assets and liabilities denominated in foreign
currencies are translated into the functional currency at the
exchange rates prevailing at the balance sheet date with any
transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than
the functional currency are included in the results of operations
as incurred.
HANJIAO INTERNATIONAL HOLDING LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
All of the Company’s revenue transactions are transacted in its
functional currency. The Company does not enter into any material
transaction in foreign currencies. Transaction gains or losses have
not had, and are not expected to have, a material effect on the
results of operations of the Company.
The exchange rates as of June 30, 2020 and December 31, 2019 and
for six months ended June 30, 2020 and 2019 are as follows:
|
|
June 30, |
|
|
December 31, |
|
|
Six months ended
June 30, |
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
Foreign currency |
|
Balance Sheet |
|
|
Balance Sheet |
|
|
Profits/Loss |
|
|
Profits/Loss |
|
RMB:1USD |
|
|
7.0795 |
|
|
|
6.9762 |
|
|
|
7.0319 |
|
|
|
6.7940 |
|
Comprehensive Income (Loss)
Comprehensive income (loss) consists of two components, net income
(loss) and other comprehensive income (loss). Other comprehensive
income (loss) refers to revenue, expenses, gains and losses that
under GAAP are recorded as an element of shareholders’ equity but
are excluded from net income (loss). Other comprehensive income
(loss) consists entirely of foreign currency translation
adjustments resulting from the Company’s translation of its
financial statements from its functional currency into USD.
Earnings (loss) Per Share
Basic earnings (loss) per share is computed by dividing net income
(loss) by the weighted-average number of ordinary shares
outstanding during the period. Diluted earnings per share is
computed by dividing net income by the weighted-average number of
ordinary shares plus dilutive potential ordinary shares outstanding
during the period. When the Company has a loss, the potential
ordinary shares are not included since their inclusion would be
anti-dilutive. For six months ended June 30, 2020 and 2019, there
were no potential ordinary shares, such as options, warrants or
conversion rights, that would have a dilutive effect on the
Company’s earnings per share.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Amendments to the
ASC 842 Leases. This update requires a lessee to recognize an asset
and liability (the lease liability) arising from operating leases
on the balance sheet for the lease term. When measuring assets and
liabilities arising from a lease, a lessee (and a lessor) should
include payments to be made in optional periods only if the lessee
is reasonably certain to exercise an option to extend the lease or
not to exercise an option to terminate the lease. Leases with a
twelve months or less lease term, a lessee is permitted to make an
accounting policy election not to recognize lease assets and
liabilities. If a lessee makes this election, it should recognize
lease expense on a straight-line basis over the lease term. In
transition, this update will be effective for public entities for
fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. The Company expects to adopt of
ASU 2016-02 when it completes its proposed transaction with a
public entity, and does not expect the adoption of ASU 2016-02 to
have a material impact on its unaudited condensed consolidated
financial statements.
In July 2017, the FASB Issued ASU 2017-11, Earnings Per Share
(Topic 260), Distinguishing Liabilities from Equity (Topic 480) and
Derivatives and Hedging (Topic 815). The amendments in Part I of
the Update change the reclassification analysis of certain
equity-lined financial instruments (or embedded features) with down
round features. The amendments in Part II of this Update
recharacterize the indefinite deferral of certain provisions of
Topic 480 that now are presented as pending content in the
Codification, to a scope exception. For public business entities,
the amendments in Part I of this Update are effective for fiscal
years, and interim periods within those fiscal years, beginning
after December 15, 2018. For all other entities, the amendments in
Part I of this Update are effective for fiscal years beginning
after December 15, 2019, and interim periods within fiscal years
beginning after December 15, 2020. Early adoption is permitted for
all entities, including adoption in an interim period. If an entity
early adopts the amendments in an interim period, any adjustments
should be reflected as of the beginning of the fiscal year that
includes that interim period. The amendments in Part II of this
Update do not require any transition guidance because those
amendments do not have an accounting effect. The Company does not
believe the adoption of this ASU would have a material effect on
the Company’s unaudited condensed consolidated financial
statements.
