Item 1.
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Financial Statements
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National
Art Exchange Inc.
Consolidated
Financial Statements
March
31, 2018
Contents
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Page
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Proforma
Combined Balance Sheets
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F-2
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Proforma
Combined Statements of Operations and Comprehensive Loss
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F-3
to F-4
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Notes
to Financial Statements
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F-5 to F-12
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National Art Exchange Inc.
Consolidated Balance Sheet
As of March 31, 2018 and September 30, 2017
(Stated in U.S. dollars)
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March 31,
2018
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September 30,
2017
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(Unaudited)
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Assets
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Current assets
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Cash and cash equivalents
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$
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16,875
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$
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31,952
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Prepaid expenses and other current assets
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145,081
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313,324
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Prepaid taxes
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29,017
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-
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Due from related parties
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16,820
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204,356
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Total current assets
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207,793
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549,632
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Non-current assets
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Plant and equipment, net
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398,931
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2,544
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Prepayment for furniture and fixtures
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52,239
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273,404
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Total Assets
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$
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658,963
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$
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825,580
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Liabilities and Stockholders’ Equity
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Current liabilities
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Accounts and other payables
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$
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19,083
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$
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24,524
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Customer deposits
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144,747
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60,058
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Due to related parties
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408,592
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10,400
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Total current liabilities
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572,422
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94,982
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Total Liabilities
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572,422
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94,982
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Stockholders’ Equity
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Common stock
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100,288
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288
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Additional paid in capital
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1,833,397
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1,833,397
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Shares to be issued
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40,000
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120,000
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Accumulated deficit
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(1,888,522
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)
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(1,217,337
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)
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Accumulated other comprehensive income (loss)
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1,378
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(5,750
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)
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Total Stockholders’ Equity
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86,541
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730,598
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Total Liabilities and Stockholders’ Equity
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$
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658,963
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$
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825,580
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See accompanying notes to financial statements
National Art Exchange Inc.
Statement of Operations and Comprehensive
Loss
From October 1, 2017 to March 31, 2018
(Unaudited)
(Stated in U.S. dollars)
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Three months
ended
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Six months
ended
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March 31,
2018
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March 31,
2018
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Net revenues
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$
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-
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$
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-
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Cost of revenues
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287,357
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574,714
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Gross loss
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(287,357
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)
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(574,714
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)
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Operating expenses:
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Selling and marketing
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32,402
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181,593
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General and administrative
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645,174
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804,592
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Total operating expenses
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677,576
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986,185
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Operating loss
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(964,933
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)
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(1,560,899
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)
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Other income (expenses):
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Interest income
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19
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54
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Loss before tax
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(964,914
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)
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(1,560,845
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)
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Tax
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-
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-
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Net loss
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$
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(964,914
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)
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$
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(1,560,845
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)
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Other comprehensive income:
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Foreign currency translation loss
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(12,645
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)
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7,128
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Comprehensive loss
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$
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(977,559
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)
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$
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(1,553,717
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)
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Loss per share
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Basic and diluted loss per share
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$
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(0.01
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)
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$
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(0.01
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)
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Basic and diluted weighted average shares outstanding
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100,288,079
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100,288,079
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See accompanying notes to financial statements
National Art Exchange Inc.
Statement of Cash Flows
From October 1, 2017 and March 31,
2018
(Unaudited)
(Stated in U.S. dollars)
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From October 1, 2017 to
March 31,
2018
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Cash flows from operating activities
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Net loss
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$
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(1,560,845
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)
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Depreciation of fixed assets
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2,471
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Decrease in accounts and other receivables
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317,369
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Increase in advance and prepayments to suppliers
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(29,879
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)
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Decrease in accounts and other payables
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(66,117
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)
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Net cash used in operating activities
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(1,337,001
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)
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Cash flows from investing activities
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Purchases of plant and equipment
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(410,683
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Prepayments for building construction and equipment
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223,442
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Net cash used in investing activities
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(187,241
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)
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Cash flows from financing activities
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Proceeds from owners’ injection of capital
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909,661
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Borrowings and payments to related parties, net
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599,590
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Net cash provided by financing activities
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1,509,251
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Net decrease of Cash and Cash Equivalents
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(14,991
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)
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Effect of foreign currency translation on cash and cash equivalents
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(86
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)
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Cash and cash equivalents–beginning of period
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31,952
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Cash and cash equivalents–end of period
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$
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16,875
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Supplementary cash flow information:
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Interest received
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$
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54
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Interest paid
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$
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-
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Income taxes paid
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$
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-
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See accompanying notes to financial statements
National Art Exchange Inc.
Notes to Financial Statements
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1.
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THE
COMPANY AND PRINCIPAL BUSINESS ACTIVITIES
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National
Art Exchange, Inc. (f/k/a Tianhe Union Holdings Limited) (the “Company”) was incorporated in Nevada on May 9, 2014.
Superior
Treasure Global Limited (the “STG”) was incorporated in the British Virgin Islands (“BVIs”) on November
17, 2017. STG, through its direct and indirect wholly owned subsidiaries, is in the business of business of auctioning, trading,
digitizing, cataloguing and displaying Chinese art work. The STG’s operations are located in the People’s Republic
of China (“PRC”).
Treasure
Artwork Corporation Limited (“TAC”) was incorporated on December 28, 2017 in the Hong Kong SAR. TAC wholly owns Yuebao
Industrial Management Consulting (Guangzhou) Company Limited (“WOFE”) which was established on January 17, 2018 in
the PRC.
Guangzhou
Cangbao Tianxia Arts Company Limited (“VIE”), which was established on March 28, 2017 in the PRC.
On
April 6, 2018, TAC and Ms. Meng Xueqin and Mr. Zhou Yongyin, all the shareholders of VIE, entered into four agreements: 1.) Shareholder
Usufruct Transfer Agreement, 2.) Exclusive Management Consultation Service Agreement, 3.) Stock Equity Transfer Priority Agreement,
and 4.) Stock Equity Pledge Agreement (collectively the “VIE Agreements”), whereby the TAC has been effectively given
full control over the operations and direction of the assets of VIE, and TAC is the primary beneficiary of VIE.
Mr.
Meng Qingxi is the sole director and shareholder of the Company; Mr. Meng Qingxi is the nephew of Ms. Meng Xueqin.
Ms.
Meng Xueqin and Mr. Zhou Yongyi have entrusted their beneficial ownership interests in VIE to Mr. Meng Qingxi for the purposes
of establishing a shareholding structure to gain listing through a reverse merger with a public listed entity; accordingly, these
are not fair market value transactions that entail consideration to be transfer from Mr. Meng Qingxi to Ms. Meng Xueqin and Mr.
Zhou Yongyi in exchange for entering to the VIE Agreements. The above re-organization transactions have been accounted for as
a combination of entities under common control. No goodwill and revaluation of the assets of the companies was recognized.
The
Company entered into a share exchange agreement with STG on April 6, 2018, whereby 40,000,000 shares of the Company stock was
issued to recipients designated by Mr. Meng Qingxi in exchange for the one outstanding share of STG, which allowed the Company
to exercise control over STG and its subsidiaries and the VIE. Mr. Meng Qingxi was the control shareholder of the Company and
STG; accordingly, the transaction was accounted for as a combination of entities under common control; goodwill was not recognized,
and the assets and liabilities of the entities were combined at their latest reported carrying values to the time of the transaction.
For
further details on the Company or STG, refer of the individual financial statements for those entities.
At
the time of the issuance of these proforma combined financial statements, the Company and its subsidiaries and VIE had yet to
generate revenues and profits or positive cash flows.
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2.
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SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
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Basis
of presentation
The
proforma combined financial statements of the Company have been prepared in accordance with generally accepted accounting principles
in the United States of America. This basis of accounting involves the application of accrual accounting and consequently, revenues
and gains are recognized when earned, and expenses and losses are recognized when incurred. The Company’s financial statements
are expressed in U.S. dollars. These proforma combined financial statements are prepared on as-if basis using the historical financial
statements of the two entities assuming that the combined entity existed from the beginning of the period presented in the results
of operations. Actual results may not have been indicative of the proforma results presented herein.
Unaudited
interim financial information
These
unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial
reporting and the rules and regulations of the Securities and Exchange Commission that permit reduced disclosure for interim periods.
Therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with
GAAP have been condensed or omitted. In the opinion of management, all adjustments of a normal recurring nature necessary for
a fair presentation of the financial position, results of operations and cash flows for the periods presented have been made.
The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the
year ending September 30, 2018.
The
consolidated balance sheets and certain comparative information as of September 30, 2017 are derived from the audited consolidated
financial statements and related notes for the year ended September 30, 2017 (“2017 Annual Financial Statements”),
included in the Company’s 2017 Annual Report on Form 10-K. These unaudited interim condensed consolidated financial statements
should be read in conjunction with the 2017 Annual Financial Statements.
Use
of estimates
The
preparation of the financial statements 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 financial statements and the
reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information
available at the time the estimates are made; however, actual results could differ materially from those estimates.
Foreign
currency translation
The
accompanying financial statements are presented in United States dollars (“USD”). The functional currency of the Company
is the USD. The functional currency of TAC is the Hong Kong dollar (“HKD”). The functional currency of WOFE and VIE
is the Renminbi (“RMB”). The financial statements of the Companies subsidiaries have been translated into United States
dollars from RMB and HKD at year-end exchange rates as to assets and liabilities and average exchange rates as to revenues and
expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.
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Exchange Rates
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3/31/2018
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Year end RMB : US$ exchange rate
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6.75676
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Average year RMB : US$ exchange rate
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6.56168
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Year end HKD : US$ exchange rate
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7.84821
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Average year HKD : US$ exchange rate
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7.81728
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The
RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions.
No representation is made that the RMB amounts could have been, or could be, converted into US Dollars at the rates used in translation.
Goodwill
Goodwill
represents the excess of the purchase price over the fair value of the net tangible and identifiable assets acquired in a business
combination. In accordance with FASB ASC Topic 350, "Goodwill and Other Intangible Assets", goodwill is no longer subject
to amortization. Rather, goodwill is subject to at least an annual assessment for impairment, applying a fair-value based test.
Fair value is generally determined using a discounted cash flow analysis.
Property,
plant and equipment
Plant
and equipment are carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using
the straight-line method. Estimated useful lives of the plant and equipment are as follows:
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Equipment
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3 - 10 years
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Motor vehicles
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4 - 5 years
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Furniture and fixtures
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5 - 10 years
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The
cost of maintenance and repairs is charged to expenses as incurred, whereas significant renewals and betterments are capitalized.
Prepayments
for equipment and furniture and fixtures
Amounts
recorded as prepayments for equipment and furniture and fixtures are transferred to plant and equipment when substantially all
the activities necessary to prepare the assets for their intended use are completed. The Company’s begins depreciating those
assets when they have transferred to plant and equipment and put into use.
Accounting
for the impairment of long-lived assets
The
Company annually reviews its long-lived assets for impairment or whenever events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable. Impairment may be the result of becoming obsolete from a change in the industry
or new technologies. Impairment is present if carrying amount of an asset is less than its undiscounted cash flows to be generated.