HANJIAO INTERNATIONAL HOLDING LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
In August 2018, the FASB Accounting Standards Board issued ASU No.
2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework
Changes to the Disclosure Requirements for Fair Value Measurement”
(“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements
on fair value measurements. ASU 2018-13 is effective for public
entities for fiscal years beginning after December 15, 2019, with
early adoption permitted for any removed or modified disclosures.
The removed and modified disclosures will be adopted on a
retrospective basis and the new disclosures will be adopted on a
prospective basis. The Company does not expect this guidance will
have a material impact on its unaudited condensed 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 Company’s unaudited condensed consolidated
financial statements.
NOTE 4 – INVENTORIES, NET
|
|
June 30, |
|
|
December 31, |
|
|
|
2020 |
|
|
2019 |
|
|
|
(Unaudited) |
|
|
|
|
|
Finished goods |
|
$ |
2,539,869 |
|
|
$ |
1,880,155 |
|
Less: allowance for slow-moving inventories |
|
|
(441,950 |
) |
|
|
(279,004 |
) |
Inventories, net |
|
$ |
2,097,919 |
|
|
$ |
1,601,151 |
|
The Company reviews its inventories periodically to determine if
any reserves are necessary for slow-moving inventory or if a
write-down is necessary when the carrying value exceeds net
realizable value. For six months ended June 30, 2020 and 2019,
provision for slow-moving inventory amounted to $168,148 and $0,
respectively.
NOTE 5 – ADVANCE TO SUPPLIERS
As of June 30, 2020 and December 31, 2019, advances to suppliers
were $6,119,435 and $266,237, respectively. The increase was due
mainly to advance approximately $5,650,000 to Baoqing Meilai Modern
Agricultural Service Co., Ltd for the purchase of specialty rice
with selenium during the first quarter of 2020 which is intended to
be sold to the Company’s target consumers.
NOTE 6 – PREPAYMENTS AND OTHER CURRENT ASSETS
|
|
June 30, |
|
|
December 31, |
|
|
|
2020 |
|
|
2019 |
|
|
|
(Unaudited) |
|
|
|
|
|
Business advance to employees |
|
$ |
28,251 |
|
|
$ |
94,034 |
|
Prepaid service fees |
|
|
37,503 |
|
|
|
91,146 |
|
Other receivable |
|
|
678,114 |
|
|
|
11,092 |
|
Total Prepaid Expenses and Other Current Assets |
|
$ |
743,868 |
|
|
$ |
196,272 |
|
As of June 30, 2020, other receivable consists mainly of a refund
due from a supplier for approximately $678,000 (RMB 4.8 million).
The Company believes that the receivable is fully collectible.
NOTE 7 – LONG-TERM INVESTMENT
On March 15, 2019, Beijing Luji executed an Equity Acquisition
Agreement with Rongcheng Health Group Co., Ltd. and acquired a 44%
equity interest in Rongcheng Tianrun Taxus Co., Ltd. (“Rongcheng
Tianrun”) for RMB 79,830,000 (approximately $11.4 million).
Rongcheng Tianrun is organized and registered in the PRC, and it is
engaged primarily in the cultivation and marketing of Taxus, a type
of medicinal plant. The ownership transfer and related registration
procedures were completed on June 20, 2019.
HANJIAO INTERNATIONAL HOLDING LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
NOTE 8 – PROPERTY AND EQUIPMENT, NET
At June 30, 2020 and December 31, 2019, property and equipment is
as follows:
|
|
June 30, |
|
|
December 31, |
|
|
|
2020 |
|
|
2019 |
|
|
|
(Unaudited) |
|
|
|
|
|
Office furniture |
|
$ |
89,670 |
|
|
$ |
90,998 |
|
Computer equipment |
|
|
84,089 |
|
|
|
82,874 |
|
Vehicles |
|
|
214,758 |
|
|
|
217,938 |
|
Software |
|
|
302,846 |
|
|
|
307,331 |
|
|
|
|
691,363 |
|
|
|
699,141 |
|
Less: accumulated depreciation and amortization |
|
|
(478,760 |
) |
|