If
an asset is considered impaired, a loss is recognized based on the amount by which the carrying amount exceeds the fair market
value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Advertising
All
advertising costs are expensed as incurred. The Company incurred $39,193 in advertising expenses during the period from
October 1, 2017 to March 31, 2018.
Retirement
benefits
Retirement
benefits in the form of mandatory government sponsored defined contribution plans are charged to the either expenses as incurred
or allocated to inventory as part of overhead.
Income
taxes
The
Company accounts for income tax using an asset and liability approach and allows for recognition of deferred tax benefits in future
years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before
the Company is able to realize their benefits, or that future realization is uncertain. The Company has incurred losses since
its inception and management is not able to estimate when that Company will generate taxable profits; accordingly, the company
has elected to not recognize and deferred tax assets.
Statutory
reserves
Statutory
reserves are referring to the amount appropriated from the net income in accordance with laws or regulations, which can be used
to recover losses and increase capital, as approved, and are to be used to expand production or operations. PRC laws prescribe
that an enterprise operating at a profit must appropriate and reserve, on an annual basis, an amount equal to 10% of its profit.
Such an appropriation is necessary until the reserve reaches a maximum that is equal to 50% of the enterprise’s PRC registered
capital.
Earnings
per share
The
Company computes earnings per share (“EPS”) in accordance with ASC Topic 260, “Earnings per share”. Basic
EPS is measured as the income or loss available to common shareholders divided by the weighted average common shares outstanding
for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common
shares (e.g., convertible securities, options, and warrants) as if they had been converted at the beginning of the periods presented,
or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e. those that increase income per share
or decrease loss per share) are excluded from the calculation of diluted EPS. The Company did not have any potentially dilutive
securities outstanding during the period covered in these financial statements.
Financial
instruments
The
Company’s accounts for financial instruments in accordance to ASC Topic 820, “Fair Value Measurements and Disclosures,”
which requires disclosure of the fair value of financial instruments held by the Company and ASC Topic 825, “Financial Instruments,”
which defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances
disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables
and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the
short period of time between the origination of such instruments and their expected realization and their current market rate
of interest. The three levels of valuation hierarchy are defined as follows:
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●
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Level
1 inputs to the valuation methodology are quoted prices for identical assets or liabilities
in active markets.
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●
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Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities
in active markets, and inputs that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the financial instrument.
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|
|
|
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●
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Level
3 inputs to the valuation methodology are unobservable and significant to the fair value
measurement.
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Commitments
and contingencies
Liabilities
for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it
is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
Comprehensive
income
Comprehensive
income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners.
Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive
income are required to be reported in a financial statement that is presented with the same prominence as other financial statements.
The Company’s current component of other comprehensive income includes the foreign currency translation adjustment and unrealized
gain or loss.
Recent
accounting pronouncements
On
January 5, 2016, the FASB issued ASU 2016-01 “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement
of Financial Assets and Financial Liabilities”, which amends the guidance in U.S. GAAP on the classification and measurement
of financial instruments. Although the ASU retains many current requirements, it significantly revises an entity’s accounting
related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair
value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated
with the fair value of financial instruments. The new standard is effective for fiscal years and interim periods within those
fiscal years beginning after December 15, 2017.
On
February 25, 2016, the FASB issued ASU 2016-02 “Leases (Topic 842)”, its new standard on accounting for leases. ASU
2016-02 introduces a lessee model that brings most leases on the balance sheet. The new standard also aligns many of the underlying
principles of the new lessor model with those in ASC 606, the FASB’s new revenue recognition standard (e.g., those related
to evaluating when profit can be recognized).
Furthermore,
the ASU addresses other concerns related to the current leases model. For example, the ASU eliminates the requirement in current
U.S. GAAP for an entity to use bright-line tests in determining lease classification. The standard also requires lessors to increase
the transparency of their exposure to changes in value of their residual assets and how they manage that exposure. The new model
represents a wholesale change to lease accounting. As a result, entities will face significant implementation challenges during
the transition period and beyond, such as those related to:
Applying
judgment and estimating.
|
●
|
Managing
the complexities of data collection, storage, and maintenance.
|
|
|
|
|
●
|
Enhancing
information technology systems to ensure their ability to perform the calculations necessary
for compliance with reporting requirements.
|
|
|
|
|
●
|
Refining
internal controls and other business processes related to leases.
|
|
|
|
|
●
|
Determining
whether debt covenants are likely to be affected and, if so, working with lenders to
avoid violations.
|
|
|
|
|
●
|
Addressing
any income tax implications.
|
The
new guidance will be effective for public business entities for annual periods beginning after December 15, 2018 (e.g., calendar
periods beginning on January 1, 2019), and interim periods therein.
On
March 15, 2016, the FASB issued ASU 2016-07 “Investments—Equity Method and Joint Ventures (Topic 323):
Simplifying the Transition to the Equity Method of Accounting”, which simplifies the equity method of accounting by
eliminating the requirement to retrospectively apply the equity method to an investment that subsequently qualifies for such
accounting as a result of an increase in the level of ownership interest or degree of influence. Consequently, when an
investment qualifies for the equity method (as a result of an increase in the level of ownership interest or degree of
influence), the cost of acquiring the additional interest in the investee would be added to the current basis of the
investor’s previously held interest and the equity method would be applied subsequently from the date on which the
investor obtains the ability to exercise significant influence over the investee. The ASU further requires that unrealized
holding gains or losses in accumulated other comprehensive income related to an available-for-sale security that becomes
eligible for the equity method be recognized in earnings as of the date on which the investment qualifies for the equity
method.
The
guidance in the ASU is effective for all entities for fiscal years beginning after December 15, 2016, including interim periods
within those fiscal years; early adoption is permitted for all entities. Entities are required to apply the guidance prospectively
to increases in the level of ownership interest or degree of influence occurring after the ASU’s effective date. Additional
transition disclosures are not required upon adoption.
On
March 17, 2016, the FASB issued ASU 2016-08 “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
(Reporting Revenue Gross versus Net)”, which amends the principal-versus-agent implementation guidance and illustrations
in the Board’s new revenue standard (ASU 2014-09). The FASB issued the ASU in response to concerns identified by stakeholders,
including those related to (1) determining the appropriate unit of account under the revenue standard’s principal-versus-agent
guidance and (2) applying the indicators of whether an entity is a principal or an agent in accordance with the revenue standard’s
control principle. Among other things, the ASU clarifies that an entity should evaluate whether it is the principal or the agent
for each specified good or service promised in a contract with a customer. As defined in the ASU, a specified good or service
is “a distinct good or service (or a distinct bundle of goods or services) to be provided to the customer.” Therefore,
for contracts involving more than one specified good or service, the entity may be the principal for one or more specified goods
or services and the agent for others.
The
ASU has the same effective date as the new revenue standard (as amended by the one-year deferral and the early adoption provisions
in ASU 2015-14). In addition, entities are required to adopt the ASU by using the same transition method they used to adopt the
new revenue standard.
On
March 30, 2016, the FASB issued ASU 2016-09 “Compensation—Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting”, which simplifies several aspects of the accounting for employee share-based payment transactions
for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding
requirements, as well as classification in the statement of cash flows.
The
ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual
reporting periods.
The
Company is currently assessing the above the accounting pronouncements and their potential impact from their adoption on the financial
statements.
The
accompanying financial statements have been prepared in conformity with generally accepted accounting principles which contemplate
continuation of the Company as a going-concern basis. The going-concern basis assumes that assets are realized and liabilities
are settled in the ordinary course of business at amounts disclosed in the financial statements. The Company’s ability to
continue as a going concern depends upon its ability to generate revenues through operations and raise additional funds via loans
from related parties or raising of funds in the public market. For the six months ended March 31, 2018, the Company reported net
loss of $1,560,845. The Company had an accumulated deficit of approximately $1,888,522. These conditions raise substantial doubt
as to whether the Company may continue as a going concern.
In
an effort to improve its financial position, the Company is working to obtain new working capital through the private and public
sales of equity or debt securities to investors for cash to fund operations and further expansion. In the event, that the Company
is unsuccessful, the combined Company may become insolvent.
|
3.
|
PREPAID EXPENSES AND OTHER CURRENT ASSET
|
|
|
March 31,
2018
|
|
September 30,
2017
|
Security Deposit
|
|
$
|
145,081
|
|
|
$
|
313,324
|
|
|
|
|
|
|
|
|
|
|
The Company paid a security
deposit for the lease of its primary business location. The amount has been carried a current asset as the lease expires within
one operating period from the date of the financial position of this report.
Plant
and equipment consisted of the following as of March 31, 2018 and September 30, 2017:
|
|
March 31,
2018
|
|
September 30,
2017
|
At Cost:
|
|
|
|
|
Equipment
|
|
$
|
401,331
|
|
|
$
|
2,544
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation
|
|
|
|
|
|
|
|
|
Equipment
|
|
|
(2,400
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
398,931
|
|
|
$
|
2,544
|
|
Depreciation
expenses translated at the average exchange rates for the period ended September 30, 2017 was $0 as equipment was placed
into service in the middle of September 2017; accordingly, the Company began recording depreciation subsequently in October
2017. The depreciation expense for the six months ended March 31, 2018 was $2,471.
|
6.
|
RELATED
PARTY TRANSACTIONS
|
Related
parties’ relationships as follows:
Due
from related parties:
Mr.
Meng owed $16,280 to the Company. The Company advanced funds to Mr. Meng for general corporate purposes, including paying expenses
and acquiring capital assets on behalf of the Company in the ordinary course of business. These amounts will be expensed in subsequent
period. The Company does not expect any interest income from the related party for holding such advances.
Due to related parties:
Mr.
Zhou Yongyi owns a building in Chengdu, PRC, where certain art related to the Company’s business is located. The Company
has paid for certain improvements to those premises during the period and subsequently. Mr. Zhou provides the use of this property
to the Company at no charge. There is no fixed rental agreement.
The
Company owed Ms. Xueqin Meng $408,592 for advances she made to the Company.
The
Company entered into the three operating lease agreements for its offices and showroom located in Guangzhou, PRC. All of the
leases will end within one year. The minimum outstanding lease payments outstanding as of March 31, 2018 are detailed in the
table below:
|
Contract
|
|
Minimum Lease
Payments
|
|
|
01
|
|
$
|
311,275
|
|
|
02
|
|
|
14,623
|
|
|
03
|
|
|
19,357
|
|
|
|
|
$
|
345,255
|
|
The
rental security deposit was $145,081 for these three leases.
VIE’s
bank deposits are with banks located in the PRC. These banks do not carry federal deposit insurance.
|
B.
|
Economic
and political risks
|
The
Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition, and results
of operations may be influenced by changes in the political, economic, and legal environments in the PRC.
Management
monitors changes in prices levels. Historically inflation has not materially impacted the Company’s financial statements;
however, significant increases in the price of raw materials and labor that cannot be passed on the Company’s customers
could adversely impact the Company’s results of operations.
The
Company evaluates subsequent events that have occurred after the balance sheet date, but before the financial statements are issued.
There are two types of subsequent events: (1) recognized, or those that provide additional evidence with respect to conditions
that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements,
and (2) non-recognized, or those that provide evidence with respect to conditions that did not exist at the date of the balance
sheet but arose subsequent to that date. The Company entered into a share exchange agreement as detailed in Note 1 above.
Item 2.
|
Management's
Discussion and Analysis of Financial Condition and Results of Operation
|
FORWARD
LOOKING STATEMENTS
The
following discussion and analysis of our results of operations and financial condition since the Company’s inception should
be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in
this quarterly report. All statements, other than statements of historical facts, included in this report are forward-looking
statements. When used in this report, the words “may,” “will,” “should,” “would,”
“anticipate,” “estimate,” “possible,” “expect,” “plan,” “project,”
“continuing,” “ongoing,” “could,” “believe,” “predict,” “potential,”
“intend,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements
are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks
and uncertainties include, but are not limited to, availability of additional equity or debt financing, changes in sales or industry
trends, competition, retention of senior management and other key personnel, availability of materials or components, ability
to make continued product innovations, adverse results of lawsuits against us and currency exchange rates. Forward-looking statements
are based on assumptions and assessments made by our management in light of their experience and their perception of historical
trends, current conditions, expected future developments and other factors they believe to be appropriate. Readers of this report
are cautioned not to place undue reliance on these forward-looking statements, as there can be no assurance that these forward-looking
statements will prove to be accurate and speak only as of the date hereof. Management undertakes no obligation to publicly release
any revisions to these forward-looking statements that may reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events. This cautionary statement is applicable to all forward-looking statements contained in
this report.
General
National
Art Exchange, Inc. (the “Company” or “we”), formerly known as Tianhe Union Holdings Limited and Lissome
Trade Corp., was incorporated in the State of Nevada on May 9, 2014. We were formed to engage in the distribution of metal cookware
made from stainless steel from China to the markets in Europe and Commonwealth of Independent States (CIS) countries. In connection
with a transaction closed on August 28, 2015 resulting in change of control, we appointed a new executive management team and
changed our planned business operations. On March 30, 2016, the Company, GLOBAL INTERNATIONAL HOLDINGS LTD. (“BVI1”),
a British Virgin Islands corporation, and its wholly owned subsidiary GLOBAL TECHNOLOGY CO., LTD. (“BVI2”), a British
Virgin Islands corporation, entered the Share Exchange Agreement, pursuant to which BVI1 (its sole director, who has the voting
and dispositive power of the shares of BVI1 is CHOW, Chun Yu Leeds), as the sole shareholder of BVI2, received 50,000,000 newly
issued shares of the Company’s common stock (“Common Stock”), constituting approximately 84% of the Company’s
Common Stock then outstanding upon the completion of the transactions contemplated under the Share Exchange Agreement, and a convertible
note issued that was convertible into 150,000,000 shares of Common Stock upon the Company’s completion of its increase of
the authorized shares by September 30, 2016, in exchange for its ownership in BVI2 and its subsidiaries and the control over Avi-Trip
formed by the VIE Agreements entered into by and between WFOE and Avi-Trip. BVI2 owned 100% of HUATIAN GLOBAL LIMITED (“HGL”),
a Hong Kong corporation, which owned 100% of TIANHE GROUP (HK) LIMITED (“THGL”), a Hong Kong corporation, which owns
100% of JIERUN CONSULTING MANAGEMENT CO., LTD. (“WFOE”) a foreign investment enterprise organized under the laws of
the People’s Republic of China (“PRC”), which had entered into various contractual agreements known as variable
interest entity (“VIE”) agreements with ANHUI AVI-TRIP TECHNOLOGY CO., LTD. (“Avi-Trip”), a corporation
incorporated on October 15, 2014, under the laws of the PRC. The VIE agreements provide WFOE with management control and rights
to the profits of Avi-Trip. The VIE agreements included the follwoing: (1) an Exclusive Service Agreement by and between WFOE
and Avi-Trip, entitling WOFE to receive substantially all of the economic benefits of Avi-Trip in consideration for services provided
by WFOE to Avi-Trip; (2) a Call Option Agreement by and among the shareholders of Avi-Trip, Jie Wei Wei and Han Yanliang, allowing
WFOE to acquire all of Avi-Trip’s shares as permitted by PRC law; (3) a Voting Rights Proxy Agreement providing WFOE with
the all of the voting rights of Avi-Trip’s shareholders; and (4) an Equity Pledge Agreement pledging the shares in Avi-Trip
to WFOE.
BVI1
never instructed the secretary and authorized agent to effectuate a change of registered shareholder of BVI2 from BVI1 being the
sole shareholder to the Company being the sole shareholder. Additionally, the Company was unable to exercise control over BVI2,
HGL, THGL, WFOE, and Avi-Trip subsequent to the execution of the Share Exchange Agreement. Furthermore, the Company was neither
able to secure substantive control over the use and disposition of the assets of BVI2, HGL, THGL, WFOE and Avi-Trip nor exercise
control over the accounting and finance department of BVI2, HGL, THGL, WFOE, and Avi-Trip in order to procure relevant financial
information for financial reporting purposes; accordingly, the Company was unable to timely file its quarterly reports Form 10-Q
for the quarters ended March 31, 2016, September 30, 2016, and December 31, 2016, March 31, 2017 and annual report on Form 10-K
for the fiscal year ended September 30, 2016.
As
a result of the Company’s inability to exercise control over Avi-Trip, on July 19, 2016, on the recommendation of the Company’s
board of directors (the “Board”), a majority of holders of the Company’s Common Stock voted to terminate the
VIE agreements between WFOE and Avi-Trip, the termination became effective August 29, 2016. The Company also did not follow the
instructions of BVI1’ directors to effectuate the change of ownership of BVI2 from BVI to the Company. In connection with
the termination of the VIE agreements, certain shareholders representing 30,722,500 shares of Common Stock, in connection with
the share issuance pursuant to the Share Exchange Agreement, agreed to return their shares of Common Stock to the Company for
cancellation and convertible note holders also agreed to return their notes to the Company for cancellation. Concurrently, Mr.
Yang Jie resigned from his positions as Chairman of the Board, President and Chief Executive Officer of the Company. Ms. WeiWei
Jie and Ms. FengYu Yi also resigned as members of the Board, which resignations were made in connection with the Company’s
termination of the VIE agreements.
30,722,500
shares of Common Stock and the note convertible into 150 million shares of Common Stock in connection with the Share Exchange
Agreement were cancelled. As a result of the termination of the VIE agreements, we became a shell company.
Treasure
Artwork Corporation Limited (“TAC”) was incorporated on December 28, 2017 in the Hong Kong SAR. TAC wholly owns Yuebao
Industrial Management Consulting (Guangzhou) Company Limited (“WOFE”) which was established on January 17, 2018 in
the PRC. Guangzhou Cangbao Tianxia Arts Company Limited (“CBTX”), which was established on March 28, 2017 in the PRC.
On
November 28, 2017, we entered into a non-binding letter of intent (the “LOI’) with CBTX, whereby the Company agreed
to acquire one hundred percent (100%) of the outstanding capital of Superior Treasure Global, Ltd. (“STG”), a company
incorporated in British Virgin Islands in exchange for 40,000,000 shares of the Company’s newly-issued common stock subject
to certain adjustment provisions and STG and its subsidiaries control CBTX through a set of VIE agreements.
On
January 20, 2018, TAC and Ms. Xueqin Meng and Mr. Yongyi Zhou, the sole shareholders of CBTX, entered into four agreements: 1.)
Shareholder Usufruct Transfer Agreement, 2.) Exclusive Management Consultation Service Agreement, 3.) Stock Equity Transfer Priority
Agreement, and 4.) Stock Equity Pledge Agreement (collectively the “VIE Agreements”), whereby TAC were effectively
given full control over the operations and direction of the assets of CBTX, and TAC was the primary beneficiary of CBTX.
On
April 6, 2018, we entered into a share exchange agreement with STG pursuant to which the Company acquired all the outstanding
equity of STG and in exchange issued 40,000,000 shares of the Company’s Common Stock to Mr. Yongyi Zhou and Ms. Xueqin Meng.
We control CBTX and its operations through the VIE agreements.
The
Company and CBTX are developing two business lines, art brokerage and art storage and exhibition services, with the primary business
operations in both the state of New York and Guangzhou, a metropolitan city in China.
Private
Art Brokerage Service
As
a brokerage of art, our primary focus is to assist buyers and sellers to trade their art work. We intend to work with art aficionados
and collectors to make the right choices when buying art. In addition to which, we will collaborate with collectors when they
decide to sell artworks. In order to help our clients, we follow the Chinese artwork market trends. We plan to provide our clients
with exclusive sale and listing agreements which will grant us the exclusive right to sell artworks on behalf of our clients,
usually for one year unless specified otherwise. Prior to offering art for sale, we will conduct
our due diligence regarding the authentication of the artwork to determine its ownership history and provenance. We are dedicated
to Chinese decorative arts such as ceramics, metalwork, hardstone and scholar arts.
Fine
Art Storage and Exhibition Services
As
part of our business plan, we also plan to provide art storage and exhibition services to our clients. We understand the uniqueness
of each artwork and we will try to offer a great level of protection to our clients’ collections when and if the clients
request us to maintain and store their art collections. We intend to host small exhibitions in galleries in the future.
We
are in the process of developing new customers in China who may use our platform to trade antiques and art and have their
collections appraised and authenticated.
Critical
Accounting Policies
We
prepare our consolidated financial statements in conformity with GAAP, which requires management to make certain estimates and
apply judgments. We base our estimates and judgments on historical experience, current trends and other factors that management
believes to be important at the time the consolidated financial statements are prepared. Due to the need to make estimates about
the effect of matters that are inherently uncertain, materially different amounts could be reported under different conditions
or using different assumptions. On a regular basis, we review our critical accounting policies and how they are applied
in the preparation of our consolidated financial statements.
While
we believe that the historical experience, current trends and other factors considered support the preparation of our consolidated
financial statements in conformity with GAAP, actual results could differ from our estimates and such differences could be material.
Basis
of presentation
The
proforma combined financial statements of the Company have been prepared in accordance with generally accepted accounting principles
in the United States of America. This basis of accounting involves the application of accrual accounting and consequently, revenues
and gains are recognized when earned, and expenses and losses are recognized when incurred. The Company’s financial statements
are expressed in U.S. dollars. These proforma combined financial statements are prepared on as-if basis using the historical financial
statements of the two entities assuming that the combined entity existed from the beginning of the period presented in the results
of operations. Actual results may not have been indicative of the proforma results presented herein.
Unaudited
interim financial information
These
unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial
reporting and the rules and regulations of the Securities and Exchange Commission that permit reduced disclosure for interim periods.
Therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with
GAAP have been condensed or omitted. In the opinion of management, all adjustments of a normal recurring nature necessary for
a fair presentation of the financial position, results of operations and cash flows for the periods presented have been made.
The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the
year ending September 30, 2018.
The
consolidated balance sheets and certain comparative information as of September 30, 2017 are derived from the audited consolidated
financial statements and related notes for the year ended September 30, 2017 (“2017 Annual Financial Statements”),
included in the Company’s 2017 Annual Report on Form 10-K. These unaudited interim condensed consolidated financial statements
should be read in conjunction with the 2017 Annual Financial Statements.
Use
of estimates
The
preparation of the financial statements 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 financial statements and the
reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information
available at the time the estimates are made; however, actual results could differ materially from those estimates.
Foreign
currency translation
The accompanying financial
statements are presented in United States dollars (“USD”). The functional currency of the Company is the USD. The functional
currency of TAC is the Hong Kong dollar (“HKD”). The functional currency of WOFE and VIE is the Renminbi (“RMB”).
The financial statements of the Companies subsidiaries have been translated into United States dollars from RMB and HKD at year-end
exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated
at their historical exchange rates when the capital transactions occurred.
|
Exchange Rates
|
|
3/31/2018
|
|
|
Year end RMB : US$ exchange rate
|
|
|
6.75676
|
|
|
Average year RMB : US$ exchange rate
|
|
|
6.56168
|
|
|
|
|
|
|
|
|
Year end HKD : US$ exchange rate
|
|
|
7.84821
|
|
|
Average year HKD : US$ exchange rate
|
|
|
7.81728
|
|
The
RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions.
No representation is made that the RMB amounts could have been, or could be, converted into US Dollars at the rates used in translation.
Goodwill
Goodwill
represents the excess of the purchase price over the fair value of the net tangible and identifiable assets acquired in a business
combination. In accordance with FASB ASC Topic 350, "Goodwill and Other Intangible Assets", goodwill is no longer subject
to amortization. Rather, goodwill is subject to at least an annual assessment for impairment, applying a fair-value based test.
Fair value is generally determined using a discounted cash flow analysis.
Property,
plant and equipment
Plant
and equipment are carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using
the straight-line method. Estimated useful lives of the plant and equipment are as follows:
|
Equipment
|
|
|
3
- 10 years
|
|
|
Motor vehicles
|
|
|
4 - 5 years
|
|
|
Furniture
and fixtures
|
|
|
5
- 10 years
|
|
The
cost of maintenance and repairs is charged to expenses as incurred, whereas significant renewals and betterments are capitalized.
Prepayments
for equipment and furniture and fixtures
Amounts
recorded as prepayments for equipment and furniture and fixtures are transferred to plant and equipment when substantially all
the activities necessary to prepare the assets for their intended use are completed. The Company’s begins depreciating those
assets when they have transferred to plant and equipment and put into use.
Accounting
for the impairment of long-lived assets
The
Company annually reviews its long-lived assets for impairment or whenever events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable. Impairment may be the result of becoming obsolete from a change in the industry
or new technologies. Impairment is present if carrying amount of an asset is less than its undiscounted cash flows to be generated.
If
an asset is considered impaired, a loss is recognized based on the amount by which the carrying amount exceeds the fair market
value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Advertising
All
advertising costs are expensed as incurred. The Company incurred $39,193 in advertising expenses during the period from October
1, 2017 to March 31, 2018.
Retirement
benefits
Retirement
benefits in the form of mandatory government sponsored defined contribution plans are charged to the either expenses as incurred
or allocated to inventory as part of overhead.
Income
taxes
The
Company accounts for income tax using an asset and liability approach and allows for recognition of deferred tax benefits in future
years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before
the Company is able to realize their benefits, or that future realization is uncertain. The Company has incurred losses since
its inception and management is not able to estimate when that Company will generate taxable profits; accordingly, the company
has elected to not recognize and deferred tax assets.
Statutory
reserves
Statutory
reserves are referring to the amount appropriated from the net income in accordance with laws or regulations, which can be used
to recover losses and increase capital, as approved, and are to be used to expand production or operations. PRC laws prescribe
that an enterprise operating at a profit must appropriate and reserve, on an annual basis, an amount equal to 10% of its profit.
Such an appropriation is necessary until the reserve reaches a maximum that is equal to 50% of the enterprise’s PRC registered
capital.
Financial
instruments
The
Company’s accounts for financial instruments in accordance to ASC Topic 820, “Fair Value Measurements and Disclosures,”
which requires disclosure of the fair value of financial instruments held by the Company and ASC Topic 825, “Financial Instruments,”
which defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances
disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables
and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the
short period of time between the origination of such instruments and their expected realization and their current market rate
of interest. The three levels of valuation hierarchy are defined as follows:
|
●
|
Level 1 inputs to
the valuation methodology are quoted prices for identical assets or liabilities in active markets.
|
|
●
|
Level 2 inputs to
the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are
observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
|
●
|
Level 3 inputs to
the valuation methodology are unobservable and significant to the fair value measurement.
|
Commitments
and contingencies
Liabilities
for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it
is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
Comprehensive
income
Comprehensive
income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners.
Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive
income are required to be reported in a financial statement that is presented with the same prominence as other financial statements.
The Company’s current component of other comprehensive income includes the foreign currency translation adjustment and unrealized
gain or loss.
RESULTS
OF OPERATIONS
Three
Months ended March 31, 2018
Revenue
We
did not generate any revenue for the three months ended March 31, 2018.
Expenses
During
the three month period ended March 31, 2018, we incurred general and administrative expenses in an amount of $645,174. General
and administrative and professional fee expenses were generally related to corporate overhead, financial and administrative contracted
services, such as legal and accounting expenses.
Net
Income
Our
net loss for the three months ended March 31, 2018 was $964,914.
Six
Months ended March 31, 2018
Revenue
We
did not generate any revenue for the six months ended March 31, 2018.
Expenses
General
and administrative and professional fee expenses were related to corporate overhead, financial and administrative contracted services,
such as legal and accounting expenses and professional fees. For the six months ended March 31, 2018 the general and administrative
expenses was $804,592.
Net
Income
Our
net loss for the six months ended March 31, 2018 was $1,560,845.
LIQUIDITY
AND CAPITAL RESOURCES
As
of March 31, 2018, our total assets were $658,963 and our current liabilities were $572,422.
As
of March 31, 2018, the Company had an accumulated deficit of approximately $1,888,522 and stockholders’ equity was $86,541.
Future
Financings
We
will continue to rely on equity sales of our common stock in order to continue to fund our business operations. Issuances of additional
shares will result in dilution to existing stockholders. There is no assurance that we will achieve any additional sales of the
equity securities or arrange for debt or other financing to fund our operations and other activities, or if we are able, there
is no guarantee that existing shareholders will not be substantially diluted.
OFF-BALANCE
SHEET ARRANGEMENTS
We
do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to investors.
Recent
Accounting Pronouncements
On
January 5, 2016, the FASB issued ASU 2016-01 “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement
of Financial Assets and Financial Liabilities”, which amends the guidance in U.S. GAAP on the classification and measurement
of financial instruments. Although the ASU retains many current requirements, it significantly revises an entity’s accounting
related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair
value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated
with the fair value of financial instruments. The new standard is effective for fiscal years and interim periods within those
fiscal years beginning after December 15, 2017.
On
February 25, 2016, the FASB issued ASU 2016-02 “Leases (Topic 842)”, its new standard on accounting for leases. ASU
2016-02 introduces a lessee model that brings most leases on the balance sheet. The new standard also aligns many of the underlying
principles of the new lessor model with those in ASC 606, the FASB’s new revenue recognition standard (e.g., those related
to evaluating when profit can be recognized).
Furthermore,
the ASU addresses other concerns related to the current leases model. For example, the ASU eliminates the requirement in current
U.S. GAAP for an entity to use bright-line tests in determining lease classification. The standard also requires lessors to increase
the transparency of their exposure to changes in value of their residual assets and how they manage that exposure. The new model
represents a wholesale change to lease accounting. As a result, entities will face significant implementation challenges during
the transition period and beyond, such as those related to:
Applying
judgment and estimating.
|
●
|
Managing the complexities
of data collection, storage, and maintenance.
|
|
|
|
|
●
|
Enhancing information
technology systems to ensure their ability to perform the calculations necessary for compliance with reporting requirements.
|
|
|
|
|
●
|
Refining internal
controls and other business processes related to leases.
|
|
●
|
Determining whether
debt covenants are likely to be affected and, if so, working with lenders to avoid violations.
|
|
|
|
|
●
|
Addressing any income
tax implications.
|
The
new guidance will be effective for public business entities for annual periods beginning after December 15, 2018 (e.g., calendar
periods beginning on January 1, 2019), and interim periods therein.
On
March 15, 2016, the FASB issued ASU 2016-07 “Investments—Equity Method and Joint Ventures (Topic 323): Simplifying
the Transition to the Equity Method of Accounting”, which simplifies the equity method of accounting by eliminating the
requirement to retrospectively apply the equity method to an investment that subsequently qualifies for such accounting as a result
of an increase in the level of ownership interest or degree of influence. Consequently, when an investment qualifies for the equity
method (as a result of an increase in the level of ownership interest or degree of influence), the cost of acquiring the additional
interest in the investee would be added to the current basis of the investor’s previously held interest and the equity method
would be applied subsequently from the date on which the investor obtains the ability to exercise significant influence over the
investee. The ASU further requires that unrealized holding gains or losses in accumulated other comprehensive income related to
an available-for-sale security that becomes eligible for the equity method be recognized in earnings as of the date on which the
investment qualifies for the equity method.
The
guidance in the ASU is effective for all entities for fiscal years beginning after December 15, 2016, including interim periods
within those fiscal years; early adoption is permitted for all entities. Entities are required to apply the guidance prospectively
to increases in the level of ownership interest or degree of influence occurring after the ASU’s effective date. Additional
transition disclosures are not required upon adoption.
On
March 17, 2016, the FASB issued ASU 2016-08 “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
(Reporting Revenue Gross versus Net)”, which amends the principal-versus-agent implementation guidance and illustrations
in the Board’s new revenue standard (ASU 2014-09). The FASB issued the ASU in response to concerns identified by stakeholders,
including those related to (1) determining the appropriate unit of account under the revenue standard’s principal-versus-agent
guidance and (2) applying the indicators of whether an entity is a principal or an agent in accordance with the revenue standard’s
control principle. Among other things, the ASU clarifies that an entity should evaluate whether it is the principal or the agent
for each specified good or service promised in a contract with a customer. As defined in the ASU, a specified good or service
is “a distinct good or service (or a distinct bundle of goods or services) to be provided to the customer.” Therefore,
for contracts involving more than one specified good or service, the entity may be the principal for one or more specified goods
or services and the agent for others.
The
ASU has the same effective date as the new revenue standard (as amended by the one-year deferral and the early adoption provisions
in ASU 2015-14). In addition, entities are required to adopt the ASU by using the same transition method they used to adopt the
new revenue standard.
On
March 30, 2016, the FASB issued ASU 2016-09 “Compensation—Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting”, which simplifies several aspects of the accounting for employee share-based payment transactions
for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding
requirements, as well as classification in the statement of cash flows.
The
ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual
reporting periods.
The
Company is currently assessing the above the accounting pronouncements and their potential impact from their adoption on the financial
statements.